Even the savviest budgeter occasionally runs into a circumstance they’re simply unprepared for, which is where a personal loan may come in handy. Common personal loan uses include covering an unexpected medical expense or home repair or even managing existing debt.
Borrowing money vs. paying cash isn’t ideal, but if you need cash ASAP and don’t have enough in savings to cover the expense, a borrower has options — one of which is a personal loan. We cover what you can use a personal loan for, as well as the drawbacks and benefits of obtaining a personal loan to consider before you borrow.
What Can You Use a Personal Loan For?
Personal loans may be used for just about anything personal (that’s legal, of course). Here are some of the most common personal loan uses.
Debt Management and Consolidation
Refinancing or consolidating high-interest debt into better loan terms is one of the most common uses for a personal loan — and possibly one of the most financially savvy.
Interest rates on credit card debt are some of the highest rates out there. In addition, credit cards almost always have variable rates, making it challenging to create a predictable budget to pay down outstanding debt.
Rates for personal loans, on the other hand, tend to be lower than credit card APRs, which could save borrowers money in interest payments just by refinancing. The fixed payback time frame of a personal installment loan also may help borrowers avoid getting into the cycle of revolving debt that could easily occur with a credit card that has no set time to repay the loan.
Even if you’re not drowning in credit card debt, but instead are facing down a multiplicity of different kinds of loans, consolidating your debt with a personal loan could be a useful tactic, depending on the financing terms a borrower may qualify for.
Instead of keeping track of payments on debts that might be due at different times of the month, it could make sense to consolidate those into one personal loan with just one payment to make each month. This may simplify a bill-paying schedule and also potentially help implement a better budget going forward — provided you don’t use the opportunity to dig yourself into even more debt.
According to The Knot, the average cost of a wedding in 2020 was $19,000, and pre-COVID times, in 2019, it was $28,000. Unfortunately, many young couples have not saved up enough to pay for their entire wedding bill themselves, and the days when the bride’s parents footed the entire wedding bill are dwindling.
A personal loan, also referred to as a wedding loan when used for this purpose, could possibly cover all or a portion of a well-budgeted wedding. Personal loans also tend to offer much lower interest rates than an average credit card offers, which The Knot reports a significant portion of newlyweds use to fund their foray into wedded bliss.
Think long and hard about whether you really want to start out your married life in debt though. Consider if you can actually afford to pay off the loan in a timely manner. If not, it might be better to see if there’s anywhere you can cut back on your wedding budget, or if you could take some more time to save up for your dream day.
Unexpected Medical Expenses
When an unexpected medical emergency occurs, it’s important for the main focus to be on health, but the financial burden can’t be ignored. Being able to pay for the out-of-pocket expenses with a low-rate personal loan may relieve some stress and offer time to heal without additional financial stress.
It’s no secret that the cost of medical care in America can be sky-high — especially for the large portion of Americans that have high-deductible health plans. The situation is even worse for those who don’t have health insurance coverage at all. When paying out-of-pocket, even a seemingly simple procedure, like casting a broken leg, could cost a shocking $7,500 , according to Healthcare.gov.
A low-interest personal loan (also known as a relocation loan) may help defray some of the out-of-pocket costs associated with moving.
According to the American Moving & Storage Association , a local move could set someone back about $1,250 on average if using professional movers. Moving a long distance (1,000 miles or more)? The average cost is typically $4,890 using the pros.
And these figures only account for the move itself. As anyone who has moved knows, additional hidden costs associated with moving out could pop up every day — storage, boxes, cleaning fees and partial security deposit returns, just to name a few.
There are also costs that could come with the new place. Most new rentals require upfront cash for a deposit, sometimes totaling three times the monthly rent (first, last and security). Opening new utility accounts may also require a deposit. And don’t forget about replacing household items left behind — even basics like soap, light bulbs, shower curtains and ketchup could easily total a few hundred dollars.
Lastly, miscellaneous costs may arise during the move itself, such as replacing broken items. Even with insurance, there’s usually a deductible to pay.
A person may already have life insurance for their own funeral, but what if mom, dad or grandpa didn’t plan ahead? If the deceased did not plan appropriately to finance their death, and life insurance doesn’t cover the bill, a personal loan may be a quick, easy solution for the family. And when you’re dealing with a major personal crisis like the death of a loved one, the last thing you want to do is pile a financial crisis on top.
With an aging U.S. population, the costs associated with death are increasingly being passed onto children of the deceased and could escalate quickly in this time of mourning. Basic costs include the funeral service, burial or cremation, and any gathering of friends and family surrounding the memorial. The average cost of a traditional funeral service with a burial is around 12,500 to $17,500 , with caskets alone costing up to $10,000.
Home Improvement Expenses
Many renters and homeowners feel that annual or biannual itch to spruce up their living spaces, which might mean a fresh coat of paint, a new piece of art, upgraded appliances or a kitchen remodeling. Depending on the level of your upgrade, the cost of home improvements could come in anywhere from a few hundred to tens of thousands of dollars.
If you’re making upgrades that will improve a home’s value, the cost may be made up when selling the house later — and you’ll enjoy a more comfortable space today. Using a personal home improvement loan can help you focus on the renovation instead of fretting about the costs. Plus, if you get an unsecured loan you won’t have to worry about putting your home equity on the line as collateral.
Deciding Whether to Take Out a Personal Loan
Going into debt should never be taken lightly, so it’s important to set out a realistic plan to repay the debt and ensure it’s realistic with your budget. No matter the reason for taking out a personal loan, a borrower will be on the hook for repaying a significant amount of money including interest, and there might be hidden fees to worry about too.
When taking out any new debt, research is essential. Shopping around for the rate, fee and terms that best fits your needs is an important step to take before applying with a lender, as it could go a long way toward ensuring you get the best bang for your buck. The good thing is there are lots of different unsecured personal loans available from a wide variety of lenders. Credit history and score may have a significant impact on the loan terms, and interest rates and qualifying criteria may vary from lender to lender.
Pros & Cons of Taking Out a Personal Loan
As you’re weighing your decision, it may also help to take a look at the overall pros and cons of personal loans.
• Fast access to cash
• Usable for a variety of purposes
• Lower interest rates compared to credit cards
• No collateral required for unsecured personal loans
• Increases your debt
• Can carry fees and penalties
• Sufficient credit and income necessary to qualify (especially for unsecured loans)
• Applying might ding your credit score
- Basic Attention Token (BAT): What It Is, How It Works, & Investing Today - March 7, 2022
- Ethereum Basics: What Is Ethereum? - January 26, 2022
- What Are Personal Loans Used For? - November 11, 2021