- Personal loans provide lump-sum financing, typically with fixed repayment terms and interest rates.
- Common uses include debt consolidation, home improvements, major purchases, and medical or emergency expenses.
- Approval depends on factors such as credit score, credit history, and debt-to-income ratio.
- Personal loans generally cannot be used for purposes such as investments, student loan debt, down payments, or business expenses.
- Checking your credit report, pre-qualifying, and consulting with a financial advisor may help you secure favorable loan terms.
Personal loans may be used to fund a range of plans and projects. Learn more about when to consider a personal loan to meet your financing needs.
Perhaps you're trying to realize a dream you've been working toward for years, or your milestone moment is approaching, and it's time to start planning. Or, maybe your life has recently changed, and your financial obligations have evolved with it. Whatever the reason, if you need to access money for personal expenses — whether planned or otherwise — you might consider a personal loan.
This type of financing may help you borrow the money you need for multiple uses, including consolidating high-interest debt. Personal loans may also be used to finance expenses for which you may not have enough cash on hand or to avoid dipping into your savings.
Before you decide whether to pursue a personal loan, it's important to understand the basics of this type of loan. To help you decide, here is an overview of personal loans.
What are Personal Loans and How Do They Work?
Personal loans typically come in the form of lump-sum financing, which means you receive the entire amount of the loan (the principal) all at once from a lender. The lender issues terms with your loan, which dictate your repayment timeline, the interest rate you'll pay on top of the principal, and any fees, such as origination fees, to get the loan. Importantly, the higher the interest rate, the more the loan will end up costing you when you complete repayment.
Loan terms vary among lenders. This depends on variables such as the size of the loan and the borrower's credit history. Generally, the stronger an applicant's credit, the more favorable the loan terms will be and the less the loan will cost overall.
Personal loans are generally unsecured, meaning you don't have to put up collateral to get the loan.
Understanding your lender before applying may help improve the chances of loan approval. When weighing your options, consider the types of loans the lender offers, available benefits, and any eligibility requirements. For example, some lenders may offer discounts for automated payments or require an existing banking relationship.
It may also help to review how the lender evaluates applicants. Knowing what to expect may reduce research time later and help you choose a lender that fits your needs.
Do You Have To Explain How You Will Use a Personal Loan?
When applying for a personal loan, many lenders will request that you specify the loan purpose. This helps them understand how the funds may be used and whether the request fits their lending guidelines. For example, a lender may not issue a personal loan that will be used for college costs, investments, or business expenses.
In many cases, you won't need to provide a detailed explanation unless the lender specifically asks for more information. Instead, expect to provide a general category, such as debt consolidation, home repair, or a major purpose.
Common Uses for Personal Loans
Personal loans are popular because they help many people address many kinds of financial needs. Here are common uses for this type of financing.
Debt Consolidation
Some people use personal loans for debt consolidation. This combines multiple debts into one monthly payment, often with a fixed interest rate. For example, using a personal loan to pay down high-interest-rate credit cards may help lower interest costs, pay off debt faster, and make payments easier to manage.
Home Improvement
A personal loan may be a good option for covering the cost of home improvements. This may include interior or exterior renovations or paying for unexpected repairs.
Wedding and Honeymoon Expenses
Some people choose to use personal loans to fund wedding and honeymoon expenses instead of using personal savings to pay for them. Since personal financing is flexible, you may use the loan to pay for all or just a portion of your celebration expenses, depending on your preference.
Travel Expenses
If you are planning a big trip, you may want to use a personal loan for travel expenses. The loan funds may cover transportation, lodging, food and drink, entertainment, and attractions. You may also keep some of the financing on hand for extra cash while traveling or leave some aside for any unexpected expenses that may arise during your travels.
Moving Expenses
You may also use a personal loan to fund moving expenses, such as moving supplies, transport, security deposits, and storage. You may also use a personal loan to decorate your new home with furniture, decor, curtains, or shutters.
Medical Expenses
Personal loans for medical expenses may help cover costs such as hospital bills, outpatient treatments, or elective procedures. By spreading payments over time, this financing option may offer relief from large, immediate expenses that are difficult to manage.
Family Planning and Fertility Treatments
A personal loan may help cover family planning expenses, including fertility treatments, adoption-related costs, surrogacy expenses, or other planned costs associated with growing your family. For example, financing may help spread out the cost of in vitro fertilization (IVF), medication, consultations, or related procedures over predictable monthly payments.
Emergency Expenses
From a broken appliance to a necessary car repair, unexpected expenses might derail your budget. Using personal loans to cover emergency expenses may help you handle these situations quickly without depleting savings. With predictable monthly payments, personal loans offer a structured way to cover costs, providing flexibility during challenging times.
Pet Care Expenses
Pet-related costs can add up quickly, especially when they involve emergency veterinary care, surgery, dental procedures, medication, or ongoing treatment. A personal loan may help pet owners manage larger or unexpected expenses without having to delay important care or draw heavily from savings.
Other Major Purchases
You may find you need financing for any number of major purchases that arise, both planned and unexpected. Since personal loans may be used to cover lots of different expenses — for example, a new computer, a home security system, or exercise equipment — you may find this extra money is the right solution for you if you're considering a purchase that costs more than you'd like to fund from your savings.
What Can't a Personal Loan Be Used For?
A major upside of personal loans is that they're generally flexible and enable you to finance a range of expenses. However, most lenders have certain loan purpose restrictions and will not offer a personal loan when the funds are to be used for investing, down payments, certain educational expenses, and business expenses. You'll want to check in with your lender to find out if they have any other specific guidelines or have other options for financing such expenses.
How Do You Get a Personal Loan?
There are several criteria lenders use to evaluate applicants for personal loans. They may include:
- Credit score: Your credit score provides a baseline for lenders to understand your past responsibility with credit, such as credit cards, auto and home loans, etc. There is no hard-and-fast rule for the minimum credit score you need, as this will vary among lenders. However, the higher your score and the better your financial standing, the more likely you may be to get approved and receive more favorable loan terms.
- Credit history: Lenders will evaluate your responsibility with past credit, including whether you make payments in full and on time, and how many credit products you have open. They will also look at how much credit history you have established.
- Credit ratios: Lenders may look at your credit utilization ratio, which is how much credit you are using versus how much credit you have available. The lower your credit utilization ratio, the better. They also look at your debt-to-income ratio, which is all your monthly debt payments divided by your gross monthly income. These numbers help lenders see how well you may be able to handle additional debt.
Lenders may also evaluate personal loan applicants based on other factors, such as your existing relationship with the financial institution. Many lenders may require applicants to have an existing account with them or to have held an account with them in the past to be eligible for a personal loan.
The following steps may help speed up your approval timeline, improve your loan terms, and give you a sense of how much the bank may approve:
- Check your credit report in advance of applying for a personal loan to ensure accuracy.
- Fix errors or discrepancies right away by notifying the credit bureaus and submitting any necessary documentation.
- Pre-qualify for a personal loan, so you can compare offers and loan terms. Since it uses a soft credit check, this will not affect your credit score.
Additionally, a financial advisor may help you evaluate current lending conditions and consider all your options.
Is a Personal Loan Right for Me?
Personal loans may be a good solution for certain types of purchases, as well as consolidating debt. You may use personal loans to take care of both planned purchases and unexpected expenses and do so with clear terms around repayment. This may be a big help when planning a healthy financial future.
Many people decide to apply for a personal loan instead of dipping into their cash reserves, to make sure they still have a buffer in their savings. This type of financing may also be a good option to consider instead of charging expenses with a credit card, since credit card interest rates are often higher than personal loan interest rates.
Before applying, review the loan terms, interest rate, fees, and monthly payment. It may also help to check your credit health and compare options from different lenders. Taking these steps may help determine whether a personal loan fits your needs, budget, and financial goals.
Frequently Asked Questions
What can I use a personal loan for?
Personal loans are often used for debt consolidation, home repairs, medical bills, major purchases, or unexpected expenses. Approved uses may vary by lender.
Are there any restrictions on how I use a personal loan?
Yes. Some lenders restrict certain uses. For example, due to specific disclosures required for a private education loan, a lender may not allow funds from a personal loan to be used for post-secondary education expenses or to refinance student loan debt. Personal loans may also be restricted for investments, business expenses, or certain down payments, depending on the lender. Other loan products may be available to meet these needs.
Will using a personal loan affect my credit score?
It may. Applying for a personal loan may lead to a hard credit inquiry, which may affect your credit score. Making payments on time may also support credit health, while missed or late payments may hurt it.
Can I use a personal loan to pay off credit card debt?
Yes, many borrowers use personal loans for debt consolidation. This combines multiple credit card balances into one monthly payment, often with a fixed interest rate.
What should I avoid using a personal loan for?
Consider avoiding a personal loan for non-essential purchases or amounts that may strain your budget. Do not take out a personal loan for restricted uses, and be sure to review the loan agreement before using the funds.
