What Can I Use a Personal Loan For?
Personal loans are the most flexible form of installment loan on the market. Find out what you can and can’t use them for here.
September 27, 2021
Despite the slowdown caused by the pandemic, personal loans have been one of the fastest-growing forms of lending in America. In the third quarter of 2020, overall personal loan debt increased by 6% from the year before — from $305 billion to $323 billion.
If you’re looking to borrow some money, this guide will explain what kind of expenses can be covered with a personal loan and it can help you decide whether this type of loan would meet your needs.
What are personal loans used for?
Consumers can use personal loans for a wider variety of expenses than other loans. Generally, once your lender wires the money to your checking account, you can do whatever you want with it.
Some common uses are:
Emergencies: While it’s always best to keep an emergency fund on hand for surprises, you might not always have enough. For example, you could use a personal loan to pay for significant and unforeseen medical bills.
Debt consolidation: If you have expensive outstanding debt (such as credit card debt), it can be a good idea to use a cheaper personal loan to pay off the accounts.
Significant personal items: Though usually unwise, you can use a personal loan to make improvements to your house or buy that new motorcycle you like.
Experiences or events: Personal loan proceeds can also go toward something like a wedding, vacation or move.
Lenders will sometimes place a few restrictions on the expenses you can fund with your personal loan. They often disallow student loans and education expenses. When you apply, the lender will ask you why you want the money, so you’ll know soon if your lender takes issue with your plans.
The most common uses from the beginning of 2020 to spring 2021 were the purchase or repair of a vehicle (40%) and home improvements (25%).
Personal loan amounts are also flexible, generally ranging from as little as $1,000 to as much as $100,000.
What is a benefit of obtaining a personal loan?
The primary benefit of obtaining a personal loan over other forms of funding is the added flexibility. You can use the proceeds to finance just about any expense you can imagine.
Of course, there are other good reasons for personal loans and some downsides to consider. Here are the most significant pros and cons of personal loans to understand before you apply.
Pros of a personal loan
Again, the main advantage of a personal loan is its flexibility across the board. That generally includes the right to customize the size and repayment term, as well as the ability to put the money toward whatever you need.
In addition, personal loans are typically unsecured. This means that you don’t have to put up any collateral to qualify for the loan, and if you default, your lender won’t immediately be able to seize your assets. Of course, your credit score would still drop, and lenders could still take you to court to collect. After a successful lawsuit, they could garnish your wages to get their money — definitely don’t skip out on paying a personal loan.
Cons of a personal loan
Unfortunately, personal loans can be a relatively expensive form of borrowing. They carry an average interest rate of 9.41%.
If you take out a $5,000 personal loan at that interest rate and pay it back over the next three years, it would cost you $1,412.47 in interest. That’s more than a quarter of the original loan balance.
Because they’re unsecured, it can also be harder to qualify for them than other forms of credit. They’re not the best type of account for someone who’s just getting started with credit.
Use personal loans responsibly
Just because you can take out a personal loan doesn’t mean you should. Using it for discretionary purchases like taking a vacation to Hawaii or adding a deck to your house might not be a good idea.
Remember, you should always do your best to keep your spending within a reasonable budget, and taking on debt to fund unnecessary expenses is a sure sign that you’re spending too much of your income.
If you want to use debt for casual spending, consider a credit card. But it’s important to pay off the balance in full each billing period before interest kicks in — usually 20 to 25 days after your statement date.
If you can’t use a credit card but need a loan, you might try to find financing that's more specific to the expense. For example, it’s inefficient to use a personal loan to finance your vehicle since you can probably get better rates with an auto loan.
To summarize, you should generally only resort to a personal loan for expenses that are:
Necessary for the safety, health or wellbeing of you or your household
Too significant in scope to be charged to a credit card and paid off before interest accrues
Not viable for cheaper financing with a loan that’s more specific to the expense
If you end up using a personal loan, make sure you shop around for the best rates, only borrow what you need and make your payments on time.
If you’re in the market for a personal loan as a way to consolidate your credit card debt, consider using a Tally† lower-interest line of credit. Tally helps you pay down debt efficiently, consolidating credit card debt into one simple monthly payment.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.