Why get personal loan?

A personal loan is typically an unsecured loan, which means that the lender does not require collateral—a home or a car, for example—to borrow money. However, with unsecured loans, the lender is taking a greater risk and will most likely charge a higher interest rate compared to a secured loan. Just how high your rate will be can depend on a number of factors, including your credit score and debt-to-income ratio.

Some banks offer secured personal loans, and the collateral can be your bank account, car, or other property. A secured personal loan may be easier to qualify for and carry a somewhat lower interest rate than an unsecured one. As with any other secured loan, you may lose your collateral if you are unable to keep up with the payments.

Even with an unsecured personal loan, failing to make timely payments can be harmful to your credit score and severely limit your ability to obtain credit in the future. FICO, the company behind the most widely used credit score, says that your payment history is the single most important factor in its formula, accounting for 35% of your credit score.

Before you opt for a personal loan, you'll want to consider whether there may be less expensive options for you to borrow money. Some reasons for choosing a personal loan are:

You might also consider a personal loan if you need to borrow for a fairly short and well-defined period of time. Personal loans typically run from 12 to 60 months. So, for example, if you have a lump sum of money due to you in two years but not enough cash flow in the meantime, a two-year personal loan could be a way to bridge that gap.

Here are five more examples of when a personal loan might make sense.

If you owe a substantial balance on one or more high-interest-rate credit cards, taking out a personal loan to pay them off could save you money. For example, the average interest rate on a credit card is 23.24%, while the average rate on a personal loan is 10.71%. That difference should allow you to pay the balance down faster and pay less interest in total. Plus, it's easier to pay off a single debt obligation rather than multiple ones.

However, a personal loan is not your only option. Instead, you might be able to transfer your balances to a new credit card with a lower interest rate, if you qualify. Some balance transfer offers even waive the interest for a promotional period of six months or more.

Though a personal loan is more expensive than other types of loans, it isn't necessarily the most expensive. If you have a payday loan, for example, it's likely to carry a much higher interest rate than a personal loan from a bank. Similarly, if you have an older personal loan with a higher interest rate than you would qualify for today, replacing it with a new loan could save you some money.

Before you replace a personal loan, however, be sure to find out whether there's a prepayment penalty on the old loan or application or origination fees on the new one, which can sometimes be substantial.

If you're buying new appliances, installing a new furnace, or making another major purchase, taking out a personal loan could be cheaper than financing through the seller or putting the bill on a credit card.

However, if you have any equity built up in your home, a home-equity loan or home-equity line of credit could be less expensive still. Of course, those are both secured debts, so you'll be putting your home on the line.

As with any major purchase, financing an expensive event, such as a bar or bat mitzvah, a major milestone anniversary party, or a wedding, could be less expensive if you pay for it with a personal loan rather than a credit card. According to a 2021 survey by Brides and Investopedia, one in five U.S. couples will use loans or investments to help pay for their wedding. As important as these events are, you may want to consider scaling costs back somewhat if it means going into debt for years to pay it off. For that same reason, borrowing to fund a vacation may not be the best idea, unless it's the trip of a lifetime.

Taking out a personal loan and paying it off in a timely manner could help improve your credit score, especially if you have a history of missed payments on other debts. If your credit report shows mostly credit card debt, adding a personal loan might also help your “credit mix.” Having different types of loans, and showing that you can handle them responsibly, is considered a plus for your score.

That said, borrowing money you don't really need in the hope of improving your credit score is a dangerous proposition. Better to keep paying all your other bills on time while also trying to maintain a low credit utilization ratio (i.e., the amount of credit you are using at any given time compared with the amount that's available to you).

Once you’re approved for a personal loan, the funds you receive will be deposited into your bank account in a lump sum. The transfer may take as little as 24 hours or as long as a few weeks, depending on the lender. In some cases, like a small purchase or one where you can negotiate a lower price, you might want to try something else before taking out a personal loan.

While it’s always important to carefully consider your financial situation before taking on a loan, sometimes a personal loan is the best way to finance a large purchase or project that you can’t afford upfront. Here are the top nine reasons to get a personal loan.

Debt consolidation is one of the most common reasons for taking out a personal loan. When you apply for a loan and use it to pay off multiple other loans or credit cards, you’re combining all of those outstanding balances into one monthly payment. This grouping of debt makes it easier to work out a time frame to pay off your balances without getting overwhelmed.

One of the best advantages of using a personal loan to pay off your credit cards is the lower interest rates. With lower rates, you can reduce the amount of interest you pay and the amount of time it takes to pay off the debt.

Takeaway: Using a personal loan to pay off high-interest debt, like credit card debt, allows you to consolidate multiple payments into a single payment with a lower interest rate.

If you need money for an emergency, using a personal loan instead of a payday loan may save you hundreds of dollars in interest charges. The average APR for a payday loan can be more than 600 percent, depending on your state. The maximum interest rate on a personal loan is typically about 33 percent.

Payday loans have short repayment terms, usually by your next payday, between two and four weeks. This quick turnaround time often makes it difficult for borrowers to repay the loan by the due date. Borrowers are usually forced to renew the loan instead, causing the accrued interest to be added to the principal. This increases the total interest owed.

Personal loans have longer term lengths and will generally cost the borrower much less in total interest.

Takeaway: Personal loans are cheaper and safer than payday loans.

Homeowners can use a personal loan to upgrade their home or complete necessary repairs, like fixing the plumbing or redoing the electrical wiring.

A personal loan is a good fit for people who don’t have equity in their home or don’t want to get a home equity line of credit or home equity loan. Unlike home equity products, personal loans often don’t require you to use your home as collateral since they’re unsecured.

Takeaway: A personal loan can help you fund a home improvement project if you don’t have equity in your home and don’t want to borrow a secured loan.

The average cost of a local move is between $900 and $2,400, while a long-distance move costs anywhere from $2,700 to $10,000, according to Angi. If you don’t have that kind of cash on hand, you may need to take out a personal loan to pay for moving expenses.

Personal loan funds can help you move your household belongings from one place to another, purchase new furniture, transport your vehicle across the country and cover any additional expenses. Using a personal loan for moving costs can also help you stay afloat if you’re moving somewhere without a job. This way you can avoid raiding your savings or emergency fund.

Takeaway: If you can’t immediately afford all of the expenses associated with a long-distance move, a personal loan can help you cover those costs.

If you have a sudden emergency, like surprise medical bills, are another common reason to take out a personal loan, especially if your doctor requires payment in full. After you’ve negotiated with the hospital, doctor and insurance company, you might need a personal loan to cover unexpected medical costs.

Emergencies around the house, such as a burst pipe, might also require quick funding while waiting for an insurance payout. In the case that you will be reimbursed for the cost, pay close attention to whether there are prepayment penalties.

Takeaway: Because they can be disbursed so quickly, personal loans are a good way to cover an emergency or unexpected expense.

Personal loans allow you to cover steep automotive repairs or purchase major household appliances and electronics immediately. Though you’ll have to pay interest and potentially upfront fees, you may save time and money in the long run, by avoiding having to use laundromats or rental cars and other short-term, expensive alternatives.

Takeaway: A personal loan can help you get new appliances as soon as you need them.

A personal loan is one way to cover the cost of a car, boat, RV or even private jet. It’s also one way to pay for a vehicle if you’re not buying it from the company directly.

For example, if you’re buying a used car from another consumer, a personal loan will allow you to purchase the car without emptying your savings account.

Takeaway: Using a personal loan is better than depleting your savings or emergency funds when paying for larger expenses.

The average cost of a wedding in 2022 was $30,000, according to The Knot. For couples who don’t have that kind of cash, a personal loan can allow them to cover the costs now and repay them later.

A wedding loan can be used for big-ticket items like the venue and bride’s dress, as well as smaller expenses like flowers, photography, the cake and a wedding coordinator. If you don’t want to deplete your savings account, consider a personal loan to help make your engagement and wedding exactly the way you always dreamed it to be.

Takeaway: A personal loan can help you finance all of your wedding expenses upfront, which can help you avoid dipping into your savings or emergency fund.

Your average vacation might not cost enough to necessitate taking out a personal loan, but there are moments you may want to splurge, such as your honeymoon. Whether you’ve just graduated or you’re celebrating an anniversary, personal loans can help you finance your dream vacation.

Takeaway: If you’re comfortable paying off your vacation for a number of years, a personal loan can help you get to your dream destination.

While a personal loan is a useful tool to finance larger or unexpected expenses, there are some situations where it may not be the best option:

Ultimately, you want to be cautious about taking out a personal loan. It should only be used to cover immediate needs to avoid putting your long-term financial well-being at risk.

A personal loan may not always be the best choice for your financial situation. But there are other options available when you need money to cover a significant expense or purchase.

When using a credit card, you won’t incur any interest at all if you pay your balance in full each month. However, if you carry a balance from one month to the next, you may pay steeper interest rates than you would with a personal loan.

If you expect to have ongoing expenses, perhaps for a remodeling project or ongoing medical bills, a home equity line of credit (HELOC) may be an option to consider. HELOCs typically come with a 10-year draw period, which provides ample time to cover ongoing expenses. Many HELOCs also offer interest-only payments during the draw period.

If you have enough equity in your home, a home equity loan may be another option. These loans provide a lump sum of money that you pay back in installments. Interest rates on home equity loans are typically lower than those offered on personal loans and the funds can be used for anything you want.

Withdrawing money from your retirement plan should be a last resort, but 401k loans are an option when no other form of borrowing is available. These loans don’t require meeting any lender or credit score requirements. But be sure you understand all the ramifications of taking a loan from your retirement plan, including any taxes or penalties that you may incur.

If you’re thinking about getting a personal loan, learn how they work before applying.

Personal loans are usually a type of unsecured loan, meaning you aren’t required to offer collateral in case you don’t repay the loan. There’s nothing for a creditor to seize if you take out an unsecured loan and don’t repay it, but there are still consequences: Your credit score will plummet and your loan could go into default. Secured loans, on the other hand, require collateral, like your home in the case of a mortgage or your car in the case of an auto loan. If you don’t pay back your secured loan, the lender could seize your property.

Unsecured loans use your credit score and credit history to determine if you qualify. While home and auto loans require you to use those loans for specific purposes, personal loans don’t have the same requirements. Instead, you can use a personal loan for almost anything, as long as it’s within the terms outlined in your loan agreement.

Personal loans are awarded in a lump sum, and you make monthly payments until your loan is paid in full. This is different from credit cards, which are a type of revolving credit. Credit cards are used as needed up to a certain amount, or your credit line. As long as you make monthly payments, you can continue to spend what you’d like up to your limit.

Personal loans can be used for practically any need you have—within reason and according to the terms of your loan. You can’t use the money for anything illegal, to gamble, or, in most cases, for postsecondary education expenses. Here are some good reasons to get a personal loan.

If you need money right away to cover bills, an emergency cost or something else that needs immediate attention, you can take out a personal loan. Most lenders provide online applications that allow you to learn whether you’ve been approved in minutes. You could receive funding that day or within a few business days, depending on your lender. You can use a personal loan to cover emergencies like:

A personal loan is a good alternative to a payday loan. Payday loans are short-term, high-interest loans that usually require repayment when you receive your next paycheck. You typically won’t have to submit to a credit check, and you can get funding right away. But payday loans could do more harm than good. Interest rates may approach upwards of 400%, and many borrowers don’t have the funds to repay the loan in full as quickly as payday loans require.

Americans owe $1 trillion in credit card debt. While some of that includes the purchases people made, it also includes interest and fees. All of this adds up and can hold many consumers back from paying off their credit card debt.

A personal loan can be used as a form of debt consolidation, especially with credit card debt. It’s also a popular reason people take out a personal loan. Personal loans charge lower interest rates compared to credit cards, particularly if you have good credit. The best personal loans charge an interest rate as low as 4%, well below the double-digit percentages most credit cards charge. You can take out a personal loan, pay off the balance of your outstanding credit cards and then make one payment to your new personal loan servicer.

Related: Best Debt Consolidation Loans

If you own your home, you could take out a home equity loan to fix or make upgrades. But you can also take out a personal loan. Home equity loans and lines of credit are great for tackling home projects, but they’re secured and use your home as collateral. Also, keep in mind that some lenders have tightened HELOC lending requirements due to Covid-19.

If you don’t want to risk losing your home in case you fall behind on payments, a personal loan is a solid substitute. Along with that, it might be quicker to get a personal loan compared to a home equity loan.

Related: Best Home Improvement Loans

If you’re moving close to where you live now, you might not need to cover any major expenses. But if you’re moving out of state, you may need extra cash to pay for moving costs. Moving far away means covering the cost of packing up your belongings, possibly hiring movers and transporting your things to your new location.

A personal loan also can help fund the process of finding a new place to live. For instance, if you find an apartment, you might need to cover the costs of the first month, last month and a security deposit. You may also need some cash to furnish your new home.

Auto loans are available if you’re looking to buy or lease a car, but personal loans are also available. Auto loans tend to have lower interest rates compared to personal loans, but they are secured loans and use your vehicle as collateral. If you’re worried about missing payments and your car getting repossessed, a personal loan might be a better option for you.

We don’t recommend borrowing money to pay for a wedding. Instead, consider paring down your wants to fit your budget, rather than increase your budget to fit your wants.

But if you do need to borrow money, you have a few options, like credit cards and personal loans. Credit cards tend to have higher interest rates compared to personal loans. Taking out a cash advance on your credit card can have even higher interest rates and fees. A personal loan is a less expensive option for borrowing if you need the money to cover the cost of a wedding.