Personal loans, which allow you to borrow a fixed amount of money, can be used for a variety of purposes and often boast interest rates that are lower than credit cards. Some uses of personal loans include financing a big-ticket purchase, paying off medical debt or consolidating multiple credit card debts into one affordable payment. They differ from mortgage and auto loans in that they don't require collateral.
Personal loans have become very popular recently; personal loan debt has grown 11.4% over the past year, according to data from Experian.
Common Reasons for a Personal Loan
The most common reason people take out a personal loan is to consolidate debt into one single monthly fixed payment instead of paying multiple bills. In fact, 67% of people who open a personal loan were already carrying installment debt, according to Experian data.
Americans, on average, carry one personal loan, according to the 2017 Experian State of Credit Report. Residents of Corpus Christi, Texas, averaged the highest number of personal loans per person among U.S. cities, while Eureka, Calif., had the lowest average at 1.11.
Other common uses of a personal loan include home renovations, medical debts or unexpected expenses, according to a USA Today Twitter poll.
In another survey from Discover, 26% of respondents cited a major medical expense as the most popular potential use for a personal loan, followed by 22% saying debt consolidation, and 13% using it to fund a small business.
According to Todd Nelson, senior vice president of strategic partnerships at online lending firm Lightstream, personal loans can be a great option for practically any purpose, including autos, adoptions, home improvements, debt consolidation, tiny houses, timeshares, RVs, medical expenses, weddings and more. However, most lenders do have certain exceptions. "The few areas that Lightstream doesn't finance are student loans, business loans or to refinance an existing LightStream loan," said Nelson.
Debt, Dreams and Dire Straits
You can't get money from anything, so before you take out a personal loan, make sure to shop around for the best interest rates and terms. Next, examine your budget to determine whether you can make the monthly payments on time and within the agreed upon schedule.
If you can do both, a personal loan may make sense for your need and have a positive effect on your credit score over the long term. Here are some ways that you could use a personal loan:
1. Consolidate Credit Card Debt
This is likely the most common reason for getting a personal loan, and doing so could help you in the long run as many personal loans offer lower interest rates than credit cards.
2. Repay Medical Bills
Not paying your bills or debt can harm your credit. Medical bills that go unpaid will end up with a collection agency that will report the past-due account to credit bureaus like Experian. Borrowing money through a personal loan to pay off medical debt could be a good way to protect your credit.
3. Student Loans
Paying down your student loan debt faster could help you save money for the long-term depending on that loan's interest rates and the personal loan's interest rates.
4. Tax Debt
If you owe the IRS more than what you can afford, borrowing money through a personal loan might make the most sense.
5. Home Repairs
Maybe you need a new roof, furnace, water heater or have flood damage that needs to get taken care of right away.
6. Paying Back Family or Friends
If you borrowed money when you needed help, you will want to repay that debt to strengthen their trust and your relationship.
7. Remodel Project
Perhaps you need a new bathroom, new hardwood floors, solar panels or a new deck but don't have the cash to pay for it outright.
8. Your Wedding
Planning a wedding can be stressful and expensive. A personal loan could help, but you should make sure that taking out a loan makes sense for your budget.
9. Dream Vacation
Financing a dream vacation or cruise is an option for a personal loan if you know you can repay the loan on time.
10. Pet Bills
Owning pets can sometimes get expensive in a hurry. Pets can get sick or injured and emergency treatment can end up costing you a lot of money.
11. Starting a Business
Whether you are looking to get a small business started or just a side hustle, a personal loan may be the ticket to getting your ideas off the ground. Balancing your budget for your new business is priority number one so you don't find yourself in a debt hole down the road.
12. Emergency Fund
Establishing an emergency fund through a personal loan sounds like the opposite of conventional wisdom, but there may be times when it is needed. Knowing you have the funds available can help you mitigate the impact on your finances.
Personal loans can help when it comes to consolidating existing debt, financing your dreams or helping with unexpected emergency expenses. Finding the right personal loan can make all the difference in the world, and most importantly, ensure that you can make your payments on time, which is the most important factor in your creditworthiness.
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The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
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Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on September 25, 2018, and has been updated.