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If you need to borrow money to cover a large purchase or emergency expense, you may consider a personal loan. Personal loans are fairly flexible and you can use them for a variety of purposes, unlike loans designed for a specific purchase (such as an auto loan).
Here’s what to know about what a personal loan is, what you can and can’t use it for, and how to secure one.
Credible makes it easy to compare personal loan rates from various lenders.
How does a personal loan work?
A personal loan is a type of loan that’s typically unsecured (meaning it doesn’t require collateral), and you can use it for almost anything. Banks, credit unions, and online lenders offer personal loans.
Personal loans come with a set repayment term, with monthly payments and interest. When you apply for a personal loan, the lender will review your credit history, as well as your income, to determine whether you’re eligible for a loan and at what interest rate.
Personal loans range in size, and the amount you can borrow depends on the lender and your personal financial situation. Generally, you can find personal loans ranging from $100 to $100,000.
What can you use a personal loan for?
One of the major appeals of personal loans is that you can use them for a variety of financial goals. Here are a few examples of common personal loan uses:
If you have multiple sources of debt with varying interest rates, consolidating all your debt into one personal loan may make it easier to manage. In some cases, you may be able to qualify for a lower interest rate, which can save you money and make it easier to pay off your debt faster.
Life often throws curveballs that cause financial strain. Between emergency vet visits, unexpected travel needs, and job loss, you may need to borrow money with a personal loan to cover a large expense or to make sure you can stay on top of your bills.
Whether you need a new water heater or want to update your kitchen, you can use a personal loan to cover many major home improvement expenses. A personal loan can help you pay for necessary repairs as well as improvements.
Whether your child needs a new computer for school or it’s time to upgrade your old mattress, a personal loan can be a way to finance a large purchase. Paying off the personal loan in installments can make funding a major purchase easier.
Major life events
From weddings to moving, some of life’s biggest moments come at a cost. Whether you saw this major life event coming or it surprised you, a personal loan can help you cover associated expenses, like hiring movers or buying new furniture.
Starting a business
While some lending products are designed specifically for business owners, you can also use a personal loan to cover some business expenses and operating costs. Just make sure to confirm with the lender that you can use the funds for your business before signing on the dotted line.
If you find yourself with medical bills you can’t pay, a personal loan can help spread out those expenses into manageable monthly payments. It’s worth checking if the medical provider will negotiate some of your debt down or allow you to pay in installments before you take out a personal loan.
Car on the fritz? Because you can’t always wait until you can save up to make a necessary vehicle repair, you may take out a personal loan to help get the repairs done sooner rather than later.
As you can see, you can use personal loans for a variety of purposes. It’s up to you to decide if paying interest to borrow money with a personal loan is worth it.
With Credible, you can compare personal loan rates from multiple lenders all in one place.
What can’t you use a personal loan for?
Personal loans do have some limitations on how you can use the borrowed funds. During the application process, lenders will typically ask what you plan to use the personal loan for. Generally, you can’t use a personal loan for:
- College tuition — You generally can’t use a personal loan to pay for college tuition. Lenders view this as a risk, since students who have no major source of income may not be able to repay their personal loan.
- Illegal activities — It may seem like common sense, but you can’t use a personal loan to finance illegal activities.
- Gambling — Even if gambling is legal where you live, you can’t take out a personal loan for the purposes of gambling or betting.
Each lender has its own unique application process, but you’ll typically need to follow these steps to get a personal loan:
- Decide how much you need to borrow. Before you apply, use a personal loan calculator to help you estimate what your monthly payments would be for the amount you want to borrow, and if you can afford it.
- Check your credit. Check your credit report before applying to make sure there are no errors hurting your score. The better your credit score is, the better loan rates and terms you may qualify for, so remedy any mistakes on your report before you apply for a personal loan.
- Shop around and compare lenders. The rates and terms a lender offers you affect how much you spend over the life of your personal loan. Shop around for the best rates and terms so you don’t accidentally overspend.
- Apply. All lenders have different application requirements, but you’ll generally need to provide documentation such as government-issued identification, recent pay stubs, bank statements, and verification of your home address.
- Receive your loan funds. Once you accept a loan offer, the lender will verify the documentation you provided. It can take anywhere from one to six business days to verify your documents and distribute your funds.
Things to consider before getting a personal loan
Before you apply for a personal loan, keep the following aspects in mind:
- Interest rate — Lenders charge interest when you borrow money, and you’ll pay it monthly as part of your loan payment. The lower your interest rate is, the less you’ll spend on interest.
- Loan term — Your loan term is the amount of time you have to repay your personal loan, and it affects how much interest you’ll pay over the life of the loan. Generally, the shorter your repayment term, the less interest you’ll pay.
- Fees — Personal loans often come with fees, such as origination fees and late fees. Ask lenders upfront what kind of fees they charge and when they charge them — these add to the cost of your loan.
- Monthly payment — Each month, you’ll make a payment toward the principal balance and a portion of the interest you owe.
You can easily compare personal loan rates with Credible.
Should you get a personal loan?
Taking out a personal loan makes the most sense when you can get a favorable interest rate and can fit the monthly payments into your budget. For example, if you need money quickly to cover an emergency expense, and you have strong credit, a personal loan can be a good option.
But a personal loan doesn’t make sense in some cases. If you don’t have a strong credit history, you may find it hard to get a favorable interest rate. Sometimes, using a credit card with a low interest rate may be a better bet (again, only if you can afford to make your monthly payments). Using a travel rewards credit card to purchase a trip that you know you can pay off by the end of the month will save you the hassle of applying for a loan, and you’ll rack up some rewards points at the same time.
Before taking out a personal loan, it’s important to consider if the expense is truly necessary and worth paying interest on.