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Life happens. Sometimes, you might need to borrow money to pay for it. You could charge planned (or unplanned) purchases to a credit card, but a personal loan could be a better fit when you need to pay for a larger expense.
A personal loan can put cash in hand when you need it. And you can build a positive credit history when you pay the loan back on time. Consider the top reasons people take out personal loans to decide if it’s right for you.
What are loans?
A loan is an amount of money that you borrow with the understanding that you’ll pay it back at a future date. Lenders set the repayment schedule, and they can also charge you interest and fees to borrow.
A personal loan is a lump sum of money you borrow for personal use. Personal loans are offered at traditional banks, credit unions, online banks, and non-bank lenders. Repayment terms for personal loans can range from a few months for short-term loans or span five to six years.
As with other loans, lenders can charge interest for personal loans. The personal loan APR you pay is typically determined by how much you’re borrowing, the repayment term, and your credit history. A higher credit can help you get a lower interest rate on a personal loan.
Personal loans can be secured or unsecured. A secured loan requires collateral; an unsecured loan doesn’t. You might consider secured personal loans if you have less than perfect credit.
Find out more about personal loans and how they work.
Top reasons for personal loans
With personal loans, you can use the money for virtually any expense the lender allows. There’s no “best” reason for personal loan funding; instead, you might consider using a personal loan in any of these scenarios.
1. Debt consolidation
Debt consolidation allows you to combine multiple debts into one. You could take out a personal loan and use the proceeds to pay off high-interest credit cards, medical bills, or other debts. You’d then make a single payment to the personal loan each month going forward. Using a personal loan to consolidate debt can make debt repayment easier to manage.
🔥 Chime Tip: You could save money on interest if the personal loan APR is less than the average APR you’re paying across your other debts.
2. Moving costs
Moving may be necessary if you’re accepting a new job, heading off to college, or you’ve decided to swap paying rent for a mortgage. But it doesn’t come cheap. According to Moving.com, the average local move costs $1,250, while a long-distance move costs $4,890 on average.
If a move is in the cards, you could use a personal loan to pay for it so that you aren’t draining your cash reserves. A personal loan could also provide extra funds to cover costs once you settle in, like paying security deposits or updating your vehicle registration.
3. Medical expenses
If you don’t have health insurance (and 28 million people in the U.S. don’t, according to the Census Bureau), then even a minor medical emergency could leave you with a sizable bill. Personal loans can be used to pay for a variety of medical expenses when you’re uninsured or underinsured, including:
- Emergency room or urgent care visits
- Orthodontic services and dental surgery
- Eye surgery
- Cosmetic procedures
- Weight loss surgery
- Ambulance or air transport charges
You can also use personal loans to pay for medical care for pets. If your dog needs emergency surgery because they swallowed their favorite chew toy, for example, you could use a loan to pay the vet.
4. Funeral costs
The loss of a loved one is stressful enough without having to deal with the added burden of paying for funeral or burial expenses. According to the National Funeral Directors Association, the national median cost of a viewing and funeral was $7,848 in 2021. Cremation costs slightly less, at $6,971.
If your loved one didn’t leave a life insurance policy behind to cover those costs, then a personal loan is one way to pay for them. Many lenders offer funeral loans specifically for that purpose.
5. Wedding costs
Tying the knot is a huge life milestone, and having a firm wedding budget is essential for keeping costs at bay. According to Zola, the typical wedding budget ranges from $10,000 to $20,000, but you could easily spend more if you’re planning a big event.
A personal loan can provide you with funds to pay for wedding attire, wedding rings, flowers, the photographer, catering – anything and everything you need to make the day special and memorable. And you could also use personal loans to finance your honeymoon if you’d rather not dip into savings.
6. Vehicle repair
Having your car breakdown can be a headache if you rely on it to get to work, school, or run errands. If you don’t have cash to pay for a new transmission or replace your worn-out tires, a personal loan can help close the gap.
You might also consider a personal loan if you’re interested in buying a car. That could make sense if you’re able to get better terms with a personal loan than a traditional vehicle loan.
🔥 Chime Tip: You could also use a personal loan to pay a down payment on auto insurance to secure cheaper monthly rates.
7. Home improvements
Making home improvements or repairs can boost your home’s value, and many homeowners tap into their home equity to pay for them. The only trouble with a home equity loan or a home equity line of credit (HELOC) is that you use the home as collateral. If you don’t pay, you risk losing the home to foreclosure.
An unsecured personal loan wouldn’t put your home at risk. Depending on how much equity you have in the home and your credit scores, you may even be able to borrow more with a personal loan and get a better interest rate.
8. Emergency expenses
An emergency fund is designed to hold money for unplanned or unanticipated expenses. If you get laid off from work, for example, or your child gets sick and you need to take time off to care for them, you could use your emergency fund to cover day-to-day living expenses.
That assumes you have a sizable emergency fund, however. According to the Federal Reserve, 36% of Americans wouldn’t be able to fund a $400 emergency expense in cash. If you’re still in the process of building emergency savings, then a personal loan can make it easier to manage unexpected costs.
9. Business expenses
Starting a business can help you become financially independent and escape the 9 to 5. You might turn to a personal loan if you don’t have the cash to bootstrap business expenses or cover your living expenses until your business takes off.
While there are loans for startups, many lenders require you to have at least one to two years in business and $50,000 to $100,000 or more in revenue to qualify for a business loan. Getting a personal loan may be easier when you haven’t been in business long and aren’t generating much revenue yet.
10. In vitro or adoption expenses
In vitro fertilization (IVF) and adoption can offer a path to parenthood but can take a financial toll. According to FertilityIQ, in vitro can easily cost over $20,000 per cycle, and patients can easily pay $40,000 to $60,000 to become pregnant successfully. Meanwhile, according to American Adoptions, adoption can cost upward of $70,000 on average through a private agency.
A personal loan can help you realize your dream of becoming a parent. You can use loan proceeds to pay for in vitro procedures or cover adoption costs, including attorney’s fees or travel expenses.
11. Federal and state taxes
If you’ve filed your tax return but have a balance due, you’ll need to pay up by the filing deadline to avoid penalties and interest. In a worst-case scenario, unpaid taxes can result in liens against your property or offsets of your tax refunds. Taking out a personal loan could make sense if you’d like to clear any tax obligations to the IRS or your state revenue department.
12. Divorce expenses
Getting divorced can be just as expensive as getting married, and potentially more so if you’re involved in a contentious dispute with your soon-to-be-former spouse. Suppose you’re in a situation where your attorney advises you against using joint assets or credit lines to pay expenses until the divorce is finalized. In that case, you might consider a personal loan in the interim.
Reasons to avoid a personal loan
There are many good reasons for a personal loan–and a few scenarios where you might want to think twice about getting one.
1. A different kind of loan might be better
Before applying for a personal loan, it’s important to consider whether the lender restricts how loan proceeds can be used. For example, some lenders might allow you to use a personal loan to pay for living expenses while you’re enrolled in school but not college tuition.
Of course, federal student loans are usually the better option if you need to borrow for school anyway since they have low interest rates and flexible repayment plans. They can also offer certain protections, like grace periods, forbearance, and deferment if you’re experiencing financial hardship.
2. You’re stuck with high interest rates
Taking out a personal loan could also be a mistake if you’re subject to a high interest rate, and you could get a different type of loan with a lower rate. For example, you may not be thrilled about using your home to secure a home equity loan. But home equity loans can offer low rates and affordable payments if you choose a longer repayment term.
3. You can’t afford the monthly payments
Keep the monthly payments on a personal loan in mind to determine whether it’s a good fit for your budget. If the payments are too high, that could put you at risk of falling behind. Late or missed payments to a personal loan could cause serious damage to your credit scores.
Where can I take out loans?
If you’re interested in where to get a personal loan, you have several options. The first place you might start is with your bank. Both major banks and smaller regional banks can offer personal loans to customers. If you have a favorable banking history, you may be able to qualify for a rate discount.
Credit unions are another option for getting a personal loan. You’ll need to be a member if you’re not one already to apply for a personal loan. Credit unions have membership requirements based on where you work, live, go to school, attend church, or your military affiliation.
Online lenders and banks may be the best places to look for personal loans since they may offer higher loan limits or more competitive rates than traditional banks and credit unions. You may be able to check your rate without affecting your credit score when comparing personal loans online.
What is a good personal loan APR?
The best personal loan APR is the lowest rate you can get based on your loan terms and credit qualifications. Personal loan rates can range from under 5% to over 30%, with the lowest rates reserved for the most creditworthy borrowers.
Poor credit or limited credit history isn’t a barrier to getting a personal loan. But it can mean that you’ll pay more interest for any secured or unsecured personal loans for which you qualify.
Personal loans can help you meet various financial needs, whether consolidating debt or simply paying for an expense that wasn’t on your radar. There are personal loan options designed to fit every budget and credit situation. Taking time to shop for the best loan rates can help you get the best terms possible when borrowing.
Worried your credit history will affect your ability to get a personal loan? Find out how to get a loan with bad or no credit.