Are you not sure if an expense is something you can pay with a personal loan? Find out everything you need to know about what they can be used for.
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With most types of loans, there’s no mystery about how you can use the money. Auto loans are for buying a car, student loans are for educational expenses, and mortgages are for buying a home. When you get a personal loan, it’s not quite so clear-cut.
Plenty of consumers have wondered about how they can use money from a personal loan. If you’re trying to figure out what your options are, here’s the lowdown on what you can and can’t do with your loan money.
What can you get a personal loan for?
I won’t keep you in suspense here -- you can get a personal loan for just about any reason.
That’s the beauty of personal loans. Unlike other loans that are intended for one specific purpose, personal loans have no such restrictions. As long as whatever you’re using the funds for is legal and the terms of your loan don’t specifically prohibit it, you’re good to go. You could get a personal loan to consolidate debt, pay for a trip to the Bahamas, or get your car fixed, to name just a few options.
Will the lender ask why you’re getting the loan?
During the application process, lenders typically ask how you plan to use your personal loan. They can conceivably use this information when deciding whether to approve your application, but your credit history and income are much more important.
In case you were wondering, it’s perfectly fine to spend your loan differently than you originally intended if your plans change. Once you have the money, it’s yours to do with it as you please. The lender doesn’t check up on how you spend your loan -- what’s important for them is that you make your payments on time.
Popular ways to use personal loans
Wondering what other consumers do with their personal loans? Here are some of the most common options:
Among the most popular reasons to get a personal loan is debt consolidation. It’s a simple process to consolidate debt with a personal loan, as you get the personal loan first, and then use that to pay off whatever debt you have. That could be credit card debt, student loan debt, or any other debt you’re paying off. For this to be worth your while, your personal loan will need to have a lower APR than what you’re currently paying.
Not only can you save money on interest this way, but it can also mean fewer monthly payments if you were previously making payments to more than one account.
If you’re looking at personal loans for this reason, you should also look at the best balance transfer credit cards, many of which offer a 0% intro APR for 12 months or longer. One crafty option is to get a balance transfer card first to pay down your debt as much as possible at a 0% APR, and then get a personal loan to refinance the remaining balance right before your credit card’s intro APR period ends.
Being a homeowner can get expensive, especially when you want to make renovations. Whether you’re interested in remodeling your bathroom, kitchen, or putting a pool in your backyard, you’ll find that renovations rarely come cheap. Depending on the job, you could end up spending several thousand dollars or more.
Ideally, you’ll have money saved to cover your costs, but there may be times when you can’t pay everything out of pocket. In that case, you can get a personal loan for your renovations.
A pipe bursts in the basement, your car breaks down, you have medical bills to pay -- hopefully not all in the same week. An emergency fund is the best way to deal with situations like that, but not everyone has one. A personal loan is another way to pay for emergency expenses at a reasonable interest rate.
As the saying goes, you’ve got to spend money to make money. While you can shop around for business loans, they can be difficult to get, especially if you have a new business that hasn’t made much money yet. Lenders will often only approve your application if your business has been open for a minimum period of time and meets their revenue requirements.
It may be more convenient to go with a personal loan instead of a business loan. You usually can’t borrow as much this way, but the application process will be easier and you’ll have a better chance at an approval.
You can do short moves without spending too much if you use your money wisely. Longer moves, such as moves to a new state or country, are almost always going to be pricy. A personal loan is one way to get yourself and all your belongings to your new home in one piece.
When to reconsider getting a personal loan
Even though you can use a personal loan for whatever you want, that doesn’t necessarily mean you should. It can be a good idea to get a personal loan if it will:
- Save you money -- Debt consolidation is the perfect example of this.
- Create value for you -- A remodel that boosts the value of your home would fit the bill here.
- Pay for a pressing bill that you couldn’t cover otherwise -- If your car needs repairs and you don’t have the money, then borrowing is better than being without transportation.
On the other hand, there are also situations when it may not be wise to get a personal loan. Some expenses consumers finance at their own peril include:
- Luxury items
- Shopping sprees
With all those expenses, you’re not saving yourself any money. You’re spending money that you don’t have, and it’s not for something that will create value for you. And none of them are things that you have to get right away, as you could be patient and wait until you have the money to pay in full.
That’s not to discourage you from paying for your vacation, wedding, or anything else with a personal loan. But whenever possible, it’s wise to save first, and then spend, instead of spending first and paying it back later.
Getting a personal loan
Personal loans are the jack-of-all-trades loans that you can use however you like. That flexibility is great, but any time you’re borrowing money, it’s important to borrow wisely.
If you want a personal loan, here’s what you should do first:
- Think about how you’ll use the loan. Make sure it’s a situation where a personal loan can benefit you in the long run, instead of just borrowing money for short-term benefits.
- Verify that a personal loan is the best financing option. Depending on the expense, there could be other financing plans or loan options available.
- Check your credit score and work on improving it as much as you can, because a lower score can help you pay less interest.
- Shop around with the best personal loan providers to get the lowest APR.
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