What can personal loans be used for?

How personal loans work

Personal loans let you borrow a lump sum of cash, which you then pay back in monthly installments. (For that reason, they are also called installment loans.) Personal loans are more predictable than borrowing with a credit card or line of credit since they come with fixed interest rates, a fixed repayment period and a fixed monthly payment that stays the same for the life of the loan.

However, be aware that rates, terms and loan amounts vary among personal loan companies. This means you'll want to shop around and compare options before you apply.

What to consider before taking out a loan

Before you take out a personal loan, consider the risks and responsibilities you're taking on. For example, personal loans don't offer the best interest rates for bad credit, and lenders often charge origination fees, explained Howard Dvorkin, chairman of Debt.com.

"If you miss a payment, there are more fees," he said. "If you default, your credit score plummets, and you're left with massive debts you now have no way to pay off."

That said, a personal loan can still make sense in very narrow circumstances. "If you possess financial discipline and you're closing in on an achievable financial goal, then it makes sense," said Dvorkin.

Factors to consider before you borrow with a personal loan include:

• Collateral requirements: Most personal loans require no collateral, however, secured personal loans also exist. If you put up collateral securing this type of loan, you can lose it if you fail to repay.
• Credit impact: Applying for a personal loan can temporarily ding your credit, and failing to make loan payments can dramatically damage your credit.
• Annual percentage rate (APR): The rates you'll pay can vary based on your credit score, income and other factors. Fortunately, some lenders let you "check your rate" before you apply, which gives you an idea of the rates you would get approved for.
• Loan fees: Watch out for origination fees, which can be as much as 12% of the loan amount. Also, watch out for prepayment penalties and other hidden fees.
• Loan terms: Repayment terms often last for up to 84 months or even longer. Ask yourself if you can afford to and want to make the loan payment for that long.

» MORE: How to apply for a personal loan

Uses for a personal loan

Personal loans can work well for large expenses you need time to pay off. While the list of ways to use a personal loan is nearly endless, some of the most common ways people use this type of funding include:

• Adoption expenses: With the average cost of international adoption ranging from $20,000 to $50,000, according to government data, taking out a personal loan to pay for adoption can make sense.
• Cars and boats: While secured auto loans and boat loans are available, you can also use an unsecured personal loan to purchase these big-ticket items.
• Debt consolidation: Using a personal loan for debt consolidation makes sense if you can get a lower interest rate than you're currently paying. Personal loans also have fixed payments and a set repayment plan that lets you know exactly when you'll become debt-free.
• Home renovations: You can use a personal loan to pay for home renovations, such as a new kitchen, an upgraded bathroom or a room addition on a home you already own.
• Moving costs: Moving is expensive, and you’ll have to pay these costs on top of whatever you paid to get a new apartment or home.
• Vacations: If you're planning a dream trip or a honeymoon and you don't have the cash to pay upfront, a personal loan for vacations can help you finance your trip.
• Weddings: Wedding loans are fairly common due to the high costs of getting hitched these days. According to The Knot, the average cost of a wedding came in at $30,000 in 2022.

» MORE: 40% of Americans need a loan right now

What a personal loan can’t (or shouldn't) be used for

You can use a personal loan for almost anything, but there are a few specific exceptions to keep in mind.

• College tuition and fees: Personal loan companies don't want these loans used to pay for college tuition and fees, nor do they want you to use personal loan funds to pay off existing student loans. If you need funding for college, you should check out federal and private student loans instead.
• Down payments: Mortgage lenders don't let borrowers use loan funds for the down payment on a home. Instead, they require buyers to save the amount they need in cash.
• Investing: Even if you can theoretically use personal loan funds for investment purposes, you shouldn't. There’s a risk you could lose some or all of it and still have to repay the full loan amount.

» MORE: What to know before taking out a personal loan

Alternatives to personal loans

Before you take out a personal loan, consider the potential downsides of borrowing, warned financial advisor Robin Snell of Nested Financial & Tax Planning. This includes the burden of adding new debt and the budget strain of having a new monthly payment. You should also think about the opportunities those debts can cost you when you take out a new loan.

"Overwhelming debt hinders seizing new ventures or investments," said Snell. "Those interest payments could enrich investments or quality of life instead of filling the pockets of big banks."

If you do decide you need to borrow money, consider these alternatives to personal loans:

• 0% APR credit cards: While credit cards aren’t good options for long-term borrowing due to the high interest rates, 0% APR credit cards can work well when you need to borrow a small sum you can pay off quickly. While 0% APR offers vary widely, the longest you can get with 0% APR on purchases is 21 months.
• Personal lines of credit: A personal line of credit from a bank or credit union lets you access cash as you need it instead of getting a lump sum upfront.
• Home equity loans and HELOCs: Home equity loans and home equity lines of credit (HELOCs) let you borrow money while using your home as collateral.
• Saving for what you want: Depending on what you need funding for, you may be able to save up the cash you need over time. If you choose this option, make sure to open a high-yield savings account so you're earning interest on your deposits.

Bottom line

You can use a personal loan for nearly any purpose, from fertility treatment to adoption expenses, a wedding and even your dream vacation. However, you'll want to think long and hard before you borrow money you'll wind up paying back with interest and fees for several years.

Snell says you should ask yourself if you really need a loan right now and if you're willing to deal with the consequences of doing so. For example, consider how the debt will impact your financial stability if unexpected life events occur, like job loss or a medical emergency.

If you decide to borrow with a personal loan, shop around and compare lenders based on their loan amounts, fees, interest rates and repayment terms. That way, you can borrow what you need without paying more interest and fees than you have to.