What are the benefits of obtaining a personal loan?
A personal loan could simplify your finances, but only if you manage it responsibly
One of the main benefits of obtaining a personal loan is that it can help you cover life's unexpected financial costs. A personal loan can be used to pay for medical emergencies, auto repairs, debt consolidation, home repairs or even vacations.
A personal loan often comes with a lower interest rate than a credit card, making it a more affordable option for those looking to consolidate existing debt.
- Personal loans can be used to consolidate debt or fund almost any expense.
- Since a personal loan usually isn’t backed by collateral, your credit score plays a big part in the rate you receive.
- Avoid using personal loans for down payments, college tuition, investing and business expenses.
Personal loan definition
A personal loan is a type of loan meant for personal use, whether it’s for debt consolidation, a wedding, a dream vacation or something else. It is usually unsecured, meaning that you do not need to provide any collateral to secure the loan. Instead, your credit score, income level and debt-to-income (DTI) ratio determine eligibility and your annual percentage rate (APR).
Personal loans generally have fixed interest rates and monthly payments. Depending on your lender, there may be fees, such as an origination fee and late payment fee.
Benefits of personal loans
Obtaining a personal loan can provide a number of benefits to borrowers looking for a financial lift. The process of applying for and obtaining a personal loan is much simpler than refinancing your home or taking out a home equity loan. Many qualified borrowers can get approved for a loan and funded within days rather than waiting for weeks. Other benefits include:
- Funds can be used for nearly anything
- Fast funding
- No collateral required
- Better interest rates than credit cards
- Build your credit score
While personal loans come with several perks, they might not be the best fit for everyone. Because creditworthiness plays a big part in a personal loan APR, you might be charged a high rate if your credit score is low. If you do have bad credit and need a personal loan, there are several lenders that may work with you.
What can I use a personal loan for?
Personal loans can be used for almost anything. During the application process, a lender might ask about the purpose of the loan, but there are usually few restrictions on how you can use the funds. Many borrowers, for example, use a personal loan for debt consolidation – paying off higher-interest debts and making a single payment each month.
While personal loans can be used for almost anything, avoid using them for investing or business expenses.
Here are a few more ideas on what you can use the loan for:
- Home remodeling
- Wedding costs
- Vacation costs
- Medical costs for you or a pet
- Emergency expenses
- Moving costs
- Vehicle financing for a motorcycle, RV, ATV or dirt bike
There are some expenses that you should avoid using personal loans for, though. According to Leslie Tayne, a financial attorney at Tayne Law Group in Melville, New York: “You should also avoid using a personal loan to invest. Investing has risks, so it's possible for you to lose money. Plus, you’ll still be on the hook for the loan balance even if your investment tanks.”
Additionally, she advises against using a personal loan to make a down payment on a home or to fund a business. “Personal and business money should always be kept separate for tax and legal reasons. Plus, a personal loan won’t help you build business credit.”
Alternatives to personal loans
Personal loans can fund many different types of purchases, but they aren’t the right choice for every expense. Additionally, if you don’t qualify for a low rate, there are alternatives worth considering:
- Delaying your purchase to save cash: While it is no fun to put off a trip or remodel until you save up cash, it can help you save money in the long run. Plus, the extra time spent saving could help you secure a better deal.
- Credit cards: While a credit card can have a higher APR, it can also be easier to qualify for a new account. Monthly bills will vary on your debt load, but the minimum payment required is typically low and easier to pay than on a fixed personal loan.
- Home equity loans: Home equity loans and home equity lines of credit (HELOC) have strict eligibility requirements, but both can also give you access to a higher amount of money than a personal loan. This can help you conquer your full home remodel to-do list without worrying about taking out an additional loan.
- Crowdfunding: For unexpected emergencies, such as a medical bill or vet expense, crowdfunding can work in your favor. Crowdfunding platforms make it easy to share your story and get donations for your cause. Crowdfunding platforms do take a small chunk of the money, but you won’t have to worry about repaying people.
What kind of credit score do I need for a personal loan?
Many lenders require a minimum credit score of 600. However, lender requirements vary, and those with a higher credit score generally receive a better APR. Having a good credit score — a FICO score of at least 670 — will boost your eligibility and secure you an affordable rate.
Having bad credit doesn’t necessarily disqualify you from a personal loan, though. You’ll want to check with each lender to see if it has a minimum credit score and what other factors it considers when looking at your application.
What is the average interest rate for a personal loan?
As of November 2022, the average rate on a 24-month, fixed-rate personal loan from a commercial bank was 11.23%, according to the Federal Reserve. Your personal rate will depend on the lender, your income and your credit history. Keep in mind that rates also fluctuate based on economic factors.
What types of things can’t I use a personal loan for?
Many lenders will not allow you to use personal loans for a down payment for a home or for college tuition costs.
Even if your lender approves these uses for a personal loan, there are better options to fund these costs. Additionally, it is wise to avoid using personal loans for investing or business costs.
Personal loans make it easier to pay for unexpected expenses and larger purchases. Taking out a personal loan is less risky than getting a loan that uses your home as collateral. However, a personal loan isn’t the best financial choice for everyone. Consider the costs, benefits and drawbacks of different types of personal loans and alternatives before making the right decision for you.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
- Federal Reserve, “Consumer Credit - G.19.” Accessed Feb. 3, 2023.
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