What Can I Use a Personal Loan For? Common Uses and Smart Tips

g-stockstudio / Getty Images/iStockphoto

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Personal loans can be used for many things, from debt consolidation to funding big purchases. Some uses are smarter than others.

A personal loan might not always not be your best option, especially if you can find a way to borrow money with a lower interest rate.

Generally, you can use the funds from a personal loan however you choose — there aren’t many restrictions. For instance, you could borrow a lump sum of money to pay off emergency medical bills, or even to fund an upcoming trip.

With personal loans, you’ll repay the money you borrow with fixed monthly payments. There are a few types of personal loans: Most are unsecured, meaning you’re not required to offer collateral to the lender, though there are some secured options as well.

6 Top Reasons People Use Personal Loans 

You can use a personal loan for almost anything, but here are some of the most common uses:

1. Debt Consolidation

If you have debt across various accounts, such as multiple credit cards with high interest rates, you can open a debt consolidation loan that combines your debts into a single account requiring one monthly payment. Not only does this streamline your debt payoff, but you can also typically secure a lower interest rate.

2. Emergency Expenses

If you’re faced with an emergency, such as a medical issue or a car breaking down, you can use a personal loan to get the necessary funds to pay it off.

3. Home Improvement Projects

Home upgrades and renovations are often quite expensive. If you don’t have enough liquid funds for your project, you could consider taking out a personal loan.

4. Major Life Events

Similarly, many people turn to personal loans to fund expensive milestone events, such as weddings, moving and adoption.

5. Large Purchases

You can also use personal loans to increase your purchasing power if you need to buy an expensive appliance or furniture, or to help fund necessary travel plans.

6. Medical or Dental Procedures

Medical and dental procedures can be quite costly. You could consider a personal loan if you don’t have the funds on hand and you have an elective procedure or an emergency issue comes up.

6 Reasons Why a Personal Loan Is a Bad Idea

While you can technically get a personal loan and use it for just about anything, that doesn’t mean you should.

Taking out a loan isn’t free — you’ll pay interest on top of the money you borrow. Beyond that, borrowing money for certain unnecessary expenses can establish unhealthy and unsustainable financial habits, such as living beyond your means.

Here are some uses of personal loans that you should avoid at all costs:

1. Investments or Stock Trading

With investing and stock trading, there’s no guarantee you’ll recoup the money you spend. That makes borrowing money to fund it extra risky, since you could end up losing money and still owing payments to the lender.

2. Everyday Spending

You shouldn’t use a personal loan to fund everyday purchases like groceries or gas. If you aren’t able to afford everyday necessities, you are likely living beyond your means, and borrowing money to afford essentials can lead you into a dangerous cycle of debt. Work on increasing your income to avoid this scenario.

3. Gambling or Illegal Activity

You can use a personal loan for most things, but gambling and illegal activities like buying illicit substances, are off-limits. Lenders make it very clear that this is a no-go.

You may have to state the purpose of your loan when you apply, and if you state either of the above reasons, you will not get approved. Even if you don’t have to state the purpose of your loan, borrowing money for illegal activities and gambling is extremely risky and should always be avoided.

4. Business Expenses

While you can use a personal loan for business expenses, it could be a better option to get a business loan. That said, if you’re just starting a small business, you may not meet the requirements for a business loan, and you can use a personal loan as an alternative.

5. Down Payment on a Home

Many mortgage lenders forbid you from using a personal loan to fund your down payment. Even if you find a mortgage lender that does allow it, it’s best avoided, because using a personal loan for such a large expense can negatively impact your overall mortgage application.

For instance, it will increase your debt-to-income ratio (DTI), which mortgage lenders use to evaluate your financial picture and whether you can afford a home loan.

Choosing the Best Reason for a Personal Loan 

If you’re considering a personal loan, make sure your reasoning makes sense.

Have a Good Purpose for Your Loan

You should only take out a loan to solve a financial problem or to add value in a way that doesn’t put you on shaky financial footing.

For example, a personal loan could make sense to fund a home improvement project that will cost thousands of dollars but also add to your home’s resale value, but only if you can afford to repay the loan.

Stay Within Your Budget

Evaluating your ability to repay the loan is key. If you do decide to take out a loan, carefully review the terms to ensure the monthly payment fits with your budget.

Keep Interest In Mind

Additionally, make sure you know how interest works on a personal loan. You’ll pay interest for the privilege of borrowing money, which will increase your monthly payments. The higher your credit score, the lower interest rate you will typically qualify for.

How Lenders View Loan Purpose 

Most lenders will ask you the reason why you need a personal loan on the application. Not only does this help the lender determine whether you’re eligible for a loan, but it can also impact the interest rate you get.

For example, if you’re using a loan for debt consolidation, that indicates to the lender that you’re looking to refinance high-interest debt, so you may be especially well positioned to get a low interest rate if you provide this reason.

No matter your reason for getting a personal loan, you should always be honest with the lender on your application. Not only will this help you get matched with the best type of personal loan for your situation, but it will improve your chances of getting approved without any issues. You should never lie on a personal loan application.

Smart vs. Risky Uses of Personal Loans 

This cheat sheet provides a quick overview of personal loan uses that are generally safer and those that are riskier and best avoided.

When To Consider Alternatives Instead

You might consider these before you dive headfirst into a personal loan.

Compare Personal Loans to Other Options

Even if your reason for taking out a personal loan is considered “safe” or smart, it may not be your best option. Make sure you know all the pros and cons of a personal loan compared to your other borrowing options before signing any agreements and finalizing your decision.

Avoid Using Personal Loans for Nonessentials

If you want to make a nonessential purchase, like upgrading a home appliance that still works or booking an expensive trip, you’re best off using your savings or working on saving up money rather than taking out a loan. Remember that borrowing money through a loan isn’t free; you’ll pay interest, which can add up, and it’s best to avoid unnecessary debt whenever possible.

Consider a 0% APR Credit Card

Beyond working to improve your savings, you could consider a 0% APR credit card as a personal loan alternative. These credit cards offer an introductory 0% APR period, typically of six to 21 months, and as long as you pay off your balance in full by the end of the period, you won’t be charged any interest. This can be a great option if you know you’ll be able to pay off your purchases in the short term.

Use a HELOC or a Home Equity Loan for Renovations

If you’re looking at a personal loan for major home renovations, explore other options like home equity loans and home equity lines of credit (HELOCs) first. These alternatives can offer lower interest rates because your home is used as collateral to secure the money you borrow.

Try a Medical Payment Plan

Finally, if you need a personal loan to pay off medical expenses, consider medical payment plans first. Medical payment plans work similarly to a buy now, pay later loan and may be available with lower interest or even no interest, so they could cost you less in the long run.

Final Thoughts: What’s the Best Way To Use a Personal Loan? 

The best reason for a personal loan is one that makes smart financial sense.

Consider What You Need, Not What You Want

That can mean a variety of different things, from paying off emergency vet expenses to funding a home renovation, but the key is that you only borrow money for needs, not wants.

Consolidate and Avoid Debt

Using a personal loan to consolidate debt and secure a lower interest rate could also be a smart option. Getting a personal loan to fund a shopping spree for items on your wish list, on the other hand, is not a wise idea because it could encourage you to spend beyond your means and trap you in a cycle of debt.

Don’t Forget Your Budget

Make sure you carefully consider why you want a personal loan and evaluate your ability to repay it alongside your budget before signing a loan agreement.

Shop Around With Different Lenders

If you do decide to get a loan, compare offers from different personal loan lenders to secure the lowest interest rate possible.

Share This Article: