What Can I Use a Personal Loan For?  

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Personal loans are a flexible way to borrow a lump sum of money, often without needing to put up collateral. You repay the loan over a set term, with a fixed interest rate and monthly payments.

Because rates are typically lower than credit card APRs, it can be tempting to use a personal loan to cover big expenses. But before you apply, make sure the reason for borrowing truly makes sense for your financial situation.

Personal Loan Basics

• A personal loan is a lump-sum loan repaid in fixed monthly installments over a set period.
• Most personal loans range from 12 to 60 months, though some extend longer.
• Most are unsecured, meaning you don’t need to put up collateral — but secured loans, which are backed by assets, may come with lower interest rates.
• Loan amounts vary by lender but often range from a few thousand dollars to $50,000 or more.

What Can I Use a Personal Loan For?

You can use the funds from your personal loan for any purpose. Unlike a mortgage, car loan or student loan, you’re not restricted to spending the money on one specific purchase or expense. But that doesn’t mean all personal loan purposes are created equal.

Here are examples of good uses for personal loans.

Debt Consolidation

With debt consolidation, you combine multiple high-interest debts into one lower-interest loan.

Here’s an example:

• You’re paying 24% on one $6,000 credit card balance.
• On a different card, you’re paying 19% on a $10,000 balance.
• You can consolidate the debt and save money by refinancing to a personal loan that charges 12% interest.

If you choose to use a personal loan for debt consolidation, address how you accumulated debt in the first place so you can get — and stay — out of debt.

Pro Tip

When consolidating debt, aim for a loan with no origination fees and make sure the total cost of the loan — including fees and interest — is lower than your current debt.

Home Improvement and Repairs

If you’re making essential home improvements or those that will increase the value of your home, borrowing money can be justified. Plus, a personal loan will save you money on interest compared with what you’d pay if you put the improvements on your credit card.

If you use a second mortgage — such as a home equity loan or line of credit — you might qualify for an interest deduction. However, keep in mind that your home serves as collateral, meaning you could risk losing it if you can’t make payments.

Medical Expenses

Medical expenses can sneak up on you without warning, leaving you unable to pay your bill.

Before applying, consider the following:

• Contact your medical provider. Check if they can work out a payment plan with a lower interest rate and better repayment terms than your personal loan offers.
• Medical credit cards could be another option. Some of them offer 0% APR.

Major Purchases

Another way to use personal loan funds is for major purchases, such as large household appliances or a personal computer.

Compare personal loan rates with in-store financing options before deciding. Some retailers offer 0% interest for six months or more to allow you to pay off your purchase before interest takes effect.

Education and Career Development

Expenses related to certification courses or other professional training can be paid for with personal loan funds.

If you’re planning to use the funds to pay for college tuition, Federal Student Aid may offer better repayment terms and other benefits that aren’t available with a personal loan.

Special Events

Events such as weddings or funerals require a large sum of money up front. A personal loan can allow the borrower to cover the expense and pay it back over time in equal monthly payments.

However, the interest attached to the loan can make the total cost of borrowing significantly more expensive.

Vehicle Repairs or Car Purchases

Vehicle repairs can be quite costly — thousands of dollars in some cases. A personal loan can cover those expenses with the convenience of monthly payments to repay the loan.

Here are some key points to know:

• Buying an older vehicle? Personal loans can also be used to purchase cars that might not qualify for traditional auto loans.
• Credit score matters. Larger amounts are often only granted to people with good or excellent credit. If your credit is fair, a used car loan may be easier to qualify for.
• Used car loans come with collateral. These loans usually offer lower rates, but your vehicle serves as collateral — meaning the lender can repossess if you default.
• Personal loans are usually unsecured. If you finance a car with a personal loan and miss payments, the lender can’t repossess the vehicle — although your credit will still take a hit.

Emergency Expenses

If you don’t have enough savings for an emergency, a personal loan can provide a low-interest option. They are safer than other options like payday loans or financing from a hospital or auto shop.

A secured loan, like a home equity loan or line of credit, might offer even lower rates but it requires using your home as collateral.

While building an emergency fund is the best way to prepare for unexpected expenses, a personal loan can be a backup when needed.

What You Should Not Use a Personal Loan For

Personal loans can help you get out of or avoid financial trouble. But if you use personal loans for the wrong reason, borrowing money might just make your financial hardship even worse.

Avoid using a personal loan for reasons including the following:

• Investing or stock market trading: Some lenders prohibit using personal loan funds for investing and stock purchases due to the high risk of loss. Plus, the loan’s interest and fees may outweigh any potential gains.
• Vacations and luxury purchases: Financing nonessential expenses with a loan can lead to long-term debt. Even if you’re approved for a no-credit-check loan, it’s better to save up rather than borrow for splurges like luxury items or travel.
• Everyday living expenses: Using a personal loan to cover groceries, bills or other routine expenses can lead to a cycle of debt. If you’re struggling to make ends meet, it may be time to revisit your budget or seek help from a financial advisor.

Pro Tip

If you’re overloaded with debt payments, consider budgeting alternatives, such as a no-spend month, or call your creditors or lenders to work out a deferred payment plan.

Key Factors To Consider Before Taking a Personal Loan

Should you decide to take out a personal loan, shop around to get the best deal. Consider whether the personal loan is secured or unsecured, as well as the following factors.

Interest Rates

• Interest rates are additional payments — on top of the amount borrowed — that you owe the lender for the privilege of borrowing.
• A personal loan with a lower interest rate and a shorter term will help keep down your total repayment amount.
• If you take out a personal loan, choose a lender offering the lowest interest rate.
• The better your credit score, the lower your personal loan interest rates will be.

Fees

• Some lenders offer no-fee loans, which means there are no origination or other borrowing fees.
• The only liability you’ll encounter is the repayment of the sum borrowed and the interest payments.
• Watch out for personal loan companies that charge high fees.

Terms

• Different personal loans have different repayment periods.
• In general, it’s preferable to take out a shorter-term personal loan than a longer-term loan.
• With a shorter-term loan, you’ll end up paying less in total interest charges.

Prepayment Penalties

• Find out whether the lender charges a fee or a percentage of the interest if you decide to pay off your loan early.
• If it does, you may want to find another lender.

Lenders

• Vet the lender for your personal loan.
• Understand the loan fees and credit score required by the specific lender.
• Read reviews to ensure that you’re choosing a reputable firm.

Personal Loan vs. Other Financing Options

Before taking out a personal loan, it helps to compare it with other financing options.

How To Apply for a Personal Loan

If you’ve decided that a personal loan is the right option for your needs, follow these steps to apply:

1. Check your credit score. About 90% of lenders use FICO credit scores. You can get your FICO credit score and your credit report free from Experian. You might also have a lender or credit card issuer that provides you with your credit score each month. Log in to your online account or check your statements if you’re not sure.
2. Prequalify for several personal loan offers so you can compare loan amounts, rates, fees and terms. Prequalifying doesn’t hurt your credit.
3. Choose the lender with the best personal loan offer and submit your application. Documentation you’ll need to provide can include photo identification, paystubs and checking account statements.
4. Wait for loan approval and fund disbursement, which can take up to 10 days.

Is a Personal Loan Right for You?

A personal loan can be a smart solution if you have a clear purpose and a solid plan to repay it. It’s best used for major expenses that aren’t easy to cover with savings — like consolidating high-interest debt or funding essential home repairs. But if you’re considering one just to fill budget gaps or finance nonessentials, it might be worth exploring other options first.

Michael Keenan and Barbara Friedberg contributed to the reporting for this article.

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