A personal loan can be a way to smooth your finances when you have an emergency or are making a large purchase. While personal loans are versatile and can be helpful, there are some risks in using them—especially if you become too reliant on them. Here’s what you need to know about how to use a personal loan.

How Personal Loans Work

Most personal loans are unsecured, meaning that you don’t usually need to provide something valuable as collateral. While some personal loans can be secured with a car title or another possession, most personal loans are likely to be unsecured.

With a personal loan, you borrow a lump sum and usually pay a fixed interest rate, and make installment payments over the course of two to five years, depending on the loan terms.

Lenders are likely to use a credit check to determine how much they’ll let you borrow, in addition to your interest rate. They’ll also consider your income and the other debts you have. Approval normally takes only a few minutes, and some lenders will provide you with the funds as soon as the next business day.

Personal Loan Uses

Personal loans are versatile and can be used for a variety of purposes. Here are some common ways to use a personal loan:

Debt Consolidation

If you have a lot of high-interest credit card debt or other loans, a personal loan can be used for debt consolidation. Depending on the situation, you might be able to get a large personal loan and use that money to pay off your smaller loans. With the help of debt consolidation, you can potentially streamline your debt and perhaps pay it off earlier.

Home Improvements

Often, relatively small home improvement projects can be completed with the help of a personal loan. You won’t need to use your home equity as collateral if you get a personal loan to remodel your bathroom or add a deck. Additionally, if you want to start your project quickly, you can likely get your funds much sooner.

However, a personal loan might have a higher interest rate than a home equity loan or home equity line of credit (HELOC), so consider whether you want to pay that higher cost.

Emergencies

An unexpected expense, such as when your car breaks down or an appliance stops working, can be covered with the help of a personal loan. You can usually get the money quickly, and it can bridge the gap if you don’t have an emergency fund to cover the cost.

Depending on the rate you receive, a personal loan can be a better choice than using a payday lender or pawnshop, both of which might charge interest rates in the triple digits.

Medical Bills

If you need dental work done or have a procedure performed out of network, a personal loan can help you cover the cost. Personal loans can also be used for elective procedures, like Lasik or cosmetic surgery.

However, before getting a personal loan to cover healthcare costs, check to see if there are alternatives. Some hospitals and other facilities will set up interest-free payment plans, which can be a better choice than a costly personal loan.

Large Purchases

Finally, personal loans can be used to make large purchases and pay for events. You can use a personal loan to pay for a wedding, vacation, or new computer. Big-ticket items might be difficult to save up for over time, and a personal loan with manageable payments can help you reach your goals faster. However, it’s important to be careful, since you will pay interest, and you might not want to be paying off that vacation three years after it’s over.

How Do People Use Personal Loans

daftarlapak303.commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

Things That You Can’t Use a Personal Loan for

While personal loans are versatile and can be used for a variety of purposes, they can’t be used for everything. Some expenses that personal loans usually can’t be used for include:

• College tuition: Most of the time, when you apply for a personal loan, the lender will ask to make sure that you aren’t using the loan for educational expenses, like tuition. In general, federal and private student loans are considered more appropriate for college tuition.
• Business startup costs: Personal loans are meant for personal uses—not to start a business. Instead, check for loans backed by the U.S. Small Business Administration (SBA) if you’re interested in getting what you need to start a business.
• Down payment: In general, you’re not supposed to use a personal loan to make a down payment on a home. Consider getting help with a down payment from a family member or seeing if you qualify for a down payment assistance program.

How to Get a Personal Loan

If you decide that you want to learn how to use a personal loan to smooth your financial situation, here are the steps that you’ll likely take to apply:

1. Review your credit: Because personal loans are usually unsecured, the lender will make a decision based on your credit score. You’re likely to get better terms if you have good credit (usually a score of at least 640). The lower your score, however, the higher your interest rate is likely to be. Check your credit report to make sure it’s accurate, and review your score to be prepared for potential terms.
2. Compare terms from three to five lenders: Make sure you’re getting the best deal for your situation by choosing three to five lenders and getting pre-qualified. Most personal lenders will give you an online quote without a hard credit inquiry. Look for a lender that offers a lower rate and monthly payment options that fit your budget.
3. Apply for a personal loan: Once you decide on a lender, complete the official application. When you take this step, there will be a hard inquiry, which can affect your credit score. You’ll need to provide documentation about your income and identity. The lender will confirm your final terms. Once you are approved and have accepted the loan terms, the lender will typically deposit the funds into your account within a couple of business days.

Choosing a Personal Loan

When comparing personal lenders, there are a few items to keep in mind so that you get the best possible deal. You want to look for a loan that fits your budget while also reducing your overall costs as much as possible.

Cost

Every loan comes with costs, including personal loans. The main costs you’re likely to see with personal loans are the annual percentage rate (APR) and any fees.

The APR is the total cost of the loan on an annual basis, including interest rate and upfront fees. You can use the APR as a way to compare different lenders, in addition to comparing the personal loan offer to credit cards and other lending choices.

Don’t forget to consider origination and administration fees. Lenders that charge these fees might do so on a percentage basis. In many cases, the origination fee is taken from your lump sum. For example, if you’re borrowing $10,000 and the fee is 1.9%, you might have $190 deducted from the funds deposited into your account.

Repayment Term

Many personal loans have repayment terms of two to five years, although some lenders offer shorter or longer terms. Your repayment term impacts how much you pay each month. If you have a five-year term, your monthly personal loan payment will be lower than if you have a two-year term. However, with a longer term, you might pay more in interest costs.

As you compare loans, consider whether you can afford a higher monthly payment if it means lower overall costs and getting out of debt faster. Or, if you need to be more comfortable with your budget, consider a longer term with a smaller payment, but also consider how you might be able to pay it off faster.

Loan Amount

Review the loan amounts offered by various lenders. You might be able to borrow as little as $1,000 or as much as $100,000, depending on your credit and what’s offered by the lender.

Look for a loan that meets your needs based on what you’re trying to accomplish. If you only need a small amount, a lender whose minimum is $5,000 might not be the right choice. On the other hand, if you need a substantial amount, looking at lenders that offer at least $35,000 could make sense.

Perks

Don’t forget to consider other perks and features that might be available through the lender. For example, some lenders offer unemployment or hardship protection. Other perks might be fast funding, refinancing to a lower rate if your credit improves later, mobile management, and access to other products and services. If all things are equal, consider these additional perks to see if one offers better protection than another.

The Bottom Line

When used carefully, a personal loan can help smooth your finances and allow you to fund large purchases in an affordable manner. However, it’s important to compare terms and make sure that your budget can handle the monthly payments. Create a plan to pay off the debt as quickly as possible to avoid getting trapped in the debt cycle.