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Top 10 Reasons to Apply for a Personal Loan
Personal loans are a handy way to solve a variety of money issues such as debt consolidation or to fund a big purchase. They are one of the most accessible methods of getting finance and can be used for multiple different reasons.
However, there are both good and bad reasons to apply for a personal loan. For now, consider the top reasons why applying for a personal loan could be the right move for you.
What is a personal loan?
A personal loan is a flexible loan type people can use to fund several goals, such as debt consolidation, home improvement, medical bills, build credit, car repairs and more. These types of loans are usually unsecured so there’s no need to put up any collateral. This is one of the reasons why they are one of the most accessible types of loan.
Personal loans are not without risk though. Unsecured personal loans run the risk of lawsuit, bankruptcy and credit damage if not paid off. Furthermore, it’s not free money — lending comes with fees and interest, so you always pay more than what you borrowed. But when used correctly, personal loans can help borrowers build credit, lengthen credit history and fix financial issues.
Top 10 reasons to get a personal loan
1. To consolidate debt
One of the top reasons to apply for a personal loan is to consolidate debt. While taking on more debt may seem counterproductive, it can be a good tactic if you have several high-interest debts to pay off. A debt consolidation lender pays off your creditors, then you make one monthly to your new lender, with a new interest rate and hopefully a faster payoff date.
- Alternative: If you have credit card debt, you can try a balance transfer card, which will have an introductory 0% APR for 12–14 months.
- Alternative: If you have high-interest loans that you’re struggling to pay off, try calling your lender to see if you can skip a payment for a month without penalties or defer payments for a period of time.
2. Home remodeling
If your home is in need of a big remodeling job such as an extension or a new kitchen, one option is to use a personal loan. Some will use home equity loans, but the downside to this is that your home is used as collateral, which some people want to avoid. An unsecured personal loan may be a preferable way to get the necessary financing.
- Alternative: Save up your money and learn to DIY small renovations to your home, like a fresh coat of paint in a room or staining existing cabinets. Then, slowly move up to bigger projects, like new tiling in the bathroom or kitchen.
[ Next: The Best Home Improvement Loans ]
3. Car repair
Another common reason to apply for a loan is to cover a car repair bill. Car repair bills always happen when we least expect it. If you don’t have the funds to fork out hundreds of dollars on a major repair, you could turn to a personal loan. Many personal loans have fast application and approval times so this makes them ideal for sudden repair bills when you need the cash fast.
- Alternative: If it’s not too complicated, see if you can get the parts you need online or wholesale and replace them yourself, with the help of online tutorials or a handy friend.
4. Build credit
If you have bad credit, no credit or little credit, it can be difficult to secure any type of funding with favorable terms, whether that be credit cards, mortgages or more personal loans. Even if you haven’t made any financial mistakes, it can be difficult to boost your credit without a paid-off personal loan. Taking out a small personal loan of $1,000 to $2,000 and paying it off on time over 12 to 24 months can improve your credit greatly.
- Alternative: Use a secured credit card, which requires a small deposit, but when you make timely payments, your credit will increase.
- Alternative: Ask your landlord and utility companies to report timely rent and bill payments to the credit bureaus. Additionally, you can sign up for credit-boosting services like UltraFICO and Experian Boost.
5. Moving and relocating costs
For people moving to a new part of town, a different state or a completely new country, moving costs can be steep. There are plenty of costs to consider from rental deposits to moving trucks, packing boxes, storage and vehicle hire. To make the costs more affordable, you may want to consider a small personal loan so you have one less thing to worry about while you plan your move.
- Alternative: If you’re relocating for a job, check if your new employer will reimburse or cover moving expenses.
- Alternative: Ask your friends for their empty shipping boxes from packages, use old holiday tissue paper for wrapping fragile items and use garbage bags to pack pillows, blankets and clothes so that your boxes can be used for sturdy items.
6. Emergency expenses
It’s hard to prepare for an emergency, whether it’s a medical problem, a broken kitchen appliance, a job loss or something else entirely. No matter what your emergency is, a personal loan can help get you through a difficult period. Not everyone has an emergency fund to fall back on, so the next best thing is an emergency personal loan.
- Alternative: If you’ve lost your job, you can borrow from your 401(k) instead, so you pay back yourself (with interest) over a period of time.
- Alternative: If a critical home appliance is broken, check your warranty to see if repairs are covered. Additionally, if you have a home warranty plan, the repair may also be covered and you’ll just have to pay a nominal trade service fee.
7. Medical or vet bills
Even if you have health insurance, medical bills can quickly spiral out of control. Just a simple overnight hospital visit can leave families struggling to get by. That’s why a lot of people fall back on personal loans to get through it financially. On a similar note, if you have pets and one of them suddenly requires surgery or expensive treatment, a personal loan can also help to ease the pressure of sudden vet bills.
- Alternative: If you have medical bills, call the billing department and ask for a payment plan or a reduction of your bill. It’s very possible that the department will comply.
8. Covering bills
While regularly relying on personal loans to cover your bills is not recommended, sometimes it’s necessary. During the COVID-19 crisis, many have found themselves out of work or had their salary cut, which makes covering the bills all the more difficult. If you have things like medical bills or lots of credit card debt to also cover, a personal loan could help you consolidate them or cover one-off bills that are unmanageable right now.
- Alternative: If you have credit card bills, consider a balance transfer to an introductory 0% APR card. If you have utility bills and rent coming due, ask for an extension on the due date or offer to pay what you can now, then settle it when you have more money.
- Alternative: Dip into your savings or ask a trusted family member or friend to help you cover your bills, if possible.
9. Education expenses
For students pursuing higher education, a personal loan can fund your studies. Whether it’s a college course or a short certification in a new skill, a personal loan can help bridge the gap between need and learning. If you are looking at college, it’s worth comparing personal loans with federal student aid first, then considering the student loans.
- Alternative: Definitely fill out the FAFSA first and apply to scholarships and grants before considering a personal loan to pay for education.
10. Family planning
When it’s time to expand your family, you may choose adoption, fertility treatments or surrogacy to bring another human into the fold. However, these options are not inexpensive and require meticulous planning and plenty of funds. A personal loan can help with adoptions fees, IVF treatments, doctor’s appointments, legal fees and surrogacy options.
- Alternative: Some health insurance policies cover IVF treatments, so it’s worth it to check your benefits to see if your health insurance provider will cover fertility costs.
When a personal loan doesn’t make sense
There are times when taking out a personal loan is not a good idea. Some of the reasons not to take out a personal loan include using the money to gamble in casinos, invest in risky business ventures or pay for an extravagant wedding you wouldn’t normally be able to afford.
Taking out a personal loan in order to participate in any type of illegal activity is just about the worst possible reason there is to take out a personal loan. Taking out a personal loan for a friend or family member is also not a good idea, as you will be the one who is responsible for making the payments on the loan and not the “real” borrower.
Additionally, consider alternatives to personal loans before signing on the dotted line. Balance transfers for credit card debt, talking to your creditors and other avenues of financing may be available if you need help financially.
Personal loan alternatives
In some cases, a personal loan might not be the best idea. For example, you may get a better deal with a car purchase by using car financing rather than a regular personal loan. Students attending college can sometimes use personal loans, but you will likely find better loan terms with a specific education loan or federal student aid. If you want to forgo personal loan altogether, you may find better options with credit cards or a line of credit. Sometimes these products come with lower APRs, more favorable financing and easier approval processes. Additionally, if you have bad credit, a personal loan may not be the best option for you.