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What Are Personal Loans Used For?

Writer and editor - Lauren Ward | Updated on 2019-10-31

Taking out a personal loan can be a smart move if what to finance a significant expense or mitigate high-interest debt. The money comes in a lump sum of cash that typically does not require collateral. With these types of installment loans, you will repay the amount plus interest every month until you pay the full balance.

How Does a Personal Loan Work?

You must qualify for a personal loan before you can secure one. Before approving, a lender will check your credit score, income, and ability to repay the loan. People with the highest credit scores typically get personal loans with the lowest interest rates.

Negotiating the terms of a loan can make all the difference for your bottom line. Negotiable aspects can include the number of months for repayment, your interest rate, and your total monthly payment. Some loans also may have origination fees ranging from 1 percent to 8 percent.

Uses for Personal Loans

Debt Consolidation

Personal loans are a pragmatic solution if you have other creditors charging you high-interest rates on debt. A personal loan can help consolidate those debts at a lower price, especially if you can forego an origination fee. If your current credit is less than amazing, you may have to shop around to find an option that works for you.

Medical Bills

Medical bills can pile up and compound with interest to create a daunting debt obligation. The first step is to reach out to your healthcare provider to negotiate terms and see if you can get a discount. A personal loan works well if you are unable to pay off the total balance on time, and the healthcare provider is charging you a high interest rate.

Tax Debts

If you are struggling to pay your tax debts, you may be eligible for a repayment plan or negotiated settlement. The goal of each is to provide a clear and feasible solution for taxpayers to repay the money they owe to the federal government. If, however, you are unable to secure a plan or settlement, you can pay your tax debts with a personal loan.

Home Renovations

The national average cost for a home remodel is $18,711, according to HomeAdvisor.com. Taking out a loan can be a savvy investment, as the money will go toward bolstering the value of your home. Double-check your homeowner’s insurance, though. It might cover a portion of the expense, too.

Vehicle Purchase

You should only consider financing a vehicle purchase with a personal loan if you score a killer. Personal loans typically have higher interest rates than auto loans. This difference in rates exists because the lender can use the car as collateral to provide a secured loan, whereas personal loans are unsecured.

More often than not, a car dealership will have compelling financing options to incentivize purchases, such as a 0-percent interest offer. Additionally, you may have poor credit that makes you unable to secure an outside loan. Be sure to do your research before shopping for a new car and see if you are eligible for pre-approval.

Divorce

According to Thumb Tack, the average divorce in the United States costs $15,000. That includes expenses, including attorney’s fees, court fees, and expert consultations. If you do not have $15,000 lying around, a personal loan can cover your obligations in a divorce proceeding.

Personal Expenses

Taking out a loan for personal use is something you can do, but we do not recommend it. Before committing to this path, at least take time to consider alternatives. That can include cheaper options, such as credit cards with 0-percent interest.

Lenders do not designate personal loans for specific purposes. Therefore, you have broad authority when it comes to using the loan for personal expenses. That can include but is not limited to, funding a vacation, birthday, or holiday gifts, electronics, jewelry, weddings, home décor, and pets.

Student Loans

Again, you can pay student loans with personal loans, but financial advisors generally do not recommend this strategy. You would essentially be robbing Peter to pay Paul. Student loans typically have low interest rates, so payments on the new loan likely will be higher. Wat’s more, you will give up opportunities, such as student-debt forgiveness, flexible payment options, and deferments.

Repaying Friends and Family

When it comes to borrowing money from loved ones, you typically have the most flexible terms. Friends and family often do not set hard deadlines for repayment and usually do not charge interest. Of course, if you are struggling to repay them, the financial obligation might get in the way of the relationship.

A personal loan can be a way to satisfy both parties. Be sure to talk with the lender first, though, to ensure that a loan is the best solution. If you do decide to take out a personal loan, you will be able to smooth over the relationship, but it may cost you more money in the long term.

Lauren Ward

Lauren Ward
Writer and editor

Specializing in original, well-researched web content, including blog posts, news articles and web copy. Areas of expertise include personal finance and lending. 10 years of experience as freelance writer and working at Federal Reserve Bank of Richmond.
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