Personal loans are general purpose loans that can be used for almost anything. Some common uses for personal loans include covering medical bills, paying for home repairs, and consolidating debt.
When you don’t have the savings to cover an important purchase or bill, a personal loan is usually a better alternative to credit cards. We’ll explain what personal loans can be used for, their drawbacks and benefits, and alternative means of paying for unexpected expenses.
What Can You Use a Personal Loan For?
Personal loans may be used for just about anything “personal” — meaning it’s not a business-related expense. Here are some of the most popular reasons people take out personal loans.
Debt Management and Consolidation
Refinancing or high-interest debt consolidation into better loan terms is one of the most common uses for a personal loan — and one of the most financially savvy. Credit card debt carries some of the highest interest rates out there. Credit cards also typically have variable rates, making it challenging to create a predictable budget to pay down outstanding debt.
Rates for personal loans, on the other hand, tend to be lower than credit card APRs. This can save borrowers a lot of money in interest over the long term. And the fixed payback schedule of a personal installment loan may help borrowers avoid falling into a vicious cycle of revolving debt that continues indefinitely.
You don’t have to be drowning in credit card debt to benefit from consolidation. For borrowers with a multiplicity of loans, consolidating debt with a personal loan can be a useful financial tactic — if the borrower qualifies for good loan terms.
According to The Wedding Report, a market research firm, the average cost of a wedding in 2022 is $27,000. Unfortunately, many young couples have not saved up enough to pay for their entire wedding themselves. (For the most part, the days when a bride’s parents footed the entire wedding bill are over.)
A personal loan, sometimes referred to as a wedding loan when used for this purpose, can cover some or all of a well-budgeted wedding. Personal loans tend to offer much lower interest rates than credit cards, which The Knot reports a significant portion of newlyweds use to fund their big day.
First, though, think long and hard about whether you really want to start out your married life in debt. Consider if you can actually afford to pay off the loan in a timely manner. If not, it might be better to cut back on your wedding budget, or take more time to save up.
Unexpected Medical Expenses
When a medical emergency occurs, it’s important for your main focus to be on a healthy outcome. But the financial burden can’t be ignored. Being able to pay for out-of-pocket expenses with a low-rate personal loan may relieve some stress and give you time to heal.
It’s no secret that the cost of medical care in America can be sky-high — especially for the large portion of Americans that have high-deductible health plans. The situation is even worse for those who don’t have health insurance coverage at all. When paying out-of-pocket, even a seemingly simple procedure, like casting a broken leg, can cost a shocking $7,500, according to Healthcare.gov.
Recommended: How to Pay for Medical Bills You Can’t Afford
A low-interest personal loan (also known as a relocation loan) may help defray some out-of-pocket costs associated with moving. According to the American Moving & Storage Association, a local move can set you back $1,250 on average. Moving a long distance (1,000 miles or more) typically costs $5,000.
And these figures only account for the move itself. As anyone who has relocated knows, hidden costs can pop up every day, from boxes and storage space to cleaning fees and lost security deposits.
There are also costs that come with a new home. Most new rentals require upfront cash for a deposit, sometimes totaling three times the monthly rent (first, last and security). Opening new utility accounts may also require a deposit.
And don’t forget about replacing household items left behind — even basics like soap, light bulbs, shower curtains, and ketchup can easily total a few hundred dollars.
Lastly, miscellaneous costs can arise during the move itself, such as replacing broken items. Even with insurance, there’s usually a deductible to pay.
Many people have life insurance to cover their own funeral. But what if Mom, Dad, or Grandpa didn’t plan ahead? If the deceased did not plan appropriately to finance their death, and life insurance doesn’t cover the bill, a personal loan can be a quick, easy solution for the family.
Basic costs for a funeral include the service, burial or cremation, and a memorial gathering of friends and family. The average cost of a traditional funeral service with a burial is around $12,500 to $17,500, with caskets alone costing up to $10,000.
Home Improvement Expenses
Many renters and homeowners feel that annual or biannual itch to spruce up their living space. That might mean a fresh coat of paint, upgraded appliances, or a kitchen remodel. Depending on the level of your upgrade, the cost of home remodel can come in anywhere from a few hundred to tens of thousands of dollars.
If you’re making upgrades that will improve a home’s value, the cost may be made up when selling the house later. Using a personal home improvement loan can help you focus on the renovation instead of fretting about costs. Plus, if you get an unsecured loan, you won’t have to worry about putting your home equity on the line as collateral.
Deciding Whether to Take Out a Personal Loan
Going into debt should never be taken lightly, so it’s important to set a realistic strategy to repay the debt. No matter the reason for taking out a personal loan, a borrower will be on the hook for repaying a significant amount of money including interest. There might be hidden fees to worry about, too.
When taking out any new debt, research is essential. Shopping around for the interest rate and terms that best fit your needs is an important step to take before applying with a lender. The good thing is there are lots of different unsecured personal loans available from a wide variety of lenders. Your credit history and score will have a significant impact on the loan terms, and interest rates and qualifying criteria will vary from lender to lender.
Recommended: How Do I Get the Best Interest Rate on a Loan?
Pros and Cons of Taking Out a Personal Loan
As you’re weighing your decision, it may help to take a look at the overall pros and cons of personal loans.
|Fast access to cash||Increases debt|
|Usable for a variety of purposes||Potential fees and penalties|
|Lower interest rates compared with credit cards||Credit and income requirements to qualify|
|No collateral required for unsecured personal loans||Applying might ding your credit score|
When it comes to weddings, funerals, cross-country moves, and other big-ticket items, a personal loan is typically a better alternative to high-interest credit cards. Other common uses for personal loans include debt consolidation, medical bills, and home improvement.
SoFi’s personal loan calculator is one tool that might be helpful in determining how your interest rate can affect your monthly payments. A fixed low-interest loan for up to $100,000 can make budgeting and repayment a simple affair.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.