Even the savviest budgeter occasionally runs into a circumstance they’re simply unprepared for. Maybe it’s an unexpected medical expense or car repair—or maybe it’s entering into wedded bliss.
Borrowing money vs. paying cash isn’t ideal, but if cash is needed ASAP and there is not enough built up in savings to cover the expense, a borrower has options such as pulling the money from a credit card or asking a family member for a loan. One common option is a personal loan. Some personal loans are unsecured, meaning that borrowers do not need to provide collateral as part of the loan approval.
In other words, the only asset behind an unsecured personal loan is the borrower’s ability to repay. As a result, borrowers will most likely need to demonstrate that they have sufficient credit and income with their chosen lender in order to qualify for an unsecured personal loan.
Unsecured loans also tend to carry higher interest rates than secured loans—which are, after all, tied to an asset the lender can repossess if the borrower stops making payments.
But personal loans make up for their relative expense in flexibility. While saving up for a rainy day or for major expenses is definitely preferable to incurring most any debt, including personal loans with even the most favorable terms possible, here are some common uses for personal loans.
Most Common Personal Loan Uses
Personal loans may be used for just about anything personal (that’s legal, of course), but here are some of the most common uses.
Debt Management and Consolidation
Consolidating or refinancing high-interest debt into better loan terms is one of the most common uses for a personal loan—and possibly one of the most financially savvy. Interest rates on credit card debt are some of the highest rates out there.
In addition, credit cards almost always 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 in some cases, which could save borrowers money in interest payments just by refinancing.
The fixed payback time frame of a personal installment loan may help borrowers avoid getting into the cycle of revolving debt that could easily occur with a credit card that has no set time to repay the loan.
Even if you’re not drowning in credit card debt, but instead are facing down a multiplicity of different kinds of loans, consolidating your debt with a personal loan could be a useful tactic, depending on the financing terms a borrower may qualify for.
Instead of keeping track of payments on debts that might be due at different times of the month, it could make sense to consolidate those into one personal loan with just one payment to make each month.
This may simplify a bill-paying schedule and also potentially help implement a better budget going forward—provided you don’t use the opportunity to dig yourself into even more debt.
According to The Knot, the average cost of a wedding in the US is about $30,000. Unfortunately, many young couples have not saved up enough to pay for their entire wedding bill themselves, and the days when the bride’s parents footed the entire wedding bill are dwindling.
Wedding planning can cause a considerable amount of stress for couples—band or DJ? beige or taupe napkins? family-style or plated meal?—and financing shouldn’t contribute to that stress.
But unfortunately, for many couples, it does. The Knot also reports that a significant portion of newlyweds use credit cards to fund their foray into wedded bliss.
A personal loan, also referred to as a wedding loan when used for this purpose, could possibly cover all or a portion of a well-budgeted wedding at a much lower interest rate than an average credit card offers, which may free up couples to focus on what matters—like seating charts.
Unexpected Medical Expenses
According to the CDC, almost half of Americans carry high-deductible health plans, including many with employer-sponsored or public insurance policies. With those plans, family out of pocket maximums can run up to $13,500 per year.
And while those sky-high rates are bad enough, the situation is even worse for the reported 9% of Americans who don’t have health insurance coverage at all.
When paying out-of-pocket, even a seemingly simple procedure, like casting a broken leg, could cost a shocking $7,500 , according to Healthcare.gov.
When an unexpected medical emergency occurs, it’s important for the main focus to be on health, but the financial burden can’t be ignored.
Being able to pay for the out-of-pocket expenses with a low-rate personal loan () may relieve some stress and time to heal without additional financial stress that could complicate the recovery process.
According to the American Moving & Storage Association , an in-state move could set someone back about $2,300 on average if using professional movers. Moving out of state? The average cost is typically $4,300 using the pros.
And these figures only account for the move. As anyone who has moved knows, additional hidden costs associated with moving out could pop up every day—storage, boxes, cleaning fees, partial security deposit returns, just to name a few. (That’s assuming guilting your friends into helping do the actual packing for the minimal cost of some pizza and beer.)
But those are just the costs of moving out of the old place. Most new rentals require up-front cash for a deposit, sometimes totalling three times the monthly rent (first, last, and security).
Opening new utility accounts may also come with a deposit. And don’t forget about replacing household items left behind; even basics like soap, light bulbs, shower curtains, and ketchup could easily total a few hundred dollars.
Lastly, miscellaneous costs may arise during the move itself, such as replacing broken items. Even with insurance, there’s usually a deductible to pay. A low-interest personal loan (relocation loan) may help defray some of the out-of-pocket costs associated with moving.
A person may already have life insurance for their own funeral, but what if mom, dad, or grandpa didn’t plan ahead?
With an aging U.S. population, the costs associated with death are increasingly being passed onto children of the deceased and could escalate pretty quickly in this time of mourning.
Basic costs include the funeral service, burial or cremation, and any gathering of friends and family surrounding the memorial. The average cost of a traditional funeral service with a burial is around $15,000 , and caskets alone could cost up to $10,000.
If the deceased did not plan appropriately to finance his or her death, and life insurance doesn’t cover the bill, a personal loan may be a quick, easy solution for the family. And when you’re dealing with a major personal crisis like the death of a loved one, the last thing you want to do is pile a financial crisis on top.
Home Improvement Expenses
Many renters and homeowners feel that annual or bi-annual itch to spruce up their living spaces. This might mean a fresh coat of paint, a new piece of art, upgraded appliances or a replacement of that old, saggy mattress and dingy sheets.
Depending on the level of your upgrade, these improvements could come in anywhere between a few hundred to tens of thousands of dollars. To understand better what that cost could look like, you can use SoFi’s Home Improvement Cost Calculator.
Feeling comfortable in your own living space may help improve happiness, productivity, and self-confidence. And certain types of remodels, like replacing old windows and doors, could help boost the value of your home.
If making upgrades that will improve a home’s value, the cost may be made up when selling the house later, along with enjoying a more comfortable space today. Using a personal home improvement loan may be a great way to focus on the renovation instead of fretting about the costs, and an unsecured installment loan may not count as a lien against the property, depending on the amount of the loan
Deciding whether to Take Out a Personal Loan
Research is essential when taking out any new debt, including a personal loan, and shopping around for the rate, fee, and terms that best fits a borrower’s needs is an important step before applying with the chosen lender.
Going into debt should never be taken lightly, so it’s important to set out a realistic plan to repay the debt and ensure the budget affords the ability to do so.
No matter what the reason for taking out a personal loan, a borrower is still on the hook to repay a significant amount of money including interest, and there might be hidden fees to worry about as well.
The good thing is there are lots of different unsecured personal loans available from a wide variety of lenders. Credit history and score may have a significant impact on the loan terms, and interest rates and qualifying criteria may vary from lender to lender. Shopping around for the right loan terms could go a long way towards ensuring a borrower gets the best bang for their buck.
Borrowers might consider starting by taking a hard look at the budget and figuring out exactly how much might possibly be afforded when it comes to rates, future payments, and total loan size. SoFi’s personal loan calculator is one tool that might be helpful.
Then, checking with the wide variety of loan providers available to see which might be able to help meet the borrower’s goals at the lowest cost possible is the next step.
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