A personal loan is a financial product intended for almost any personal purpose. Still, most people want to know when it is a good idea to borrow and when it’s not. After all, you pay to borrow so it isn’t something you should do unless it offers you advantages.
Luckily, there are smart ways to use a personal loan that can benefit you. Lets take a look at some of the best use cases to help you and what you can do to get the most out of your personal loan.
Understand How a Personal Loan Works
Your range of options for a personal loan are huge. Banks, credit unions, and private lenders offer them, both on and offline.
Even so, you need to understand how a personal loan works to make sure you’re comparing similar products. Personal loans have many things in common, but various factors differ and can affect your personal loan greatly.
Here are a few terms you should pay special attention to:
Loan Term – the length of time allotted to loan repayment. Typically, a personal loan term ranges from 6 months to about 5 years. Generally, the shorter the term the higher the payments and the less interest you pay.
Interest Rate – Every lender determines how much they charge you for borrowing money. This is expressed as a annual percentage rate (APR). Usually, your personal loan interest rate remains fixed throughout the life of the loan, but you should confirm this. Some lenders offer variable rate personal loans that fluctuate with rising and falling federal interest rates.
Payment Amount – Typically, you pay a monthly personal loan payment. It includes a portion of the amount you borrowed, interest, and sometimes fees.
Some lenders offer additional payment options and many do not charge origination fees or prepayment penalties. Read more about personal loan terms here to understand what’s involved before you decide.
Credit Scores Often Play a Major Role
Lenders consider many factors when they set your personal loan interest rate. Your credit scores are often one of a lender’s primary considerations.
It is important that you understand the factors that affect your credit score, because many are under your control. That means you can maximize your credit score before you apply for personal loans, improving your chances of getting the best possible offerings.
Prequalify Through Multiple Lenders
Interest is the amount a lender charges you for borrowing money from them. The higher the interest rate, the more you pay. Obviously, it is very important to get the lowest possible interest rate available to you. Otherwise, borrowing may not be a wise choice.
Luckily, many lenders allow to prequalify online. You can see what is available to you and can choose your best option. However, you should always choose lenders that use a soft credit inquiry. This does not affect your credit score.
Fortunately, lending brokers allow you to prequalify through many potential creditors using a single application form. You can see the interest rates offered and generally these lenders use soft inquiries and are fee-free too.
What Can You Use a Personal Loan For
Theoretically, you can use a personal loan for almost any personal reason. You can find a personal loan lender for almost any financial situation too. Even so, just because you can get a personal loan it doesn’t mean you should borrow.
So, what are the common uses for a personal loan and when does one make good sense, both economically and for convenience sake? The following are just a few common uses that are also smart, because they benefit you.
Consolidating Debt
If you’re carrying a lot of high interest credit card debt, a personal loan could save you money. Credit cards use compound interest that accumulates quickly if you do not pay off the balance each month.
A personal loan uses simple interest. Every payment you make reduces your outstanding balance and pays a portion towards interest. A personal also combines multiple credit card debts into a single payment. This makes it easier to manage your debt and if you are offered a decent interest rate, it also saves you loads of money. Read more about debt consolidation here.
You may think it would be easier to do a balance transfer to a single credit card, but be careful. Promotional balance transfer interest rates are usually time limited. Once the promotion expires you could end up paying far more than you should.
Some credit cards and personal loans also charge you fees that increase your cost to borrow. That being said, many lenders don’t charge fees at all so choose wisely.
Increasing Your Credit Score
The credit reporting agencies measure your ability to manage various credit types well. If you’ve only ever used credit cards, expanding into installment credit such as a personal loan can improve your credit mix and payment history when you repay as agreed.
A well-managed personal loan is also one of the best ways to boost your credit score if you use a personal loan to pay off credit cards. This lowers your credit utilization ratio and lender risk.
A higher credit score often leads to more competitive interest rates. Consequently, borrowing money costs you less.
Buying a Used Vehicle
Many dealers and most private sellers will not finance used cars. So, can you use a personal loan to buy a car? The answer is “yes”. If a vehicle is too expensive for you to buy in one shot or you don’t want to drain your savings, you can take out a personal loan.
Buying a used car with a personal loan offers many advantages. First, you can borrow the full amount without paying a down payment. Second, the title of the vehicle is in your name, so you have the freedom to manage your assets as you please.
Finally, many lenders allow you to use a personal loan to buy any vehicle type you want. This includes an RV, boat, or motorcycle. Instead of paying the entire amount out-of-pocket, you can spread it out in manageable payments.
Increasing Home Equity
If you want to do small renovations to your home, personal loans can be a good option. They can increase the value of your home by a considerable amount to offset the cost of borrowing.
Examples of the improvements that provide the most ROI include a garage or entry door replacement, deck, HVAC, or new windows. Larger home renovations are better paid for by other means such as a home equity loan.
Budgeting for Major Events
You might be tempted to charge your way through a wedding or a vacation, but that makes it too easy to spend wildly. If you don’t pay off the balance each month, you’ll pay compound interest and interest rates on credit cards are usually very high.
Using personal loans makes better sense in both these situations. Lock in the best possible prices on things such as wedding rings and clothing and airline tickets and hotels. After all, things aren’t getting any cheaper and taking out a personal loan can help keep you on budget. Repay through manageable monthly payments.
Making Large Purchases
When you don’t have the cash upfront to buy a major item such as a new couch, computer, or refrigerator, a personal loan can help you buy.
Personal loans are a much better choice than a credit card since they offer convenience. Pay off the balance in small payments and lock in a lower interest rate too. You may be able to negotiate with the seller too, since you’re essentially paying in cash.
Paying Medical or Tax Expenses
Even if you have health insurance and pay your taxes, you could face additional costs. Insurance policies don’t cover everything and you could end up on an IRS installment plan that accrues interest and penalties.
Luckily, a personal loan can help you settle an outstanding bill with a hospital and the IRS. You control the repayment terms and a good personal loan interest rate is a better option than what the IRS offers.
You can also use personal loans to get elective procedures such as cosmetic surgery, laser eye surgery, and dental work. Did we mention you can also borrow if your pet needs help?
Handling Emergencies
Even if you have an emergency savings fund, expensive things can happen that cost you more than what you’ve saved. Luckily, a personal loan can get you through a tough situation until you can get back on track.
You choose how long you want to take to repay your personal loan. If you need to pay small payments, you can stretch out the term. If you want to pay off the personal loan quickly, choose a short term and pay less interest.
What Can’t You Use a Personal Loan For?
As the name suggests, personal loans are loans for personal use. They aren’t meant for the following purposes.
Business Expenses
Personal loans are loans for personal use. They’re not meant for business and can’t be used as a tax write off. However, the Small Business Association offers many business loan options. One may work for you.
Tuition
Personal loans are not meant for college tuition or fees. Most lenders won’t let you use one to pay off an existing student loan either.
If you need a loan for college tuition or you’re struggling to repay a loan, Federal Student Aid may be able to help.
Down Payment on a Home
Mortgage lenders do not allow you to pay a down payment on a home using personal loan funds. This is because it is an undisclosed financial burden that increases borrow and lender risk. If you are caught doing so, the lender could potentially call the mortgage.
Be Smart – Use FlexMoney’s Lender Network
FlexMoney’s extensive network of lenders offers you an easy, safe way to find your best possible personal loan. Complete one application form and we’ll immediately show you what’s available to you. Compare interest rates and terms and find the best personal loans in minutes.
Complete your application for a personal loan now and we’ll connect you with the best alternative lending platform in the U.S. Our lenders offer between $200 and $35,000. You could qualify even if traditional lenders turned you down.