When trying to raise money to take care of some personal needs, a personal loan might be your last resort. But does that mean personal loans are the best kinds of loans to take? If you eventually decide to take a personal loan, you should know that there is a right and wrong way to go about it.

This article will address what personal loans are and the right and wrong ways to use them.

• What is a Personal Loan?
• What is a Good Reason to Get a Personal Loan?
• When are Personal Loans a Bad Idea?
• Can You Return a Personal Loan?
• Which Bank Has The Easiest Personal Loan Approval
• Personal Loan Benefits
• Personal Loan Tips
• Why Would a Personal Loan Application Be Rejected
• What Are The Best Ways to Get Your Personal Loan Approved
• What is The Cheapest Way to Borrow Money
• What is a Good Loan Rate?
• What Are The Right Ways to Use a Personal Loan
• What Are The Wrong Ways to Use a Personal Loan

What is a Personal Loan?

A personal loan is money you borrow for just about any purpose, including debt consolidation, an unexpected medical bill, a new appliance, a vacation, or even a student loan. You pay the money back—including interest—in monthly installments over time, usually two to five years, Most personal loans are unsecured, meaning they are not backed by collateral.

Unless you can qualify for a 0% intro period credit card, rates on personal loans are typically cheaper than those on credit cards, and the limits on how much you can borrow are usually higher. If you have high balances on multiple high-interest credit cards, a debt consolidation loan can roll your debts into one payment at a lower rate.

Read Also: LendingPoint Personal Loans Review

Lenders make their decisions based on factors including credit score, credit report and debt-to-income ratio. Not surprisingly, consumers with excellent credit receive the lowest rates, but some lenders offer loans to customers with scores 600 or lower. Consumers who don’t qualify for unsecured loans may be offered secured or co-signed loans.

You should compare rates from multiple lenders before choosing. The loan with the lowest APR is the least expensive — and therefore, usually the best choice.

Most lenders allow you to see estimated rates without affecting your credit score. Some loan marketplaces allow you to easily compare several offers at once. If you qualify, you may receive your money as soon as the next day.

What is a Good Reason to Get a Personal Loan?

Today, technology has made it very easy to get a personal loan, this can be done from the comfort of your home at any time. But the ease also presents a danger, you might decide to get a personal loan for every reason possible. Below are good reasons to get a personal loan.

Emergency Purchases

Life is full of surprises and sometimes these surprises can be costly. Accidents happen. People or pets get sick. Your roof needs repairs and it’s the rainy season. The financing typically offered in these sorts of situations often comes with a high rate, resulting in potentially paying much more than you should. When you run into extra emergency costs that weren’t in your original budget, check your options before you make any fast decisions. A personal loan may offer you a lower rate and you can see if you qualify in minutes.

Pay off credit cards and consolidate debt

Dealing with credit card debt on multiple cards can be stressful, but you’re not alone. In fact, the average U.S. household has $15,654 in credit card debt, costing hundreds to thousands of dollars a year in interest – that’s real money that could be saved!

In today’s rising rate environment, now is the best time to see if you qualify for a personal loan. Credit cards’ “floating rates” can be impacted by the Federal Reserve raising interest rates, so credit card holders may start seeing the APR on their statements increase soon as a result. Not only can a personal loan with fixed terms and rates help you discover real savings, but it can also enable you to mark the date when you can expect to make your last payment. Who doesn’t want to say goodbye to revolving debt, and hello to more financial freedom?

Major Purchase

Whether you’re a car enthusiast who wants a new ride, or a home chef who wants the latest kitchen appliance, that big purchase may not be a part of your standard budget. Getting a personal loan can help you make that big purchase now and spread fixed payments over a fixed time period so don’t have to wait to enjoy the things you want.

Home Improvement

For most people, their home is where they spend the most time with friends and family, and the biggest purchase they’ll make in their lifetime. Why not invest in it to make it more enjoyable today while increasing its property value in the long term? Whether you want to remodel your bathroom or add a pool in your backyard, a home improvement personal loan can help you get the extra financing to make it happen.

Create Memories

Special moments with our loved ones are priceless. Money can be a major hurdle and stressor when trying to give your child their dream wedding or plan your family’s summer vacation. Check to see if a personal loan can enable you to experience all the wonderful things you dream to share with people you care about most.

When are Personal Loans a Bad Idea?

We have seen the good reasons to get a personal above, but does that mean there is no bad side to a personal loan? For one, interest rates are typically higher than they are on secured loans and if you fail to pay the money back on time, it could hurt your ability to take out new loans in the future. Here are other reasons.

You’re using it to pay for wants

Vacations and weddings are fun, but they’re not necessary expenses. Taking out a loan to cover these optional and already expensive events just isn’t smart. You’re better off saving for these occasions well in advance so you have enough money when the time comes. 

Estimate how much you will need and when you’ll need the money by. Then, figure out how much you must save each month in order to make that happen. If you’re unable to make ends meet, consider cutting your expenses, delaying the event, or looking for ways to increase your income, like starting a side hustle.

You’re not sure you can keep up with the payments

When you apply for a personal loan, your lender should tell you how much your monthly payments will be. If you’re unsure whether you can pay this much each month, you shouldn’t take out the loan. The risk of default is high and extremely costly. 

Your lender will report your missed payments to the credit bureaus and this will lower your credit score. You’ll probably end up with debt collectors coming after you. And you won’t be able to take out any new loans to because no lender will be willing to take the risk that you’ll also default on your payments to them.

You qualify for a secured loan

Secured loans require collateral, which is something the bank can seize if you fail to pay back what you owe. Your collateral is your car in an auto loan or your home in a mortgage. Personal loans have higher interest rates because they don’t require collateral. That means there’s nothing the bank can take if you fail to pay back the loan, so it charges you more in interest to compensate for the increased risk.

There’s no rule saying you can’t use a personal loan to buy a car or a home, but if your aim is to pay the least in interest possible, you’re better off going with an auto loan or mortgage. Personal loan interest rates typically vary from around 14% to 30%, depending on your credit. The average auto loan APR is only 4.21% for a 60-month loan while the average 30-year fixed mortgage interest rate is about 3.99%. 

To put this in perspective, if you took out a $10,000 personal loan to buy a car with a 20% interest rate and a five-year repayment term, you’d pay nearly $16,000 over the term of the loan. By contrast, if you took out an auto loan for the same amount with a five-year repayment term and a 4.21% interest rate, you’d only pay about $11,100 overall. 

You need it to cover your basic living expenses

Chronically borrowing money is a sign that you’re in serious financial trouble. A personal loan may help you in the short term by giving you some fast cash, but it could leave you with an even bigger problem over the long term as you’ll have to pay back everything you borrowed, plus a hefty chunk in interest, too.

If you’re considering a personal loan to help put food on the table or keep the lights on, it is time to seriously reevaluate your budget. Look for areas where you can cut costs, like dining out or cable, and try to boost your income by working overtime or pursuing a promotion. Consider applying for government benefits if you believe you qualify. You may even have to take more drastic steps like moving to a more affordable area where living costs are lower. It’s not an ideal situation to be in, but making these moves is better than perpetuating your debt cycle.

You’re going to invest the money

Borrowing money to invest isn’t a good idea because there are no guarantees that you’re going to make money. It’s possible, but if you invest the money in the wrong assets, you could wind up losing the borrowed amount, which you’ll then have to pay back out of your own pocket.

If you’d like to get into investing, start setting aside a little money each month to put toward this goal. With the rise of robo-advisors, you can get started with just a few dollars and you don’t have to know that much about investing to make a profit. Or you could employ a financial advisor if you want more personalized investment advice.

Personal loans can be a great way to help you pay down high-interest credit card debt or make some upgrades to your home, but that doesn’t mean they’re the right answer in every situation. If anyone of the five above scenarios apply to you, stay away from personal loans and try saving up on your own or taking out another kind of loan instead.

Can You Return a Personal Loan?

Typically when you accept a personal loan and the money has been deposited into your account there are no true givebacks. You can cancel the loan before you sign the paperwork and the fund are in your bank account. The one exception is a mortgage refinance, but that is not considered a personal loan. 

Depending on the lender, they may offer you a short period of time when you can return the loan. It depends on the lender and they do not have to offer it. You should ask your lender if they offer this period of time. While you may not be able to cancel the loan, you can always pay off the loan. There is a slight catch here.

You were in the amount of $5,000 with 10 percent interest. Most likely there were fees associated with your loan, so only $4,500 was deposited into your account. However, you owe $5,000 back to the lender. You also have to pay interest for the amount of time you had the money. In reality, to pay off the loan right away, you have to pay money out of pocket.

Payday loans often have a two-day cooling-off period. You do not have to have a reason for canceling the loan. You have to give back the money. They do not charge you fees or interest. If you are in the UK and receiving money from a lender in the UK, they have a 14 day cooling-off period. You can cancel your loan within 14 days from the date the loan is signed. After that, you have 30 days to pay back the money. You may be charged interest for the days that you have the loan and there may be fees on top of that.

Which Bank Has The Easiest Personal Loan Approval

Wells Fargo

Wells Fargo is one of the nation’s biggest banks. If you don’t want to visit one of their 5,400 branches across the U.S., you can access info on their easy-to-navigate website. Wells Fargo offers competitive rates, a big range of loans, and less stringent credit requirements than others.

Advantages

• Long repayment terms: up to 84 months
• Minimal fees: No origination fee or prepayment penalties
• Quick funding: Money available on the next business day
• Discounts: Interest-rate breaks for auto payments, additional WF accounts

Disadvantages

• No prequalification: You have to actually apply for a loan, which triggers a score-dinging hard credit check
• Application process: Online/phone applications for current bank clients only; newcomers must apply in person at a branch

Other Important Information

• Loan ranges: $3,000 to $100,000
• APR range: 5.49% to 24.49%
• Credit requirements: Minimum 600 score (though of course, the higher the better)

LightStream

LightStream is the online lending division of SunTrust Bank, now known as Truist. LightStream prides itself on offering loans for nearly every need or occasion, from a new car to a wedding; however, one of their specialties is financing for home improvement projects. Some people prefer using personal loans for remodels or major repairs because they don’t require putting up the residence as collateral, as home equity loans or lines of credit do.

Advantages

• Large loan ranges: As low as $5,000 or as much as $100,000
• No fees: None. Really.
• Long repayment terms: as high as 12 years

Disadvantages

• Stringent credit requirements: While LightStream doesn’t specify the credit score you need, they suggest having good to excellent credit to qualify
• No prequalification: You have to actually apply for a loan, which triggers a score-dinging hard credit check

Other Important Information

• Loan ranges: $5,000 to $100,000
• APR range: 4.99% to 16.99% with autopay
• Credit requirements: Good or excellent credit recommended

Marcus by Goldman Sachs

If you have a mountain of outstanding credit card balances or other high-interest liabilities, you might consider using a personal loan to consolidate them into one big debt for better terms. Marcus by Goldman Sachs, the online consumer banking arm of the investment management firm, specializes in such debt consolidation loans to those with decent credit.

Advantages

• Fees-free: No charges for late payment, prepayment, or loan origination
• Flexible repayments: Borrowers can choose and change repayment dates, and even skip a payment
• Discounts: .25% reduction in interest with auto-pay

Disadvantages

• Stringent requirements: Good to excellent credit score required
• No cosigners allowed: No helping hand if your own credit isn’t solid enough to qualify

Other Important Information

• Loan ranges: $3,500 to $40,000
• APR ranges: 6.99% to 19.99%
• Credit requirements: A minimum score of 660 is recommended

TD Bank

Those with sketchy credit histories or low credit scores can still often qualify for a loan if the lender allows cosigning. A cosigner acts as an additional repayment source—responsible for the loan should the primary borrower default or fall behind—and their presence not only helps you qualify for the loan but can also improve its terms and size. TD Bank allows for cosigning, and offers competitive terms and features, too.

Advantages

• Low APR: Maximum APR is 18.99%, far lower than many lenders’ upper limit
• Fast process: Funds in 48 hours (with Express Loan)
• No hidden costs: No origination or application fees

Disadvantages

• Limited availability: TD Bank operates in only a few states
• Application process: While you can apply online, by phone, or in person, you might have to visit a branch to complete the process

Other Important Information

• Loan range: $2,000 to $50,000
• APR range: 6.99% to 18.99%
• Credit requirements: At least 660 score

Personal Loan Benefits

Collateral Usually Isn’t Required

Unsecured personal loans don’t require borrowers to put up collateral. The consequences of defaulting on an unsecured loan are severe, but the loss of a vehicle, house, or priceless family heirloom isn’t among them.

Potential for Higher Borrowing Limits Than a Credit Card

According to the Consumer Financial Protection Bureau’s report The Consumer Credit Card Market 2017, average credit line size in 2017 ranged from a little under $10,000 for super-prime borrowers, to about $6,500 for prime borrowers, to about $1,250 for subprime borrowers.

Each card’s spending limit falls within a range defined by the issuer or card network, with lower limits reserved for applicants who barely qualify for the card and higher limits for very well-qualified applicants. For instance, credit limits on a secured credit card designed for consumers with impaired credit might range from $300 for the weakest applicants to $5,000 for the strongest. On a no-annual-fee cash back credit card, limits might range from $2,500 to $10,000. On an ultra-premium travel credit card such as Chase Sapphire Reserve, limits might range from $10,000 to $50,000.

Like personal loan providers, credit card issuers use several factors to set spending limits. Most come from consumer credit reports:

• Debt-to-income ratio
• Recent bankruptcies or delinquencies
• Timing and frequency of credit inquiries (hard credit pulls)
• Payment patterns on other active credit accounts
• Income and employment history
• Credit score

Personal loan borrowing limits tend to be more generous than credit line limits. While borrowing limits vary by lender, most personal lenders cap loan principals at $25,000 to $30,000. Some are more generous; SoFi allows qualified borrowers to apply for up to $100,000 in a single loan.

Potential for a Lower Interest Rate Than a Credit Card

Personal loan interest rates are typically lower than credit card interest rates for comparable borrowers.

Unsecured personal loan rates start at 5% or 6% APR for very well-qualified borrowers. By contrast, it’s rare to find even low-APR credit cards with regular APRs under 10%, regardless of applicant strength. Plenty of credit cards have low or no-interest introductory offers that last 12, 15, or even 21 months, but rates spike to 10%, 15%, 20%, or higher once the intro period ends.

Easier to Manage Than Multiple Credit Card Accounts

A single, fixed-rate personal loan funded in a lump sum is much easier to manage than multiple credit card accounts with different spending limits, interest rates, payment due dates, and issuer policies. If you know you need to borrow $25,000, why not apply for a single personal loan in that amount rather than four credit cards with spending limits of $6,250 apiece?

Predictable Repayment Schedule

Personal loans are installment loans with fixed interest rates, repayment terms, and monthly payments. At approval, you’ll learn precisely how much you’ll need to repay each month, how many monthly repayments you’ll need to make, and your total interest cost over the life of the loan.

Revolving credit lines, such as credit cards and home equity lines of credit, aren’t so predictable. The only constant is your monthly payment due date; your required minimum monthly payment depends on your credit utilization, and your interest rate is subject to change with benchmark rates.

Personal Loan Tips

Create A Budget

Creating a budget is one of the best things you can do for your financial situation, regardless of your income or debt. Trying to manage your personal loan without a budget puts you in a position of vulnerability and confusion—you don’t always know where your money is going or how much of it is going there. If you find yourself afraid to check your bank account, having less money than you know you should, or are unsure of areas where you’re overspending, then creating a budget might be the answer.

The first step in budgeting is to divide your expenses into categories. It’s better to start off with broad categories, like “Food”, rather than categories like “Coffee”, “Fast Food”, “Groceries”, and “Dining Out”. Simple categories are easier to calculate and keep track of. If you have no idea how to go about making a budget, there are plenty of free resources online to help walk you through the process. There is also an abundance of apps that make keeping up with your budget simple and easy.

Consolidate Your Loans

For borrowers managing multiple personal loans, consolidation could be a great way to simplify your debt repayment. Debt consolidation is when you take out a single, large loan that can be used to repay all of your other loans and debt. Then, instead of making payments to multiple lenders each month with different interest rates and requirements, you will be making a single payment to one provider.

Debt consolidation is especially helpful if you’re able to secure an interest rate on your new loan that is lower than the average interest rate of your previous loans.

The only downside to consolidating your debt is that you will likely end up having to repay your debt faster than before. Before consolidating your debt, be sure that you can make the payments on your new loan. It might also help you to repay large portions of your loans on credit rather than with a single loan, consolidating it in more manageable pieces.

Pay On Time

Making your monthly payments on time every month is the best way to avoid late fees and penalties as well as hits to your credit score. These are unnecessary and all-too-common consequences that will work against your financial situation, so be mindful of them and do your best to stay on top of payments.

Once you create a budget, you’ll realize it’s much easier to make payments on time. Having a financial plan and a portion of money set aside each month will prevent you from being unable to make a monthly payment on your loan. If you find yourself forgetting to make your monthly payments, see if your provider offers an automated payment system.

If you’ve just taken out a personal loan, or are about to, a great way to give yourself a cushion is to make an early monthly payment as soon as you receive the loan. By being a payment ahead of your installment plan you’ll have a buffer against a missed payment.

Pay More Than Your Minimum

Following the same strategy of making an early initial payment, it helps to pay more than your monthly minimum when you can. Paying a little extra each month keeps you ahead of your loan term as well as provide you with some other financial perks.

For one thing, making extra payments on your loan will reduce the overall length of your repayment plan. This will help clear you of debt and enable you to regain your financial independence even sooner, and by paying off your loan ahead of time, you’ll reduce the amount of interest you owe, saving you money in the long run.

Not only that, but your credit score will also improve when you pay off your debts faster than expected. A lower credit score will benefit you in a variety of ways, like lowering down payments and interest rates for a long time to come.

If you’re considering paying more than the minimum on your monthly loan installments, be sure to read up on your provider’s policy regarding this. While some will allow you to pay your loan off faster, others may charge fees for doing so, negating the benefits of early repayments.

Keep An Eye On Your Credit Score

Lastly, keep a close watch on your credit score while repaying a personal loan. Your credit score plays a big role in your finances and has an important relationship with the loans you take out—your credit score will affect and be affected by your personal loans.

The way you manage your personal loans will be reflected in your credit score. Sticking to your monthly installment plan or even getting ahead of it will improve your credit score. Falling behind on your payments, on the other hand, will lower your credit score.

Having a higher credit score is important for a variety of reasons. Your credit score is how prospective lenders determine your reliability. The more reliable you seem, the lower your interest rates and down payments will be. High credit scores can also help when making a big purchase, like a home or car, and give you access to premium credit cards with great benefits.

Why Would a Personal Loan Application Be Rejected

Been declined for a personal loan? It isn’t a nice feeling especially when you really need the cash, but unfortunately, it can happen. To help get back in control of the situation, understanding why your application was denied can help you out the next time you try to qualify for a loan.

Here are the 6 most common reasons why people are not approved for a personal loan.

Low Credit Score

After you apply for a personal loan, one of the first things the lender will do is to check your credit score. In India, CIBIL is one of the respected firms that provide credit score data to lenders. If your CIBIL score is above 700, it is considered an eligible score, making it highly likely that you will be given a Personal Loan.

Low Income

While processing your Personal Loan application, one of the required criteria for eligibility is to have an appropriate regular income through a job, profession, or business. If your income is lower than the criteria or if it is volatile, the chances of you getting a Personal Loan can drop.

Inaccurate Details in Application

If the details regarding your name, residence, phone number and other account details are inaccurate, it will be difficult to generate the necessary information about you. Without the right information, it is impossible for the banks to approve your personal loan.

Job Instability

Financial stability is highly valued when it comes to providing you a loan. If you switch jobs frequently or do freelance work which is volatile, there are high chances that your loan application will get rejected.

Too Many Pending Loans

Banks can access your financial profile even if you have availed loans from third party banks, which is why it is advisable to avail loans only when necessary and ensure timely payment of installments. If you have multiple ongoing debts with banks and NBFCs, your likelihood of getting the personal loan decreases.

Not Eligible

There are other criteria of eligibility for personal loans other than income level and credit scores like age, nationality and even educational qualification. Many times banks tend to think twice about your loan application due to these reasons.

What Are The Best Ways to Get Your Personal Loan Approved

Make sure all the basics are correct

You don’t want to give a lender the simplest reason to refuse you, so before you send your application across, make sure that you’ve double checked every detail.

Are your name, address and employment details correct? Have you filled in every required section, leaving nothing out? It’s simple things like this that can cause an application to be rejected, especially if you’re applying online, with less chance to amend things.

Check your credit rating

Checking your credit rating is an excellent step to take as it gives you a much more secure idea of where you stand and what loans are available to you.

Some lenders will specify a certain credit rating, and others will specialise in lending to people with more diverse histories. Payday loans companies generally have less stringent requirements, so can be a solid option for people who might be refused a more traditional loan.

Don’t apply to too many loans

Whenever you actually apply for a loan, it leaves a digital footprint on your credit score.

The issue with this is when you are rejected for several loans in a row. Lenders will see this, and question why other lenders have rejected you. This can put paid to even a decent application, as it can make you seem desperate for money and unable to repay.

In general, do not apply for a loan unless you’re absolutely sure you want it.

Know what loans are available

Knowledge is power, and knowing exactly what your options are vastly increased your chance of finding a loan that’s suitable for your needs.

There are a huge amount of personal loan options available to us, and literally thousands of lenders willing to provide credit to people like you.

Make sure you check multiple lenders, online and offline, before settling on anything. The more options you consider, the better armed you are when it comes time to make a decision.

Verify everything

Once you’ve found a loan that’s suitable for your purposes, a good choice is always to contact the lender, whether that’s a bank or credit company, and ask them directly about requirements and loan eligibility.

If you’re getting a loan from a bank, you might need to make a personal appointment and bring identification and details, so it’s good to be prepared up front.

Make sure you know the purpose of the loan

Certain loans are only designed for certain purposes. Whether secured or unsecured, there might be things that you cannot use your loan for.

A great example of this is the current trend of cryptocurrency investment. Many lenders will specify that personal loans cannot be used for this reason.

Make sure you meet the income requirements

Loans generally have a minimum income requirement, and some may need proof of verified employment for a certain amount of time before considering giving you a loan.

Remember, lenders want you to be able to repay your debts. It’s better for the both of you. They don’t want to have to chase you for money, or call in debt repayment services, and you don’t want to affect your credit score or have money problems.

Consider early repayment

Remember, it’s usually possible to pay off a loan early, so if you get into a position to do so, and save money in the long run, you don’t want to be hit with heavy charges for doing so.

Check if your particular choice of loan has early repayment options, and what they are. If you think there’s a good chance you’ll be able to pay off part or all of your loan early, you’re far better suited finding one with no charges.

Consider borrowing more

A general rule of thumb is that the larger the loan, the cheaper it is. Because of the way loans are bracketed, you might actually save money in the long term by borrowing slightly more.

For example, a loan of $2000 could cover what you need, but have a higher APR than a $2500 dollar loan, which could mean higher repayments and paying more back, long term.

Ask your loan provider if there are any options regarding this, when you’re taking out your loan.

What is The Cheapest Way to Borrow Money

Depending on your needs the cheapest way to borrow money will most likely be a personal loan or a credit card. These are not the only ways of getting hold of money, however. You can also use a bank current account overdraft or borrow against the value of your house.

The best way to decide how to borrow money cheaply is to think about how much you want to borrow, how long you will need it for, and how you are planning to pay it back.

If you are looking for a relatively small amount of money, then you could look for a loan with the lowest APR or an overdraft or credit card with a 0% interest period.

What works best for you when looking for the cheapest way to borrow money is a deal where you get the lowest interest rate for the longest time, or where you get a long period of no interest at all.

There certainly isn’t one loan that works for everyone, but there are some ways which are generally cheaper to borrow than others.

Here are some things to consider when you are thinking about the best way to borrow money:

• How much do you need to borrow?
• How long do you need it for?
• What will you use the money for?

Think about your income and credit history – if you have a poor credit rating you might not have access to all the loans in the market.

A credit card might be the best option if you don’t want to take out a loan.

What is a Good Loan Rate?

Generally, a good interest rate for a personal loan is one that’s lower than the national average, which is 9.41%, according to the most recently available Experian data. Your credit score, debt-to-income ratio and other factors all dictate what interest rate offers you can expect to receive.

But it’s also important to look beyond interest when evaluating personal loan options. Understand your loan term, or how long you’ll pay it back, as well as fees you could be charged, such as origination and late payment fees.

What Are The Right Ways to Use a Personal Loan

Debt consolidation

Consolidating debt is a move to pay off your old debts by transferring them into one new loan. Doing so also allows you to reduce the amount of stress you may be experiencing from managing multiple accounts, can give you more control over your situation, and can help you see the progress you are making toward being debt-free.

“If your debts have gotten out of hand and you’re struggling to keep track of payments, a personal loan can be used to pay off creditors thus consolidating all your payments into one monthly bill,” Ross says.

Loans often have a better interest rate than some credit cards or other debt, so this is an acceptable method to manage debts.

“The important thing here is that the personal loan is not new debt,” Ross says. “You’ve simply transferred multiple debts into one location.”

Help with home purchase

Another good way to use a personal loan is to help with the purchase of a home. The loan may be taken out to be used as a down payment or to help cover other expenses, such as closing costs. This is usually a good investment, because you build equity as you make your mortgage payments. Once it is fully paid, it becomes a valuable asset. Keep in mind that a personal loan will affect your debt-to-income ratio, which can affect your ability to get a mortgage.

Maintaining a home

Speaking of your home being a good investment, it’s also important to protect it by keeping it in good shape. This includes preventative maintenance and repairing unexpected problems that come up. For example, if your roof is leaking and it is time for a new one but you can’t afford to pay for it out of pocket, taking out a personal loan to fund it would be a good idea. You are preventing further damage to your home and increasing your home’s value.

“If you own a home and need to make repairs, a personal loan can help get the work done quickly if you don’t have time to save up for it,” Ross says. “This is an appropriate use of a personal loan, because the cost of the loan is at least partially offset by increasing the equity in your home.”

Buy or repair a car

Like a home, a car is going to be a big investment for you. Being able to go wherever you need to go, when you need to go, makes a lot of difference with your job, business and life.

So if you need a new car to get to work or school, a personal loan can be used to help purchase it. You also may opt for an auto loan, which is secured by the vehicle, or a combination of both. However, there’s a fine line between necessity and luxury. Look for a good deal on the car and be sure the purchase is reasonable for your income level.

Repairing a car is also a good use for a personal loan because, in many cases, you are investing in something that is going to help you get to work and generate income.

Help start up your business

Starting your own business can be pretty expensive with the need for permits, office space, equipment, inventory, a website and much more. Many budding entrepreneurs are on a tight budget and a personal loan can help to fund a startup. While new businesses can be risky endeavours, Ross says that you are “using the loan to establish a new means for making money, which will enable you to pay the loan back in a reasonable amount of time.”

Medical expenses

Your health is a top priority and it’s important to invest in it to ensure you stay healthy. Health insurance is a necessity, but it can only do so much. Many medical expenses go beyond what insurance covers. When this happens, you’re better off getting a personal loan to pay those medical bills up front.

What all these personal loans have in common is that you are using the money to invest in things that benefit you in the long term: your budgeting goals, your health, your car, your home and/or your business.

On the flip side, there are uses of personal loans that have little to no long-term benefits.

What Are The Wrong Ways to Use a Personal Loan

Vacations

Once you find out you can get a personal loan, you may start imagining the beaches in Hawaii or jungles of Costa Rica, but you’ll want to pump the brakes on those daydreams.

“Taking out a loan to go on a vacation is a surefire way to create unnecessary personal debt,” Ross says.

She says many consumers take out loans to go on “once-in-a-lifetime” trips. The problem is that it ends up taking years to pay it off. Think about if the two-week vacation is worth years of monthly payments.

The best advice is to take a vacation when you’ve got extra cash on your hands. That’s when you know you’ve earned a break.

Lavish weddings

Another common pitfall is taking out a personal loan to pay for a lavish wedding. According to Market Watch, one-third of couples go into debt for their wedding day. While getting married should be a memorable experience, you don’t want to start your marriage off on the wrong foot. Don’t be pressured into expectations from the people around you, because they’re not the ones who’ll be paying off the loan once you’re back from your honeymoon.

Ross advised against upgrading your wedding with a personal loan because “wedding costs can balloon quickly without much thought being given to the fact that once the day is over, this money is gone.“

If you really want that dreamy wedding of yours, then save up for it. Your future self will thank you for not starting off your married life worrying about long repayments and high interest rates.

The holidays

Don’t let lenders take advantage of your eagerness to be the modern-day Santa Claus. While you want your kids and loved ones to be happy during the holidays, personal loans are not the best way to pay for gifts. Once the holidays are over, the feelings fade and toys are forgotten, but the debt remains. You should consider how limited you’ll be the rest of the year in what you can give as gifts because of your holiday debt.

Gambling

Debt should be a planned financial decision with a reliable outcome. It’s therefore wise to avoid getting personal loans for things in which outcomes are out of your control. Nothing is more unpredictable than gambling.

Stock market ventures

The same goes for the stock market, which is a kind of gamble in itself. Unlike other business investments in which you have more control over your profits, the stock market is very volatile and people can lose as much as they can profit in a matter of minutes. Some day you may have the funds to invest in the stock exchange, but don’t take out a personal loan to do it.

Paying bills or buying everyday items

Lastly, you may have bills piling up, need some new clothes or need groceries, but a personal loan isn’t a good solution for these recurring costs. “Instead, consumers should look into their complete financial picture and figure out what they need to change in terms of their lifestyle and budget in order to live within their means,” Ross says.

Conclusion

At the end of the day, a personal loan can be used for anything and isn’t limited to the factors listed here.
And though there are many different reasons to take out a personal loan, remember that no matter the circumstance, it must be paid back eventually. When you take out a personal loan to pay off credit cards or to throw the perfect wedding, you are borrowing money that must be repaid with interest on top. Personal loans are a great way to consolidate debt and make major purchases, but you should always utilize this financial resource responsibly.