Top 4 Reasons to Get a Personal Loan
There are many different reasons to get a personal loan. Many people find they can save money by refinancing debt. Others turn to a personal loan during an emergency, or discover an unsecured loan with a fixed monthly payment is the best and easiest way to pay for a major expense.
4 Good Reasons to Get a Personal Loan
1. When paying off high-interest rate debt
Loan refinancing and consolidation
Using a new loan to consolidate other debts is one of the most common reasons for getting a personal loan. However, the driving factor behind taking out a debt consolidation loan can vary depending on your circumstances.
For example, your goal may be to simplify your finances by decreasing how many bills you have to juggle each month. You can do this by paying off multiple debts with your personal loan (i.e., debt consolidation), leaving you with a single monthly payment.
Ideally, you can also save money by getting a personal loan with a lower interest rate than your current debts. When that’s the case, it can also make sense to refinance a single debt with a lower-rate personal loan.
Consolidating and refinancing debts can also change your monthly payment amount. Choosing a personal loan with a shorter term will lead to higher monthly payments, but you’ll also pay off the loan much faster (and enjoy a lower cost to borrow). A longer term will have lower monthly payments, which may be easier to manage on a tight budget, but will cost more in interest overall. Compare your options to figure out what works best for you.
Credit card refinancing and consolidation
A type of debt refinancing, paying down multiple credit card balances can be another good reason to get a personal loan.
As with loan refinancing, you may be able to save money. According to the Federal Reserve, credit cards had an average interest rate of 14.58% during the third quarter of 2020, and 24-month personal loans had an average 9.34% interest rate during the same period.
Personal loans can also be easier to manage than credit cards, as you don’t have to worry about variable rates or variable monthly payments, and you’ll know exactly when the loan will be paid off. As an added bonus, paying down credit card debt with a personal loan can lower your credit utilization rate, which may improve your credit scores.
2. When the unexpected (and expensive) occurs
A leaky roof, broken water heater, or sudden plumbing or electrical issues can happen at any time. Often, these need to be addressed immediately to prevent further damage and make your home safe and comfortable. Your savings or a credit card could be best for minor repairs. However, a personal loan can offer a larger lump sum payout that you may need for more expensive repairs.
Unexpected medical expenses are another common reason for taking out a personal loan. On average, a three-day hospital stay costs around $30,000, according to HealthCare.gov. Even if you have insurance, you may need help paying deductibles, copays, and medical bills from out-of-network providers. However, before taking out a loan, try to negotiate a lower cost with your providers and see if they’ll offer you a no-interest payment plan.
A divorce can be emotionally tolling and expensive for both parties. Even uncontested divorces can cost thousands of dollars in court costs, attorney fees, and expert consultations. Contested divorces can cost a lot more. NOLO found average costs range from $10,600 to $20,400 depending on whether the case goes to trial. Some attorneys offer clients payment plans, but you may still want a personal loan for non-attorney fees and expenses.
Unless someone had set aside savings to pay for their funeral, it’s often up to family members and loved ones to cover the expense. The National Funeral Directors Association reports the median cost of a funeral with viewing and burial was $7,640 in 2019. And that’s before flowers, a grave marker, and a vault (which many cemeteries require).
Many households don’t have an emergency fund to fall back on, and they may need to figure out how to cover emergency expenses during a crisis. Personal loans can be a good option because you can often quickly apply online and get the funds deposited directly into your bank account within a few business days.
3. When planning for a large expense
Elective medical procedures
Health insurance might not cover elective procedures, such as fertility treatment, hair restoration, or weight loss surgery. Additional dental work generally isn’t covered by general health insurance plans either. LendingClub works directly with thousands of U.S. health care providers to offer patient loans and lines of credit with competitive rates and affordable repayment options.
Unlike unexpected home repairs, you have time to prepare for and dream about home improvement and home remodeling projects. Some improvements, such as replacing a garage door, remodeling a kitchen, or adding a deck can even increase your home’s resale value — making the project something you can enjoy now and profit from later.
You may also want to consider a home equity loan or home equity line of credit, both of which are popular ways to finance home improvement projects. However, those won’t be an option if you don’t have enough equity in your home. Additionally, those are secured loans, while an unsecured personal loan lets you borrow money without using your home as collateral.
The cost of a move can vary widely depending on how far you’re going and how much stuff you have, but it could be as high as $5,000 for long-distance moves. However, that’s only the cost associated with hiring movers to transport your belongings. A personal loan can help cover those expenses and give you money to get settled in your new home.
4. When starting or growing a business
Whether you’re starting a new business, freelancing on the side, or are an established business owner, financing can be important to long-term success. However, you need to match the type of small business financing to your business’s needs.
For example, a credit card could make sense if you can pay off the bill within 30 to 60 days. However, for major purchases that will take longer to pay off, a personal loan can offer a low and fixed interest rate with predictable monthly payments. These features can make installment loans a good option for financing large purchases while minimizing the impact on your cash flow.
The Bottom Line
A personal loan can be a good option for emergencies and planned expenses alike, especially when compared to high-interest rate credit cards or payday loans. However, whether you should get a personal loan can depend on the loan offer.
Fortunately, many online banks and lending marketplaces such as LendingClub can help you get prequalified with a soft credit check, which allows the lender to review your credit history without touching your credit scores. You can then review your estimated loan amounts and repayment terms to see if getting a personal loan makes sense for you right now.