What are some possible uses for a personal loan? Find out what some of your options are here.
Personal loans are flexible, versatile loans that can be used for many purposes, such as funding medical costs, repaying debts, paying for big purchases, or paying for your wedding.
But, while lenders don’t necessarily restrict what you do with personal loan funds, there are some things you may be better off taking out a different loan to finance.
It’s important to understand how you can use personal loan funds, and this guide will explain some of the key things you can do with the cash you get from them.
What can you use a personal loan for?
Typically, when you apply for a personal loan, the money is deposited directly into your bank account, or you’re given a check when you sign the loan paperwork. After the money has been deposited, you can do anything you want with it.
But occasionally, personal loan lenders will impose a few limited restrictions. You can read the fine print on your loan application or loan documents before you sign them to find out if there are any restrictions as to what you can use the money for. And although you likely won’t get caught using the funds for a prohibited purpose if you pay the loan back on time, defaulting on your loan or declaring bankruptcy could lead lenders who are trying to collect payment or prevent further discharge of funds to investigate the claims you made on your application.
Regardless of whether you’re likely to be found out or not, you should never be dishonest about your intentions when completing a loan application, as defrauding a financial institution by lying on an application can have serious legal consequences.
The good news is, this generally won’t be an issue. Outside of a few limited exceptions, your personal loan funds are yours to do anything you’d like with, and lenders don’t really care much about what you plan to do with the money you borrow. This means you can:
- Pay for home improvements
- Pay down and consolidate higher-interest debt
- Pay for anything you need or want to buy, such as a vacation, a wedding, or any other big purchase
You don’t need a personal loan that’s marketed as having a specific purpose
Sometimes, you’ll be taking out a personal loan with a specific goal in mind. For example, you may want a personal loan for debt consolidation, or to fund a wedding. There are lenders that market loans that are meant for these specialized purposes. For example, you could search for "wedding loan," or "home improvement loan," and you would find lenders offering these.
For the most part, these specially advertised loans are just standard personal loans with fancy marketing. You don’t need to restrict yourself to a loan marketed for a specific thing just because you want to use the loan for that purpose. And in fact, you can find a broader array of lenders offering general personal loans at a better rate by shopping around for a variety of loan providers, rather than restricting yourself for no reason.
You also want to be especially careful with loans marketed as debt consolidation loans, as sometimes these loans charge much higher rates or fees because the lenders prey on people who are trying to get out of debt. A general personal loan at a reasonable interest rate can be the best approach for paying off other debt you owe, to simplify the payment process and reduce interest costs.
What shouldn’t you use a personal loan for?
Though you can use a personal loan for almost anything you want, there are likely some things it’s a bad idea to use one for.
You may also not want to use a personal loan to buy a car, because you may be able to get a lower rate on a secured auto loan designed for a vehicle purchase instead. Auto loans use the vehicle as collateral, and the car can be repossessed if you don’t pay back the loan on time. Because there is less risk to the lender due to the vehicle acting as collateral, auto loans usually charge less interest than personal loans, and may also be easier to qualify for.
You also should never borrow money you cannot easily pay back, and should think carefully before taking out a personal loan for a purchase that isn’t necessary. While you could take out a personal loan to go on vacation, for example, this probably isn’t a wise plan, because then you’ll end up paying interest on your vacation and paying it off over a long time. This can be costly, and can affect your ability to accomplish other financial goals. Instead, you should take a vacation you can afford to pay for with cash.
Be smart about borrowing using a personal loan
You can use personal loans for anything you want, but that does not mean you should borrow for things that aren’t important. It’s a good idea to use a personal loan if you want to consolidate debt, or if you need to borrow for an essential purchase and can get a loan at a lower rate than you’d get from a credit card.
But you shouldn’t borrow more than you need, shouldn’t borrow for nonessential things, and should sometimes explore other loan options that could come with borrower protections that personal loans don’t provide.
Our picks for the best personal loans
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2024 The Ascent. All rights reserved.