How to Finance a Purchase
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Few Americans can get through life without financing something. Whether it's a home, vehicle, or large project, financing can make it easier to get things done.
Keep reading to find out more about financing.
Financing is when a financial institution -- like a bank, credit union, or online lender -- lends you money to cover an expense. For example, when you need money for a car, a lender provides financing in the form of a loan. Financing is how most Americans pay for major purchases, such as:
The best type of financing for you depends, in part, on what you plan to do with the money. Below, we'll cover the main types of financing -- and what you need to know about each.
Note: If you've lost income due to the coronavirus pandemic, you may qualify for a coronavirus hardship loan. Read our guide to coronavirus hardship loans for more details.
Important characteristics of personal loans include:
The credit score needed for a personal loan varies. If your credit score is less-than-perfect, check out our expert-recommended lenders for below-average credit:
TIP
If your credit score is low, you may be charged a higher personal loan interest rate. It's worthwhile to take some time to boost your credit score before applying for a personal loan.
Some personal loans are "secured," while others are "unsecured." Here's the difference:
A secured loan is backed by collateral. Say you take out a loan for a boat. The lender considers the boat "collateral," an item of value they can repossess if you fail to make your payments. All secured loans are backed by collateral, like bank accounts, vehicles, or jewelry.
An unsecured loan is backed only by your signature. If you miss payments, your credit score will take a hit -- but other than suing you for the money, the lender does not have many options (they can't take your possessions). That is why it's harder to qualify for an unsecured loan, and the interest rate on an unsecured loan is almost always higher.
If your credit score is low, you might have a better chance of getting approved for a personal loan by applying for a secured loan. Even if you can get a personal loan without putting up collateral, you might get a lower interest rate with a secured loan.
You can use the calculator below to calculate the monthly payment on a personal loan.
Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.
| Lender | APR Range | Loan Amount | Min. Credit Score | Next Steps |
|---|---|---|---|---|
Apply Now for Discover Personal Loan
Powered by Credible
Rating image, 5.0 out of 5 stars.
5.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
7.99% - 24.99%
|
$2,500 - $40,000
|
660
|
Apply Now for Discover Personal Loan
Powered by Credible |
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
11.49% - 20.49%
|
$2,000 - $30,000
|
740
|
|
Rating image, 4.0 out of 5 stars.
4.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
6.70% - 35.99%³
|
$1,000 - $50,000¹
|
300
|
Debt consolidation allows you to take out a single lower-interest loan to pay off higher-interest debts. You apply for a low-interest loan, use the funds to pay off your high-interest debt, and then focus on repaying the loan. This strategy can save you a significant amount of money in interest charges.
Imagine you have three credit cards. You owe $5,000 on each card, and you pay 17% interest. Here's how much money you could save with a debt consolidation loan:
| Item | Credit cards | Debt consolidation loan |
|---|---|---|
| Interest rate | 17% | 7.99% |
| Monthly payment | $450 | $380 |
| Time to pay off | 46 months | 46 months |
| Amount paid in interest charges | $5,445 | $2,464 |
As you can see, in this scenario, a debt consolidation loan could save you a jaw-dropping $2,981. If you're considering a debt consolidation loan, take a look at our experts' list of best debt consolidation loans.
This type of financing makes sense for borrowers with a good credit score (700 or above). Like a credit card, this is unsecured financing. The lender sets a total amount that can be borrowed, and you can take funds out as needed, up to that total. Once you have repaid it, that amount is again available to you.
Homeowners with enough equity in their homes have a financing option not available to other borrowers -- a home equity loan. It works like this: Say you owe $100,000 on your home, but it's worth $200,000. That means you have $100,000 in equity. Most lenders will lend up to 85% of the equity, in this case, $85,000. As with other financing types, you make payments each month for a set number of months.
When you finance a purchase, you borrow money and pay it back with interest. Usually, you repay it in monthly installments. Before the lender gives you the money, you sign a contract outlining how much you are borrowing, the interest rate, how much your monthly payments will be, and when the loan will be paid in full.
If you're considering whether to finance a purchase, it's time to do some homework.
These simple steps will help you save money when you get a personal loan:
Financing is helpful when you need something but do not have the cash available to pay for it. For example, if you are in an emergency room with a broken arm and must cover your co-pay before treatment, you can apply for a medical loan. If someone you love passes away and you need funds to cover the funeral, or someone is ill and you need to travel to see them, financing is a good idea.
Financing is a responsible option when you need (rather than want) what you are financing and you have the income to repay the loan. It is a good idea when your credit score is strong enough to land one of the best personal loans available.
Financing is a bad idea when you want something but do not have the money to pay for it.
Let's say you move into an apartment with bright blue carpeting. You decide your sofa clashes with the flooring and head out furniture shopping. The smart move is to save enough cash for a new sofa, or better yet, save for a sofa cover that matches the carpeting.
As useful as financing is in many situations, it is not without risks, including:
There is a lot of talk about the value of "balance," and with good reason. When it comes to your money, balance is all about building an emergency fund with enough to cover three to six months' worth of bills, paying cash whenever possible, keeping debt to a minimum, and taking advantage of financing options when it benefits your bottom line.
Financing a purchase not only allows you to buy the things you need now and pay for them over time, it can also help you build strong credit and add to the quality of your life.
As with every important financial decision, it is essential to weigh your options. Ask yourself if what you want to finance is something you need, if you can easily afford the monthly payments, if your job is secure, and if you have money put away for a rainy day.
Also, consider whether the purchase you want to finance will add to your bottom line. For example, installing wood floors in your home can increase its value from 3% to 5%. Let's say you have a home currently worth $250,000 and spend $15,000 to install wood floors. If the property's value immediately rises by an amount between $7,500 and $12,500, you made a wise investment.
Only you can decide for sure whether financing a purchase is the right move. But you have already taken the first step by learning more about the process.
Here are some other questions we've answered:
Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.
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. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands. Terms may apply to offers listed on this page.
*Upstart Loan Disclaimer
¹ Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Minimum loan amounts vary by state: GA ($3,100), HI ($2,100), MA ($7,000).
³ The full range of available rates varies by state. A representative example of payment terms for an unsecured Personal Loan is as follows: a borrower receives a loan of $10,000 for a term of 60 months, with an interest rate of 18.60% and a 8.51% origination fee of $851, for an APR of 23.07%. In this example, the borrower will receive $9149 and will make 60 monthly payments of $258. APR is calculated based on 5-year rates offered in December 2024. There is no downpayment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will be approved.
Citi® Personal Loan Disclosure
Terms, conditions, and fees for accounts, products, programs and services are subject to change at any time. You must be at least 18 years of age (21 years of age in Puerto Rico). Co-applicants are not permitted. Existing Citi deposit and credit card customers who have been a Citi customer for less than 12 months are not eligible for a Citi® Personal Loan.
If you apply online, you must agree to receive the loan note and all other account disclosures provided with your loan origination in an electronic format and provide your signature electronically.
Rates as of 12-01-2024. Your APR may be as low as 11.49% or as high as 20.49% for the term of your loan. The lowest rate quoted assumes excellent credit and a loan term of 24 or 36 months. Your APR will depend on a variety of factors including your creditworthiness, term of loan, and existing relationship with Citi. Citi offers personal loans with a period of repayment between 12 and 60-month terms. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the APR. If you are in default, your APR may increase by 2.00%. Rates subject to change without notice.
To check for offers you may qualify for, Citi conducts a soft credit inquiry. If you are presented with an offer and choose to proceed with the application process, Citi will conduct a hard credit inquiry which may have an impact on your credit score.
Citi® Personal Loan proceeds cannot be used to pay for post-secondary education expenses or for business purposes. Credit cards issued by Citibank, N.A. or its affiliates, as well as Checking Plus and Ready Credit accounts, are not eligible for debt consolidation, and Citibank will not issue payoff checks for these accounts. If you are unsure of the issuer on the account, please visit https://www.citi.com/affiliatesproducts for a list of Citi products and affiliates.
If you are approved for a personal loan with Citi, you can get your funds the same day with a Citi deposit account, or up to 2 business days for a non-Citi account when using direct deposit. Or, you can select to receive a check by mail in approximately 5 business days.
Personal loans are made available by Citibank, N.A., Equal Housing lender
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. Motley Fool Money does not cover all offers on the market. Motley Fool Money is 100% owned and operated by The Motley Fool. Our knowledgeable team of personal finance editors and analysts are employed by The Motley Fool and held to the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands. Terms may apply to offers listed on this page.
*Upstart Loan Disclaimer
¹ Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Minimum loan amounts vary by state: GA ($3,100), HI ($2,100), MA ($7,000).
³ The full range of available rates varies by state. A representative example of payment terms for an unsecured Personal Loan is as follows: a borrower receives a loan of $10,000 for a term of 60 months, with an interest rate of 18.60% and a 8.51% origination fee of $851, for an APR of 23.07%. In this example, the borrower will receive $9149 and will make 60 monthly payments of $258. APR is calculated based on 5-year rates offered in December 2024. There is no downpayment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will be approved.
Citi® Personal Loan Disclosure
Terms, conditions, and fees for accounts, products, programs and services are subject to change at any time. You must be at least 18 years of age (21 years of age in Puerto Rico). Co-applicants are not permitted. Existing Citi deposit and credit card customers who have been a Citi customer for less than 12 months are not eligible for a Citi® Personal Loan.
If you apply online, you must agree to receive the loan note and all other account disclosures provided with your loan origination in an electronic format and provide your signature electronically.
Rates as of 12-01-2024. Your APR may be as low as 11.49% or as high as 20.49% for the term of your loan. The lowest rate quoted assumes excellent credit and a loan term of 24 or 36 months. Your APR will depend on a variety of factors including your creditworthiness, term of loan, and existing relationship with Citi. Citi offers personal loans with a period of repayment between 12 and 60-month terms. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the APR. If you are in default, your APR may increase by 2.00%. Rates subject to change without notice.
To check for offers you may qualify for, Citi conducts a soft credit inquiry. If you are presented with an offer and choose to proceed with the application process, Citi will conduct a hard credit inquiry which may have an impact on your credit score.
Citi® Personal Loan proceeds cannot be used to pay for post-secondary education expenses or for business purposes. Credit cards issued by Citibank, N.A. or its affiliates, as well as Checking Plus and Ready Credit accounts, are not eligible for debt consolidation, and Citibank will not issue payoff checks for these accounts. If you are unsure of the issuer on the account, please visit https://www.citi.com/affiliatesproducts for a list of Citi products and affiliates.
If you are approved for a personal loan with Citi, you can get your funds the same day with a Citi deposit account, or up to 2 business days for a non-Citi account when using direct deposit. Or, you can select to receive a check by mail in approximately 5 business days.
Personal loans are made available by Citibank, N.A., Equal Housing lender
