A personal loan can be used for nearly anything. You might see the loans advertised differently (home improvement loans, travel loans or medical loans etc.) but they all function the same way.
The best way to use a personal loan though is to reach a financial goal. For instance, you could use a loan to consolidate high-interest debts. You should compare personal loans with other financing options to find the one that best fits your needs.
How do personal loans work?
Unlike home loans, the majority of personal loans are not secured Which means they are not backed by any collateral, such as your car or house. The decision to approve, or not, is based on your creditworthiness, income and any other debts.
Because personal loans usually have fixed rates, the monthly repayment remains the same for the full loan term.
Reasons to get a personal loan
Debt consolidation
If you have multiple forms of debt, you may want to use a personal loan to consolidate them. This will unsecured debts like credit cards into a single payment, ideally at a lower interest rate. This method will save you money and can help you pay off your debt faster.
Home improvement project
You can use your loan to help fund a home improvement project. This could be a bathroom remodel or a new kitchen.
Unlike equity financing, personal loans don’t need the home to be used as collateral. The money is usually within a week of the application, and sometimes the same day – depending on the loan source.
Personal loans normally have higher interest rates and larger repayments each month. Because of this, it is best to shop around to find financing that fits your budget.
Refinancing an existing loan
A lot of lenders will allow you to use a personal loan to refinance an existing loan, and at a lower rate of interest. This works in the same way as a debt consolidation loan.
If your credit rating has improved since taking out the loan, you might be able to qualify for a competitive rate. Before doing this, think about whether the new loan comes with any fees that would nullify the savings.
Medical bills
Personal loans can be used to cover dental or other health care expenses. This can include an emergency procedure, cosmetic work.
That said, medical loans can be one of the most expensive ways to finance any kind of health care, so perhaps consider alternative ways to pay any medical debt first.
Weddings, holidays and other discretionary expenses
Some of the more ‘big ticket’ events might need 3rd party financing. For instance, a wedding can cost more than £20,000, and not every happy couple can pay outright. Personal loans are one way to cover the difference.
A big holiday can add up, too. Though fly now, pay later payment plans are becoming more popular, personal loans are another way to cover that dream trip.
Personal loans can cover emergencies
If you need your car to get to work, and it breaks down, you may need a personal loan to get it fixed. In these cases, look for a small personal loan with an upper APR of 36% and monthly repayments that you can afford. You should also plan to repay the loan as soon as possible.
Personal loans are usually a better choice than turning to a payday or pawnshop loan – both of these options come with very high-interest rates that are best avoided at all costs.
Be sure to compare loans with low, or no-cost alternatives – such as a cash advance app or family loan.
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