What’s the Purpose of a Loan? The Top 6 Reasons for Personal Loans

Birdseye view of desk.

© Getty Images

By Brian Robson, Bankrate

Personal loans are borrowed money that can be used for large purchases, debt consolidation, emergency expenses and much more. These loans are paid back in monthly installments over the course of typically two to six years, but it can take longer depending on your circumstances and how diligent you are with making payments. Although it may seem frivolous to take out a personal loan for, well, personal reasons, a loan can be greatly beneficial if you can keep up with payments.

When do personal loans make sense?

While it’s always important to carefully consider your financial situation before taking on a loan, sometimes a personal loan is the best way to finance a large purchase project that you can’t afford upfront. Here are the top six reasons to get a personal loan.

1. Debt consolidation.
2. Alternative to a payday loan.
3. Home remodeling.
4. Moving costs.
5. Emergency expenses.
6. Large purchases.

Get Prequalified for a Personal Loan

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.
Get Started

1. Debt consolidation

Debt consolidation is one of the most common rationales given for taking out a personal loan. Imagine carrying multiple loans or outstanding credit cards that all have varying interest rates and balances due. That's a recipe for financial trouble, and it's also where personal loans can step in to help.

When you apply for a loan and use it for debt consolidation, you're combining all of those outstanding balances into one monthly payment. This grouping of debt makes it easier to work out a timeframe to pay off your balances without getting overwhelmed.

One of the best advantages of using a personal loan to pay off your credit cards is the lower interest rates. With lower rates, you can reduce the amount of interest you pay and the amount of time it takes to pay off the debt. Consolidation allows you to pay off credit cards in finite terms with a clear end date in sight.

2. Alternative to a payday loan

If you're facing financial hardships, you may be tempted to take out a payday loan to help you get by in the interim. However, payday loans are often predatory and can leave you much worse off than before.

Though payday loans may be easy to get, they carry extreme risks if you can't pay back the amount owed in the time agreed upon. Some payday lenders charge interest rates in excess of 400 percent. Personal loans, on the other hand, are typically more straightforward and incur much lower APRs, even if you have poor credit.

3. Home remodeling

A personal loan can be a great option to pay for home remodeling. Whether you want to put on a new roof, install solar panels, remodel your kitchen or add a swimming pool, if you don't currently have the cash on hand, a personal loan can be a big help when it comes to home improvements.

Furthermore, a personal loan is a good fit for people who don't have equity in their home or don't want to get a home equity line of credit or home equity loan. Unlike home equity products, personal loans often don’t require you to use your home as collateral. In that way, they involve less risk.

4. Moving costs

You probably won't need to take out a personal loan to relocate over a short distance. However, if you're facing a long-distance move, perhaps for a new job opportunity, then costs can be expensive enough to warrant applying for a personal loan.

Personal loan funds can help you move your household belongings from one place to another, purchase new furniture for your new residence, transport your vehicle across the country and cover any additional expenses.

Before pursuing a personal loan to help cover your big move, consider whether your new income will enable you to pay off your loan balance. This consideration will help you avoid the added stress of paying off your personal loan on top of starting a new career in a new location.

5. Emergency expenses

Finance funeral expenses

Though it’s uncomfortable to consider, personal loans can be a helpful resource in the event of a family member's death. In short, funerals are expensive. Between the burial plot, casket, funeral home services and other factors, costs can quickly add up to thousands of dollars.

If a deceased person's estate can't afford those expenses, a family member or other person may choose to apply for a personal loan to cover the deceased's final costs.

Pay medical bills

Medical expenses are another significant reason people go to lenders for personal loans. Common medical treatments that may require the use of a personal loan include dental work, cosmetic surgery, fertility treatments and other procedures that can cost $5,000 or more. Ancillary expenses like medical travel, parking, medications and aftercare also can be effectively financed by a personal loan.

6. Large purchases

Pay for appliances

Household disasters can strike unexpectedly. If you suddenly need to buy a new washer and dryer but don't have the funds on hand, a personal loan can provide relief. Other large purchases, such as an entertainment center or gaming computers, can also end up costing more than what you have in your checking or savings account.

Personal loans allow you to purchase major household appliances and electronics immediately, rather than having to wait months to save up for them. Though you’ll have to pay interest and potentially upfront fees, a personal loan can save you time and money in the long run, since you'll be able to avoid using laundromats and other short-term but expensive alternatives.

Buy a car, boat or RV

You can also apply for a personal loan when considering a larger purchase like a car, boat or recreational vehicle. After all, most people aren't walking around with tens of thousands of dollars at their disposal.

Examples of other large purchases that may require a personal loan include tiny homes, motorcycles, snowmobiles and horses (including the trailer, saddle and other equestrian equipment).

Pay for a wedding

In some cases, it's a good idea to take out a personal loan before you walk down the aisle. A wedding loan can be used for big-ticket items like the venue and bride's dress, as well as smaller expenses like flowers, photography, the cake and a wedding coordinator.

You can also consider paying for the engagement ring with a personal loan. Depending on the kind of ring you're getting, engagement rings can easily cost several months’ worth of your salary. If you don't want to deplete your savings account, consider a personal loan to help make your engagement and wedding exactly the way you always dreamed it to be.

Take a dream vacation

Your average vacation might not cost enough to necessitate taking out a personal loan, but what about a honeymoon or a luxury cruise? Whether you've just graduated and want to go on a trip or you're celebrating an anniversary, personal loans can help you finance your dream vacation.

Should I get a personal loan?

If you have a budget in place, a personal loan could be a good way to fund a project or consolidate debt. While a personal loan isn’t free - you’ll be paying interest in addition to the principal - having payments spread out could allow you to take a vacation or remodel your kitchen when you might not otherwise have the chance.

Before applying for a personal loan, ask yourself whether you have the room in your budget for a regular monthly payment and whether you’re prepared to make those payments over a number of years. Make sure to shop around for a good interest rate and use a personal loan calculator to get a sense of how much you’d pay each month.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Get Started

The bottom line

At the end of the day, a personal loan can be used for almost anything - even beyond the options 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.

See more at Bankrate