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If you need to borrow money to cover a large purchase or emergency expense, you may want to consider a personal loan. Personal loans are quite flexible and you can use them for a variety of purposes, unlike loans designed for a specific purchase (like an auto loan).
Here’s what you need to know about what a personal loan is, what you can and can’t use it for, and how to get one.
Credible, it’s easy to compare personal loan rates from various lenders.
How does a personal loan work?
A personal loan is a type of loan that is usually unsecured (meaning it doesn’t require collateral), and you can use it for almost anything. Banks, credit unions, and online lenders offer personal loans.
Personal loans have a fixed repayment term, with monthly payments and interest. When you apply for a personal loan, the lender will examine your credit history, as well as your income, to determine if you qualify for a loan and at what interest rate.
Personal loans vary in size and the amount you can borrow depends on the lender and your personal financial situation. Usually, you can find personal loans ranging from $ 100 to $ 100,000.
What can you use a personal loan for?
One of the main attractions of personal loans is that you can use them for a variety of financial purposes. Here are some examples of common uses for personal loans:
If you have multiple sources of debt with variable interest rates, consolidating all of your debts into one personal loan can make management easier. In some cases, you may qualify for a lower interest rate, which can save you money and allow you to pay off debt faster.
Life often throws curveballs that cause financial stress. Between emergency vet visits, unforeseen travel needs, and job loss, you may need to borrow money with a personal loan to cover a large expense or to make sure you can get your bills under control. .
Whether you need a new water heater or want to update your kitchen, you can use a personal loan to cover many major home renovation expenses. A personal loan can help you pay for needed repairs and improvements.
Whether your child needs a new computer for school or it’s time to upgrade your old mattress, a personal loan can be a way to finance a major purchase. Paying off your personal loan in installments can make it easier to finance a large purchase.
The great events of life
From weddings to moving houses, some of life’s greatest moments come at a cost. Whether you saw this major event in your life coming or surprised you, a personal loan can help cover associated expenses, such as hiring movers or purchasing new furniture.
Start a business
While some loan products are designed specifically for business owners, you can also use a personal loan to cover certain business expenses and operating costs. Just be sure to confirm with the lender that you can use the funds for your business before signing on the dotted line.
If you find yourself with medical bills that you can’t pay, a personal loan can help you break those expenses down into manageable monthly payments. It’s worth checking whether the health care provider will negotiate some of your debt or allow you to pay in installments before you take out a personal loan.
Car on the fritz? Since you can’t always wait until you can save for a needed vehicle repair, you can take out a personal loan to help get the repairs done as soon as possible.
As you can see, you can use personal loans for various purposes. It’s up to you to decide whether paying interest to borrow money with a personal loan is worth it.
With Credible you can compare personal loan rates from several lenders in one place.
What can’t you use a personal loan for?
Personal loans have certain limits on how you can use the borrowed funds. During the application process, lenders will usually ask you what you plan to use the personal loan for. As a general rule, you can’t use a personal loan to:
- Tuition fees – You generally cannot use a personal loan to pay for your tuition. Lenders see this as a risk, as students who do not have a significant source of income may not be able to repay their personal loan.
- Illegal activities – It might sound like common sense, but you can’t use a personal loan to finance illegal activities.
- Gambling – Even though gambling is legal where you live, you cannot take out a personal loan for gambling or betting purposes.
Each lender has their own application process, but you will usually need to follow these steps to get a personal loan:
- Decide how much you need to borrow. Before applying, use a personal loan calculator to help you estimate your monthly payments for how much you want to borrow, and if you can afford it.
- Check your credit. Check your credit report before applying to make sure there are no errors affecting your score. the the better your credit score, the best rates and loan terms you can qualify for, so correct any mistakes in your report before applying for a personal loan.
- Shop around and compare lenders. The rates and terms a lender offers you affect how much you spend over the life of your personal loan. Look for the best rates and conditions so you don’t accidentally spend too much money.
- Apply. All lenders have different application requirements, but you will usually need to provide documents such as government issued ID, recent pay stubs, bank statements, and verification of your home address.
- Receive your loan funds. Once you accept a loan offer, the lender will verify the documents you provided. Verifying your documents and distributing your funds can take from one to six business days.
Things to consider before getting a personal loan
Before applying for a personal loan, keep the following points in mind:
- Interest rate – Lenders charge interest when you borrow money, and you’ll pay it monthly as part of your loan repayment. The lower your interest rate, the less you will spend on interest.
- term of the loan – The term of your loan is the time you have to repay your personal loan, and it affects the amount of interest you will pay over the term of the loan. As a general rule, the shorter your repayment term, the less interest you will pay.
- Costs – Personal loans often come with fees, such as origination fees and late fees. Ask lenders in advance what types of fees they charge and when they charge them – these are on top of the cost of your loan.
- Monthly payment – Each month you will make a payment on the principal balance and part of the interest you owe.
You can easily compare personal loan rates with Credible.
Should you take out a personal loan?
Taking out a personal loan makes perfect sense when you benefit from a favorable interest rate and you can adapt the monthly payments to your budget. For example, if you need money quickly to cover an emergency expense, and you have good credit, a personal loan may be a good option.
But a personal loan does not make sense in some cases. If you don’t have a strong credit history, it may be difficult for you to get a great interest rate. Sometimes using a credit card with a low interest rate can be a better bet (again, only if you can afford your monthly payments). Using a travel rewards credit card to purchase a trip that you know you can pay off by the end of the month will save you the hassle of applying for a loan, and you’ll earn reward points at the same time.
Before taking out a personal loan, it is important to determine if the expense is really necessary and worth paying the interest.