How To Use Personal Loans

How To Use Personal Loans

There are no shortage of options when it comes to helping finance both expected and unexpected expenses. Personal loans rank among the most popular, and most stable. According to data from Transunion, 22.7 million consumers used personal loans in 2023. 

Their popularity makes sense. In many cases, personal loans offer a more reasonable interest rate than a credit card and can offer some flexibility for a wide range of expenses like home renovation, debt repayment or an emergency expense. 

They also typically work on a fixed rate and offer an easy-to-follow repayment schedule that can be set over the course of a few years. 

What is a personal loan anyway? 

A personal loan is a sum of money borrowed from your bank or financial institution that you pay back in fixed installments. This loan accrues a set amount of interest, and can be obtained for both personal and professional purposes. Think: home renovation, covering expenses while starting a small business, or, as is becoming more and more common practice, consolidating debt. 

Like a credit card, a personal loan is an unsecured loan, meaning it is a loan that is not issued based on collateral. Whereas secured loans, like mortgages and car loans, are based on collateral, like your home and car respectively, unsecured loans are not. As a result, they are often issued based on factors like credit score and income. The approved amount of your loan can vary depending on those same factors.

They are also more flexible in their repayment terms than some other types of loans. Like a mortgage, when you take out a personal loan, you have some choices when it comes to the amount of time you’ll take to repay the amount. You may choose an option that will take longer to pay off but offers a higher interest rate, or a shorter-term agreement with a lower interest rate.  to take longer to pay it off with a lower interest rate, depending on your current financial situation. 

What kind of personal loan is right for me? 

There are many different types of personal loans to choose from, and the right one for you depends on what you’re looking to accomplish with the loan, and your current financial situation some examples of personal loans include 

Home Improvement Loans

This is a loan you might take out if you’re hoping to renovate or fix something in your home but don’t currently have the cash flow to do so. They can be approved in amounts ranging from as little as $1K to as high as $100,000, and are offered by many different financial institutions at interest rates that similarly range widely, anywhere from 7% to somewhere in the ballpark of 30%. 

Debt Consolidation Loans

This is becoming an increasingly common use for personal loans. Debt consolidation loans can help with tackling mounting debt at a potentially better rate than the skyrocketing APR% typically associated with credit cards. The amount of savings depends on how much lower the rate you get approved for can be, but many institutions promise rates starting as low as 7%. it’s an appealing option, especially when current credit card interest rates average about a whopping 25%. 

Medical Loans 

The number of people in this country who go into debt for medical purposes is staggering. According to the Commonwealth Fund, 72 million people struggle with medical bills or are in medical debt. While medical expenses can (and should!) be negotiated, you can technically take out a personal loan to assist with medical expenses. However, it is likely a better option to seek out a payment plan with the medical institution itself, as the interest rates are lower. 

Business Loans 

While there are professional loans you can take out specifically with the intention of funding your business, some smaller business owners might also opt to take out a personal loan to cover expenses like inventory, payroll, or any other expense that comes up. This option offers a business owner more flexibility than putting everything on a credit card or having to detail exactly what part of the business the loan is for as is the case sometimes with a professional loan, for example.  

No matter the reason for taking out a personal loan, it’s also crucial to keep in mind some of the other variables associated with personal loans. For example, fixed rate loans are loans that have a fixed interest rate that does not change over time, while variable rate loans are not beholden to maintaining the same interest rate. If interest rates are low, it’s considered to be wise to take on a fixed rate loan. However, if they’re high, and may potentially come down, it could be more financially lucrative to opt for a variable rate loan. 

How do I apply for a personal loan?

It has never been easier to look into and apply for a personal loan. Online search engines like NerdWallet and Lending Tree make comparing different types of personal loans, along with their terms and interest rates, extremely simple. 

Once you have sifted through the many different options, you can go about applying for the loan with terms and interest rates that work for you, your budget, and your particular reason for seeking out the loan in the first place. There are two ways to apply, either in-person or online. According to Marketwatch, in both cases, the required documents are typically the same.

“Each online lender has its own specific requirements when applying. Typically, you’ll need to include proof of identification, your address, your Social Security number and proof of income. The lender may also ask about other debts and why you need the loan,” it explained. 

To apply for a loan in person: applying for a loan in person is a good option for someone who might need more one-on-one assistance. To apply for a loan in person, simply go to your bank and meet with a loan officer along with the required documents. You might want to stop into your bank ahead of time to find out exactly what you’ll need to bring so you’re not stuck having to go back and forth. 

To apply for a loan online: applying for a loan online is a bit more streamlined and faster process. You simply browse through a search engine and apply. You can also check out the amount you will be approved for and the terms of your loan before accepting. 

You will need to enter the same type of personal information, including your social security number and driver’s license number, along with the type of loan you are seeking, the amount you are seeking, your work status and your sources of both income and monthly expenses. 

Once you have applied for your loan, the timeline differs between in-person and online, too. Online applications are typically approved or denied faster, while in-person applications may take a few days to come back. 

What are some pros and cons of using personal loans? 

• Pros

  • Fixed interest rates: many personal loans offer fixed interest rates, which means they cannot go up over time. This offers more stability and knowledge of what the total amount you’re going to owe over the life of the loan will be, so you’re not surprised by a new number month to month.

  • Predictable repayment schedules: no matter what you plan to use a personal loan for, the payment will be due at the same time each month, making it easier for you to plan around and budget accordingly while you pay the loan back.

  • No collateral required: personal loans are ideal for people who do not yet own a home or a car, or do not want to put their assets at risk for a loan. Since collateral is not required, your assets cannot be seized under the terms of your loan, though there are other risks, like a drastically decreased credit score and having your loan sent to collections. 

• Cons

  • Higher interest rates than secured loans: while not always necessarily the case, unsecured loans can have higher interest rates than those offered through mortgages or other secured loans. That’s because the bank is taking a larger risk by offering a loan to someone without the promise of collateral.

  • Fees: fees for personal loans are comparable to any other fees you might take on when applying for other types of loans: there is the interest, of course, but also origination fees when you first open the loan, the potential for late fees, and another, more surprising fee – an early payoff penalty. In some cases, you could be charged for paying your loan off faster than expected. That’s why it makes more sense to continue paying the terms of the loan, even if you end up coming into a windfall at some point during its contract.

  • Potential for debt accumulation: as with any loans, secured or unsecured, taking out a personal loan can make you vulnerable to getting into debt. Depending on your ability to pay it off and how much you are able to pay down over time, taking out a personal loan can be a slippery slope if you do not have a plan in place to pay it back in a timely fashion. 

What are some alternatives to personal loans and how do they compare?

Personal loans v. credit cards

Personal loans and credit cards have a few things in common. Namely, they are both unsecured loans that are not based on collateral. They also involve a certain amount of interest. Credit cards, however, only very rarely have fixed rates, meaning interest can fluctuate. Some credit cards also charge yearly fees, which is less common with personal loans. Personal loans can offer a lower interest rate than credit cards, but it is not guaranteed. Credit cards are also revolving credit, meaning you have access to it continually as you pay it off, whereas personal loans are one lump sum, paid off over time. 

Personal loans v. home equity loans

Home equity loans are loans that are taken against the equity of your home. According to Investopedia, “the loan amount is based on the difference between the home’s current market value and the homeowner’s mortgage balance due.” Obviously, this type of loan is only available to those who own a home. Like a personal loan, these loans are offered at fixed rates, but if the balance is not paid off, the home can be seized. 

Personal loans v. payday loans

Payday loans are high-interest, short term loans that are currently illegal in multiple states in the United States due to their predatory nature. The name payday comes from the fact that the borrower is expected to pay the loan back on their next payday. It is meant to hold someone over until they are paid. Personal loans are a much more secure and stable option, however they are not always an option depending on your credit score. You should take extreme caution before seeking out a payday loan. 

What are the interest rates & repayment terms? 

Interest rates and repayment terms vary on a number of factors including your credit score, income, the loan amount and the specific lender. According to Bankrate, the average interest rate for a personal loan is 12.42 percent, on the low end compared to credit cards. However, for people with low credit scores, that number can soar upwards of 30 percent. 

Overall, personal loans can be a cost-effective and stable way to finance an unexpected or expected expense that you don’t currently have the cash flow to cover. While there is risk involved with all borrowing, especially if you’re unsure how you’ll be able to pay it back, personal loans offer a bit of flexibility and give you some options if you’re in a tight spot.

To calculate how much a personal loan would cost, find – and be sure to check out Stash’s personal loan offerings here.