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If you need to borrow money to cover a major purchase or an urgent expense, you might 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 a car 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 come with a fixed repayment term, with monthly payments and interest. When you apply for a personal loan, the lender will look at 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. Generally, you can find personal loans ranging from $100 to $100,000.
What can a personal loan be used for?
One of the main attractions of personal loans is that you can use them for various financial purposes. Here are some examples of common uses for personal loans:
If you have several sources of debt with variable interest rates, Consolidating all your debts into one personal loan can make it easier to manage. In some cases, you may qualify for a lower interest rate, which can save you money and make it easier to pay off your 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 big home renovation expenses. A personal loan can help you pay for necessary 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. Repaying the personal loan in installments can make it easier to finance a major purchase.
Major life events
From weddings to moving house, some of life’s greatest moments come at a cost. Whether you saw this major life event coming or it surprised you, a personal loan can help you cover associated expenses, like hiring movers or buying 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 you can’t pay, a personal loan can help you break those expenses down into manageable monthly payments. It is worth checking whether the medical provider will negotiate part of your debt or allow you to pay in installments before taking out a personal loan.
Broken down car ? Because you can’t always wait until you can save up to make a necessary 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 multiple lenders in one place.
Why can’t you use a personal loan?
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. Generally, you cannot use a personal loan to:
- Tuition – You generally cannot use a personal loan to pay tuition. Lenders view 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 may seem logical, but you cannot use a personal loan to finance illegal activities.
- Gambling – Even if gambling is legal where you live, you cannot take out a personal loan to gamble or bet.
Each lender has their own application process, but you’ll 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 what your monthly payments would be for the amount 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 scorethe best loan rates and terms you could qualify for, so correct any errors on 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 terms so you don’t accidentally overspend.
- To apply. All lenders have different application requirements, but you will generally 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 have accepted a loan offer, the lender will verify the documentation you have provided. It may take one to six business days to verify your documents and distribute your funds.
Things to consider before getting a personal loan
Before applying for a personal loan, keep the following aspects in mind:
- Interest rate — Lenders charge interest when you borrow money and you 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 — Your loan term is the amount of time you have to pay off your personal loan, and it affects the amount of interest you will pay over the life of the loan. Generally, 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 kind of fees they charge and when they charge them – these are added to the cost of your loan.
- Monthly payment — Each month, you will make a payment on the principal balance and a portion of the interest you owe.
You can easily compare personal loan rates with Credible.
Should I take out a personal loan?
Taking out a personal loan makes more sense when you can get a great interest rate and the monthly payments can fit your budget. For example, if you need money quickly to cover an urgent expenseand 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, you may find it difficult to get a good interest rate. Sometimes using a credit card with a low interest rate may be a better bet (again, only if you can afford to make your monthly payments). Using a travel rewards credit card to buy a trip you know you can pay off by the end of the month will save you from having to apply for a loan and you’ll earn rewards points at the same time.
Before taking out a personal loan, it is important to determine whether the expense is really necessary and worth paying interest.