There are a lot of different personal loans out there. The type you choose and the reason you give for it will depend on your specific financial needs. Sometimes it’s obvious, like when you need an auto loan to buy a new car, or a mortgage for a new house. But some personal loans can be used for a wide range of reasons.
In addition to thinking more about what to say to a potential lender, it will be essential to consider whether a personal loan is a suitable option for your needs.
How Do Personal Loans Work?
Personal loans work by providing funds, which borrowers will have to repay over time. A personal loan can come in all kinds of amounts, interest rates, and terms. Many people take out a personal loan because it can be fast and more cost-effective than other loan types such as payday loans or credit cards. You can find personal loans at a bank, credit union, or through private lenders. Before choosing one to work with, definitely compare rates from multiple lenders to find the best rate.
Personal loans can be secured loans that require collateral (you will risk losing if the loan defaults) or an unsecured loan that does not. Most personal loans are typically unsecured. To get a personal loan, you’ll have to submit some information on your identity, income and give a lender the okay to pull a credit report and check your credit score. Most lenders will let you know within one to two business days about approval.
Personal loans are typically paid back in a time frame of a few months to a few years, depending on the lender’s terms. Once you get the borrowed money, you will have to repay it, usually over monthly payments.
How Will the Reason I Give for a Personal Loan Impact It?
The reason you are taking out a personal loan will determine the type of personal loan you need. Lenders will assess the risks of lending and determine whether the product (or products) they are offering will be the right fit for your needs.
This process can also be helpful for you, as it can give you an accurate picture of your potential loan terms. From here, you can filter through lenders to find the right personal loans for your needs. For example, there are personal lenders that only give out funds to resolve the debt. This could be credit card debt, student loans, car loans, or other debts that you are looking to pay off with the new loan.
Interest rates and repayment terms will also vary depending on the type of loan and trends. For example, in 2020 and the beginning of 2021, home loan rates were at a record low. And if you were borrowing funds to put towards buying a home but didn’t specify why you needed them, you would be missing out on savings. This is especially true when going to a lender that offers a variety of different loan options.
Remember that your credit score, credit history, and income will also play a role in approval, interest rates, and the loan period.
What are the Most Common Reasons to Give for a Personal Loan?
To get a better idea of what you may want to tell your lender, below are some of the most common reasons to get a personal loan:
A Short-Term Unexpected Emergency Expense
Sometimes an emergency fund is not enough to cover unexpected costs. An unexpected expense is definitely one of the most common scenarios of getting a short-term personal loan. Unexpected emergency expenses like medical emergencies, covering moving costs, job loss, car repair, the death of a family member, and vet bills can all mean having to take out a personal loan. And in short-term emergencies, they can be a good option for fast funds. While also providing the possibility of steady repayment without having to struggle while getting back on your feet.
To Consolidate Debt
Debt consolidation is the process of paying off multiple loans with a new loan. The process can create a better financial situation and help you save money through better interest rates (fixed interest rates or variable interest rates). This method can help pay off the principal amount quicker for existing debts.
A Large Purchase
Purchases like cars, RV’s, electronics, and boats are another reason that people take out personal loans. Instead of paying a lump sum upfront, paying for a large purchase over time fits better with most people’s budgets.
Home Repair and Renovation
Homeowners can look to home equity loans or home renovation loans to take care of major work on their homes. These renovation expenses are another common way to use a personal loan.
Covering Costs for Major Milestones and Goals
Milestones like weddings, birthdays, and anniversaries can cost some extra money. Personal loans can work well, whether it is wedding expenses, large purchases for a loved one, or a dream vacation. They can be a valuable tool for covering the necessary costs of these kinds of large celebrations.
Personal loans from a bank or credit union also work well for any structured goals you may have. For example, startup costs for a business.
If any of your expenses fall into these categories, borrowing money through personal loans can mean the extra cash you need for unexpected expenses or any planned spending.
When Don’t Personal Loans Make Sense?
Although personal loans can be helpful for some, for others taking out a small-dollar personal loan may not make sense—they can cost you more and make repayment difficult. For one, if you have poor credit, you will find interest payments to be high depending on the lender. Instead of taking on high-interest debt, it may be better to apply for loans that cater to a low credit score, as they may mean a better deal.
Another reason why borrowing money from a personal loan may not be the best option depends why you are borrowing the funds in the first place. Here are a few examples of categories that each come with their own specific types of loans:
Paying for School
Although you can take out a personal loan for almost any expense, including tuition, student loans are often the best lending options to pay for college. Dedicated student loans for college have lower interest rates and interest charges than personal loans. These loans also usually come with a higher loan amount and with a ton of flexibility (especially federally-funded student loans). And in most cases, students don’t have to worry about monthly payments until after they graduate.
Buying Real Estate
If you are buying a home and need funding, mortgage loans make more financial sense. Mortgage loans are specifically designed to make the home buying process easier while considering more than just credit score and income. Mortgage lenders look at a variety of factors to come to approval and the monthly payment. And depending on the housing market, you could get a lower interest rate compared to a personal loan.
Car loans/auto loans make car buying more manageable and affordable. Additionally, auto loans usually come with perks, such as lowered interest rates for a period, depending on the dealer. Oftentimes these deals are unique to this secured loan type.
And so, before you get a personal loan, think about what your credit scores your credit report can get you and what kind of expense that you are using.
The most common reasons to get a personal loan include emergency expenses, major purchases, home repairs, or milestones. A personal loan may be the right option if you have a good credit score, and your costs fall under these categories. While other purchases and expenses like college, financing a car or buying a home may not work best for a personal loan. Finally, letting your lender know precisely why you want a personal loan can help you find the best product and offer for your needs!