Key Takeaways
- Debt consolidation is a strategic reason for obtaining a personal loan. It combines multiple high-interest debts into a single, lower-interest payment, simplifying finances and reducing overall interest costs.
- Financing significant expenses, such as home renovations, medical bills, or major life events, is another valid reason for a personal loan, providing the necessary funds upfront with manageable repayment terms.
- Using a personal loan to cover unexpected emergency expenses can be a prudent choice, offering quick access to funds without the high interest rates associated with credit cards or payday loans.
Lenders often ask why you need a personal loan, and giving the right reason can help get your application approved. The best reasons include debt consolidation, covering medical bills, home repairs, or major purchases. These show lenders you’re borrowing responsibly.
Keep reading to learn how to explain your reason clearly and improve your chances of approval.
How Do Personal Loans Work?
Personal loans provide quick access to funds that are repaid over time, usually in monthly installments over a few months to several years. They come in various amounts, interest rates, and terms, and are often more affordable than payday loans or credit cards.
Personal loans generally are available through banks, credit unions, or private lenders, it’s important to compare offers to find the best rate. Most of the time a personal loan will be an unsecured loan, while secured options, requiring collateral, are less common.
To apply, you’ll need to verify your identity, income, and undergo a credit check. Those with a positive credit history can save money on interest and increase their chances of approval. Approval typically takes one to two business days.
Does the Reason I Give for a Personal Loan Impact It?
Yes, in some cases the reason you give for a loan can 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.
Common types of debt eligible for these loans include:
- Credit card debt
- Student loans
- Car loans
- Other personal debts you want to consolidate or pay off
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
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 High Interest 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). Consolidating debt can help pay off the principal amount quicker for existing debts.
A Large Purchase
Purchases like cars, RVs, 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 and other business related expenses.
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 on why you are borrowing the funds in the first place. Here are a few examples of categories that each come with their specific types of loans:
Paying for School
Although you can use a personal loan for almost any expense, including tuition, student loans/education 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 than using a personal loan. 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, such as your down payment, debt-to-income ratio, the home’s value, employment history, and more. And depending on the housing market, you could get a lower interest rate compared to a personal loan.
Vehicle Financing
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 score and credit report qualify you for.
FAQ: Best Reason for Personal Loan Approval
Your best course of action with a personal loan is to be honest about what you are planning on using the funds for, so you can find a lender that is best suited for your needs. Debt consolidation, home repairs, car repairs, and common reasons for personal loan use.
Using your personal loan for a different purpose than what you stated on your application is generally not illegal, but it may violate the loan agreement, especially if the lender has restrictions on use. While most personal loans offer flexibility, misrepresenting your intent can hurt your credibility and affect future loan approvals.
The best ways to increase your chances of approval for a personal loan are to increase your credit score as much as possible, provide all sources of income (try and increase it if possible), and ensure that all the information you submit is accurate and up to date. Some lenders are more flexible than others, however, that may mean paying more, so keep that in mind.
Yes, the reason for a personal loan can matter because lenders use it to assess risk and determine if the loan aligns with their lending criteria. While many lenders allow flexibility, some may offer better terms for certain uses like debt consolidation or home improvements. Being honest and choosing a practical, responsible reason can improve your chances of approval.
The Bottom Line
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.
However, expenses like college, financing a car, or buying a home may not be suited 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!
