7 Reasons to Use Personal Loans
Personal loans offer borrowers the flexibility to meet financial needs and achieve goals that might otherwise be out of reach.
Unlike mortgages or auto loans, which are tied to a specific purpose, personal loans offer the freedom to use the funds as you see fit — whether it’s to consolidate debt, handle unexpected expenses, finance home improvements, or pursue personal projects. Plus, with both secured and unsecured options available, personal loans are accessible to borrowers with all types of credit.
In this article, we’ll explore 7 compelling reasons why personal loans could be the right choice for you.
How do personal loans work?
Personal loans are a versatile financial tool that can help you navigate life's challenges and opportunities.
Here's what you need to know:
- When you take out a personal loan, you borrow a specific sum based on your financial needs. Depending on the type of loan, that amount can range from a few hundred to several thousand dollars.
- Personal loans have clear repayment terms and interest rates that can be fixed or variable.
- Personal loans are either secured or unsecured. Secured loans require collateral while unsecured loans are backed by your signature.
Applying for a personal loan is easy:
- Step 1: Research different lenders and loan options; compare interest rates, repayment terms, and fees.
- Step 2: Once you've chosen a lender, you must complete an application form. This form will ask for personal and financial information, including your employment history, income, assets, and current debts.
- Step 3: The lender will review your application and may or may not conduct a credit check. They will then notify you of the approval decision.
- Step 4: If approved, you'll review and sign a loan agreement outlining the loan terms and conditions, repayment schedule, and applicable fees.
- Step 5: Once the loan agreement is signed, the lender will disburse the funds to your designated account.
Reasons to get a personal loan
Personal loans have many benefits. The right loan can provide extra funds for a large purchase, help you address a financial challenge, or achieve a goal you’ve been working toward. Here are just a few examples of how borrowers have used personal loans:
1. Emergency expenses
Personal loans can provide essential monetary support for emergencies by offering a quick solution to sudden expenses. While having a financial safety net is ideal, personal loans can be a backup plan when used responsibly.
No matter which type of personal loan you choose, you should only borrow what you need and repay the loan promptly. This approach can help you protect your financial well-being in the long term.
2. Debt consolidation
Personal loans can be a practical solution for consolidating debt. Consolidation combines high-interest debts into one manageable loan, eliminating the need to juggle multiple payments and due dates.
Consolidating debt with a personal loan could also reduce your overall interest costs, potentially leading to substantial long-term savings compared to maintaining multiple high-interest debts.
3. Financing a car
A personal loan could be a suitable option for purchasing a vehicle, especially for those with credit challenges who may only qualify for alternative financing methods. While personal loans offer flexibility and ease of access, it’s important to consider the pros and cons before applying.
Pros:
- No collateral requirement. Personal loans typically rely on factors like credit history and income, while auto loans use the vehicle you’re financing as collateral.
- Flexibility. Since you can use a personal loan however you see fit, you could purchase a vehicle from a private seller or independent dealership. These options aren’t always available with traditional auto loans.
- Potential for competitive rates. For borrowers with strong credit profiles, personal loans can offer competitive rates, potentially leading to cost savings over time.
Cons:
- Higher interest rates for poor credit. Borrowers with less-than-perfect credit may face higher interest rates compared to traditional auto loans.
- Shorter loan terms. Personal loans often have shorter repayment terms, which could result in higher monthly payments compared to auto loans with longer durations.
- Lack of auto-specific benefits. Personal loans don't include perks like warranties, dealer incentives, or other protections that are often part of auto loan packages.
Ultimately, deciding to use a personal loan for vehicle financing depends on your individual circumstances, financial goals, and credit history.
4. Wedding costs
Planning a wedding is exciting, but expenses can quickly get out of hand! Personal loans offer a solution for financing your dream day, but careful wedding budgeting and planning are crucial to avoid starting your marriage with high debt.
Start by setting a budget that accounts for all expenses. Before turning to personal loans, consider other funding sources such as personal savings, contributions from family, or a dedicated wedding fund.
When exploring personal loans to cover wedding costs, be sure to:
- Compare lenders. When loan shopping, compare offers from lenders to find the best terms and rates that match your financial situation.
- Borrow responsibly. Avoid borrowing more than necessary to prevent long-term debt.
- Explore cost-cutting options. Consider alternatives like a smaller guest list, a less expensive venue, or DIY decor to cut costs.
Using a personal loan to pay for wedding expenses — in combination with budgeting and cost-cutting measures — can help you achieve the wedding of your dreams without extending the financial burden for years into your marriage.
5. Home improvements
Personal loans can provide a flexible way to finance home renovation projects without depleting your savings or using high-interest credit cards.
With personal loans, you can work toward modernizing your living space, boosting your home’s curb appeal, and attracting potential buyers when it’s time to sell. Additionally, home improvements can lead to increased comfort, better functionality, and improved energy efficiency, making your home a more enjoyable place to live.
6. Large purchases
Personal loans can be a useful solution for making large purchases when other funding options aren't feasible. For example, you can use the lump sum of funds for furniture, major appliances, last-minute travel, and more without the long wait required to save.
By using a personal loan to finance these big purchases, you avoid depleting your regular savings or emergency savings fund.
7. Education
Personal loans can be an option to cover education-related expenses like tuition, books, and living costs. This can be particularly helpful for students who do not qualify for scholarships or federal financial aid.
But there are factors to consider when using personal loans to pay for higher education. For one, they often have higher interest rates and shorter repayment terms than federal loans, which may mean higher monthly payments. Personal loans also don’t offer a deferment period while you’re in school, meaning you’ll have to start repaying your loan immediately.
Still, if you’re attending school part-time while you work, a personal loan might be a practical solution for covering education costs.
When not to use a personal loan
Personal loans are a versatile type of financing, but they’re not always the best choice for every situation. Using personal loans for unnecessary spending, like lavish vacations or luxury purchases, can create excess debt and financial strain. Instead, consider saving money in advance using a dedicated savings account for discretionary expenses (e.g., a “vacation fund” or a “swimming pool fund”).
Regardless of your financing option, responsible borrowing is essential to avoid over-extending yourself. Before taking on debt, carefully evaluate your financial situation, consider the long-term implications, and assess your ability to comfortably repay the loan. If you have doubts, give yourself more time to decide.
Alternatives to personal loans
Personal loans aren't the only financing option; some alternatives may better suit your circumstances, goals, and preferences. Consider the pros and cons carefully before selecting one of these products.
Home equity loan
A home equity loan is a type of loan allowing homeowners to borrow against the equity in their home, typically using the property as collateral.
Pros:
- Lower interest rates due to home collateral
- Higher borrowing limits are suitable for major expenses like renovations
Cons:
- Risk of losing your home if payments aren't met
- Closing costs and fees may increase borrowing costs
Credit card
Whether plastic or digital, credit cards allow you to borrow funds up to a certain limit to make purchases. As the cardholder, you must repay the borrowed amount and any accrued interest within a specified period.
Pros:
- Instant access to funds for smaller purchases or emergencies
- Rewards programs and perks for cardholders
Cons:
- Higher interest rates, especially for revolving balances
- Potential for overspending and accruing debt
Line of credit
Similar to a credit card, a Line of Credit is a revolving credit account that allows you to borrow funds up to a credit limit, typically with interest charged only on the amount borrowed.
Pros:
- You can access funds as needed
- Interest is charged only on amount borrowed
- Available credit replenishes as payments are made
Cons:
- Interest rates may be variable and fluctuate over time
- Easy access to funds may tempt you to overspend
- You may find yourself in a cycle of debt accumulation
Payday Loan
A Payday Loan is a small-dollar, short-term loan typically paid back on your next payday. It is often used to bridge financial gaps between paychecks.
Pros:
- Often accessible to borrowers with poor credit or no credit history
- Quick approval, providing quick funds in urgent situations
- No collateral required
Cons:
- Small borrowing amounts
- Short repayment terms, often two to four weeks
- Based on income and employment history
Title loans
This is a type of secured loan that uses your vehicle's title as collateral to “secure” the loan amount. Although the lender will hold your title until you’ve paid off the loan, you can keep driving your vehicle while you make payments.
Pros:
- Often accessible to borrowers with poor credit or no credit history
- Quick approval, providing funds in urgent situations
- Do not typically require credit checks
Cons:
- May have high interest rates
- Potentially short repayment terms
- Risk of vehicle repossession if you can’t repay
See if an Advance America loan can help you
Advance America has been a trusted lender for more than 25 years. We offer a variety of personal loans to fit your needs, and you don’t need good credit to be approved.
Visit us in-store to apply or start your online application now.
