A personal loan is a common type of consumer installment loan (paid back over time, usually in monthly installments) that can be used for many different purposes.
What is a personal loan?
Most personal loans are unsecured loans, meaning that there is no collateral (asset pledged to secure the loan) required. Because there is more risk to the lender, unsecured loans typically have higher rates than similar secured loans.
What can personal loans be used for?
Personal loans can be used for many different purposes depending upon the lender and other factors. Some common loan purposes include:
- debt consolidation and credit card refinancing
- home improvement
- big-ticket items
- car, motorcycle, RV (compare personal loan rates to rates and terms on a secured car loan)
- household expenses
- medical/dental expenses
- moving expenses
On the other hand. . . . just because a lender may be willing to offer you a personal loan for a particular purpose, that doesn’t mean you should be taking out a loan for that purpose. We aren’t big fans of using personal loans for things like vacations, weddings, and other large expenses that are not absolute necessities. Try to find ways to reduce the cost of these large items so that you can enjoy them without going into debt to pay for them.
- Personal loans can range from $1,000-$50,000, but some lenders may go as high as $100,000 in certain circumstances.
- Common loan terms are 1-5 years, but some lenders will offer longer terms.
- The longer the term, the lower your monthly payment.
- The longer the term, the more you will pay in total interest over the life of the loan.
- Interest rates vary according to your individual credit profile and will usually be higher than in a comparable secured loan.
- Some lenders charge an origination fee just to process the loan, so make sure you are aware of that and figure it into the total cost of the loan.
What is the difference between personal loans and in-store financing?
Unsecured personal loans can be used for many different purposes, including major purchases such as furniture, electronics, appliances, etc. Many large national stores or store chains also offer in-store financing for these types of purchases. What are the differences between the two?
- Some stores may offer 0% or reduced interest rates at different times of the year but only to buyers with excellent credit. You should compare the rate and terms you’d get in-store with those you could get through a personal loan.
- With some in-store financing, if you can’t pay the balance off in full before the promotional period ends or if you don’t make your payments on time, you may owe deferred interest, which can be at rates that resemble credit-card rates or higher. You need to read the fine print very carefully.
- In-store financing may give your credit score more of a hit than a personal loan. In-store financing may be reported as a consumer finance loan, which can negatively affect your score, or as revolving debt, which will negatively affect your credit utilization rate and therefore also hurt your credit score. Personal loans may be reported as installment debt, which will also have an impact on your credit score but typically to a lesser degree because it will not affect utilization rate.
Some personal loan providers
- You can look for a personal loan at traditional banks or online lenders (sometimes referred to as marketplace lenders, alternative lenders, and tech-enabled lenders).
- Some online lenders in this space include:
Alternatives to personal loans for certain purchases
There are instances when personal loans may make financial sense, such as if you are consolidating and refinancing debt at a better rate (after figuring in origination fees and other terms) or paying for necessary items like medical expenses, moving, etc. But here are some possible alternatives you might want to explore before you take out a personal loan for some of these things:
- Shop around for used furniture instead of new furniture
- Look for furniture at thrift shops or trustworthy online sites.
- Some apartment buildings have online social media that allows residents to post sales of used furniture when they need to move.
- If you do go the used route, check out the condition of the furniture before buying.
- Instead of buying a new car, try to keep your car for a longer amount of time if possible or buy a used car (either certified pre-owned from a dealer or privately after checking repair and incident reports and having the car inspected by a mechanic or two).
- If you do decide to purchase a new car, compare the rates and terms on a personal loan vs. an auto loan through the dealer or other private lenders. (See “Auto Loans.“)
- Try a staycation instead of a vacation that involves air and hotel. Or travel locally by car instead of incurring the cost of airfare.
- Look for ways to reduce the cost of weddings and other events. (Can you vary the venue or size of the guest list? Can you provide your own flowers? Drinks? Dessert? Can you consider alternative menu options?)
- Try to reduce the cost of certain home improvement projects with a little sweat equity. (Can you paint that room yourself?)
Why you should avoid payday loans
- Unless you like paying astronomical interest rates (some can be nearly 400% APR) and taking on terms that may be very hard to manage, you should stay away from payday loans. That’s our view.
- If you want to read more about payday loans, go to the CFPB website here.