When should you consider a personal loan?

Key takeaways:

• A personal loan can help with debt consolidation, urgent expenses, and purchases which don’t fit other loans.
• Personal loans can be secured or unsecured.
• This isn’t the best option for education, home purchases, or investing.

If you’re trying to simplify your finances, make a big purchase, or just want to know your options in case of an emergency, you may be wondering whether a personal loan is the right move for you.

Let’s take a look at when a personal loan may be helpful and when other options may be best.

What is a personal loan?

Unlike other products, personal loans can be used for a variety of scenarios. They’re lent in one lump sum vs a rolling line of credit.

Personal loans can be:

• Secured: Backed by other funds or assets; typically have lower interest rates
• Unsecured: Not backed by other funds or assets; typically have higher interest rates

What are the most common reasons for getting a personal loan?

Personal loans are often used for:

• Debt consolidation
• Home improvement
• Emergency expenses 
• Purchases that don’t fit under other loans

A member’s credit score, debt-to-income ratio, and comfort with risk are all important when finding the right product.

“No matter what loan, I ask the member, ‘What option is going to help you sleep at night?’” said Nicole Pilger, a senior financial solutions guide at Elevations. Making sure the loan is a responsible choice that won’t cause extra stress is key.

High-interest credit card debt

If you have multiple credit cards with high-interest rates, you can use a personal loan to pay the cards, then pay off the loan at a lower interest rate (and one bill). See if a secured loan is an option for you, since this option typically has lower rates.

This not only saves you money but can help you improve your credit score and make you more attractive to lenders for the future.

You can also consider a balance transfer. Many banks and financial institutions allow you to move debt from multiple cards to a low-interest credit card, offering the same benefit. The decision depends on your credit score, type of debt, and amount of debt.

Home improvements

Making home improvements can boost your home value.

Also consider a home equity line of credit (HELOC), so you can only borrow what you need from the full amount and only repay what you borrow. Depending on your interest rate and project, this can save you money.

Emergency expenses

Whether you’re going through unexpected medical expenses, a car breaking down, or a family emergency, a personal loan is a lending option to explore.

Make sure to compare interest rates and approval timelines if your situation is urgent.

Purchases that don’t fit other loans

Personal loans can also be a good fit for purchases that just don’t fit under other loans, such as health expenses.

Nicole Pilger, a senior financial solutions guide at Elevations, once helped member purchasing a vintage motorcycle through a personal loan. Because it was valued much more highly than the motorbikes usually purchased with an auto loan and the member’s finances could comfortably accommodate a personal loan, it ended up being the best option.

When another loan might work better

Take a thorough look at your options if you need to fund:

• Educational expenses
• Home purchases
• Investing

Depending on the situation, a personal loan may not be the right choice. In one case, Nicole found that a member needing funds for dental work qualified for a credit card with a 0% intro rate. Since the member was able to pay off the loan in 12 months, using a card vs a personal loan helped them save plenty of interest. However, every situation can be different.

Educational expenses

Many lenders don’t grant personal loans for educational loans — they’re required to follow extra regulations in these cases due to the 2008 Higher Education Opportunity Act. 

Home purchases

Using a personal loan to buy a house is technically possible in a few scenarios, but often just isn’t realistic. That’s because personal loans tend to have:

• Higher loan rates than mortgages
• Fewer options than mortgages

However, you could use a personal loan to improve your debt-to-income ratio by consolidating debt in preparation for applying for a mortgage. 

When is a personal loan definitely not a good idea?

Always try to avoid taking on debt in situations like:

• Vacations
• Gambling
• Non-essential expenses
• Another option would save you money

Taking on a personal loan affects your credit score and your monthly budget for quite some time. So, it’s important to only use a personal loan if the expense is necessary. 

To afford something that’s just out of reach but important, like a vacation, try a high-yield savings or money market account. You can automatically deposit part of your paycheck in a dedicated account that earns funds.

Tip: Read our guide to reaching financial capability

The bottom line: When should you consider a personal loan?

A personal loan may be right for you if:

• Another product isn’t the best fit for your purchase.
• It lowers your monthly interest payments.
• You have a way to repay the loan.
• You’ve talked to a financial advisor and explored your options.

Explore personal loans at Elevations