When it comes to personal loans, there is no one-size-fits-all option. The best loan for your needs depends on factors such as how much you need to borrow and whether you have good credit scores.
Here are some tips that can help you identify a loan that fits your goals:
- Shop around with different lenders. Thanks to the internet, it’s easier than ever to shop around and compare rates and loan terms. Our parent company, LendingTree, is an excellent place to start because you can easily explore options from different lenders in one place. Start by filling out an online form.
- Read the fine print. Make sure you understand each loan’s terms, conditions and interest rate, along with your monthly payment.
- Look for a low-cost loan. Ideally, you should look for a personal loan with the lowest rate and fees (or no fees) you can find.
- Read reviews. The internet is a treasure trove for reviews of various lenders. Reading product reviews can help you gauge the quality of each lender and what your experience might be like.
Part II: Common Uses for a Personal Loan
While borrowing money and paying it back slowly can be ideal no matter what your goals might be, you might be surprised to find out just how many uses personal loans can have.
“I’ve found that personal loans can be helpful when looking to consolidate higher interest debt, pay for a major expense or quickly get funds when needed for an emergency,” says Jeff Rose, founder of Good Financial Cents and partner of Discover Personal Loans.
Rose also pointed to a new survey from Discover Personal Loans, which showed that 26 percent of respondents cited a major medical expense as the most popular potential use for a personal loan, followed by 22 percent saying debt consolidation, and 13 percent using it to fund a small business.
Take note: That doesn’t mean personal loans are ideal for all uses. Here are some potential uses for personal loans, along with some pros and cons to consider:
If you have several types of debt and you’re struggling to keep up, debt consolidation can be a smart way to tackle the problem. When you consolidate debt, you take out a new loan, use it to pay off your existing debts and are left with just one loan to repay.
The real benefit of using a personal loan for debt consolidation is knowing exactly how much you pay each month and precisely how long you have until you’re debt-free.
“You don’t get that with a credit card,” says Gerri Detweiler, a writer, educator and authority on credit and loans.
You’ll have to decide when a personal loan makes sense as a debt consolidation tool over other options — such as a balance transfer credit card. It will likely come down to your credit score and which option will cost you the least over time. For example, a debt consolidation loan may have a higher interest rate than a balance transfer credit card, many of which come with a 0 percent APR for 12 to 21 months.
You can find 0% balance transfer offers at CompareCards.com, another LendingTree site.
Taking a personal loan to cover medical expenses “can be very helpful, especially if it keeps you out of collections,” Detweiler says.
Before you take this step, however, you should speak to your provider to see if it offers a payment plan. If so, you may be able to make payments on your outstanding medical debts without paying interest.
You can take out a personal loan to buy a car, but should you? Detweiler says it depends on the type of car you’re buying and how much it costs.
“You would probably get a better interest rate through a car dealership since personal loans are unsecured but car loans use the car as collateral,” she says.
On the flip side, a personal loan might work better if you’re buying an older used car from an individual instead of a dealership.
Detweiler notes that, while a lot of people use a home equity loan or HELOC, or home equity line of credit, to remodel their home, not everyone has enough equity to qualify. A personal loan could be ideal since you may qualify no matter how much equity you have in your home.
Not only that, but you won’t lose your home if you fall behind on payments with a personal loan. A home equity loan uses your home as collateral.
Moving can be expensive, but you should try to save up the cash before your move, if you can. If you’re short on funds, a personal loan or a credit card can work well. The best option for your needs depends on the interest rate you qualify for and how long repayment might take you.
Starting a business
Detweiler says she’s a big fan of trying to separate personal and business credit, but there are still times when using a personal loan to finance a business could be beneficial.
If you’re a startup that’s not yet earning money, for example, you might not yet qualify for a business loan.
“In that case, a personal loan could help you get your business off the ground,” she says.
Boosting your credit
“A personal loan can help you improve your credit mix, and that can boost your score,” says Detweiler. “But you shouldn’t get into debt just to build credit.”
If you want to build credit without getting into debt, signing up for a secured credit card and using it regularly can also help. Read more about how secured cards work.
When it comes to the unexpected, personal loans can be a better option than some other types of borrowing, like payday loans. Not only are interest rates typically low, but you can figure out an exact payment plan to pay the debt off before you sign up.
But first, you should “really think about whether you need to borrow or whether you could come up with the money another way,” says Detweiler.