A personal loan is a form of funding that can be used for multiple purposes, from consolidating debt to covering large purchases.
What is a personal loan?
Personal loans are a form of borrowing money that will eventually be paid back with interest. They are known for being a versatile type of loan which can be used for pretty much anything. Many choose to use personal loans to cover unexpected expenses which may arise, cover a large purchase such as a home renovation or wedding, or to consolidate debt.
These loans will be paid back in fixed monthly instalments with additional interest. The exact amount of the monthly payment will depend on how much you are borrowing and for how long (source: WeLendUs). There will also be variation between different lenders and your personal financial circumstances will impact the conditions of the loan.
What are personal loans used for?
One of the reasons why personal loans are so popular is because they offer ample opportunity regarding what the loan can be used for. Here are some of the reasons you may consider taking out a personal loan:
Consolidating debt – debt consolidation is a common reason why one might wish to take out a personal loan. This involves bringing together old debts and high-interest credit cards onto one personal loan which has a lower interest rate. It is a way to pay off your existing debt and save money in the long run. In some cases, there may be government loan options available to help with excess debt.
Home renovations – large-scale remodels, repairs and renovations are a good reason to take out a loan so that you can cover the up-front costs and pay them off over time.
Medical bills – if you are unable to pay for medical procedures using public health services, you may need to seek out private healthcare options, which can often be a very expensive undertaking. A personal loan could help you cover your costs and eliminate your medical debt.
Large purchases – it may be that you want to invest in a large purchase such as a new refrigerator, new laptop or new mattress. Whatever it is that you need, you may struggle to find the upfront cash in order to pay for it. A personal loan can help you make the purchase and then pay it off in small instalments over time
To pay for a car or vehicle – specific auto loans are available to finance a car purchase, which can sometimes offer lower interest rates than personal loans. That said, personal loans, unlike auto loans, don’t tend to require a deposit or any collateral so may be preferable for this type of purchase.
Covering unexpected expenses – if you don’t have enough savings to cover unexpected payments that may arise, a personal loan could be a way to keep you afloat financially.
What should you avoid using a personal loan for?
While it can seem like personal loans can be used for pretty much anything, there are some exceptions to what you can use a personal loan for.
School fees – the majority of lenders will not permit you to use your personal loan in order to cover your university tuition and fees. Some lenders will also prohibit the use of a personal loan in order to cover existing student loans.
Business expenses – there are many lenders who will not allow you to use a personal loan for business purposes. However, there are many different business loans and grants available which are a better option than personal loans.
Down payment for a mortgage – generally speaking, you cannot use a personal loan for a deposit or down payment on a home.