Personal loans are among the most versatile forms of credit, allowing you to use the funds for just about anything. But depending on the lender, there may be some restrictions on how you can use the proceeds.
If you’re considering a personal loan for an upcoming expense, to help pay off debt, or for some other reason, it’s important to consider that some uses may be off the table. Read on for everything you need to know.
What is a personal loan?
A personal loan is an installment loan that you can use for a variety of purposes. Depending on the lender, loan amounts can go as high as $100,000, with repayment terms between one and seven years.
Most personal loans are unsecured, which means you don’t need to put up collateral to get approved. Some lenders also offer loans to borrowers across the credit spectrum, so you still have options even if your credit score needs work. That said, popular lenders charge interest rates as high as 36% to borrowers with bad credit, so a personal loan may not be your best option if you have bad credit.
Some lenders offer secured personal loans that you can get if you use a savings account, certificate of deposit, vehicle, or another asset as collateral. These loans typically offer lower interest rates than unsecured loans — even if you have poor credit — and can be a good way to build or rebuild your credit history. But if you default on your payments, you may lose your collateral.
You can find personal loans from a variety of lenders, including traditional banks, credit unions, and online lenders.
Popular uses for personal loans
You can use your personal loan funds for just about anything, as long as the lender doesn’t specifically prohibit a certain use. In general, there are certain purposes that are more common than others. Here’s a quick breakdown of the most common personal loan uses.
Debt consolidation
A debt consolidation loan is a personal loan used to pay off high-interest debt, particularly credit cards. On average, a two-year personal loan has an 11.21% interest rate, according to the Federal Reserve — that’s nearly half the average 20.40% APR for credit cards.
In addition to interest savings, a debt consolidation loan can also simplify your payoff plan by reducing the number of monthly payments you need to make. You can also consolidate other forms of debt, but make sure the terms you receive are better than what you’re paying.
Credit Card Debt Piling Up?
Medical bills
Some medical providers offer interest-free payment plans, but if that’s not an option, you can use a personal loan. By using a personal loan to pay off your medical bills, you’ll avoid potential collection calls and pay off your debt over time.
A personal loan can also be used for expensive elective procedures, such as Lasik or cosmetic surgery.
Home renovations
If you have a lot of equity in your home, a home equity loan or home equity line of credit can be cheaper than a personal loan. But those loans require you to use your home as collateral, which means defaulting on payments could result in foreclosure. If you want to avoid that risk, a personal loan can be an excellent alternative to pay for home renovations.
Emergency expenses
If your car has broken down, a major home appliance stopped working, or you have other pressing financial needs, a personal loan can be a quick way to get access to cash. In some cases, lenders offer next-day or even same-day funding.
Some credit cards offer 0% APR promotions that can also work for financial emergencies, but it can take a week or two to get your card in the mail (and not everyone can qualify).
Major life events
Major life events can be expensive and difficult to manage without significant savings. If you’re getting married, moving, adopting a child, starting in vitro fertilization, paying for a funeral, or you have some other life milestone on the horizon, a personal loan can help cover costs with a structured repayment term and fixed monthly payment.
Vacation planning
While it’s best to avoid using a personal loan for vacation costs, since vacations are not a necessity — a personal loan can be beneficial if you need to travel for an emergency, pay for a trip up front, or close a gap your savings cannot cover.
What not to use a personal loan for
There are several ways a personal loan can enhance your lifestyle and improve your financial situation. Depending on the lender, however, some uses may be prohibited. Here are some examples:
- Educational costs: Whether it’s college tuition and expenses, other educational expenses, or student loan consolidation, you can expect to run into snags with most personal loan companies. Even if it’s not expressly prohibited to use a personal loan in these cases, you can generally get better terms and benefits from federal student loans and private student loan refinance companies.
- Home down payment: Lenders offering personal loans won’t stop you from using loan funds for a home down payment, but don’t expect the mortgage lender to accept it. In many cases, you’ll need to provide a history of your funds, and if it’s clear they’re borrowed — unless it’s from a family member or friend — they’ll likely be ineligible.
- Investments: Many personal lenders exclude investment-related uses, but even if they don’t, borrowing money to invest can be incredibly risky. As a result, it’s best to avoid this option.
- Business expenses: When not prohibited, using a personal loan for business expenses can be a good way to fund your startup. Many business financing options available to new business owners can be sparse and expensive. However, some personal lenders don’t allow business use, so make sure you read the fine print before you apply. Since a high percentage of businesses fail in the early stages, ensure you can make the monthly payments without business revenue before you proceed.
It’s important to note that personal loan companies don’t have access to your bank account, so they can’t track how you spend your loan proceeds. In other words, there’s nothing stopping you from using your funds for something the lender doesn’t allow.
That said, these restrictions are in place for a good reason, and it’s best to avoid using a personal loan for these purposes.
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Where to find a personal loan
Personal loans are offered by traditional banks, credit unions, online banks, and other online lenders. With so many options available, it’s crucial that you take the time to shop around and compare interest rates and other terms before you apply.
Most major banks don’t offer personal loans, but you can often find them among regional and community banks. Credit unions typically offer personal loans with lower interest rates and fees than traditional banks. Credit unions are also the most common source for secured personal loans.
But in many cases, you’ll get the best terms from an online lender, which won’t have the same overhead costs as brick-and-mortar banks and credit unions. Still, it’s important to research and compare all of your options to ensure you’re getting the best deal available.
How to compare personal loans
There isn’t a ton of variety among personal loans beyond a handful of features. But before you apply for a personal loan, it’s still important to compare options from multiple lenders. Here are some of the things you’ll want to look for in a lender:
- Interest rates: Each lender has its own approach to interest rates. While rates are generally fixed, you may see a variety of interest rate ranges, depending on where you look. As a result, one lender may offer you a lower rate than the rest.
- Repayment terms: In general, personal loan repayment terms can go from one to seven years, but depending on the lender, you may get more or less flexibility within that range. Because the repayment period can impact your interest rate and monthly payment, it’s important to find a lender that offers a term that works for you.
- Fees: Some personal lenders charge upfront origination fees, which are deducted from your loan disbursement and can be as high as 10% of the loan amount. If you have good credit, you can easily avoid these fees by selecting a lender that doesn’t charge them. If you have poor or fair credit, however, your options may be limited. Some lenders may also waive late fees.
- Loan amounts: Depending on how much money you need, some lenders may not offer an amount low or high enough to meet your needs.
To explore personal loan options, you can use Purefy’s rate comparison tool to see real offers based on your credit profile. In just a couple of minutes, you can shop our network of 15+ lenders with no impact on your credit score.
This process can help you save time and make it easier to compare options side by side. You can also use Purefy’s personal loan calculator to get an idea of what your monthly payment would be and how much total interest you’ll pay based on your loan terms.
