What Can I Use a Personal Loan For?

Takeaways: What To Know About Personal Loans

• Personal loans let you borrow a set amount up front and repay it in fixed monthly payments.
• Common uses include debt consolidation, emergency expenses, moving costs, medical bills, home repairs and major life events.
• Debt consolidation may lower the total interest you'll pay on debt but use caution: New credit card debt can make repayment harder.
• Personal loans aren't typically a good fit for ongoing living expenses, purchases you can save for or needs better served by other loans.
• Before applying, compare APR, loan amount, repayment term, total costs, fees and how quickly funds are available.

What Is a Personal Loan?

A personal loan is a set amount of money you borrow up front, then repay in equal, predictable monthly amounts during the loan term, or the period of time you committed to repaying it. You can use a personal loan on just about anything your financial institution allows.

BECU consumer loans senior product manager Andrea A. said the most common use of personal loans is debt consolidation. After that, people use them for unexpected expenses like medical bills and car repairs, along with life events like moving costs and weddings.

“If you're making a big purchase — say you just moved into a house and need furniture — you might consider a personal loan because the interest rate may be lower than a credit card,” Andrea said.

A personal loan differs from a credit card because once you receive the funds, you can't borrow against it again as you pay it down. You get the money, you repay it on a schedule, and when you've paid it off, it's wrapped up.

Because the interest rate is fixed, your payment stays the same every month until the loan is paid off. “That allows you to budget,” Andrea said. “Unlike a credit card, your interest rate won't increase even if overall interest rates do.”

Is a Personal Loan Right for You?

A personal loan isn't right for everyone.

These are three things Andrea encourages members to think about when they consider applying for a personal loan:

• Why do you need the loan? Make sure it will help with an important financial goal.
• Will you be comfortable with the monthly payment over the life of the loan? For example, can you afford to make the payments for 36 months?
• Do you understand the total cost of the loan? The interest rate determines the cost based on how much you borrow and how long you take to repay it. BECU doesn't charge origination and early repayment fees, but other lenders might, so factor in those costs. Lenders also typically charge fees for late payments, so be sure you can make your payments on time.

How Much Should You Borrow?

Before applying for a personal loan, figure out how much you need and only apply for that amount.

Sometimes lenders will approve you for more than you need, which can encourage you to overspend.

“Just because you get approved for it doesn't mean you can afford it,” cautioned BECU's lead financial educator, Stacey B.

If you don't qualify for the full amount you requested, partial approval may be possible.

“Sometimes we approve a lower amount and talk with the member to see if they're okay with that,” Andrea said. “What we want is an amount that's good for the member, and that doesn't get them into too much debt.”

What You Can Use a Personal Loan For

Personal loans are flexible by design. You can use one for almost any major expense, and that range of options makes a personal loan useful.

Ideally, though, Stacey encourages people to plan ahead and save for big events and emergencies as much as possible.

“If you already have trouble saving, trying to pay off a loan and save for your next big expense will be an even bigger challenge,” Stacey said. “Start with building up your emergency fund, then try to make saving for upcoming planned expenses part of your regular budget.”

She suggested contributing a set amount to special savings accounts for events like a wedding or a dream vacation and the less fun necessities like taking your car to the shop.

“I call them moments, memories and maintenance,” Stacey said. “Planning ahead and paying out of savings reduces how much you need to borrow and pay back, and can reduce your overall costs because you won't have to pay interest.”

Debt Consolidation

If you're carrying balances on multiple credit cards at high interest rates, you can use the personal loan to consolidate them all into one loan. The personal loan's rate is likely lower and can reduce both your monthly payment and the total interest you pay over time.

With debt consolidation, if you stick with it, you can benefit down the road, Stacey said.

But if you start using your credit cards again, you will have both the loan payment and new card balances — a harder situation than the one you started with.

“If you haven't really addressed the behaviors that got you into debt in the first place, there's a good chance you'll rack up debt again,” Stacey said.

Consolidation might work well when:

• You can identify what spending created the debt and have a plan to change it.
• You're prepared to treat your paid-off credit cards as closed, or at least not available for everyday spending.
• Your monthly income reliably covers the new loan payment with room to spare.

If you're not confident you can avoid re-accumulating credit card debt, a conversation with a financial counselor before applying is worth more than the loan itself.

Emergency Expenses

Sometimes a personal loan can help if you're faced with an emergency like a surprise car repair — as long as you know repaying the loan fits comfortably within your budget.

Just like with debt consolidation, if you're already struggling to pay your expenses, adding more debt and a loan payment might compound your problem. If you have savings, it might be better to deplete it and start saving up again. You can think about taking out a loan later if your savings still isn't enough, rather than turning to a personal loan first.

“It's hard to take money out of savings, but that's exactly what it's for,” Stacey said. “Run the numbers on how much interest you would pay and how much that item will ultimately cost if you borrow money to pay for it. You don't have to pay interest on your savings.”

Home Repairs and Improvements

Some home expenses are too urgent or too small to justify a home equity loan or HELOC, or perhaps you don't yet have enough equity in your home to get those loans.

If you have a failing HVAC system or a quick-fix plumbing problem, get an estimate of the funds needed first, then apply for the personal loan. A home improvement loan might be another option for these expenses. Be sure to research APR, terms and conditions before you apply.

Medical Bills and Expenses

Medical bills tend to arrive unexpectedly and in amounts that are hard to absorb all at once. If you can't get a payment plan option, a personal loan lets you pay the provider in full and work through the balance on a monthly schedule you can plan around.

Moving Costs

Relocating comes with up-front costs that tend to hit all at once, including deposits, movers, temporary housing and rent overlap. A personal loan can cover that gap when your savings and your timing don't quite line up.

Wedding and Other Life Events That Exceed Your Budget

Big life events such as weddings, honeymoons and other planned milestones are common uses. When an expense you've been saving for runs over your budget, and you have a realistic repayment timeline, spreading the cost over a personal loan can be more cost effective than carrying the balance on a credit card. But, as with all planned events, do your best to save and stay within your budget.

Auto Repairs and Expenses

If your car needs a small but spendy repair, or a surprise repair that comes on the heels of another big expense, a personal loan can help cover the cost. But be aware that car maintenance and repairs are always going to be an expense if you own a vehicle, so do your best to save for those as part of your monthly budget.

What a Personal Loan Should Not Be Used For

Check with the financial institution to find out what you can and can't fund with a personal loan. For example, you can't use a BECU loan to pay business expenses, Andrea said. You would need to apply for a business loan instead.

Ongoing Living Expenses

If you're considering a personal loan to cover rent, groceries or utility bills, you'd be adding a monthly loan payment on top of expenses you're already struggling to meet. BECU offers a Financial Health Check and debt counseling free to members. Before applying, you should be able to answer the question: How will this new payment fit into my monthly budget.

Purchases You Can Save For

Using it for lifestyle expenses like a vacation you want to take now but can't afford is usually not a good use of money, Stacey said. If the expense isn't urgent, saving for a few months costs nothing. Unless your loan has a 0% APR, borrowing always costs something.

New or Used Vehicles

Even if you're buying an inexpensive car, an auto loan will almost always offer a lower rate than a personal loan for a vehicle purchase, because the car serves as collateral.

Home, Education and Business Borrowing

Many lenders won't allow you to use a personal loan as a down payment on a house, for tuition or to fund a new business. There are specialized loans for each of these needs.

How To Compare Lenders

Research two or three lenders for rates, terms, fees and approval requirements before deciding where you want to apply, Stacey said. Use a loan calculator for your research and limit your applications because each one shows as a hard pull on your credit report, which can temporarily lower your credit score.

Annual percentage rate: The APR is the most accurate cost comparison because it accounts for the lender's additional fees.

“Where rates are concerned, even a small increase can make a big difference in your monthly payments and total interest you pay for the loan,” Stacey said.

Use a calculator to understand how much you'll pay each month and how much extra interest you'll pay over a longer loan term.

“It may be tempting to choose a longer repayment term to get a lower monthly payment, but a shorter repayment term can reduce the total amount you pay in interest,” Stacey said.

Fees: Compare any one-time or ongoing personal loan fees that each lender has and make sure to read and understand the fine print.

Funding speed: If timing matters, ask how quickly funds are available after approval.

“Getting a personal loan can be as quick as today or tomorrow if BECU has the information needed to fund the loan,” Andrea said. This can differ slightly based on how you'll use the money. “For example, for debt consolidation, BECU needs complete lender information for your current debt to pay them off,” she said.

Plan for a couple of days between hitting send on the application and the funds reaching your account, as the lender reviews your identification, personal information, income and credit history.

Borrower advantages: Some lenders offer rate repricing if your situation changes. BECU's annual reprice program reviews all member loans and lowers interest rates if a member has shown an improved situation — specifically, their credit score — and meets the program requirements.

“If a member had a higher interest rate while paying down their debts, we reward them by reducing the rate as their financial situation improves,” Andrea said.

What To Do Next

If you've worked through this guide and a personal loan feels like the right move, here's where to go from here:

• Apply online: Check our rates and apply.
• Not a member yet: See if you're eligible to join BECU.
• Still have questions: Talk to a loan officer by phone, chat or in branch.

And if you're not quite sure yet, a loan officer can help you think through whether a personal loan, a line of credit or a different approach makes the most sense for your situation, without any pressure to apply. BECU also offers free financial counseling to members, if that's the best strategy for you right now.

Related Content