A personal loan can be used for just about anything. In 2024, the majority of people taking out personal loans are using them to get out of debt.
Unlike specialized loans, like a mortgage or auto loan, personal loans are unsecured and are not tied to any collateral. You can apply for these types of loans through banks, credit unions, and even online lenders.
Personal loans can be handy in all types of circumstances. Let's examine when taking out a personal loan could be the smartest thing to do in specific financial situations.
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If you want to consolidate high-interest debt
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Personal loans often come with more favorable interest rates than credit cards, which may help you lower your monthly payments or even accelerate your best payoff.
In 2024, the average personal loan interest rates are around 12.5% vs. average credit card interest rates of almost 21%.
If you're using personal loans to pay down credit card debt, be careful not to run your credit cards up again, after you use the loan to pay them off. This may put you in a difficult financial position where your monthly payments could become higher than before.
For those who want to boost their FICO
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Personal loans are factored into the equation used to determine a person's creditworthiness. If you're trying to improve your credit, taking out a personal loan and paying it on time every month may help boost your credit score.
Payment history accounts for 35% of your credit score. Having a long history of on-time payments can help give your score a boost.
However, if you are late making payments or miss a payment — that will have the opposite effect and can drop your credit score.
When you can get better financing
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If you're looking to make a big purchase using credit, you may want to shop around for rates before signing on any dotted lines. You may be surprised to find out that a personal loan offers more favorable financing than in-house credit offerings.
For example, if you're looking to buy a new refrigerator, the retailer may offer in-store financing or credit card options that seem appealing and reasonable, like low monthly payments or 0% APR for a few months.
However, when you examine the fine print, there are potential annual fees and additional interest charges that may mean you end up spending more.
Resolve $10,000 or more of your debt
Credit card debt is suffocating. It constantly weighs on your mind and controls every choice you make. You can end up emotionally and even physically drained from it. And even though you make regular payments, it feels like you can never make any progress because of the interest.
National Debt Relief could help you resolve your credit card debt with an affordable plan that works for you. Just tell them your situation, then find out your debt relief options.1 <p>Clients who are able to stay with the program and get all their debt settled realize approximate savings of 46% before fees, or 25% including our fees, over 12 to 48 months. All claims are based on enrolled debts. Not all debts are eligible for enrollment. Not all clients complete our program for various reasons, including their ability to save sufficient funds. Estimates based on prior results, which will vary based on specific circumstances. We do not guarantee that your debts will be lowered by a specific amount or percentage or that you will be debt-free within a specific period of time. We do not assume consumer debt, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Not available in all states. Please contact a tax professional to discuss tax consequences of settlement. Please consult with a bankruptcy attorney for more information on bankruptcy. Depending on your state, we may be available to recommend a local tax professional and/or bankruptcy attorney. Read and understand all program materials prior to enrollment, including potential adverse impact on credit rating.</p>
How to get National Debt Relief to help you resolve your debt: Sign up for a free debt assessment here. (Do not skip this step!) By signing up for a free assessment, National Debt Relief can assist you in settling your debt, but only if you schedule the assessment.
Paying for a home improvements
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Personal loans may be a better choice than refinancing or using a home equity line of credit (HELOC) when paying for big home projects.
Some lenders require minimum withdrawals from HELOCs or cash-out refinances, forcing you to take out more money than you need.
Because personal loans can be tailored to the cost of the project, you can pay the loan off quicker and end up paying less interest in the long run.
These types of loans are also unsecured unlike a HELOC, which uses your home as collateral. This means if you default on your personal for any reason, you won't be at risk of losing your home.
Funding big life events
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Big life events like weddings, adoptions, etc., can be expensive and hard to save up for. A personal loan offers a way for you to experience these once-in-a-lifetime events without requiring you to wait until you have enough money to cover it.
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Looking to borrow a smaller amount
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Personal loans can be as small as $1,000. Other types of loans may have bigger minimums. If you only need $2,000 to remodel your bathroom, it doesn't make sense to get a HELOC or cash-out refinance.
Credit cards may offer a higher line of credit tempting you to get into more debt than you need.
If you're planning a move
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Moving costs add up quickly—even moving locally can cost thousands of dollars, while cross-country moves can run into five figures.
A personal loan can give you peace of mind if you're planning a move. You'll be able to adequately pack, move your stuff, and settle into your new place without worrying about having the funds to cover everything.
Bottom line
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Borrowers generally need to have a minimum credit score of 580 to qualify for a personal loan. However, the better your credit score is, the more favorable loan terms and interest rates you'll qualify for.
Keeping tabs on your credit history and debt amounts can lower your financial stress, especially if you're planning on borrowing money in the near future.
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