Personal Loan Guide
Personal Loan Guide

Personal Loans by Purpose: Smart Uses and Ones to Avoid

Personal loans can fund many goals, but not all uses are wise. Here's a breakdown of common purposes, what lenders allow, and how to decide if a personal loan fits your need.

A collage of simple icons representing loan purposes: a house, a car, a ring, a heartbeat, and a graduation cap.

Introduction to Common Personal Loan Uses

Personal loans are a flexible form of borrowing, and people use them for a wide range of expenses. According to the Federal Reserve, outstanding personal loan balances reached $356 billion by the end of 2022, representing about 10% of nonrevolving consumer credit. That popularity reflects how easily these loans can adapt to different financial situations.

The most common purposes include debt consolidation, medical bills, vacations, weddings, and home improvements. While lenders may market loans for specific uses, such as a wedding loan or a vacation loan, the underlying product is typically a standard personal loan. Many lenders do not require you to state a specific purpose, but some may ask how you plan to use the funds.

  • Debt consolidation is one of the most frequent reasons borrowers take out personal loans.
  • Other common uses include medical expenses, vacations, weddings, and home improvements.
  • Lenders may advertise purpose-specific loans, but these are often just marketing labels.

Sources: Federal Reserve Board, Experian, OneMain Financial

Using Personal Loans for Debt Consolidation

Debt consolidation loans are marketed for paying off multiple debts, such as credit cards and medical bills, by combining them into a single loan with one monthly payment. If your new loan has a lower interest rate than your current debts, you might reduce your monthly payment and simplify your finances.

However, a debt consolidation loan is not always a win. If the repayment term is longer than what you had remaining on your existing debts, you could end up paying more in total interest over time, even with a lower rate. Before you consolidate, compare the total cost of your current debts with the total cost of the new loan, considering both the interest rate and the repayment period.

  • A debt consolidation loan can simplify payments by combining multiple debts.
  • A lower interest rate may reduce monthly payments, but a longer term can increase total interest.
  • Compare the total cost of your current debts with the new loan before deciding.

Sources: OneMain Financial

Home Improvement Loans: A Personal Loan Option?

Yes, you can use a personal loan for home improvement projects such as remodeling, roof replacement, or energy-efficient upgrades. Because personal loans are typically unsecured and funded quickly, they can be a convenient option for renovations that need to start soon.

Unlike a home equity loan or home equity line of credit, a personal loan does not put your home at risk if you default. However, interest rates on personal loans are often higher than those on secured home equity products, so the best choice depends on your financial situation and the size of the project.

  • Personal loans are suitable for remodeling, roof replacement, and energy-efficient upgrades.
  • No collateral is required, so your home is not at risk.
  • Rates may be higher than home equity loans, so compare options carefully.

Sources: OneMain Financial

Large Purchases: Weddings, Vacations, and Other Big-Ticket Items

Personal loans can help fund large purchases like weddings, vacations, major appliances, furniture, or medical procedures not covered by insurance. A wedding loan, for example, can cover everything from the engagement ring to the honeymoon. A vacation loan can pay for flights, accommodations, meals, and car rentals. These are essentially standard personal loans, so the same eligibility criteria and interest rates apply.

Using a personal loan for such expenses can make sense if you have a solid plan to repay it and the purchase is important to you. But because personal loans carry interest charges, borrowing for a vacation or a wedding means paying more over time than paying upfront. It is wise to budget for the total cost, including interest, before committing.

  • Personal loans can fund weddings, vacations, and other large purchases like furniture or appliances.
  • These loans are not restricted to the purpose named in marketing.
  • Consider the total cost with interest before borrowing for a discretionary expense.

Sources: Federal Reserve Board, OneMain Financial

Medical and Emergency Expenses

Medical loans are a type of personal loan that may be used for medical procedures, dental work, infertility treatments, or prescription drugs. Such loans can help you manage healthcare costs that are not fully covered by insurance or that arise unexpectedly.

When facing a medical emergency, a personal loan can provide funds quickly, but it is important to compare alternatives like payment plans offered by the provider or credit options with lower rates. Only borrow what you need and be sure you can manage the monthly payments on top of other financial obligations.

  • Medical personal loans can cover procedures, dental work, infertility treatments, and prescriptions.
  • Emergency expenses may require fast funding, which personal loans can provide.
  • Compare payment plans and other credit options before choosing a personal loan.

Sources: OneMain Financial

Uses to Avoid: Tuition, Gambling, and Investments

While personal loans are flexible, most lenders place a few limitations on how you can use the funds. You typically may not use the proceeds for educational expenses, to buy investments, or for illegal activities. For example, many lenders prohibit using funds for gambling activities, such as casino gambling or online betting, because it is considered high-risk and may be illegal in some jurisdictions. Using a personal loan for investments, such as buying stocks or bonds, is usually prohibited and can be risky.

These restrictions exist partly because other financial products are better suited to those needs, and partly to reduce risk for the lender. For educational expenses, federal student loans generally offer lower rates and more borrower protections than personal loans.

  • Most lenders ban using personal loans for education, investments, or illegal activities like gambling.
  • Investing borrowed money can amplify losses if the market declines.
  • Federal student loans are often a better choice for college costs than personal loans.

Sources: Experian, Bankrate

How Lenders View Your Intended Use

Most lenders do not require you to state a specific purpose for a personal loan. Even when a lender markets a loan for a particular use, such as a wedding loan, there is generally no requirement to use the funds for that purpose. The key factors lenders evaluate are your creditworthiness, income, and debt-to-income ratio when determining eligibility and terms.

Your intended use rarely affects your interest rate or approval odds. Instead, lenders focus on your financial profile. That said, if you tell a lender you plan to use funds for a prohibited purpose, such as investments or tuition, your application may be rejected. So it is wise to be honest about your plans and to check your lender's policy on allowable uses.

  • Lenders generally do not require a stated purpose for a personal loan.
  • Approval and rates depend mainly on creditworthiness, income, and debt-to-income ratio.
  • Some uses, like education or investments, are typically prohibited, so check with your lender.

Sources: Experian

Choosing the Right Loan for Your Purpose

To decide whether a personal loan fits your specific need, first consider whether the expense is essential or discretionary. For essential costs like medical bills or home repairs, a personal loan can provide necessary funds. For discretionary spending like vacations or weddings, weigh the long-term cost of interest against the immediate enjoyment.

If you decide to borrow, compare offers from multiple lenders, focusing on the annual percentage rate (APR), fees, and repayment terms. Be cautious of high-cost alternatives like payday loans, which can have extremely high APRs, or title loans, which put your vehicle at risk. A personal loan is generally a safer choice if you need to borrow for a legitimate purpose.

  • Evaluate whether your expense is essential or discretionary before borrowing.
  • Shop around and compare APRs, fees, and terms from different lenders.
  • Avoid payday loans and title loans because of their extremely high costs and risk of asset loss.

Sources: OneMain Financial, Bankrate

Frequently asked questions

Can I use a personal loan to pay for a wedding?

Yes, you can use a personal loan to cover wedding expenses, from the engagement ring to the honeymoon. Lenders often market these as wedding loans, but they are standard personal loans. You'll be responsible for repaying the loan with interest, so consider the total cost before borrowing.

Sources: OneMain Financial
Should I use a personal loan for home improvement?

A personal loan can be a good option for home improvement projects, especially if you don't want to use your home as collateral. It can fund projects like remodeling, roof replacement, or energy-efficient upgrades. However, interest rates may be higher than home equity loans, so compare options to find the best deal.

Sources: OneMain Financial
Why can't I use a personal loan for college tuition?

Most personal loan lenders prohibit using funds for educational expenses because there are dedicated student loan products designed for that purpose. Federal student loans generally offer lower interest rates and more flexible repayment options than personal loans, making them a better fit for tuition costs.

Sources: Experian, Bankrate
What are the most common reasons people take out personal loans?

The most common reasons include debt consolidation, medical bills, vacations, weddings, and home improvements. According to the Federal Reserve, personal loans are used for a variety of purposes, and outstanding balances were $356 billion at the end of 2022.

Sources: Federal Reserve Board, OneMain Financial
How does my intended use affect my interest rate?

In most cases, your intended use does not affect the interest rate. Lenders base your rate primarily on your creditworthiness, income, and debt-to-income ratio. However, if you state a prohibited purpose, such as investing in stocks, the lender may reject your application altogether.

Sources: Experian
Can I use a personal loan to start a business?

Some lenders may restrict using personal loans for business purposes. Starting a business involves risks that lenders may not want to take on with an unsecured personal loan. You should look into small business loans or other financing options specifically for businesses.

Sources: Bankrate

Sources

  1. An Overview of Personal Loans in the U.S. — Federal Reserve Board
  2. FinTech-Issued Personal Loans in the U.S. — Federal Reserve Board
  3. What Are the Different Types of Personal Loans? — Experian
  4. 9 Different Types of Personal Loans to Know — OneMain Financial
  5. 8 types of personal loans and their uses — plus 5 to avoid — Bankrate