When To Get A Personal Loan (And When Not To!)

A personal loan is a lump sum of money that you get from a bank, credit union, or online lender that you repay over the course of a few years and monthly installments plus interest. You can use the money for pretty much anything, but some reasons for getting one make more financial sense than others. In this video, I'll tell you about two good reasons for getting a personal loan and three times to reconsider. Then later in the video, I'll give you some tips for comparing loan offers and shopping. So here are two good reasons to get a personal loan. The first is debt consolidation. So with a debt consolidation loan, you take the funds from your new personal loan and pay off your other unsecured debts. So say a couple of credit cards, maybe another high interest personal loan, and you're left with one monthly payment. Usually you want to have your debt consolidation loan have a lower interest rate than the debts you were paying before so that you're saving money in the end. These type of loans are best for multiple debts across different lenders and credit cards or for large debts that you can't pay off within about a year. The second reason is for home improvement projects. You can use the funds from this kind of loan to pay for a kitchen or bathroom remodel, to repair your roof, or even update your outdoor space. A home improvement loan is the right choice if you don't want to use your home equity or you don't have a lot of home equity or if you don't want to use your house to secure the loan, which is the case with something like a home equity loan or HELOC. Personal loans have higher rates and shorter repayment terms than a home equity option would, which means your monthly payment will be a little bit higher, but it also means you'll clear the debt sooner. Now let's address a few reasons that you could get a personal loan, but you may have better options. First is medical bills. So let's say that you're in a car accident and you wind up in the hospital and you have this long hospital stay and then you're hit with a huge medical bill. Technically you could use a personal loan to pay that bill, but because personal loans have interest attached to them, you'll probably wind up paying more than you need to. What you can try instead is setting up a payment plan with the hospital or doctor's office or dentist's office that you visited because those usually have little to no interest attached to them. Next is covering bills. If you have a loss of income or say lose your job, it could be tempting to take out a personal loan to cover your utility bills or rent payment that month, but that can do more harm than good. Try instead calling your utility company or landlord to see if they can work with you to find a way for you to make those payments. If not, it may be time to consider a larger lifestyle change like moving in with a friend or family member or finding somewhere else to cut expenses. Finally, a wedding or vacation. I know a lot of people tend to use a personal loan to pay for a wedding, which is totally fine, but if you have a long enough engagement, you can save up for the wedding and actually pay for it interest-free. In terms of a vacation, you'll actually end up paying a lot more with a personal loan than you originally intended because of the added interest. Plus, you'll be paying for that vacation for years to come. Instead, try getting a zero-interest credit card. These credit cards require good or excellent credit to qualify, which is about what you'd need to get a good rate on a personal loan anyway, and if you can pay them off in about a year or so, you can usually do it interest-free. Now you know the best ways to use a personal loan. If you do decide to get one, here's a quick tip. Compare annual percentage rates and calculate your monthly payments to understand how the loan will fit into your budget. An APR is the best apples-to-apples comparison of loan offers, and you can pre-qualify with a lot of online lenders to see what rates they could offer you, what your monthly payment would be, and how much interest you'd pay over the lifetime of the loan. You can take that and do it across multiple lenders without affecting your credit, and you can actually do it on NerdWallet to see all of your offers at once. I'm Annie Milliburn, a personal loans writer with NerdWallet, and one of the most common questions I get about my job is, what is a personal loan? And I hope that question is answered for you now. If you have any questions, feel free to leave them in the comments below, and don't forget to subscribe.