More than 19 million Americans currently have a personal loan, LendingTree reports — and no doubt many borrowers may have been tempted by some of the benefits of personal loans. If you have a high credit score, you may be able to get a personal loan with a mid-single digit rate. “Other advantages include easy access, which means you can get the money quickly, and the fact that personal loans are usually unsecured, so you’re not putting your house or car as collateral,” says Ted. Rossman, senior industry analyst at CreditCards. .com. (See the lowest personal loan rates you can qualify for here.)
While this all sounds tempting, there are rules about what you should and shouldn’t spend with personal loan money. The high-level rule: Personal loans are best used for occasional big expenses like home renovations or credit card consolidation that you know you can pay off, but just need a little time to do so, says Rossman.
Acceptable things to use a personal loan
If you don’t have savings to pay for certain items, the pros say a personal loan can be a good option. “Personal loans can be reasonable solutions for paying for home renovations and for consolidating credit card debt,” Rossman says, adding that medical debt and some other one-time large purchases needed are other scenarios in which the use of a personal loan can sometimes make sense.
Of course, you need to look at the rates and terms you get on one personal loan and compare them with the rates and terms you might get on another loan. Sometimes a personal loan will have lower interest rates and better terms, other times not. For example, NerdWallet personal loan expert Annie Millerbernd notes that for home renovations, personal loans can be “your fast-start choice” because they fund so quickly. But, she adds, “Interest rates may be higher than what you’d find with the equity in your home,” though it may be worth it for those who need a big fix. for their home because “you could have that home improvement project moved the same week you applied for the loan.” (See the lowest personal loan rates you can qualify for here.)
Why you shouldn’t use a personal loan
Relying on a personal loan shouldn’t happen every month, Rossman insists. “If you’re running out of funds month after month, there’s a bigger problem,” says Rossman, in which case you should budget and look to increase your income or reduce your expenses.
Personal loans must do not be used to meet basic needs, if you can help it, says Millerbernd. “If you need help paying your rent or running errands, a personal loan is a temporary solution that you could pay off for years,” she adds. “Try the interest-free options first or borrow from a friend or family member or look for a charity that can help.”
The same goes for discretionary purchases, with Brian Walsh, senior manager and certified financial planner at SoFi, noting that it’s better to delay the purchase and save for it. “Don’t let today’s dream vacation be a bill you pay for three years,” says Millerbernd.
Rossman advises against using a personal loan for things like retail splurges and refinancing federal student loans (you’ll lose federal protections on these loans if you convert them to a personal loan). Also, credit cards, if you can pay them off monthly, tend to be better suited for weddings and vacations. “A credit card can reward you for wedding purchases so you can earn honeymoon points – as long as you can pay off the balance each month to avoid interest. You won’t find anything like points on a personal loan,” says Millerbernd.