What Can Personal Loans Be Used For? Your Quick Guide

Personal loans are one of the more flexible ways to borrow money. While some lenders restrict how the funds can be used — such as for mortgage payments, car purchases or tuition — many personal loans can be used for a wide range of expenses.

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Key Takeaways

• Personal loans can be used for many types of expenses, from debt consolidation to home improvements to emergency costs. They offer more flexibility than most other loan types, though some lenders do restrict certain uses like down payments or tuition.

• Debt consolidation is one of the most common and potentially valuable uses. Rolling multiple high-interest debts into a single personal loan can simplify payments and reduce overall interest costs, as long as the loan rate is lower than your existing debt.

• A personal loan works best when you have a clear repayment plan. Taking one out to cover a risky investment, non-essential purchase or debt you're already struggling to manage can make your financial situation worse.

• Checking your credit score and prequalifying with multiple lenders before applying can help you secure the best terms. Prequalification uses a soft credit pull that does not affect your score.

Summary generated by AI, verified by MoneyLion editors

Debt Consolidation

If you're paying off several different loans and credit cards, you can get buried under the interest payments for all of your debts. Debt consolidation allows you to roll all of your debts into one lump sum. Then you can pay towards all of your debts once a month and, potentially, save a lot of money in interest.

Debt consolidation only works if you can get a personal loan with a lower rate than your current debt. It’s also important to consider fees, as high fees can cancel out the benefits of a lower rate.

Home Improvements

Do you have to renovate your kitchen, bathroom or any other part of your house? A personal loan may give you enough capital to improve your home.

You might be able to stretch out your loan and add more years to the backend if you want lower monthly payments. Loans are an investment in your house that can increase its value and let you tap into more equity. 

Some lenders offer loans just for home improvement.

Medical Expenses

Medical expenses can add up in a hurry, and not everyone has enough time to save up for them. A personal loan can quickly give you the funds you need to cover an urgent expense.

Car Repairs

Rather than paying the repair cost upfront, possibly draining an emergency fund, you can borrow capital from a lender.

Education Expenses

For some people, student loans won't cover much more than tuition. You’ll likely have to buy textbooks, software, computers and more as part of education expenses. While these expenses can add up, a personal loan may make them more manageable.

Wedding Costs

While total expenses depend on your location, the venue and other factors, you may end up with a big bill after your special day. A personal loan can give you the required funds to cover wedding costs upfront, so you don’t have to postpone your big day until you and your partner have enough funds.

Large Purchases or Emergency Expenses

If you need to make a large purchase at the last minute, say your refrigerator or washer needs to be replaced and you don't have enough in your emergency fund to cover it, a personal loan can help you out.

Tax Debt

If you don’t have the cash to cover your tax debt, a personal loan can help. Opting for a longer term might make it easier to cover the monthly payments.

This approach only improves your finances if the personal loan’s rate and fees are lower than the tax debt’s rate and fees.

Starting a Small Business

If you have a business idea, but need some more money to get it off the ground, a personal loan is a great place to start. However, it's worth considering a business loan as well.

Moving Costs

A personal loan can even help with moving costs. It can cost thousands of dollars to load your belongings in a truck and have them hauled to your new property.

Not everyone has enough savings to cover this expense, but banks may have extra capital readily available to help with your move.

What You Should Not Use Personal Loans For

It's best to avoid a personal loan if:

• You already have a lot of debt

• You're trying to finance a risky investment or a non-essential purchase

• You don't know how you'll pay back the loan

Although personal loans allow a lot of flexibility for what you can finance, some lenders have restrictions. For example, you often can't use a personal loan for:

• Down payment on a home

• Tuition — you'll have to use student loans

How To Get a Personal Loan

If you're ready to start applying for a personal loan, you should:

• Check your credit score: Your terms will be better if you have a good credit score. If you can, put off getting the loan until you improve your credit score.

• Find lenders that allow you to prequalify: This lets you see the terms you'll be offered without hurting your credit score.

• Pick the lender that offers you the best terms: The best loans have low interest rates, no junk fees and a repayment schedule that works for your budget.

FAQs

Can I use a personal loan for anything?

Yes, you can use a personal loan for just about any expense. Some lenders have a few restrictions.

Can lenders restrict what you use a personal loan for?

Lenders can restrict what you use a personal loan for, but it's usually for expenses like car and tuition payments.

What can be used as collateral for a personal loan?

Many personal loans are unsecured, which means they do not have collateral. However, you can use a house, car or any other asset as collateral for a secured personal loan.

Key Terms

• Debt consolidation: The process of combining multiple debts into a single loan, ideally at a lower interest rate. It can simplify monthly payments and reduce total interest paid, but only makes financial sense if the new loan's rate and fees are lower than your existing obligations.

• Unsecured personal loan: A loan that does not require collateral. Approval is based on your credit score, income and debt-to-income ratio, making it accessible for a broad range of borrowing needs.

• Secured personal loan: A loan backed by an asset such as a car or savings account. Secured loans can be easier to qualify for but put your collateral at risk if you default.

• Prequalification: A soft credit check that lets you preview estimated loan rates and terms without affecting your credit score. Comparing prequalified offers from multiple lenders is one of the best ways to find favorable terms.

• Home equity: The portion of your home's value that you own outright. Some borrowers use personal loans for home improvements as an alternative to tapping home equity, particularly when they want a faster or simpler application process.

Summary generated by AI, verified by MoneyLion editors

Sources

• Consumer Financial Protection Bureau. 2023. "What do I need to know about consolidating my credit card debt?"

• Consumer Financial Protection Bureau. 2024. "What is a home equity line of credit (HELOC)?"