How to Use a Personal Loan

In addition to mortgages, auto loans, and credit cards, most lenders will also offer what is known as a personal loan. Most personal loans are generally unsecured (meaning that there is no collateral) and have terms lasting anywhere from 12 to 60 months.

While the funds from a personal loan can be used for virtually any purpose, some applications will be more beneficial than others. Here’s how to use a personal loan.

Debt Consolidation

One of the main reasons that people use personal loans is for debt consolidation. This makes it possible to exchange high-interest debt for a single loan with a lower interest rate.

For example, suppose someone has outstanding credit card debt with a 20% APR. Since credit card debt compounds daily, their balance quickly accumulates interest and spirals out of control. However, if they could get approved for a personal loan with a fixed 10% APR, they’d save themselves a ton of interest.

Not only would this strategy help keep their payments predictable and more manageable, but it may also positively influence their credit score. This would be because there is no more outstanding credit card debt, and their credit utilization ratio would be reduced – both of which are factors in calculating credit scores.

Start a Business

Entrepreneurs who need start-up capital can use personal loans to get the funds they require quickly. This may be as much as $40,000 (depending on state regulations) and could be used for activities like:

• Buying inventory
• Purchasing equipment
• Hiring help
• Advertising
• Etc

The great thing about using a personal loan to invest in a business is that it will have the ability to produce a return on investment (ROI). For instance, someone who may wish to start a lawn care company would have the capital to start taking on clients and producing revenue. Not only would this ensure that they can pay back the loan, but it could also produce profits for the entrepreneur and help grow the business.

Perform a Home Renovation

People who want to make updates to their homes can rely on a personal loan to provide them with quick access to cash. Even though a home renovation can be expensive, it’s generally viewed as a good use of the money because it will add value to the home by increasing the homeowner’s equity. Depending on the update, some projects, such as a minor bathroom or kitchen remodel, can produce a 100+ percent ROI.

Emergency Fund

Financial gurus have recommended for years that people should have at least 3 to 6 months’ worth of living expenses set aside in cash if they become unemployed, get into an accident, etc. However, most people struggle to save up this much money.

As an alternative, a reasonable personal loan could be used to provide an immediate source of funds that could be set aside as an emergency fund. This would give the applicant the ability to handle anything life throws their way while slowly paying back the loan over time.

The Bottom Line

Personal loans can be put to good use for a wide variety of purposes, such as debt consolidation, starting a business, and performing a home renovation. Think of the loan like an investment and put it towards those things which will deliver the greatest ROI.

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