App version: 0.1.0

Reasons to Apply for a Personal Loan

Editor’s note: At Lantern, we strive to help you make financial decisions with confidence. To do this, we occasionally feature content that includes information about our partners and their products or services. We do not provide, endorse, or guarantee any third-party product, service, information or recommendations—and our opinions are our own.
Lantern

Lantern

Updated May 7, 2021
Share this article:
Reasons to Apply for a Personal Loan; One of the many benefits of personal loans is that they can be used for almost any purpose.
One of the many benefits of personal loans is that they can be used for almost any purpose. Whether you’re interested in paying off debt or making a major purchase, there’s likely a personal loan to fit your needs.Keep in mind that some lenders require (legally) that you use money you receive from them for the purpose you stated when you applied for the loan. Be sure to check terms and conditions for details about how you can use any funds you apply for.Below are a few common reasons you might choose to apply for an unsecured personal loan.

1. Consolidating Debt

If you’ve incurred debt from sources like credit cards or unpaid bills, a debt consolidation loan might help. In debt consolidation, the funds you receive are used to pay off your outstanding debts. Then you pay back the loan in installments. The top personal loans may have lower interest rates than those on credit cards or other forms of debt, which could save you money in the long run. If you need to repay outstanding debt balances with high interest rates in a timely manner, you might want to consider using a personal loan to consolidate your debt.

2. Home Improvement

As a homeowner, you know that maintaining a home is a big responsibility. Sometimes you need extra cash to cover repairs and preventive maintenance. A personal loan can help pay for anything from touch-up paint to new appliances and major upgrades. If you have an unexpected home expense that needs immediate attention, like a plumbing or electrical issue, an online personal loan may be a way to receive financing quickly.

3. Emergency Medical Costs

Accidents and illnesses can be wildly unpredictable, changing your whole life in the blink of an eye. As a result, you may end up with large medical bills you can’t afford to pay on time. If you’ve already exhausted all other payment options with the hospital (some offer payment plans) and your health insurance provider, a personal loan may help you replay outstanding  medical bills. If you have excellent credit, a personal loan might also provide a less-expensive alternative to paying with a credit card.  

4. Purchasing a Car

When you’re shopping for a car, you typically have loan options: You might get financing directly from the car dealership, apply for online loans, take out an auto loan with your bank, or use a personal loan. Sometimes a personal loan or auto loan from a bank will offer interest rates without any markup, but they may come with other conditions, depending on whether you’re buying a new or used vehicle. Compare your options to shop for favorable rates and terms.

5. Starting a Small Business

If you’re just starting a business, there may be small business loans to meet your needs. However, if you haven’t yet established business credit, it can be difficult to qualify for a small business loan. That may make personal loans possible alternatives for securing funds. If you have good personal credit, banks or online lenders may be able to provide you with a personal loan for business.It’s important to note that some personal lenders will not allow borrowers to use the funds for business expenses. Make sure you check for any restrictions against using a personal loan for business purposes before submitting your application. 

Types of Personal Loans

When you’re looking for the right personal loan for your needs, there are a few different options to consider. Here are some common types of personal loans:

1. Unsecured Personal Loan

What is it?Unsecured personal loans are lending options that don’t require the borrower to put up collateral.Why choose it?Unsecured loans may be an option if you have good to excellent credit and don’t want to take on the risk of offering collateral to get a loan. When you offer collateral, if you default on paying back your loan, the borrower may be able to seize your collateral in payment.Keep in mind:Because unsecured loans are riskier for the lender, they may come with higher interest rates than secured loans. For the same reason, if you have no credit or poor credit, it may be more difficult to get an unsecured loan. You may also need to show proof that you’re making a reliable income.

2. Secured Personal Loan

What is it?A secured personal loan is one backed by collateral, like a home, car, or personal savings. If you default on your loan, the lender can seize the collateral as payment.Why choose it?If your credit score is low and you have collateral to offer, a secured loan may be a good personal loan for you. Additionally, secured personal loans may come with lower interest rates than unsecured loans because the collateral makes them less risky to lenders.  Keep in mind:With a secured loan, you’re likely offering up something valuable as collateral. Before committing to the loan, take some time to assess and eliminate any possible roadblocks to repayment. Otherwise, you risk losing whatever you put down as collateral, which could potentially have big repercussions.   

3. Variable-Rate Loan

What is it?Variable-rate loans have interest rates that fluctuate with index rates, meaning that your personal loan interest rate can change from month to month.Why Choose it?If you’re seeking a shorter repayment term, a variable-rate loan may be a good option since the starting interest rates are typically lower than those for fixed-rate loans. Variable-rate personal loans may also have a cap that limits how much the rate can rise.Keep in Mind:Check with your lender to see if its variable-rate loan has a cap and if so, what it is. While variable-rate loans may carry lower APRs, those APRs have the potential to increase, which could increase your monthly payments and make budgeting more difficult.

4. Fixed-Rate Loan

What is it?A fixed-rate personal loan has an interest rate that never changes, keeping your monthly payments the same for the life of the loan.Why Choose it?You might consider a fixed-rate personal loan if you want predictable payments to allow you to plan your finances and budget more accurately.Keep in mind:If index rates are relatively low, you could end up paying more interest on a fixed-rate loan that you would with a variable-rate loan, which changes with the index. Compare the rates and terms for personal loans online and read what other borrowers have said about their experience with fixed- and variable-rate loans to help you decide which option might be right for you.

5. Personal Loan with a Cosigner

What is it?Cosigned loans are loans for which a borrower who wouldn’t qualify on his or her own brings in a cosigner. Often, the borrower has no credit, a limited credit history, or poor credit. If the borrower defaults on the loan, the cosigner is responsible for repaying the loan.Why choose it?If you need a personal loan and have little to no credit, a cosigner may be able to help you get approved for a loan with lower interest rates and more favorable terms than you could get on your own. Cosigned loans are also useful personal loans for building credit if you’ve never had a credit card or borrowed money before.Keep in mind:Both the borrower and cosigner are responsible for the loan. If payments are late or go unpaid, both the borrower’s and the cosigner’s credit will be affected.

Applying for a Personal Loan Online

Applying for personal loans online can be quick and simple. Keep in mind that a personal loan from an online lender can carry a higher interest rate than would a loan from a traditional bank or credit union and online loans are often unsecured, so no collateral is necessary. Here are some steps to take before applying for a personal loan:
  1. Check your credit. If you find errors, resolve them before applying for loans. If you have poor credit and you have time to improve it, work on building credit before you apply.
  2. Decide how much you need. Determine the loan amount that serves your needs and aligns with your personal financial goals.
  3. Know your debt-to-income ratio (DTI). Your DTI is how much you have in monthly debt payments divided by your gross monthly income. Essentially, it tells lenders what percentage of your income already goes to paying off debt; which means the lower it is, the better. Personal lenders have different DTI requirements but generally look for a DTI between 35% and 40%.
  4. Research and compare top personal loan options. There are numerous options from banks to online lenders, each with pros and cons. Compare rates, terms, and conditions to make sure the lender you choose aligns with your needs.
After you’ve completed the steps above, you can follow these steps to apply for an online loan:1. Get prequalified. Once you’ve narrowed down your top online lenders, you can get prequalified to see which online loans you may be eligible for. Lenders will usually do a soft credit inquiry, though some may use a hard credit check. Prequalification does not guarantee that you’ll get approved, but it does give you an idea of which loans could be most suitable for you. Depending on the lender, prequalification can take as little as seconds and may require only that you provide a few pieces of information on an online form.2. Choose loan(s) and fill out application(s). After you’ve determined one or more good personal loans for your needs, gather your documents and begin the loan application process. Documents may include:
  • Your employer’s information
  • Your financial information (checking/savings account balances and numbers)
  • Your tax documents
  • Your pay stubs
  • Your Social Security number
  • Documents supporting your need for the loan (e.g. medical bills, home renovation estimates, car quotes).
3. Submit application(s). Once you e-sign the application, you give the lender permission to check your credit and verify your information. This will trigger a hard credit inquiry, which can take a few points off your credit score. Lenders may ask for additional documents as well, so be prepared to scan and email to expedite your approval process.Personal loans online typically get money to you quickly, sometimes even the same day that you apply. Check with your lender about payment options like automatic debits from your bank account, which can streamline the payment process.

Personal Loan Repayment Calculator

Estimating your loan payments and how they fit into your budget is an important step to finding the top personal loans for your needs. Use this loan repayment calculator to help you determine which personal loans could be a good fit for you. Personal Loan Repayment Calculator

Questions to Ask Before Applying for a Personal Loan

Whether or not to apply for a personal loan can be a major decision that affects your future finances. Before you apply for a personal loan, ask the following questions to ensure that you’re making the right choice for your situation:1. Can I responsibly take on the debt of a personal loan?Taking on debt can be life-changing, so make sure you’re doing it for the right reasons. Getting a personal loan can help with necessary costs like home repairs or medical expenses. If you want to make an optional purchase, like a vacation, you might want to consider saving up for it or seeking out alternatives that don’t affect your debt-to-income (DTI) ratio.2. Are there additional fees?Some banks and online lenders may require origination fees or other upfront costs that you may not initially know about. When comparing lenders, it’s crucial that you ask about any additional fees so you can budget and plan your finances accurately.  3. Does the loan have prepayment penalties?Sometimes, you may find it possible to pay off your personal loan before the end of the term. While this may save you money on interest, some lenders penalize borrowers for early repayment. If you plan to pay off the loan early, check with lenders to see what, if any, penalties they charge.4. Is there a cap on the variable interest rate?If you choose a personal loan with a variable interest rate, ask the lender if there is a cap and what it is. When you’re trying to decide between a fixed- or variable-rate loan, it will help to know how much your monthly payments could fluctuate with a variable rate. If there isn’t a cap, you could end up paying more in interest, depending on the index/benchmark.5. Is the interest rate too good to be true?It’s important to compare personal loans online so you can secure funding with favorable rates. But remember, advertised rates may reflect the lowest possible rates, typically reserved for borrowers with the highest credit scores and income. 

Alternatives to Personal Loans

While personal loans can be a great option for short-term expenses and necessary purchases, you may find other sources of financing better suited to your specific needs. Here are a few alternatives to consider.

1. Personal Line of Credit

Personal lines of credit are a type of revolving credit that functions more like credit cards than personal loans. A line of credit allows you to spend up to a certain amount, accessing funds as needed. You pay interest only on what you borrow, not on the entire credit line, and you make monthly payments based on how much credit you’ve used. A line of credit can be useful for both ongoing expenses and one-time large funding needs. Personal lines of credit usually allow for cash advances on the full credit limit, which may help if you run into a situation in which you need a lot of cash in a pinch.Small businesses can benefit from having a line of credit to pay for expenses like daily purchases and unexpected repairs. A line of credit can also be useful for homeowners who want access to funds for home repairs or renovations but don’t want to take out a personal loan.Lines of credit are typically unsecured (don’t require collateral), which can mean potentially higher interest rates. A secured personal line of credit reduces risk to the lender, meaning that interest rates may be lower. If you pay your balance regularly, you can avoid costly interest payments, making a line of credit a potentially useful form of flexible financing.

2. Payday Loans

Payday loans are small, short-term loans that borrowers are supposed to repay in full upon receiving their next paycheck. These loans can be risky because they typically carry very high interest rates that dramatically inflate the cost of the loan. Loan amounts can range from about $100 to $1,500, depending on the lender, which state you live in, and your ability to pay back the loan. Lenders usually only require an active bank account, identification, and a proof of income for eligibility.While payday loans might be useful as a last resort for unexpected expenses, because of their high interest rates, they’re typically not advisable. Payday loans can get borrowers into a deeper cycle of debt due to their high borrowing costs and short terms, and they’re considered to be a “predatory” form of financing.  

3. Credit Cards

Credit cards can be a form of financing for small, unexpected purchases, especially if you can pay the balance each month. Because credit cards are usually unsecured (they don’t require collateral), interest rates are typically quite high, making for expensive monthly payments if you carry a balance from month to month. If you pay the balance in full each month, you won’t incur interest.Some companies offer incentives and rewards, like airline miles and points toward future purchases, for making purchases and paying your bill. There may also be introductory 0% APRs for a specified period of time, allowing you to use the card without incurring interest if the balance is paid off within that time frame.Always read credit card terms and conditions carefully, as some companies may have high penalties for late payment and/or charge an annual fee.

Additional Resources


Lantern Disclosure: SoFi receives compensation in the event you obtain a loan through the Lantern marketplace. The Lantern website is owned by SoFi Lending Corp., a lender licensed by the DBO under the CFL, license number 6054612, NMLS #1121636 (nmlsconsumeraccess.org). Loans may not be available in all states.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612. SoFi Lending's NMLS number is 1121636. NMLS Consumer Access. SoFi Lending Corp. operates this Lantern website in cooperation with Even Financial Corp. ("Even"). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lenders' and/or partners' conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page.SOLC20005

Frequently Asked Questions

Can I get a personal loan with bad credit?
What is a personal loan?
How quickly can I get a personal loan?
Will a personal loan hurt my credit?

About the Author

Lantern

Lantern

Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
Share this article: