What can you use a personal loan for?

If you want to borrow money, you might be considering a credit card or a personal loan. But what’s the reason for taking out a loan? This guide will help you decide if a personal loan is the right option for you by explaining when a loan can be more or less beneficial than another form of credit.

How can I use a personal loan?

Personal loans are typically a type of unsecured loan, meaning you won’t be required to offer something as collateral in case you can’t repay the loan. They can be a great way to finance a large one-off expense, such as a new kitchen or a wedding. It is also common to use personal loans to consolidate other debts, for example, credit card debt or other loans. This is because personal loans typically have lower interest rates than credit cards.

Let’s take a look at some of the best reasons for using a personal loan:

How top lenders let borrowers use their personal loan

Will the purpose of the loan affect my application?

Yes, the reason for taking out a loan can affect your application. For example, if you’re applying for debt consolidation, you may already appear to be at higher risk than someone who’s buying an asset, such as a car, or someone who’s investing in their property by making renovations.

Below are some examples from providers when the purpose of your loan may affect your eligibility:

1. Some providers, like Tesco Bank, will not lend you money for the purpose of paying off your mortgage.
2. Some providers, like the Post Office, will not lend for the purpose of “Investing or trading in cryptocurrencies or other high-risk investments can lead to you losing some or all of your money”.
3. Some providers, like Santander and HSBC, will not lend for the purpose of a house deposit, household bills, personal tax bills, stocks and shares or business, including raising capital.
4. No provider will lend money for the purpose of using it to gamble as this is illegal.

It does, however, also depend on how the lender assesses your application’s risk. Ultimately, your eligibility will come down to whether you meet the lender’s application criteria, your credit history and whether you can afford the loan.

When should I not use a personal loan?

While loans can be used for many situations, sometimes it’s better to opt for another solution:

• If you can easily save the money. Want to buy a luxury item or treat yourself to a splurge purchase, but it isn’t urgent? A personal loan won’t be the best option. One idea is to work out how much your repayments would be and save that amount each month instead.
• If it’s a bad investment. Are you thinking of taking out a loan to make home improvements or some other investment? Make sure the investment will add value. Otherwise, you’ll be repaying your loan on an idea that lost money.
• If your income and employment aren’t stable. Taking out a personal loan when you’re in an unstable financial situation could hurt you in the long run. If there’s any reason you think your income or employment situation might change for the worse, consider alternatives like cutting back on expenses or saving money in a savings account.
• If the purpose of the loan isn’t accepted by the lender.Most lenders will have a list of reasons for getting a loan that they will not accept when reviewing your application. These may include mortgage repayments, house deposits, gambling, investing or business. Always check the lender’s T&Cs before applying.

Credit Card vs Personal Loan

Choosing whether a credit card or a personal loan is more beneficial all depends on your circumstances. Generally, personal loans are a better form of credit when wanting to pay for a large one-off expense, such as a wedding or a new kitchen. This is because most personal loans will have a greater credit limit and a lower interest rate than a credit card, meaning you can borrow more money and will be paying back less in total.

Credit cards are better designed for smaller or everyday purchases. Credit cards are incredibly convenient – they can be stored in your purse or wallet and used for both in-store and online purchases. It’s important to keep in mind that the amount you can spend using them is limited to your available credit. Always ensure that your purchases do not exceed the limit.

How to compare personal loans

Here is a list of features to compare when considering personal loan options:

• Loan amount. Check what the minimum and maximum borrowing amounts are and if they meet your needs.
• Loan terms. Some lenders offer shorter loan terms than others. This affects the monthly repayment amount.
• Upfront and ongoing fees. These fees will be added onto your principal loan amount and will therefore affect your repayments and the interest you have to pay.
• Type of interest rate. Your loan can either be fixed or variable, and both of these rates will come with different features.
• APR. The annual percentage rate incorporates the fees as well as the interest rate to show you the true cost of the loan.
• Repayment flexibility. Check whether you’ll be able to make additional repayments or pay off the entire loan amount early without penalty.

Frequently asked questions

• How can I get approved for a loan?

  The first step is to compare your personal loan options. Follow the instructions on the lender’s website and review the eligibility criteria to make sure you qualify. There’s no guarantee that you’ll be approved.

• Why was my personal loan application rejected?

  Some lenders may provide the reason for rejection when they send the notification. Otherwise, it can be difficult to determine why your application was rejected. Be sure to review the eligibility criteria closely before submitting further personal loan applications.

• How can I borrow money with bad credit?

  When you have bad credit, your options for personal loans may be limited. But there are lenders who may approve your application.