What can you use a personal loan for?

Personal loans can be great solutions for many situations, but not for every circumstance.

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:

PurposeCan you fund this with a personal loan?What to consider for this purpose
Buying a carYesIf the vehicle is eligible, you may get a car loan for lower rates. Unsecured personal loans are also an option.
Debt consolidationYesYou can get a debt consolidation personal loan or consider a balance transfer credit card.
Home improvementYesAs well as considering a personal loan for home improvement, consider a “home equity loan”, which is secured against your property.
HolidayYesThere are lenders that will you give you an unsecured personal loan to pay for a holiday.
WeddingYesSome lenders will lend you money to finance the cost of your wedding.
Pet careYesA personal loan can help you pay for unexpected costs of being a pet owner, like veterinary bills.
Boat or jet skiYesLenders impose maximum loan amounts that might not cover the total cost of your boat or jet ski. You may have the option of using the boat or jet ski you purchase as collateral for a secured loan.
Pay off taxesMaybeYou might be able to take out a loan to pay your tax bill in one lump sum to avoid fees charged by the HMRC for instalment payments or late payments. Check lenders’ terms and conditions.
Going greenYesMany lenders are willing to help you foot the cost of becoming energy efficient by offering loans you can use to buy solar panels and more.
MortgageUnlikelyYou may be able to take out a personal loan to pay off your mortgage, but this may not be the best strategy in every circumstance, especially if the loan’s interest rate is greater than your mortgage.
House DepositUnlikelyLenders generally won’t allow loans for the purpose of paying a deposit, and personal loans aren’t often accepted as a viable deposit source. Check the loan lender’s terms and conditions as well as your mortgage lender.
BusinessUnlikelyLenders have different criteria for approving loans for business purposes, and most will not allow a personal loan to pay for them. You’ll need to shop around for the appropriate loan for your business.
GamblingNoIt is illegal for lenders to knowingly lend someone money to use for gambling. It also breaches the law and the betting operator’s T&Cs if someone were to gamble with borrowed money.

How top lenders let borrowers use their personal loan

ProviderCar financing & refinancingBusiness expansionDebt consolidationHome improvementSpecial occasion & weddingHoliday
NatWest
HSBC
Barclays
Lloyds
Nationwide
Halifax
Santander
TSB
RBS
Post Office

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.

What other credit options do I have to consider?

While a personal loan is a viable option for everyday financing for a new car or home improvements, you also have other financing options to consider. These include:

  • Home equity loans. If you’re undertaking home renovations, using the equity from your home can also be an option. Work out the costs of this as well as a personal loan to see which one would be a better option.
  • Business loans. If you require a large loan for business purposes, you can compare business lenders offering financing up to £5,000,000.
  • Credit cards. These can be a good source of ongoing credit and can come with high limits – up to £100,000 – that you can use when you don’t have the money ready.
  • Balance transfer credit card. If you have debt across a few credit cards or even a few personal loans, you can consider a balance transfer credit card. These let you pay 0% interest on the debt for an extended time.

Frequently asked questions

Would UK borrowers recommend their personal loan provider to friends/family?

Response% of respondents
Yes89.80%
No6.94%
Don't know3.26%
Source: Finder survey by OnePoll of 750 Brits
We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you.

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