4 Things You Should Never Use a Personal Loan For (And 3 Things You Should!)

If you’ve done any research into personal loans, then you already know how versatile they are! One of the best benefits to these kinds of loans is that you can use them for anything – but should you?

Believe it or not, there are a few situations where a personal loan isn’t your best option. That’s why today, we’re highlighting the 4 things you should never use a personal loan for.

What Shouldn’t a Personal Loan Be Used For?

Paying Your College Tuition

While some personal loans can be used to finance higher education, it all comes down to the fine print. To offer personal loans for educational purposes, lenders must follow federal regulations as laid out in 2008’s Higher Education Opportunity Act. Under this act, lenders must provide a 30-day “rumination” window, make special disclosures, and let borrowers cancel their loans within three days of disbursing their loans. In short, lenders have a lot of rules to follow if they want to give out loans for education! Because these requirements are stringent, many lenders prohibit borrowers from using their personal loans to pay for tuition-related expenses.

Even if a personal loan lender follows the HEOA’s standards to the letter, there may be better educational loan options for borrowers. Federal student loans, for instance, often have a lower interest rate and a longer repayment period (usually 10-20 years) than most personal loans. Further, because most individuals seeking loans for college tend to have shorter credit histories, any personal loan they apply for will likely have a higher interest rate.

Putting a Down Payment On a Home

Coming up with the down payment for a home can feel impossible, especially in the current market– no matter how hard you save, it can feel like it will never be enough! That’s why taking out a personal loan to cover the upfront costs of home buying may sound appealing. After all, borrowing the funds and repaying them back in small amounts every month seems less daunting than coming up with the money on your own. However, most FHA mortgage and conventional mortgage lenders forbid buyers from using personal loans as a down payment. Their reasoning is this: if you took out a personal loan and a mortgage, you’d be on the hook for at least two debt payments every month. From the perspective of a lender, this increases the chances that a borrower will be unable to make their mortgage payments.

Financing a Brand New Car

At first glance, auto loans and personal loans may seem interchangeable. After all, they’re both loans, right? Not quite. There are two broad types of loans: unsecured loans, which are loans that are not backed by collateral, and secured loans, which are backed by assets like a home or a vehicle.

An auto loan is a secured loan, typically guaranteed by the car you’re purchasing. This means there is less risk to your lender. If you find yourself unable to make the loan payments, they can always repossess the car and sell it to recover the money they lent you. Given the lower risk, you’re likely to qualify for lower interest rates for an auto loan over a personal loan on a brand new car from the dealership.

Paying For Expected Expenses

Benjamin Franklin once wrote, “In this world, nothing is certain except death and taxes.” If he were alive today, we’re certain he would’ve added “bills” to that list! From utilities to rent, bills are a monthly inevitability. If you find yourself unable to pay your bills, you may be better off revisiting your budget or looking into other forms of debt relief rather than using a personal loan.

What Are Some Good Uses For Personal Loans?

Consolidating Your Debt

If you’re carrying a substantial balance on one or more credit cards with high interest rates or juggling multiple debt payments a month, then taking out a personal loan to consolidate your debt can help you improve your credit score and make your debt more manageable.

By paying off all your other debt obligations with a personal loan, you turn what was once multiple payments into one affordable payment with a lower interest rate. Not only does this make debt easier to keep track of, but it also improves your credit score!

Improving Your Credit Score

It may sound counterintuitive, but taking out a personal loan can help to improve your credit score in the long run. As long as you consistently make your monthly payments on time and pay off your debt within the repayment term, you’ll be able to build a stronger credit history and improve your credit score.

Covering Unexpected Expenses

For many Americans, covering a large, unexpected expense would be difficult. Even with savings, having to pay upfront could cause financial strain for months and years ahead. Some examples could be a medical emergency, relocation, car problem, death in the family, or pet emergency. A personal loan offers you the flexibility of spreading the expense over a period of months and at an interest rate typically lower than most credit cards.

Home Renovations or Improvements

Whether you’re buying new appliances, remodeling your kitchen, or repairing your garage door, taking out a personal loan to pay for home improvements or renovations may be less expensive than financing directly through the seller or with a credit card.

The Bottom Line: Personal Loans Are Great – In Most Cases!

While we’ve highlighted some situations where a personal loan isn’t the best solution, that’s not to say that these loans are never useful! Personal loans work well in a wide variety of situations – even more than the three we outlined above! Personal loans can also help you cover emergency expenses, pay for your dream wedding or vacation, make a big purchase, and more!

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