3 Great Reasons to Get a Personal Loan

If you are thinking about borrowing money, a personal loan could be an option for you. Personal loans tend to have lower interest rates than other kinds of debt, with the average rate coming in at 11.48% as of May 2023 according to the Federal Reserve.

There are good and bad reasons to take out a personal loan, though. Here are three of the best justifications for borrowing via this method.

1. To consolidate debt

Consolidating debt could be one of the best reasons to get a personal loan. When you consolidate, you use the proceeds from your new personal loan to pay off other debts you owe.

Where you previously may have had multiple monthly payments to keep track of, you will now have just one. This single payment can be more affordable and easier to manage, you are less likely to forget it, and you won't have choices to make about which debts to concentrate on paying first.

You may also be able to reduce the interest rate on the debts you're consolidating and thus save money on total payoff costs. Say, for example, you have a $5,000 credit card balance with a 21% APR that you're currently paying $95 a month toward and a $6,000 loan at 15% that you're paying $150 a month on.

If you got a new 36-month loan at 7.49%, your new monthly payment would be $342.11, so about $97 a month more. But you would save $9,957.04 in interest and reduce your repayment time by 9.2 years, so you would end up a lot better off in the end.

2. To avoid expensive payday loans or credit card debt

As mentioned above, the average interest rate on personal loans was about 11.48% as of last May. By comparison, the average interest rate on a credit card during that same time period was 20.68%.

If you must borrow for a big purchase -- think new appliances or a car repair -- you are a lot better off paying 11.48% on your purchase than paying 20.68% -- or, worse, paying upwards of 400% APR on a payday loan.

Not everyone can pay cash for everything they buy, and there may be times when you have to finance something. If that's the case, consider whether a personal loan with its more affordable interest rate is a better option. Your personal loan will also come with a set payoff schedule of a few years, unlike a credit card where you could get stuck in a cycle of debt for decades if you make only minimum payments.

It can be faster and easier to just charge stuff on your credit cards rather than going through the process of applying for a personal loan. But, the easiest approach isn't always the right one, and a personal loan could save you big in total interest costs.

3. To make minor improvements to your home

Finally, if you are making some minor improvements to your home, a personal loan could be a good way to fund them.

A personal loan will have a higher interest rate than a home equity loan and the interest won't be tax deductible, while interest on the home equity loan might be. But, getting a home equity loan requires jumping through several hoops, potentially including getting an appraisal to determine your home's current value and paying closing costs.

If you just need to borrow a small amount for a minor repair, the hassle of a home equity loan may not be worth it and you may want to opt for the simpler, easier-to-qualify-for personal loan instead.

If you find yourself in any of these situations, aim to get at least three different quotes from different personal loan lenders to find out if an affordable, effective borrowing option exists for you. You may just find a personal loan is the best choice for your borrowing needs.