Borrowing to pay for college, a down payment on a home, or even a car is a financial given for Americans striving to reach their long-term goals. These loans are as common as Sunday brunches and binge watching Netflix. And with the rising popularity of personal loans, it’s clear that they, too, are becoming a part of the financial journey for many people.
Personal loans are helping more Americans, including those with highly successful careers, take advantage of great job opportunities, offset the cost of financial curve balls, and prepare for some of life’s pleasant (and not so pleasant) surprises.
But they have to be used responsibly.
Working to get the most out of a personal loan comes way before the loan money hits your bank account. It takes a commitment to purposeful planning, smart finance management, and an understanding of the application process prior to signing on the dotted line.
Here’s what you need to know about personal loans so you can responsibly hit the bullseye on all of your life and career targets.
The Personal Loan Advantage
Personal loans can be used for just about anything. Plus, they’re typically unsecured, which means you don’t have to put collateral down, unlike a mortgage. And, according to Alan Donner, SoFi’s Personal Loan Product Lead, that’s a big plus. “Most personal loans are approved based on personal credit worthiness, not an underlying asset, so there’s no risk of losing your home or car if for some reason you aren’t able to pay the money back,” he says.
That accommodating condition has led many to conclude that personal loans attract only strapped-for-cash borrowers constantly in need of a financial fix. But that’s simply not true. A recent national survey found that the majority of personal loans are used by those with strong financial footing.
Savvy borrowers don’t use personal loans to go on frivolous shopping sprees or splurging on dream vacations. Instead, they borrow only as much as they need and use the money to attend to their health, career, and quality of life in any of the following practical ways:
To kill credit card debt: A personal loan can offer a fresh start to anyone serious about getting rid of credit card debt. With the average variable credit card annual percentage rate (APR) climbing to over 16% last month, thousands of dollars can be saved by refinancing that debt with a low-interest personal loan.
But there’s a caveat to this strategy: You have to be all in—mind and money. “When consolidating credit card debt, you want to avoid perpetuating the cycle that got you into debt in the first place,” warns Donner. This means you need to curtail the bad spending habits that got you in trouble in the first place.
To upgrade your home: Home remodeling can be a huge financial undertaking, and you might need some extra cash to pay for the upgrades. “Large remodeling expenses can include everything from new appliances and furniture to new windows and a new roof,” says Donner. “And if you’re someone who loves the sun and water, a new pool is a pricey desire.” If personal loan rates continue to drop, homeowners are smart to take advantage. Upgrading a part or all of your house is a great way to help improve the value of your home. To get more information about renovation project returns use this Home Project Value Estimator.
To stay healthy: The cost of healthcare is high. Even if you have a track record of prudent spending, consistent saving, and moderate credit card use, an unexpected medical emergency can wreak havoc on your finances. Using a personal loan to pay for medical expenses not covered entirely (or at all) by insurance can provide a low-cost alternative to using credit cards with high-interest rates.
To plan a family: Couples or individuals who have trouble conceiving on their own may choose an elective medical procedure, such as in vitro fertilization (IVF), to assist them in becoming parents. IVF is a costly procedure that typically isn’t covered by insurance. “Even for those with insurance it can be expensive,” Donner says. “They can be burdened with high deductibles or large out-of-pocket payments.” According to the American Society for Reproductive Medicine, a cycle of IVF can cost $12,400 on average, and it may take several cycles before success hits.
Other couples might choose adoption, which can also be extremely expensive. “The average cost to adopt a newborn in the U.S. is $38,000,” says Donner. “It’s a huge financial undertaking, but definitely rewarding.”
To help with unplanned special deliveries: While many people plan their families and budget accordingly, sometimes pregnancy is a surprise. And that means unforeseen additional expenses, so spending habits have to change. A personal loan can help with those costs, preventing a family from turning to credit cards to cover the outlay.
To end an era: A divorce can change your financial situation dramatically. “The transition can cause some people to exhaust funds for moving expenses, child care, or taking the steps necessary to reenter the workforce,” says Donner. Rather than raid your retirement account (and possibly incur penalties for early withdrawals), a personal loan can serve as a welcome lifeline.
To level up career-wise: Professionals may use a personal loan to enhance their skills through a series of industry or online training classes. “Most certificate programs, don’t qualify for education loans,” says Donner, “so using a personal loan could be a great investment.”
Personal Loan Factors in a Nutshell
Once you decide how you’ll use a personal loan, it’s time to look for the best loan fit. And that boils down to three factors: interest rates, origination fees, and loan terms.
1. If you plan to use a personal loan to consolidate debt and pay off credit cards, look for the loan with an interest rate lower than what you’re already paying. You’ll also have to choose between a fixed and variable interest rate. A fixed rate remains the same through the entire term of the loan; a variable interest rate will fluctuate over the term, based on an index.
2. Some, but not all, personal loans have origination fees— the costs of processing the loan, which are deducted from the loan amount. So do your homework.
3. Pay close attention to loan terms, which can vary greatly, depending on the lender. Some lenders only offer one-, three-, and five-year terms loans. Remember, the shorter the loan term, the more you’ll pay each month, but the less you’ll pay in interest over the life of the loan. So be realistic when calculating payments into your budget.
Want the Best Rates? Be the Best Borrower.
Locking down the most desirable personal loan means that you have to put your best financial foot forward as a candidate. Personal loans with the best rates and terms go to responsible spenders with good credit.
“Most lenders look for candidates with prime or super-prime credit quality, which means credit scores above 660,” says Donner. “But SoFi doesn’t stop at credit score review to determine personal loan worthiness. Our approach is holistic; we also look at your work experience, your income relative to your monthly expenses, and your credit history. That gives us a better picture of your financial situation, so we can help you secure the loan you need.”
How to Make a Post-Personal Loan Comeback
Once your personal loan is approved, you’ll need to adjust your short-term financial goals and focus on strategic debt repayment and saving, “At first, make minimum payments each month on all loans while simultaneously putting money into an emergency fund,” says Donner. “Do that until you save enough to cover three to six months worth of living expenses. Then, focus on tackling the loan with highest interest rate by throwing extra money at it each month.”
Rinse and Repeat
After you start to make a dent in your high-interest debt, focus on reaching your long-term financial goals. “Start a college fund for your child, save for a down payment on a home, and put money away for retirement,” says Donner.
A personal loan can be key to helping you navigate life’s calamities and opportunities without missing a beat. Discover how you can benefit from a personal loan, and get pre-approved online with no obligation.
If you enjoyed learning how to use a personal loan responsibly then start with getting your money mindset right and build your emergency fund.