Is the purpose of your loan important?
Taking out a personal loan is exactly that – personal. While many lenders will ask you the reason for your loan, most reasons won’t prevent you from getting a personal loan. However, your credit score and history will affect your approval and the rates and terms you are offered. Here’s why some people take out personal loans and when their goal matters.
What does the purpose of the loan mean?
The purpose of your loan is the reason why you want to borrow the money. When filling out a loan application, you may come across a section that asks for the purpose of the loan. Some lenders do this to make sure you are applying for the right product. They can also use the purpose of your loan to assess risk and assign loan terms.
The reasons for taking out a personal loan
There are many reasons why you might want to consider taking out a personal loan, including:
- Emergency room : If you need to pay bills right away and don’t want to be late, you can take out an emergency loan to cover those costs. If you lose your job, cut back on your work hours, or have an emergency medical bill, a personal loan may meet your short-term needs.
- Debt Consolidation: You can save money on interest payments when you consolidate high interest credit card debt with a personal loan. The average credit card interest rate is currently around 16%, although it can go as high as 20% depending on your credit score and your credit card issuer. Personal loan interest rates are currently on average below 11%. If you have exceptional credit, you might get the lowest interest rate available, which is often a lot less.
- Home improvements or repairs: If a water line bursts or your air conditioning fails, a home improvement loan can pay for the repairs if you don’t have the money and don’t want to use your credit card.
- Child-related expenses: If you want to expand your family, a personal loan can cover the costs of fertility treatments, adoption fees, or hospital costs related to labor and delivery or needs after your child returns home. .
- The main stages of life: If you’re planning a big move for a new job or helping an adult child pay for a wedding, you may need extra cash to pay for the costs that add up.
- Funeral and end-of-life needs: A personal loan can cover funeral, burial and end-of-life costs associated with the death of a loved one.
- Big purchases: You can use a personal loan to buy a recreational vehicle like a boat, RV, or private jet, or to shop for your quality of life. You can also use a personal loan to spread out the costs of purchases that would take a significant chunk of your budget, such as dental bills, new appliances, and veterinary expenses.
Is the reason for taking out a personal loan important?
Your reason for getting a personal loan can affect the type of loan you take out, as well as the loan amount and the interest rate you get.
Some lenders have a specific type of borrower to lend to. For example, Payoff is a lender that only serves borrowers with indebted credit cards. If you are looking for a personal debt consolidation loan, this might be a lender to consider. But if you are looking for a home improvement loan, you will have to look elsewhere.
LightStream has interest rates depending on the purpose of your loan. For example, in mid-July 2021, a new car loan purchase has rates as low as 2.49% APR, but K-12 student loans start at 5.93% APR.
Why it matters
While many lenders are ready to meet your needs, it’s important to remember that the purpose of your loan can affect your interest rate and terms. Some lenders have a minimum amount that you can borrow depending on why you need a personal loan.
To make sure you get the best deal, compare the interest rates, terms, and fees of lenders who offer personal loans that suit your needs. Review credit requirements, such as your credit score, history, and income.
The bottom line
Your reason for getting a personal loan is yours, but your potential lender can determine important lending factors based on that reasoning. Whatever your reason for needing a personal loan, compare lenders to see which one offers the best deal for your needs. Avoid borrowing more money than you need, and find a lender who has a reasonable repayment plan.