There are all kinds of reasons to apply for a personal loan, and you don’t owe an explanation to anyone other than the loan company. Even then, you ultimately have the power and freedom to spend the lump sum you receive however you see fit.
Key Takeawats
- When you apply for a personal loan online, you are typically asked the reason for your loan. You’ll usually pick from a list of options, such as debt consolidation, a wedding, or another large purchase.
- The reason why you’re borrowing could impact the terms of your loan, including your interest rate, available repayment terms, potential loan amounts, and more.
- Note that some lenders don’t offer personal loans in certain scenarios. For example, most personal loan companies won’t approve your loan if you plan to use the funds for college tuition.
How Reasoning Affects Your Personal Loan Terms
Some personal loan companies offer better rates and terms for certain loan purposes over others, or they might offer longer repayment terms in specific situations. As an example, you might be offered longer repayment terms for a home improvement loan than if you apply for a personal loan for debt consolidation. Meanwhile, interest rates can also be lower for home improvement loans and loans for other purposes over debt consolidation loans.
The reasons why terms vary depend entirely on your lender and their approval process, and they can also vary by loan company. As an example, at the time of this writing, LightStream offers interest rates as low as a 6.99% annual percentage rate (APR) with autopay. However, the rates differ depending on how you will use the money. For example, a $5,000 home improvement loan starts at 7.49% with autopay, but a debt consolidation loan for the same amount will incur an 8.89% APR.
Common Reasons for Personal Loans
Personal loans are common in a range of circ*mstances where someone needs a lump sum of cash that they can utilize right away. These loans are usually unsecured as well, meaning there is no requirement for collateral to get approved.
Common reasons for a personal loan include:
- Debt consolidation
- Home improvements
- Wedding financing
- Major home purchases
- Adoption expenses
- Medical expenses
How to Answer Lender Questions When Applying for a Personal Loan
When you apply for a personal loan online or at a brick-and-mortar financial institution, you should be as honest as you can when it comes to the reason why you want to borrow money. If you need access to cash so you can pay for a cruise or an all-inclusive resort stay, for example, you would select an option that says something to the effect of “vacation” during the application process if it’s listed. If not, an alternative option that says something like “other” or “financing a large purchase” could work as well.
The same rule applies if you need a personal loan for debt consolidation, a home remodeling project, or financing an upcoming wedding. The lender can deny you your loan if they find out that your application contained incorrect information.
Is a Personal Loan Right for Me?
Personal loans are popular with consumers for a few reasons, including the fact that they come with fixed interest rates and fixed monthly payments. These loans also come with a set repayment plan that won’t change, meaning you’ll know upfront how long it will take for your loan to be paid in full.
With all this in mind, a personal loan makes sense when:
- You need a lump sum of cash that you can spend: Where credit cards offer a line of credit that you can use to make purchases, personal loans offer a lump sum of money that’s sent to your bank account. This makes personal loans a better option for borrowers who need actual cash that they can spend however they see fit.
- The monthly payment for which you qualify is affordable: Personal loans are best for people with predictable incomes who can afford to make the loan payment they’re offered when they apply.
- Paying the money back is a priority: If you fail to repay a personal loan, your credit score will suffer considerable damage, and other negative consequences can come into play. Personal loans are best for people who have a concrete plan to pay their loans back in full.
Finding the Best Personal Loan for Your Needs
The good news about personal loans is the fact that so many lenders compete for your business. Even better, you can compare all of them online and from home. By taking a look at the best personal loan companies, you can figure out which ones have the loan terms and features you want the most.
Several factors to consider with each loan company include:
- Approval requirements: Some lenders list specific approval requirements on their websites, including a minimum income or minimum credit score.
- Convenience: Look for lenders that make it simple to check on your loan, in addition to allowing you to make payments online or using a mobile app.
- Interest rates: Search for lenders that offer the lowest starting interest rates, keeping in mind that your interest rate will impact your total loan costs the most.
- Additional fees: Check to see what fees may be added, including an origination fee or early repayment fee.
- Monthly payments: Check the minimum monthly payment listed for the amount you want to borrow and make sure you can easily afford it. If in doubt, use a personal loan calculator to see how much you would owe each month.
- Pre-approval: Some lenders let you check your rate or gauge your approval odds before you apply, which can give you an idea of the loan terms you can qualify for without a hard inquiry on your credit reports.
- Repayment terms: Some lenders let you repay your loan through five or six different repayment plans, whereas others may only offer two or three.
- Time to funding: Finally, check whether lenders offer fast funding in as little as a few business days—especially if you need money quickly.
How Do People Use Personal Loans?
Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.
How to Apply for a Personal Loan
Applying for a personal loan can look different depending on which company you go with, but most request the same basic information during the application process. For example, you might be asked to share any of the following:
- Assets you have, including savings and investments
- Citizenship status
- Date of birth
- Driver’s license number
- Employment and income information
- Loan purpose
- Personal details like your full name, address, and phone number
- Requested loan amount
- Requested loan repayment term
- Social Security number (SSN)
- Total monthly housing costs
Once you find a lender you prefer and apply for a personal loan, you may be approved in a matter of days (or even sooner). You may also need to supply supporting information to finalize your loan application, such as pay stubs from an employer or recent tax information.
What Do You Say When Requesting a Loan?
When requesting a personal loan, be honest and forthright when it comes to your reasoning for taking out the loan. Your reason could include anything from debt consolidation to adding a new bathroom to your home to even buying new furniture.
What Is the Easiest Way to Get a Loan?
The easiest way to get a loan is through an online lender. Many online personal loan companies make it easy to apply and secure funding within a few business days.
Is Applying for a Personal Loan a Hard Inquiry?
While checking your rate with a personal loan company won’t result in a hard inquiry on your credit reports, moving forward with a full application will.
The Bottom Line
Whether you need to consolidate and pay down high-interest debt, purchase a new computer, or pay for a much-needed vacation, a personal loan could be the answer. Comparing loan options, including different rates and repayment terms, is the only way to know for sure.
