Personal loans can be used for a wide variety of expenses — here are the things you may not know about them

Personal loans are installment loans that have fixed monthly payments. While they typically require you to have a good credit score to qualify, they can be a great choice for consumers who require some flexibility when it comes to how they spend their money.

Personal loans also tend to have lower annual percentage rates, or APRs, than traditional credit cards. According to the Federal Reserve's latest data, in May 2022, the average interest rate for a 24-month personal loan was 8.73% while the average APR for credit cards with interest (for cardholders who carried a balance) was 16.65%.

If you're thinking about taking out a personal loan to cover medical bills, home repairs, or other expenses, Select offers a closer look below at what you can and can't use a personal loan to pay for.

The major advantage of a personal loan is that it's a lump sum of money you can use to pay for most types of expenses. Many personal loan companies will provide you with the funds within a few business days, while some of them offer loan amounts of up to $100,000.

There are, however, a few things you aren't allowed to use a personal loan to pay for. Check with your personal loan lender to see if there's anything specific they say you can't use the funds for, as the lender could require you to pay back the entirety of the loan with interest immediately if you choose to use it to cover prohibited expenses.

Notably, most personal loans typically cannot be used to pay for college tuition, to make a down payment on a home or to cover business-related costs. For these kinds of expenses, it's better to opt for other types of credit or to pay with cash instead.

Other than that, personal loans can be used to pay for a lot of things, including wedding costs, home repairs, medical bills, a new car, moving expenses, appliances, exercise equipment, and furniture, among other big-ticket items.

Personal loans can also be used for debt consolidation. With a debt consolidation loan, the new lender will pay off all your existing accounts, whether they're credit cards, student loans or other personal loans — it then becomes your responsibility to pay the personal loan lender a fixed monthly payment. 

Debt consolidation can be useful for those who struggle to stay on top of paying off multiple loans or lines of credit. You should, however, make sure you're not spending more in interest with this type of loan than you would by making the payments on your existing accounts. 

Select ranked Upstart as one of the best debt consolidation loans for people with fair or average credit and LightStream as the best for those with good or excellent credit.

There are several fees associated with personal loans that you need to be aware of. For starters, you might encounter a late fee if you fail to make your payment on time or a prepayment penalty fee, meant to discourage borrowers from paying off their loan early, if you manage to pay off your loan before the length of the loan term ends.

Lastly, there may be an origination fee, or a fee for making the loan, which is typically represented as a percentage of the loan and deducted from the amount of the loan upfront. The origination fee may range from 1% to 5% and there are many lenders that don't charge any origination fees, such as LightStream, mentioned above.

Select also ranked PenFed Personal Loans and Discover Personal Loans among the best personal loan lenders based on several factors including no origination fees, no prepayment penalty fees and the length of the approval process.

There are very few things personal loans can't be used to pay for. However, it's still important to check the fine print, terms and conditions on your loan as using it for prohibited expenses could result in you having to pay it back immediately.

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