8 reasons why people take out personal loans, and what to consider if you do

Few Americans have the cash they need on hand to pay for big-ticket items upfront. That's why it's not unusual for people to take out mortgages, car loans and student loans, so they can pay for these costly expenses over time.

But when it comes to other major purchases — like home renovations, engagement rings, medical bills — an increasing number of Americans are turning to personal loans to help manage the cost.

Personal loans are the fastest-growing debt category, according to a 2019 Experian study. While mortgages still made up the largest portion of consumer debt (71.7%), in 2019, Americans reportedly took out personal loans at a faster rate than auto loans, mortgages, credit cards and student loans.

A form of installment credit, personal loans are sometimes used as an affordable alternative to credit cards because they generally charge lower interest rates. Personal loan APR averages 9.34% according to the Fed's most recent data. Meanwhile, the average credit card interest rate is around 16.6%.

Unlike with revolving credit, you don't continue to have access to your loan once you pay it off — a plus for people concerned with getting in over their heads with spending.

Here are some ways that people use personal loans.

1. Paying off debt

Debt consolidation is the most common reason that people take out personal loans. The average American has about four credit cards in their wallet, and when you run up a balance on multiple cards, it can be difficult to manage all the different bills and APRs. A personal loan can streamline your payments into one monthly bill. 

Personal loans can also save you on interest. People who refinance high-interest credit card debt can save money with a lower APR.

If you have a good to excellent credit score, a balance transfer card offers another way to pay off debt, and you might not have to pay interest.

The Citi Double Cash® Card comes with 0% APR introductory period for the first 18 months on balance transfers (then 19.24% - 29.24% variable. See rates and fees); balance transfers must be completed within 4 months of account opening and there's an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5), and after the debt is gone you can earn 2% on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases. Plus, for a limited time, earn 5% total cash back on hotel, car rentals and attractions booked on the Citi Travel℠ portal through 12/31/24.

If you decide to go with a balance transfer card rather than a personal loan, make sure you have a clear repayment plan so you finish paying off the balance before the intro period ends and you get hit with a high interest rate.

2. Home renovations

About 17% of consumers in Experian's study used their loan for home improvements. Whether you're looking to do a full gut job or just upgrade your appliances, a personal loan gives you the option to pay for home repairs with an installment plan.

Spending a few hundred dollars per month is probably more realistic for many Americans than dropping $20,000 at once on a new kitchen. However, keep in mind that you pay interest to use a personal loan and the renovations will end up costing more in the long run. If you're not in a rush to do the renovation, it could be more cost effective to make a plan to save the cash you need instead of taking on more debt.

For somewhat smaller purchases, like a new washer/dryer, consider a 0% APR credit card like the Chase Freedom Unlimited®. The Freedom Unlimited offers one of the longest periods to finance home renovation projects, with no interest on new purchases and balance transfers over the course of 15 months from account opening (then 20.49% - 29.24% variable APR; there's an intro balance transfer fee of either $5 or 3% of the amount of each transfer, whichever is greater, on transfers made within 60 days of account opening. After that it's either $5 or 5% of the amount of each transfer, whichever is greater).

3. Education

Federal student loans are usually the best choice to get a flexible, low-interest loan to pay for college. But if you're just looking to take some online courses or develop a new skill to help advance your career, a personal loan can be a good option to help you afford the education you need to get a better job or qualify for that promotion.

Before you sign up, be sure to check for no-cost alternatives first, such as asking your employer whether they sponsor employee professional development.

And if you're looking to make a career shift, research what kind of salary you can expect to bring in once you complete your education. It's important to know if you'll be able to afford the loan's monthly payments with your new (and hopefully improved) salary. That will help you decide if the costs are worth it.

4. An emergency

Unfortunately, many Americans can't afford to save for emergencies, and you may need a personal loan to help you cover a car repair, medical bill or day-to-day expenses if you suddenly lose your job. Before you decide to go this route, research all your options. See if you can negotiate down the costs, or set up a payment plan with the mechanic or your health-care provider. And if you've lost your job, find out what unemployment benefits you qualify for so that, if you still need a loan, you can minimize the total amount you need to borrow.

5. Tax debt

If you owe the IRS money that you don't have available in a savings account, you could take out a personal loan to cover the costs. While the IRS does offer payment plans, they come with fees. Do you research before you take out a loan, comparing the fees you'll pay for a IRS payment plan with the total interest you'll pay over the lifetime of your loan.

6. Wedding costs

The average American wedding costs over $33,000 according to The Knot, which is a big chunk of change. If you and your partner are comfortable with idea of taking on debt, you might want to consider a personal loan to pay for your wedding expenses. Of course, your wedding doesn't have to cost nearly as much as the average, but if celebrating your special day in style is high priority, crunch the numbers to see if a loan is the best way to cover the costs. Again, it's important to have a clear payoff plan and understand how the monthly loan payments will impact your overall budget.

And if you've got the wedding covered but need cash to pay for the engagement and/or wedding ring, you could look into financing that with a loan, too.

7. A major life change

Moving, divorce, career changes, etc. come with emotional and financial costs. As much as possible, plan ahead for these transitions, but if you're in a pinch and need money to hold you over, you may be able to get a personal loan in a matter of days.

8. Vacations

Increasingly, airlines and travel companies are offering point-of-sale loans to customers who want to escape the winter blues and get away. You can also fund your vacation with a personal loan, though it's not advised.

There are better ways to travel that don't drain your resources. If you're fortunate enough to have disposable income, challenge yourself to put it into an existing or new savings account before you borrow money. The Ally Online Savings Account is a good option to save for vacations because you can create up to 10 "buckets," or funds, within the same account. This helps you organize and keep track of your savings goals so you don't have to borrow unnecessarily.

Also consider a travel rewards credit card with a large welcome bonus to see if you can cut down the cost of your vacation by cashing in points or miles. The Capital One Venture Rewards Credit Card has a welcome bonus of 75,000 bonus miles once you spend $4,000 on purchases within the first 3 months from account opening (see rates and fees).

While the notion of fast cash sounds great, remember that you'll have to start making payments on your personal loan right away (usually within 30 days). Before you take out a personal loan, make sure you have a clear purpose for it and a plan to pay it back.

Keep these things in mind when you do your research:

• Interest rates: Most personal loans come with fixed-rate APRs, so your monthly payment stays the same for the loan's lifetime. In a few cases, you can take out a variable-rate personal loan. If you go that route, make sure you're comfortable with your monthly payments changing if rates go up or down. 
• The size of your loan:  Lenders offer a wide range of loan sizes, from $500 to $100,000. Before you apply for a loan, consider how much you can afford to pay each month.
• The loan's term: The length of time you have to pay off the loan is usually between one and seven years. The longer the term, the smaller your monthly payments and the higher your interest rates. 
• Fees: Some lenders charge origination, or sign-up, fees, but it's possible to avoid these fees.

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