Large purchases
Big purchases like a new car or electrical appliance can be a strain on your budget if you pay for them all at once. By using a personal loan, you can make these purchases more affordable by breaking down the cost into smaller payments. This can be useful if you need to replace an essential item quickly and don’t have the savings to cover it.
Debt consolidation
If you have multiple debts, you could combine some or all of them into one consolidation loan. This can make managing your finances simpler and less stressful.
Instead of juggling several payments, you could have just one monthly payment with one interest rate. However, you might end up paying more interest overall if you spread the loan over a longer period of time.
If you consolidate debt from existing credit cards, your credit score may increase, which may make it easier for you to access credit in the future. This is because paying off your credit cards can lower your credit utilisation ratio (how much of your available credit you are using). Over time, your credit rating should increase, as long as you do these three things:
- always pay your loan on time
- keep those credit cards open
- don’t spend on the credit cards
A good credit score can help you access credit in the future with lower interest rates.
Home improvements
Whether it’s a new kitchen, bathroom, or just some fresh paint, a personal loan can help you make your home more comfortable. Renovations can be expensive but spreading the cost with a loan can make these projects more attainable.
Plus, improving your home can increase its value, making it a worthwhile investment. You might also find that certain improvements, like a new boiler, could save you money on utility bills in the long run.
Special occasions
Whether you’re planning the holiday of a lifetime or a dream wedding, you might find that these special occasions rack up a larger bill. A personal loan can allow you to enjoy these moments without compromising on your plans.
Things to consider before taking out a personal loan
Interest rates
Make sure you understand the interest rate and how it will affect your repayments. Interest rates can vary widely, and a higher rate means you’ll pay more over the life of the loan. So, it’s worth comparing offers to find the best deal.
It’s also best to check if the rate is fixed or variable, as this can affect your monthly payments.
A fixed interest rate stays the same for a set period. This can make budgeting easier as your monthly repayments will be predictable. But you won’t benefit if interest rates go down. With a variable interest rate, on the other hand, your payments can go up or down.
Fees
Check for any additional fees, such as early repayment charges. Understanding all the costs involved can help you avoid any surprises and ensure you’re getting the best deal. It’s also a good idea to read the fine print and ask the lender about any fees you don’t understand.
Repayment terms
Know how long you will be repaying the loan and what your monthly payments will be. Longer terms can mean lower monthly payments, but you might end up paying more in interest overall.
Make sure the repayment schedule fits comfortably within your budget. Consider how any future change in circumstances might affect your ability to make payments over the loan term.
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Intelligent Lending Ltd is a credit broker, working with a panel of lenders. Homeowner loans are secured against your home.
What shouldn’t you use a personal loan for?
Although you’re generally free to spend the money how you like, there are certain things you should avoid borrowing for. This includes:
- Everyday living costs like food, rent and utility bills – this could be a sign that you are in financial difficulty, and getting a loan out could make your situation worse. Read on to find out how to get help with debt.
- Taking a loan out for someone else – it is possible to do this, but you should think carefully before you decide to go ahead. If the other person doesn’t pay, you will be legally responsible for covering the loan repayments.
- A deposit on a property – a lender will likely reject your mortgage application if they are concerned that you can’t afford repayments on both a loan and a mortgage.
- Business purposes – it’s doubtful that you’ll be approved for a personal loan for business purposes. If you are, you need to be careful as you’ll be personally responsible for repaying the loan.
- Gambling and investments – lenders don’t class this as an acceptable use of a personal loan. It is risky and could lead to you losing money and not being able to pay the loan back.
Any illegal activities or purchases – this is an obvious one. Lenders won’t lend to anyone for this purpose.
Is a personal loan right for you?
A personal loan can be a useful way to manage large expenses. Just make sure you understand the terms and can comfortably afford the repayments.
If you’re unsure, it might be worth speaking to a financial adviser. Remember, borrowing money is a big decision, so it’s important to be informed and confident in your choice.
Disclaimer: We make every effort to ensure content is correct when published. Information on this website doesn't constitute financial advice, and we aren't responsible for the content of any external sites.
Adele Kitchen
Personal Finance Writer
Adele is a personal finance writer with more than 10 years in the finance industry behind her. She writes clear and engaging guides on all things loans for Ocean, as well as contributing blogs to help people understand their options when it comes to money.
