A personal loan can be utilized to eliminate debt, fund significant purchases, or organize the wedding you have always envisioned; however, it is essential to consider the associated costs.
Many Americans lack the necessary funds readily available to make significant purchases outright. Consequently, it is common for individuals to secure mortgages, auto loans, and student loans, allowing them to spread the financial burden of these substantial expenses over a longer period.
However, for other significant expenditures—such as home improvements, engagement rings, and medical expenses—an increasing number of Americans are opting for personal loans to assist in managing these costs.
Personal loans have emerged as the fastest-growing category of debt, as indicated by a 2019 study conducted by Experian. Although mortgages continued to represent the largest share of consumer debt at 71.7%, it was noted that in 2019, the rate at which Americans secured personal loans surpassed that of auto loans, mortgages, credit cards, and student loans.
As a type of installment credit, personal loans are often regarded as a more cost-effective alternative to credit cards, primarily due to their typically lower interest rates. According to the latest data from the Federal Reserve, the average annual percentage rate (APR) for personal loans stands at 9.34%, whereas the average interest rate for credit cards is approximately 16.6%.
Once you repay a personal loan, you no longer have access to those funds, which can be advantageous for individuals worried about overspending, in contrast to revolving credit options.
There are various purposes for which individuals utilize personal loans.
Home renovations
Approximately 17% of participants in Experian’s research utilized their loans for home improvement projects. Whether you intend to undertake a comprehensive renovation or simply enhance your appliances, a personal loan provides the flexibility to finance home repairs through an installment plan.
For many Americans, allocating a few hundred dollars each month may be more feasible than making a one-time payment of $20,000 for a new kitchen. However, it is important to consider that borrowing through a personal loan incurs interest, which ultimately increases the total cost of the renovations. If you are not pressed for time regarding the renovation, it may be more financially prudent to devise a savings plan to accumulate the necessary funds rather than incurring additional debt.
For smaller expenditures, such as purchasing a new washer or dryer, you might explore a 0% APR credit card, such as the Chase Freedom Unlimited®. This card offers one of the most extended financing periods for home renovation projects, providing no interest on new purchases and balance transfers for 15 months from the date of account opening (after which the variable APR ranges from 19.74% to 28.49%; an introductory balance transfer fee applies, either $5 or 3% of the transfer amount, whichever is greater, for transfers made within the first 60 days of account opening. Subsequently, the fee will be either $5 or 5% of the transfer amount, whichever is greater).
Paying off debt
Debt consolidation is a prevalent motivation for individuals seeking personal loans. On average, an American possesses approximately four credit cards, and accumulating balances across multiple cards can complicate the management of various bills and annual percentage rates (APRs). A personal loan can simplify this process by consolidating payments into a single monthly obligation.
Additionally, personal loans can lead to interest savings. Individuals who refinance high-interest credit card debt may benefit from a reduced APR.
For those with good to excellent credit scores, a balance transfer card presents an alternative method for debt repayment, potentially allowing for interest-free payments.
The Citi Double Cash® Card features a 0% APR introductory period for the first 18 months on balance transfers (subsequently 18.49% – 28.49% variable; refer to rates and fees). Balance transfers must be executed within four months of account opening, and an introductory balance transfer fee of 3% applies to each transfer (minimum $5) made during this period. Afterward, the fee increases to 5% of each transfer (minimum $5). Once the debt is settled, cardholders can earn 2% on every purchase, receiving unlimited 1% cash back at the time of purchase, plus an additional 1% as payments are made. Furthermore, there is a special travel promotion that allows for 5% total cash back on hotels, car rentals, and attractions booked through the Citi Travel℠ portal until December 31, 2025.
Should you opt for a balance transfer card instead of a personal loan, it is essential to establish a clear repayment strategy to ensure the balance is paid off before the introductory period concludes, thus avoiding the imposition of a high interest rate.
Education
Federal student loans are often regarded as the most advantageous option for obtaining a flexible, low-interest loan to finance college education. However, if your goal is to enroll in online courses or acquire new skills to enhance your career prospects, a personal loan may serve as a viable alternative to cover the educational expenses necessary for securing a better job or achieving a promotion.
Prior to committing to a loan, it is advisable to explore no-cost alternatives, such as inquiring with your employer about potential sponsorship for professional development initiatives.
Additionally, if you are contemplating a career transition, it is essential to investigate the expected salary range upon completion of your education. Understanding whether your anticipated income will enable you to manage the monthly loan payments is crucial in determining whether the investment is justified.
Tax debt
If you find yourself in a situation where you owe money to the IRS and do not have sufficient funds in your savings account, you may consider obtaining a personal loan to settle the debt. Although the IRS provides payment plans, it is important to note that these plans may incur additional fees. It is advisable to conduct thorough research prior to securing a loan, comparing the fees associated with an IRS payment plan against the total interest that will accumulate over the duration of your loan.
Vacations
Airlines and travel companies are increasingly providing point-of-sale loans to customers seeking to escape the winter season. While it is possible to finance your vacation through a personal loan, this approach is generally not recommended.
There are more prudent methods to travel that do not deplete your finances. If you have disposable income, consider depositing it into an existing or new savings account prior to taking on any debt. The Ally Online Savings Account is an excellent choice for vacation savings, as it allows you to create up to 10 distinct “buckets” or funds within a single account. This feature enables you to organize and monitor your savings objectives, reducing the need to borrow.
Additionally, you might explore a travel rewards credit card that offers a substantial welcome bonus, which could help lower your vacation expenses by redeeming points or miles. For instance, the Capital One Venture Rewards Credit Card provides a welcome bonus of 75,000 miles after you spend $4,000 on purchases within the first three months of account opening, along with a one-time $250 Capital One Travel credit in your first year as a cardholder—equivalent to $1,000 in travel.
