When applying for a personal loan, you’ll usually be asked what the purpose of the loan is - often you’ll be choosing from a drop-down menu of options.
The reason for your loan can be important since many lenders take this into account alongside your financial situation when making lending decisions.
If you’re considering a loan, it’s also important to understand the monthly repayments you’d be looking at - our loan calculator makes this easy.
Why apply for a personal loan?
The main reason to apply for any type of loan is to spread the payments for a major purchase, in order to make the cost more manageable.
For example, if you need to fix the roof on your house, you might be looking at a cost of £5,000. Unless you’re lucky enough to have £5,000 sitting in a savings account, you’ll face a choice: either put off replacing the roof until you have enough to make the purchase outright or consider a personal loan to bring the purchase forward.
In this example, a personal loan from Koyo could have a Representative 21% APR.
That means that you’d repay more than you would if you paid for the work using savings since you’d be paying interest on top of the loan amount. However, by splitting the payments, you should be left with an affordable monthly amount.
That’s not the only reason for borrowing money - we’ll also look at debt consolidation loans - but the general principle of a good personal loan is that it helps you to bring an important purchase forward.
The other important thing to bear in mind is that repayments should be affordable. A loan shouldn’t be a way for borrowers to get further into debt by living beyond their means or buy expensive items they won’t be able to pay for.
If you want more information on what a personal loan is, take a look at our full guide. Below, we’ll delve into more detail around the reasons for personal loans.
Related post: Taking out your first loan? Our guide for first time borrowers will help you pick the right option for you, as well as maximise your chances of approval with insider tips and advice.
What are the best reasons for a personal loan?
Sadly, there’s no “best answer” that will give your application a boost no matter what. However, there are lots of bad answers which will serve as a red flag to most lenders. These include:
- Anything linked to crime.
- Paying for unnecessary purchases.
So what’s a good reason to take out a loan? This will vary from lender to lender, but below, we’ve set out some of the most common reasons, along with an explanation of each.
Bear in mind though, that just because a lender is happy to lend you money, it doesn’t necessarily mean that a loan is a good idea for you - a loan is an important financial decision and something to consider carefully. This flowchart should help you to get a sense of whether a loan is a good idea given your personal finances:
For debt consolidation
We’ve covered debt consolidation in detail in a separate post but to explain simply, a debt consolidation loan is a way to borrow a lump sum which you use to pay off other, typically more expensive, forms of borrowing. This might include bad credit card debt, short-term borrowing or even guarantor loans. Done correctly, it should:
- Help you save money on repayments.
- Help you manage monthly repayments - since you only have one to worry about.
Because a good debt consolidation loan will save you money if you’re borrowing at a lower interest rate, it can be a very good reason for a personal loan (and it’s one of the loans offered by Koyo).
However, a debt consolidation loan isn’t right for everyone - the Money Advice Service says that it doesn’t make sense if:
- You can’t afford the new payments.
- The loan wouldn’t clear all your existing debts.
- You end up paying more (because the rate is higher or the term is longer).
If that’s the case, you can take a look at their guide.
However, if you can save money and afford the repayments on a debt consolidation loan (you can use our loan calculator if you’re not sure), then debt consolidation can be a very good reason.
If you’re making a substantial improvement to your home, this type of loan can be a good way to fund it - but it’s worth noting that it will always be cheaper to pay using savings. However, if you want to bring forward improvements, a loan can help you to meet the upfront cost while spreading the payments over months or years.
You might have a choice between unsecured and secured personal loans. Secured loans - also known as home equity loans - are secured against your home, which means that your home is at risk if you fail to make full repayments.
Many lenders, including Koyo, offer unsecured home improvement loans.
If your roof is damaged or your car needs repairs, again, the cheapest way to pay for work will be using savings. However, if that’s not an option, a personal loan can be a good alternative.
If the expense is small and you have a good credit rating, using a low or zero-interest credit card can work, but if the expense is large and you’ll have to pay it off over a longer period, a personal loan will often be cheaper.
To buy a car
A loan can be an effective way to cover the upfront cost of a car. Unless you can get 0% finance from a dealer, personal loan rates are usually cheaper than dealer finance (1) and it shouldn’t affect your manufacturer’s warranty.
Another key difference is that, with a personal loan, you own the car outright. With some other forms of car finance, the car is taken as security, meaning that the car will be repossessed if you don’t keep up monthly payments. With an unsecured personal loan, your agreement is between you and the lender, although there are of course significant consequences for missed payments - including a serious dent to your credit history, making it very hard to borrow again in the future.
It’s worth noting that, because you own the car, it’s yours to use as you please - that means no mileage restrictions (such as you might find with PCP or leasing agreements).
To learn more, read our insider’s guide to financing a car without letting a bad credit score hold you back, covering car loans, HP, PCP and lesser-known alternatives.
When to apply for a personal loan
The timing of your application shouldn’t affect whether the loan is improved. However, the cost of loans, in general, does change constantly, as new offers are often being added to or withdrawn from the market.
While you’re unlikely to be able to “time the market”, if you couldn’t find a cost-effective loan in the past, it might now be worth taking another look at what’s out there.
Lastly, bear in mind that taking out a personal loan is likely to affect your credit score - our guide has the detail but, in short, your score will take a small dip when you first apply, but should then increase as you make repayments. That might be something to consider if you’re considering applying for a mortgage - if so, it could be better to delay a personal loan.
Hopefully, this guide gives you all the information you need but, if you have any other questions, let us know in the comment section below. And if you’re thinking about taking out a loan, you can visit our homepage for more information.