You’ve probably heard it said that you can use a personal loan to pay for almost anything, but what does this really mean? And even if it’s true, and you can use it to pay for all manner of things, then the next question is… are there things you shouldn’t use a personal loan for, even if you can?

Generally speaking, we would say that the best way to use a personal loan is so that you can reach a financial goal. This could mean consolidating your high-interest debts (you know, to improve your credit score and reduce your expenses) or paying to renovate your house and turn it into your dream home.

Information we can help you with:

• How personal loans work
• 7 Reasons you would get a personal loan
• 4 Things you shouldn’t use a personal loan for

How do personal loans work?

The first thing to know is that personal loans are a form of installment credit. So, unlike a credit card, a personal loan provides you with a one-time payment of cash. Usually paid into your bank account as a single lump sum.

These loans are unsecured, which means that this type of loan isn’t backed by collateral – like your car or your house. Instead, you’ll complete an application and if you’re approved and receive your money, you’ll then pay this amount back (plus interest) in monthly installments for an agreed period of time.

It’s a good idea to use a tool, like the AA Inform Personal Loan Calculator, because it will give you a clearer idea of what your loan repayments will be for the amount that you’d like to borrow.

Click here to use our calculator.

What a personal loan can be used for

When it comes to your finances, it’s always a good idea to carefully consider your circumstances before you take out a loan. To help you figure this out, we’ve researched the 7 best reasons to get a personal loan.

1. Creating your dream home. A personal loan is a useful way to pay for upgrades or to complete necessary repairs, like fixing the plumbing or redoing the electrics, without having to borrow a secured loan.
2. Emergency expenses. Emergencies happen, like having to pay for a loved one’s funeral or medical bills. A personal loan can be disbursed quite quickly and is a low-cost option to help you cover these kinds of expenses.
3. Vacation costs. We’re not thinking about an average holiday, but something a bit more grand and momentous, like a honeymoon, luxury cruise for your anniversary, or a dream trip. Just keep in mind that you’ll pay interest on that loan long after your holiday is over.
4. Debt consolidation. This is actually quite a common reason to take out a personal loan, because you can use it to pay off multiple other loans or credit cards in a single payment with a lower interest rate.
5. Moving costs. Even short distances are pricey, but a long-distance move can cost thousands, and a personal loan is ideal if you can’t immediately afford all of the expenses at once.
6. Large purchases. Need to replace your washing machine or the entire transmission in your vehicle, but don’t have the funds on hand? This is precisely when a personal loan is useful.
7. Wedding expenses. While it might seem like spending a wack of money on a wedding is unnecessary, the heart wants what the heart wants and a personal loan is a low-cost option to help you cover a few big ticket and smaller expenses, like the wedding dress and venue, as well as the cake and flowers.

Don’t use a personal loan for this

While a personal loan is a flexible solution that can help resolve a number of financial quandaries, there are actually a few things you should NOT use a personal loan for.

1. Starting a business. Firstly, personal loans don’t help you build business credit and if the business fails to make enough to repay the loan, the lender will come to collect from you personally.
2. Basic living expenses. While a personal loan can help with a temporary hardship while you get back on your feet, if you can’t find your financial footing then having another loan to repay could create a more significant problem.
3. Investing. It’s tempting if you feel like your investment could be a sure thing, but the interest rates attached to a personal loan could cut into or even totally negate your returns. It’s just not worth it.
4. Paying for university or college. It’s far better to exhaust all your other options, including student loans, scholarships, and grants before you consider a personal loan because if you qualify for better financing options then it’s wiser to get a loan designed for the purpose you want to use it for.

We hope that this information will help you make an informed decision about whether or not you want to get a personal loan.

Don’t forget that AA Inform is home to a range of useful tools and resources. In addition to our Personal Loan Calculator, you can also check out our Fuel Rate Calculator, and even get multiple home insurance quotes from the AA Insurance Supermarket.