Benefits of personal loans for large purchases
By Gina Freeman
Reviewed by James Heflin
Sep 19, 2023
Read time: 5 min
Personal loans can be a great way to cover large purchases.
Speed and flexibility are two of the biggest advantages of personal loans.
Paying with a personal loan can make your purchase happen sooner and could save you money.
Sometimes a big ticket item comes along, and it’s normal if you don’t happen to have a huge stockpile of cash set aside to cover it. For most of us, financial readiness means knowing your options and putting yourself in the best position to choose the right option for your situation. In some situations, a personal loan is a great way to cover a large purchase so that you don’t have to put it on your credit cards, tap into your emergency fund, or put your dreams on hold.
Here’s what you need to know about how and when to cover a large expense with a personal loan.
What is a personal loan?
A personal loan is a very flexible form of borrowing. Personal loans are installment loans, which means you borrow a lump sum and pay it off over time, usually with equal monthly payments. Loan amounts can range from $1,000 to $100,000, and repayment terms can run between 12 months and twelve years.
There are two main forms of personal loans: secured and unsecured. Unsecured personal loans are most common. You qualify based on your credit standing and financial situation. Another name for unsecured personal loans is “signature loan.”
Secured loans require that you offer something valuable to the lender as a guarantee that you’ll repay the loan. For instance, a car loan is secured. The thing of value is the car. If you don’t repay the loan, the lender has the right to sell the car. Secured personal loans are similar. For instance, a person could borrow against a Certificate of Deposit (CD) account that they own. A CD is a type of savings account that sometimes charges penalties if you withdraw the money before a certain amount of time has passed.
Types of large purchases you might finance with a personal loan
Personal loans can be ideal for large purchases because they are fast and flexible. You can finance almost any legal purchase with a personal loan, and you don’t need a down payment. Here are some popular uses for personal loans.
Home improvements, large appliances, and furniture are among the most popular purchases financed with personal loans. You don’t need home equity to borrow with a personal loan. The right renovations can make your house or condo more comfortable now and improve its value when you sell.
If used correctly, it can be cheaper to use a personal loan to pay for a trip than to save up for it. For instance, many cruise lines offer discounts of 50% or more if you book and pay a year in advance. So if you’re planning to pay off your trip over the course of one year, you could save money if you buy your vacation now and repay the loan over 12 months instead of saving for 12 months and paying full price later.
It’s possible to buy a vehicle with a personal loan. One advantage to paying for cars, RVs, boats, bikes, and other motorized fun with a personal loan instead of traditional financing is that you won’t have to make a down payment. (Most boat and RV lenders want 10% to 30% down.)
You’ll also have more flexibility than with an auto loan if the vehicle you want is older, needs a little work, or isn’t typical. Classic car? Vintage car? Muscle car? Enthusiast car? A personal loan lets you do you.
Tiny home or manufactured home
A personal loan can help you say goodbye to your landlord and get into an affordable home. Or pop up a weekend cabin on that lot your family has owned for ages. Or finance an ADU (additional dwelling unit) for rental income. No down payment or home appraisal is required.
Paying for medical care can be a challenge, even if you’re insured. If you need non-emergency surgery, providers will likely want upfront payment—at least for the part your insurer won’t cover. That’s not what you want to hear when your knee is acting up, or your teeth are embarrassing you. You shouldn’t have to put off important healthcare, and a personal loan can help you do what’s right for your body.
It takes a lot of lead time to pull off a wedding with all the bells and whistles. The top venues, caterers, and entertainers get booked early, and they typically want 50% of their fee up front. If funds are tight, a personal loan for a wedding may help you score that venue everyone wants and nail down your favorite band.
Why use a personal loan for a large purchase?
Why would you choose a personal loan for a big-time buy? Personal loans can be better than other borrowing options like credit cards or vehicle loans. However, they aren’t right for all purchases. Here’s a list of potential advantages and drawbacks when financing a large purchase with a personal loan.
Benefits of using a personal loan for a large purchase
Not all benefits apply to all situations. These are potential advantages a personal loan may offer depending on your goals.
Faster funding. Personal loan providers, especially online lenders, usually have electronic underwriting systems. They can often process your information and fund loans in just a day or two.
Larger loan amounts. You might bump up against your credit card limits, but it’s easy to find personal loans as large as $50,000. Some lenders offer even larger loans.
Down payment and appraisal not required. That’s a real advantage when you’re buying a boat, classic car, or vacation cottage.
Fixed interest rates. Most personal loans have fixed interest rates and payments. That makes budgeting your payments easier. Also, personal loan interest rates tend to run lower than those of credit cards and some specialty loans.
Installment loans. Personal loans are straightforward and predictable. You know what your payment is and how long it will take to zero your balance. Installment loans can help your credit score by improving your credit mix. And making on-time payments on an installment loan creates good credit history.
Easy to prequalify. Many personal loan providers offer loan prequalification with no hard credit check and no damage to your credit score.
Drawbacks to using a personal loan for a large purchase
Not all disadvantages apply to every situation—these are just potential issues that you might need to consider.
The interest rate isn’t automatically the best every time. Auto dealers, for instance, may offer low promotional interest rates on vehicles they want to move off the lot. And if the car you want falls into that category, you could snag a below-market loan at the dealership.
Qualifying can be harder. Personal loans are unsecured, which can make them a little harder to qualify for compared to similar secured loans. You may be able to improve your chances of qualifying by adding a co-signer or co-borrower.
Costs. Most borrowing options (not just personal loans) have costs. For a personal loan, the charges usually come out of the loan proceeds or are rolled into your balance. You’ll also pay interest.
Higher payments. Personal loans often require higher payments than credit cards, even when their interest rates are lower. That’s because credit cards come with low minimum payments designed to stretch out your repayment and earn more interest for the issuer. Personal loan payments are calculated to pay off your balance within the term that you select. That keeps your interest costs down, but the payments might give you sticker shock.
Personal loans can be a smooth and cost-effective way to manage large purchases. If you’ve got a big buy in your near future, these versatile loans are worth considering.
Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.
James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.
Frequently asked questions
When is a personal loan better than a car loan?
Personal loans can be better than auto loans when you don’t want to make a down payment, or you’d like more time to repay than an auto lender offers. Personal loans can be a better choice for older cars or enthusiast vehicles that auto lenders shy away from. Personal loan interest rates can be lower than auto loan rates depending on the lender and your borrower profile.
What is the maximum personal loan amount?
You can find personal loan providers advertising loans of up to $100,000. Your income and credit rating would have to support a higher loan amount.
Why do personal loan lenders ask about the loan’s purpose?
If personal loans can be used for anything, why do lenders care about your loan purpose? There are two main reasons. First, there may be uses the lender doesn’t allow—for instance, refinancing a student loan. Second, the loan purpose may affect the risk of the loan. There might be a difference between the risk of starting a business vs funding a home improvement, for instance.