Benefits of personal loans for large purchases

Sometimes a big-ticket item comes along that you need right now. It's common to not have a huge stockpile of cash set aside to cover every major expense that crops up. A personal loan could be a way to spread that big purchase out over a few years of fixed monthly payments.

A personal loan could cover a large purchase without putting it on your credit cards, tapping your emergency fund, or delaying your plans. But it's important to understand what you're getting when you take out a personal loan.

Here are some of the key things you need to know about using personal loans for large purchases and how to decide if a personal loan is right for your situation.

What is a personal loan?

A personal loan is a 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 typically range from $1,000 up to $100,000, and repayment terms typically run two to seven years. A personal loan often fits a major purchase well because you get the full amount upfront and repay it in equal installments over multiple years.

Unsecured personal loans

Personal loans come in two main forms: secured and unsecured. Unsecured personal loans are most common. You qualify based on your credit standing and financial situation, without needing to pledge collateral or something of value to back up the loan.

Another name for an unsecured personal loan is "signature loan." It's called that because your signature guarantees the loan instead of property or a security deposit.

Secured personal loans

Secured loans require you to pledge collateral to the lender as a guarantee that you'll repay the loan. If you don't repay the loan as agreed, the lender could take your collateral.

For instance, a car loan is a secured loan. 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 work in a similar way. For instance, you could borrow against a Certificate of Deposit (CD) account you own. A CD is a type of savings account that sometimes charges penalties if you withdraw the money early. If you use the CD as collateral for a personal loan, the lender could take the CD if you stop making your loan payments.

Types of large purchases you might finance with a personal loan

Personal loans suit many large expenses because they're flexible and convenient. 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

You could use a personal loan to finance home improvements, large appliances, and furniture. The right renovations can make your house or condo more comfortable now and improve its value when you sell.

A personal loan could be a good fit for a renovation because it needs no home equity or appraisal. You get the full amount upfront, so you can pay contractors and buy materials on your schedule. Fixed monthly payments often make it easier to budget for the work.

Vehicles

It's possible to buy a vehicle with a personal loan. You won't need a down payment for cars, RVs, boats, bikes, or other motorized fun. (Most boat and RV lenders want a sizable down payment.)

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. Older, vintage, muscle, or enthusiast car? A personal loan lets you do you.

If the vehicle you want to purchase is eligible for a traditional auto loan, however, consider that route first. A personal loan is often more expensive than a comparable auto loan.

Tiny home or manufactured home

A personal loan could 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. You don't need a down payment or home appraisal.

Make sure you've already explored your mortgage options before going the personal loan route here, though. A secured mortgage or home equity loan is often more affordable than an unsecured personal loan.

Medical procedure

Medical care can be a challenge to cover, 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.

Upfront medical costs are hard to face when your knee is acting up or your teeth are making it hard to eat. You shouldn't have to put off important healthcare, and a personal loan could help you do what's right for your body if your provider doesn't offer an affordable payment plan.

Why use a personal loan for a large purchase?

Why would you choose a personal loan for a big-time buy? Personal loans could be a better fit than credit cards or vehicle loans for some purchases.

A personal loan and a credit card handle a big purchase differently. A personal loan typically gives you a fixed rate, a fixed monthly payment, and a set payoff date. Credit card rates are usually variable, and a balance can linger for years if you only pay the minimum. Personal loans also tend to carry a lower rate than credit cards.

A personal loan isn't the right fit for every purchase. The following advantages and drawbacks that follow can help you decide whether it's a good fit for you.

Benefits of using a personal loan for a large purchase

Not all benefits apply to every situation. A personal loan may offer these potential advantages, depending on your goals:

• Simple online process. Many providers, especially online lenders, use electronic underwriting to handle your application fully online.

• Larger loan amounts. You can find personal loans as large as $50,000, and some lenders offer more, well beyond many credit card limits.

• No down payment or appraisal. A personal loan skips both, which could help when you buy a boat, classic car, or vacation cottage.

• Fixed interest rates. Personal loans typically have fixed interest rates and payments, so your payment stays predictable with a clear payoff date.

• Installment loans. Personal loans are straightforward, so you know your payment and exactly when your balance reaches zero.

• Easily compare rates across lenders. Many providers let you get a rate quote using a soft credit check that doesn't affect your credit score.

Drawbacks to using a personal loan for a large purchase

Not every disadvantage applies to your situation. Consider these potential issues before you decide.

• The rate isn't always the lowest available. A secured loan, such as an auto loan or mortgage, could provide a much lower rate if your purchase qualifies.

• Stricter qualification than secured loans. Unsecured personal loans can be harder to qualify for than secured loans since you're relying only on your credit, debt, and income, rather than collateral. A co-signer or co-borrower may help.

• Origination fees. Personal loans aren't free. Most have origination fees, which lenders usually take from the proceeds or roll into your balance. You'll also pay interest.

• Higher payments. Personal loans often require higher monthly payments than credit cards because loans are set up so you can pay the balance in full during the loan term. Card minimums stretch repayment to earn the card company more money.

How to get a personal loan for major purchases

A personal loan for a major purchase follows a clear path. You can move through these steps at your own pace.

• Add up how much you need to borrow, including tax, delivery, and setup costs, so you request the right amount.

• Check your credit score and gather income and identity documents, such as recent pay stubs and a government ID.

• Prequalify with at least three lenders to check your estimated rates, amounts, and terms for the purchase.

• Compare the offers against your budget and timeline, then complete your application when the numbers work.

What credit score do you need for a major purchase?

Each lender sets its own credit score requirements, so there's no single minimum score for all loans. Lenders weigh your whole financial picture. Many personal loans are available to borrowers across a range of credit.

In general, larger loans require better credit than smaller loans, though you could offset a lower score with more favorable qualifications. For example, if you have low existing debt and a high income, a lower score might not stop you from qualifying for a large loan.

How to prequalify and apply

It's smart to compare quotes from three to five personal loan lenders before you choose one to apply. Pick lenders that use a soft credit inquiry for prequalification. A soft inquiry won't hurt your credit score. Achieve Personal Loans could be a good place to start.

Personal loans could be a smooth, cost-effective way to manage a major purchase. Once you know your numbers and your timeline, you're ready to take the next step with confidence.

Find out if you're eligible through Achieve Personal Loans in minutes.