Personal loans are (usually) unsecured loans that don’t require collateral—something that would be forfeited to the lender if you defaulted on the loan, like a car—and can be used to pay for almost anything. But that doesn’t mean they should be used for just anything. Like any financial tool, a personal loan’s pros and cons should be carefully considered before you use it.

Here are some of the best ways to use a personal loan.

Refinancing credit card debt

Credit card debt is some of the worst debt you can carry because it comes with high interest rates that compound—meaning if you don’t pay off the balance each billing cycle, you’re paying interest on interest. If you have a large amount of credit card debt, it can keep you from reaching your other financial goals and becoming debt free.

One option is to pay off those credit card balances using a single personal loan. This will mean fixed monthly payments and can mean a lower interest rate, and faster repayment schedule or lower monthly payments (the longer the repayment period, the lower the monthly payment but the greater amount paid in interest).

This is a smart move if you can get a much lower rate on the loan than your credit cards, and any origination fees don’t offset this difference. You’ll save money in interest and have a fixed payment each month you can more easily account for in your budget—as long as you don’t go back to using those credit cards!

Consolidating other debts

If you have other types of debt spread across multiple accounts, multiple APRs (annual percentage rates, aka interest), and all with different billing dates, consolidating it into one loan can help you pay less in interest over time and pay on time with one payment. You would take out a personal loan and then pay off your other debts completely with that money.

This really only works to your advantage if your other loans don’t have lower APRs and you can afford the new single loan payment each month.

Home improvements (sometimes)

It’s true that home renovations can add value to your home and make it better fit your lifestyle. The traditional way of financing these projects are with savings (the best route, if you can wait to save the money) or with a home equity loan or home equity line of credit (HELOC). Home equity loans require you to put up the equity in your home as collateral, but they also usually have lower interest rates than unsecured personal loans. You can also see if any repair costs you’re considering are covered by your homeowner’s insurance.

Ideally, you would only use a personal loan to make home improvements or repairs if you had recently purchased the home and don’t have enough equity in it yet to qualify for a home equity loan.

Terms

When comparing personal loans from different lenders, you’ll want to look at the terms of the loan. This includes:

• Origination fees (if they apply) of 1% to 8% of the loan amount (principal), which are added to the principal and then interest charged on that total
• The number of months to repay the loan, usually 12 to 60 months
• The interest rate
• The monthly payment

Unsecured personal loans will have higher interest rates than secured personal loans (those with collateral). Some lenders offer secured personal loans with lower rates, but they will determine what they will accept as collateral from you.

Regardless of the type of personal loan you’re considering, the higher your credit score, the lower the interest rate on the loan. The difference between interest rates can be dramatic. 

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