Borrowing money is rarely cheap, but sometimes it is necessary. How many people could buy a home with cash, for example? One smart use of borrowed money is to replace "bad" debt with "good" debt, and there are more good reasons.

Here are four good uses for a personal loan—and one really bad use.

Debt Consolidation

One loan to rule them all: Instead of multiple smaller payments to various lenders throughout the month, you make one payment on a personal loan at more favorable terms than most or all of the smaller debts you replaced. That is debt consolidation.

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Debt consolidation can reduce the stress you feel managing different payment amounts and due dates. The more bills you juggle, the bigger the chance of missing a payment—and late fees are no joke.

Debt consolidation makes it easier to see the progress you are making as you whittle down your debt.

Escape Expensive Credit Card Debt

Personal loans often have better interest rates than credit cards. The average credit card interest rate today is 20.21% according to data collected by The Balance¹. Compare that to good rates on personal loans, which can be 3.5% to 4.5%, and you see why paying off credit cards is a great use of a personal loan.

Before you tap Make Payment in another credit card app or write another check to a credit card company, consider how much further your money would go if you were paying down a personal loan instead.

Paying $655/month on a $35,000 balance
Credit card 20.21% 138 (11.5 yrs) $55,279
Personal loan 4.5% 60 (5 yrs) $4,132
Personal loan 3.5% 59 (~5 yrs) $3,104

Seeing credit card debt in a table like this paints a stark picture. Credit cards are designed to keep you in debt longer, paying exorbitant interest for years and years. If you make the same monthly payment on a low-interest personal loan instead, you can clear your debt twice as fast and save over $50,000 in interest!

Here is another scenario. Let's say you are paying down $25,000 in credit card debt by making payments of $450. Put that money toward a personal loan instead, and you save $45,000 in interest and get clear of debt in a third of the time.

Paying $450/month on a $25,000 balance
Credit card 20.21% 165 (~14 yrs) $48,918
Personal loan 4.5% 63 (~5 yrs) $3,086
Personal loan 3.5% 61 (~5 yrs) $2,324

Down Payment on a Home

Another good use of a personal loan is to help with buying a home. You can take out a personal loan to make the down payment or cover other expenses, such as a long-distance move.

The average down payment for a newly built home in 2019 was 6%, according to Forbes, which wrote, “There are ramifications for putting less than 20% down.”

If you can swing a 20% down payment, mortgage lenders won't make you carry private mortgage insurance (PMI). This saves you anywhere from 0.3% to 1.15% on your home loan. PMI is usually paid monthly but can be rolled into the cost of the loan. PMI is insurance that you pay to protect the lender, not yourself, and you are stuck paying it until you have attained 20% equity.

Keep in mind that a personal loan would increase your debt-to-income ratio, which mortgage lenders will be considering when you apply for a mortgage.

Emergency Home Maintenance

Protecting your home's value is important. If your roof starts leaking or the plumbing goes south, you might not have enough money in savings to pay for the crucial repairs. Water damage has a way of compounding; what starts as an annoying leak can lead to rot and mold.

Don't lose 10% of your home's value due to neglecting the small stuff. Check out our home maintenance checklist.

A personal loan is a sensible way to fund repairs quickly because the cost of the loan is at least partially offset by the value you preserve in your home. Go beyond repairs and into home improvement (energy-saving windows, adding a deck, new attic insulation) and the personal loan could help you increase equity.

Because a personal loan is an unsecured loan, meaning you do not have to put up an asset as collateral, a personal loan does not carry the risk that you could lose your home in the event of nonpayment.

But Don't Pile Debt on Top of Debt

A very bad use of a personal loan would be to add one more debt to an already heavy load. Your goal should be to consolidate and replace messy, expensive debt with a personal loan that has comfortable payments and terms for yourself. A personal loan is not a good move if you merely want more money to spend irresponsibly.

The independent nonprofit American Credit Counseling Service offers warning signs of financial trouble and has experts to discuss your options.

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