You know how personal loans can feel like a financial Swiss Army knife? You can use them for just about anything—home projects, big purchases, consolidating debt. But just because you can use a personal loan for something doesn’t mean you should. In fact, some lenders flat-out ban certain uses, like paying for college or making a house down payment.
So, what else falls into the “probably not a good idea” category? We’re covering eight expenses that you might want to think twice about financing with a personal loan—plus better alternatives to consider. Because at the end of the day, a loan is still debt, and the last thing you want is to make your financial situation harder instead of easier. Let’s get into it.
Table of Contents
1. College expenses
⭐ Our recommended alternative: Federal or private student loans
The best way to pay for college is with federal student loans, not personal loans. The reason is that there is no credit check for undergraduate federal student loans, and you don’t have to make payments while you’re in school. If you need additional ways to pay for college, private student loans are still preferable to personal loans, but private student loans often require a cosigner.
Additionally, federal student loans come with many protections and repayment plans that make it easier to afford payments when you graduate. Many private student loan lenders also have perks, like the ability to skip a payment (private lender Earnest offers this) or make interest-only payments while in school. On the other hand, personal loans tend to have higher interest rates than federal or private student loans.
Consider repayment options, too. When you take out a personal loan, you have to make payments immediately, which can be challenging for a student with a limited budget. So, before taking out a personal loan, exhaust all other options, including federal grants, scholarships, work-study programs, and working while taking classes part-time.
2. Starting a business
⭐ Our recommended alternative: Business loan, business credit card, or business grants
If you’re starting a business, it might be tempting to take out a personal loan to help fund it. However, personal loans tend to have short repayment terms, and that can make it challenging to cash flow your new business.
Additionally, when starting a business, it’s important to establish business credit, especially if you’ll need funding in the future. SBA loans, for example, require a business to have good business credit to be eligible for one. To establish business credit, open a business credit card.
You can also apply to business grants, start-up competitions, and start-up accelerators that can provide funding, support, and guidance from experienced business owners. To get funding for your business, whether it’s a grant or a loan, you’ll likely need to register your business and have a business plan to be considered.
3. Wedding
⭐ Our recommended alternative: High-yield savings account, personal savings, family gifts
Getting married is an incredibly exciting milestone, but the average wedding in the United States now costs $33,000. So, it’s no surprise many people consider using a personal loan to help pay for a wedding. There are even several lenders that offer personal loans specifically for weddings.
However, a better alternative would be to use personal savings or family gifts to pay for it. Debt can create problems in a new marriage. According to research published in the Society for Consumer Psychology journal, the more financial stress couples feel, the less they communicate.
So, adding a monthly payment to pay back a wedding loan can negatively impact your cash flow and your marriage. A better option is to take the time to save for a wedding or speak to loved ones about contributing to the cost of your special day. Additionally, consider alternatives like having a smaller wedding or eloping.
4. Monthly expenses
⭐ Our recommended alternative: Side hustles, budgeting
Research from the Federal Reserve showed 65% of adults said price increases due to inflation made their personal finances worse in the past year. If you’ve made a trip to the grocery store lately, chances are your monthly expenses have been steadily increasing. However, taking out a personal loan to cover monthly expenses is not a good long-term strategy.
Personal loans come with monthly costs, and if you’re struggling to afford your monthly bills, adding a new one won’t be helpful, even with a temporary influx of cash initially. The best alternative to taking out a personal loan is to either earn more or budget carefully.
Tracking your spending can help reveal certain areas of your budget where you overspend. Additionally, adding extra hours at work, getting overtime, or starting a side business can provide extra income that can make affording these new, increased costs a little easier.
The type of loan you take out really comes down to the purpose of the loan. There are certain types of loans and financing options that work well for some things and poorly for others. Some major things to consider are the interest rate for the loan you are requesting, the time period you must pay it back in, and whether or not there are any prepayment penalties. Ideally, depending on the interest rate and your cash flow, you want to pay down your loans and get rid of that burden as quickly as you can. A personal loan is not a “healthy” type of debt like a mortgage, student loans, or car loans.
5. Vacations
⭐ Our recommended alternative: High-yield savings account
Personal loans are best for intentional purchases, like renovating your home before listing it for sale to get a better price. Unfortunately, a vacation is a want instead of a need. For that reason, it makes more sense to save for your vacation in a high-yield savings account over time and only take one when you can afford it.
A 2024 survey showed that 47% of Americans said they couldn’t afford a vacation, but nearly half of those respondents said they’d travel anyway. Many people go on vacation to relieve stress, but coming home to debt as a result of a vacation can create more financial problems.
Keep in mind that vacations don’t have to be lavish. Driving to a new city and staying for the weekend can also promote feelings of relaxation and happiness. Plus, saving for it ahead of time by putting portions of your paycheck in a savings account earmarked for travel, can help you to enjoy your trip completely guilt-free.
6. House down payment
⭐ Our recommended alternative: Personal savings, family gift, or first-time homeowners program
To get approved for a conventional home loan, you’ll need a good credit score, a low debt-to-income ratio, and a down payment. Most lenders, including Fannie Mae, don’t allow borrowers to use a personal loan for a down payment.
Personal loans increase your debt-to-income ratio and signal to lenders that you may not be financially prepared for homeownership. It’s best to use personal savings, a family gift, or down payment assistance from a first-time homebuyer program.
Some loans, like FHA loans, require smaller down payments of 3.5%, making homeownership more accessible. However, if you have less than 20% equity, you’ll need to pay primary mortgage insurance (PMI), adding to your costs.
Buying a home is a major financial step, so having enough savings for maintenance and a down payment without added debt is crucial. Avoiding personal loans for your down payment ensures a stronger financial foundation.
7. Investing and cryptocurrency
⭐ Our recommended alternative: Retirement accounts, brokerage accounts
It’s never wise to invest with money you’ve borrowed. Instead, invest in work-sponsored retirement plans or brokerage accounts with money you’ve earned. The stock market, by nature, rises and falls. Cryptocurrency is also highly volatile and much less regulated.
If you borrow money hoping to make money with it, and you aren’t successful, you still have to pay back your personal loan in addition to the money you lost. Ultimately, investing wisely means having a plan and a long-term strategy to see your money grow over time.
While investing always comes with risks, research shows that the stock market over the past 100 years has had a return of approximately 10%. However, that return includes years when the market was down and years when it flourished. Trying to time the market by investing with a loan is a risky strategy that can put you in a much worse financial situation.
I often recommend personal loans for consolidating higher-rate debt. It’s a next-best solution for consolidating credit card debt if a 0% balance transfer is not available. The first thing to ascertain is whether or not your cash flow after taking out the loan is strong enough to pay it back as it is required to be. Having a delinquency here can be incredibly harmful over the long-term.
8. Medical expenses
⭐ Our recommended alternative: HSA/FSA, medical/hospital financing
Health emergencies can be financially daunting. A recent survey found that 41% of adults have some type of medical or dental debt.
If you must have unexpected surgery, take a trip to the emergency room, or get a diagnosis that will require significantly more trips to the hospital, you might think a personal loan is the only option to cover the cost. However, hospitals offer payment plans as well as reductions on bills if you qualify.
Working out a repayment plan with your hospital or doctor’s office is better than taking out a personal loan with a higher interest rate. Another option is to use your HSA or FSA if you have one. These accounts have tax benefits as well. If you don’t have access to an HSA or FSA, starting an emergency specifically for medical expenses can help you be prepared to pay for costs as they arise.
Ultimately, using resources like hospital payment plans or emergency funds can help prevent you from getting further into debt while you manage health issues.
