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4 Smart Ways to Use a Personal Loan

Reading time: 4 Minutes

November 21st, 2022

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A personal loan can be a powerful financial tool for accomplishing your goals. Used wisely, a personal loan can be a great way to make large purchases, save money and consolidate high interest debt.

But first, it's important to understand exactly how a personal loan works and how you can use it to your advantage.

Personal Loans 101

Taking out a personal loan may sound intimidating at first, but the basics are simple. You borrow money from a bank or credit union and repay it with fixed-amount monthly installments, plus interest, over a set period of time until the debt is completely repaid. Unlike other specific types of lending like mortgages or auto loans, you can use personal loans for whatever you need, such as buying a couch, paying off an unexpected hospital bill or even helping pay for home renovations.

Most personal loans are unsecured, which means there's no collateral required. With a secured loan, collateral acts as a kind of insurance policy for the lender: If you don't repay the loan, they can take possession of the collateral. For instance, with an auto loan or a mortgage, the lender can take away your car or home if you default.

How to Apply for a Personal Loan

In order to acquire a personal loan, you'll need to go through an application process with the lender of your choice. You may be asked to provide W-2 forms, tax returns and pay stubs. The lender will look at your credit report and your debt-to-income (DTI) ratio, which measures the total amount you owe every month against the total amount you earn. Of course, you are more likely to be approved for the loan if you have a good credit score.

You should know that when a lender looks at your credit report with the purpose of assessing your creditworthiness, a hard inquiry will remain on your credit report for two years. That means that while you can shop and apply to more than one lender, you should do so in a short time frame to minimize the impact of hard inquiries. Most credit score models will count these multiple inquiries as a single event if they occur within a short window of time.


Smart Ways to Use a Personal Loan

1. Debt Consolidation

A personal loan typically has lower interest rates than a credit card, so if you're carrying an ongoing credit card balance, you can likely save money on interest charges by taking out a personal loan and paying off your credit cards. You may lower the amount of interest you owe, have the convenience of a single monthly payment and most likely pay off your total debt in a shorter period of time (Think of those notices you see on your credit card statement showing how long it would take to pay off your balance making only the minimum required payment.).

2. Home Improvement

In the Islands, repairing the roof or fixing up termite damage can be a normal part of keeping your home in good shape. And think about how much more useful and enjoyable your place could be if you upgraded and modernized one or two of its rooms, such as the kitchen or the bathroom. Taking out an unsecured personal loan can be a straightforward, accessible way to invest in your home, boosting its value and increasing your equity. And, if you're on a timeline, getting approved for a loan can be quicker than other alternatives such as home equity lines of credit, mortgage refinances or home equity loans (though these types of loans may be tax deductible).

3. Large Purchases

If you need to make a large purchase such as an engagement ring or couch, a personal loan can help you break it down into smaller payments over time. This can be helpful as the cost can be more manageable and the interest rates likely lower than if you'd used a credit card for the purchase. And, of course, you'll be able to enjoy the item now, rather than waiting until you've saved up enough money.

4. Emergency Medical Expenses

We don't like to think about medical emergencies, but accidents and illnesses can happen. And when they do, it's usually when you least expect it. While a good health insurance policy is a must, it can be reassuring to know that you can use a personal loan to help pay off medical debt, high deductibles and out-of-network charges.


  • Remember, late or missed payments can lower credit scores. Automating payments each month can help keep you on track. If you're unable to pay your bills on time, consider other options.
  • Look carefully at the fees that can be associated with personal loans, such as late payment fees, check processing fees, non-sufficient funds (NSF) fees and annual fees before you make any decisions.
  • You can pay down personal loans faster and save on interest by making more frequent payments or making larger payments when you get a bonus or tax refund. But make sure your loan terms don't include a prepayment penalty, which can ding you if you pay down the loan too quickly.
  • Compare the annual percentage rate (APR) of your personal loan while shopping around. The APR will include the interest rate and certain fees.

Ready to get started? Apply online for a Bank of Hawaii personal loan today, or call 808-643-3888.

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