Does Your Loan Purpose Matter? Yes — Here’s Why

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When applying for a personal loan, lenders will ask why you need the funds — and your answer matters. While many lenders offer personal loans that can be used for any (legal) purpose, some place restrictions on how funds can be used or adjust rates based on your intended purpose.

Understanding how loan purpose affects your approval odds, loan amount, interest rates and terms can help you get the best possible deal. Here’s what to know before you apply.

Why does loan purpose matter?

Debt consolidation, emergency expenses and home improvement are all common uses for personal loans. However you intend to use your loan, be prepared to disclose your loan purpose to the lender — it’s often a required part of the application process.

The loan purpose matters because the lender needs to determine whether the money will be used for something it allows. Some lenders may have specific restrictions as to what funds can be used for. The purpose of your loan may also impact the amount, interest rate and terms you qualify for.

Lender choice

Some lenders only offer loans for specific purposes. For instance, Happy Money specializes in loans for credit card debt consolidation. This can be a problem if you are trying to consolidate other unsecured debts, like a high-interest payday loan. In this case, you’d have to consider another lender.

Loan amount

Your loan purpose may impact the amount you’re allowed to borrow.

While some lenders, like LightStream, offer loans of up to $100,000, these large amounts are typically reserved for major purchases or home improvement projects. If you want to pay for a vacation (or other non-necessity) with your loan, you’re unlikely to qualify for a lender’s maximum amount — even with excellent credit.

Repayment term

Like loan amount, the repayment terms that are available to you may depend on your loan purpose.

For example, LightStream offers terms of up to 12 years for home improvement loans, but limits terms to up to seven years for other purposes. Before accepting a loan, review the repayment terms carefully to ensure you can comfortably afford the monthly payments.

Interest rates

When comparing lenders, you will quickly find that interest rates vary significantly. Your personal loan rate will be based on factors like credit score, income, loan amount and term.

However, some lenders will also consider your borrowing purpose when determining your rate offer. Lenders may charge a lower rate if you plan to use the loan for debt consolidation versus making a significant purchase with the money.

What can I use a personal loan for?

Personal loans are versatile and can cover a wide range of expenses. Debt consolidation remains the most popular use for personal loans because they help borrowers save money by consolidating high-interest debt, like credit cards, with a personal loan with lower interest rates. If you have stellar credit, you could secure the lowest interest rate available, which is often much less than a credit card.

Other common personal loan uses include:

• Emergency expenses, like medical bills or urgent car repairs
• Home improvements or major repairs
• Monthly bills
• Moving expenses
• Wedding costs
• Vacation funding
• Large purchases, such as appliances, RVs or boats
• Funeral costs
• IVF and other fertility treatments
• Adoption expenses
• Pet emergencies or vet bills

Restricted personal loan uses

While personal loans can be used for nearly any purpose, lenders typically impose a few common restrictions. In most cases, you can’t use a personal loan to finance:

• Down payment on a home using an FHA or conventional mortgage: This is risky, as the likelihood of falling behind on loan payments is higher with two payments to manage. Saving money over time in a high-yield savings account is a better way to create a down payment fund.
• Educational expenses and tuition: The 2008 Higher Education Opportunity Act restricts the types of education loans that lenders can issue, so personal loans for college are often disallowed. Federal student loans could be a viable option with their low interest rates, generous loan terms and wide availability, regardless of credit history.
• Business-related expenses: Personal loans are intended to be just that: personal. Funds often may not be put toward your small business. While some lenders don’t explicitly prohibit this use, it’s best to use a small business loan for business-related expenses.
• Gambling or speculative investments: Gambling is risky, and lenders’ goal is to avoid risk. Other high-risk speculative investments — like cryptocurrency, stock market trading or IPOs — are also typically prohibited.

Bottom line

Your reason for getting a personal loan is yours, but your potential lender can determine important loan factors based on that reasoning. Regardless of why you need a personal loan, compare lenders to see which offers the best personal loan rates based on your credit and needs. To find the best deal, get prequalified with multiple lenders, as this will give you a realistic idea of your eligibility without impacting your credit.

Frequently asked questions

• What is the best reason to give when applying for a personal loan?
  

  The truth. Misrepresenting your loan purpose can lead to loan denial, future legal issues or account closure.

• What happens if I use my loan for a different purpose?
  

  If your plans change after receiving the funds — for example, using the money for debt consolidation instead of a wedding — check your lender’s policies. Some lenders allow flexibility, while others impose restrictions. The safest course is to contact your lender to disclose the change in loan use and ask for next steps.

• Does loan purpose affect approval odds?
  

  Yes. Some lenders base loan approvals, amounts or terms on how you plan to use the funds. Your loan purpose can also influence your interest rates, affecting the overall cost of borrowing.