Is your loan goal important? Yes, here’s how much

Your reasons for taking out a personal loan are just that: personal. So does your loan goal matter? In short, yes.

While most reasons won’t stop you from taking out a personal loan, you should explain why you need the money you’re borrowing. Generally, you can use the loan proceeds however you want, but some lenders have restrictions. Additionally, the purpose of the loan can affect the loan terms you receive.

Why is the purpose of a loan important?

The lender must determine whether the money will be used for something they allow. Debt consolidation, making large purchases or emergency expenses are all common uses for personal loans. But some lenders have specific usage restrictions. The purpose of your loan can also affect the amount, interest rate, and terms you qualify for.

How the purpose of a loan affects your loan

The purpose of your loan can influence these four factors:

• Choice of lender: Some lenders only offer loans for specific purposes. For example, Happy Money only offers loans for credit card debt consolidation. If you are also trying to consolidate other unsecured debts, such as high-interest personal loans, you should look for another lender.
• Loan amount: While some lenders like LightStream offer loans of up to $100,000, these are typically reserved for major purchases or home improvement projects. If you need a loan to pay for a vacation, chances are you won’t get approved for the maximum amount from the lender, even if you have excellent credit.
• Refund term: The purpose of your loan may affect the repayment terms available to you. LightStream offers longer terms of up to 12 years for home improvement loans, but up to seven years for other purposes.
• Interest rates: Many lenders determine personal loan rates based on factors such as your credit score, loan amount, and term. Some also take into account what the money will be used for when developing the rate offer for a loan. Lenders may charge a higher rate if you plan to use the loan for debt consolidation, rather than making a significant purchase with the money.

Common reasons to take out a personal loan

Your borrowing purpose is the reason you want to borrow money. When you are filling out a loan application, you may come across a section that asks why you are applying. Some lenders do this to match you with the right product. They can also use your loan goal to assess risk and assign loan terms.

There are many reasons why you might consider taking out a personal loan, including:

• Child-related costs: If you want to expand your family, a personal loan can cover the costs of fertility treatments, adoption fees or hospital bills from childbirth onwards. While it can also help cover needs after your child comes home, a personal loan is usually best for fixed costs.
• Debt consolidation: You can save money on interest payments by consolidating high-interest debt, such as credit cards, with a personal loan with lower interest rates. The average credit card interest rate is currently about 21 percent. The interest rate on personal loans averages just over 12 percent. If you have excellent credit, you can get the lowest interest rate available, which is often much lower than a credit card.
• Overdue debts: Whether you owe a collection agency or the IRS, you can use a personal loan to pay off the outstanding balance and eliminate the extra stress.
• Emergencies: If you have bills to pay now and don’t want to be late, you can take out an emergency loan to cover those costs. If you lose your job, have your work hours reduced, or have an emergency medical bill, a short-term personal loan can meet your needs.
• Funeral and End of Life Needs: A personal loan can be used to pay for funeral, funeral and associated end-of-life costs when a loved one dies.
• Improvements or repairs to your home: If a water pipe bursts or your air conditioning breaks down, a home improvement loan can pay for the repairs if you don’t have the money and don’t want to use your credit card.
• Education costs for primary and secondary education: If your child attends a private school, a personal loan can help cover the often expensive tuition.
• Major purchases: You can use a personal loan to purchase a recreational vehicle, such as a boat, RV, or private jet, or to improve your quality of life. You can also use a personal loan to spread the cost of purchases that would take a significant portion of your budget, such as dental bills, new equipment, and vet bills.
• Important life milestones: If you’re planning a big move for a new job or helping an adult child pay for a wedding, you may need extra money.
• Vehicle financing: Although not the norm, personal loans can be used to purchase a car. This is especially true if you prefer not to use the vehicle as collateral, such as with a car loan.
• Holiday costs: A regular vacation probably doesn’t justify using a personal loan to cover the costs. But a personal loan may be worthwhile if you want to cover the costs of a vacation to mark an important milestone, such as a honeymoon or anniversary.

Limited use of personal loans

Most lenders allow you to use the loan proceeds however you wish. But if the lender imposes usage restrictions, they likely fall into one of these categories:

• Down payment on a home purchased with an FHA or conventional mortgage: Lenders consider this practice risky because the likelihood of falling behind on loan payments is higher if two loan payments are due. While it may take some time, saving over time in a high-yield savings account is a better alternative to making a down payment for a new home.
• Educational purposes, including tuition and fees: This stems from the Higher Education Opportunity Act of 2008, which sets a series of requirements that lenders offering education loans must meet. Many lenders do not meet these obligations, so personal loans are often disallowed for higher education expenses. However, federal student loans can be a viable option because they have low interest rates, generous loan terms and are available to most students regardless of their credit history.
• Business-related expenses and gambling activities: Not all lenders restrict the use of loan proceeds for these purposes. Still, it’s worth asking, as it’s not uncommon for business expenses or expenses resulting from gambling activities to be prohibited.

When you do not use a personal loan

Personal loans can be a quick, easy way to get the money you need. However, there are cases where they are not the best choice. For example, you can get a much lower interest rate and better loan terms if you need financing for a car and take out a car loan instead. This also applies to the home purchase. A 30-year mortgage gives you a longer loan term, making your monthly payments more affordable.

Consider whether you need the money. If you want to cover the cost of something you want rather than an actual need, you’re better off saving over time to make the purchase. Plus, you keep more of your hard-earned money in your pocket because you don’t have to pay interest.

Be wary of personal loans if you have fair or poor credit. Although some lenders offer bad credit loans, they often come with higher interest rates and fees. The lowest rates on personal loans often go to people with excellent credit and solid financial records.

Most importantly, run the numbers to make sure borrowing makes sense. You can do this using a personal loan calculator. If the monthly payment stretches your budget, it’s not worth the headache, no matter how you plan to use the money.

The bottom line

Your reason for getting a personal loan is your own, 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 one offers the best personal loan rates based on your creditworthiness and needs. If possible, try to compare offers from lenders that offer prequalification, as this will give you a realistic idea of ​​what you qualify for without impacting your credit.

Frequently asked questions

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

  The best reason is exactly what you want to use the loan for. Lying to your lender can lead to legal problems.

• What happens if I use my loan for another purpose?

  Sometimes things change between the time you apply for a personal loan and the time you plan to use the money. Suppose you withdrew the money to pay for a child’s wedding, but the wedding was postponed or canceled. You can use the money for other needs, such as paying off debt or financing other ventures, such as a vacation. But before you use the money, make sure there are no restrictions from your lender. If you are concerned about misuse of the funds, contact your lender to see if the purpose of your new loan is covered.