Loan Purpose: Does It Impact Your Eligibility?

When applying for a loan, the purpose of the loan matters because the lender needs to determine whether the money will be used for something it allows. While most lenders allow you to use the loan proceeds however you see fit, some lenders have specific restrictions on how you can use the funds. The purpose of your loan may also impact the amount, interest rate, and terms you qualify for. Some lenders only offer loans for specific purposes, such as credit card debt consolidation, while others offer an array of personal loan products tailored to specific uses, such as home improvement loans, medical and dental loans, wedding loans, or IVF loans.

Lenders' criteria and restrictions

Lenders have different criteria and restrictions when it comes to loan purposes. While some lenders allow borrowers to use the loan proceeds for any purpose, others have specific restrictions on how the funds can be used. It is important to note that the loan purpose can impact the approval, loan terms, interest rates, and the loan amount offered.

Some common restrictions that lenders may impose include:

• Down payment on a home: Lenders may restrict the use of a personal loan for the down payment on a home, especially if it is purchased with an FHA or conventional mortgage. This is because the likelihood of falling behind on loan payments is higher with two loan payments to manage.
• Educational expenses and tuition: Due to the 2008 Higher Education Opportunity Act, lenders offering education loans must meet certain criteria. Many lenders do not meet these requirements, so personal loans are often disallowed for higher education expenses. Federal student loans or specialised education loans are better options in this case.
• Business-related expenses: Some lenders may restrict the use of personal loans for starting a business or other business-related expenses.
• Investing: Lenders may prohibit using a personal loan for investing or purchasing assets.
• Paying off other debts: Lenders may have restrictions on using a personal loan to pay off other debts, such as credit card debt or another student loan.
• Vacation expenses: While some lenders may allow it, taking out a personal loan for a vacation is generally not recommended as it may not be approved for the lender's maximum amount, even with excellent credit.

It is important to note that these restrictions may vary depending on the lender and the type of loan. Some lenders offer loans for specific purposes, such as debt consolidation or home improvement loans, while others provide more flexible personal loans that can be used for a variety of purposes. When applying for a loan, it is essential to review the lender's criteria and restrictions to ensure that the loan purpose aligns with their allowed usage.

Loan amount and interest rates

The purpose of a loan can impact the loan amount and interest rates. Lenders may have restrictions on how the money they lend can be used. For example, a lender may not allow the proceeds of a personal loan to be used to pay for college tuition, repay another student loan, purchase a home, or start a business.

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

The loan purpose can also influence the interest rate offered. While many lenders make interest rate determinations based on factors like your credit score, loan amount and loan term, some also consider 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 versus making a significant purchase with the money. For example, LightStream offers loans of up to $100,000 for large purchases or home improvement projects, but if you need a loan for a vacation, it’s unlikely you will get approved for the lender’s maximum amount, even with excellent credit.

The purpose of the loan can also determine the loan rates and the amount you can borrow. Some lenders allow you to borrow more (and at lower rates) for certain loan purposes. For example, LightStream offers longer terms of up to 12 years for home improvement loans but up to seven years for other purposes.

The best reason for a personal loan is debt consolidation, as you’re not putting more strain on your finances by taking on additional debt. Plus, you could save money on interest with debt consolidation, putting you in a better financial position in the long run.

Loan approval and terms

The purpose of a loan can impact whether a lender approves it or not. Lenders want to know how you plan to spend the loan to ensure it isn't for a purpose they don't allow. For example, many lenders do not approve loans for gambling or speculative investments. Lenders also tend to view loans for emergencies, debt consolidation, home improvements, or education favorably.

The loan purpose can also influence the loan amount, interest rate, and loan term. For example, a lender might offer better rates and longer terms for home improvement loans than for debt consolidation loans. Lenders may also set interest rates based on the loan amount, term, and the creditworthiness of the applicant.

While personal loans are unsecured and can be used for a wide range of purposes, it is best to be transparent with the lender about your intentions. Being honest is the only way to ensure you receive the funds you need on time.

Before taking out a loan, it is critical to determine the repayment term, as this can affect the cost of your monthly payments. For example, LightStream offers longer terms of up to 12 years for home improvement loans but up to seven years for other purposes.

Loan purpose and risk

The purpose of a loan is the reason an applicant wants to borrow money. While there are many acceptable uses of personal loan funds, including debt consolidation, paying for a large purchase, or covering the cost of a home renovation, the loan application will likely include a section asking why the applicant is requesting the loan.

Lenders need to determine whether the money will be used for something they allow. Some lenders may have specific restrictions on what funds can be used for. For example, lenders may not allow the proceeds of a personal loan to be used to pay for college tuition, repay another student loan, purchase a home, or start a business.

The purpose of the loan can also impact the size of the loan, the interest rate, and the loan term. Some lenders focus on loans for certain purposes, such as credit card consolidation, while others offer an array of personal loan products tailored to specific uses, such as home improvement loans, medical and dental loans, wedding loans, or IVF loans.

Some lenders may set interest rates based solely on the loan amount, the loan term, and the creditworthiness of the applicant. Other lenders might use those factors and have interest rate ranges for different loan purposes. For example, a lender might offer better rates (and longer terms) for home improvement loans than they do for debt consolidation loans.

The purpose of a loan can also help determine the risk associated with the loan. Lenders may view certain loan purposes as riskier than others and may charge a higher interest rate or impose other restrictions. For example, using a personal loan for a down payment on a home is considered risky because the likelihood of falling behind on loan payments is higher with two payments to manage.

Loan alternatives

The purpose of a loan can determine the loan rates, the amount you can borrow, and what lenders you can work with. Some lenders allow you to borrow more (and at lower rates) for certain loan purposes. For example, a lender might offer better rates (and longer terms) for home improvement loans than they do for debt consolidation loans.

Lenders will also want to know how you intend to spend the loan to make sure it isn't for a purpose they don't allow. Some lenders only offer loans for specific purposes. For instance, Happy Money only offers loans for credit card debt consolidation.

• Federal student loans: These are a good alternative to personal loans for college, which are often disallowed. They come with low-interest rates, generous loan terms, and wide availability, regardless of credit history.
• Fixed-rate loans: Most borrowers choose fixed-rate mortgages. Your monthly payments are more likely to be stable with a fixed-rate loan, so you might prefer this option if you value certainty about your loan costs over the long term.
• Adjustable-rate mortgages (ARMs): ARMs offer less predictability but could be cheaper in the short term. You might want to consider this option if you plan to move again within the initial fixed period of an ARM.
• Qualified mortgages: These are mortgages that follow certain criteria and are verified by the lender. They are generally less risky and less expensive than non-qualified mortgages.
• Non-qualified mortgages: These are riskier and more expensive and are used when loans have unique characteristics that make them ineligible to be a qualified mortgage. They are sometimes marketed towards self-employed borrowers or borrowers without Social Security numbers.
• Special Purpose Credit Programs: These are loans from private lenders for low- to middle-income borrowers in targeted communities.

Frequently asked questions