Does your loan purpose matter?
Taking out a personal loan is exactly that — personal. But the reason you take out a personal loan matters to your lender. While most reasons won’t stop you from obtaining a personal loan, you’ll need to provide an explanation for why you need the money you’re borrowing.
Some lenders have restrictions on what you can use your loan for, so you’ll want to make sure your use qualifies before completing an application. Your loan purpose, credit score and credit history will affect whether you’re approved and what rates and terms you’re offered.
Reasons for taking out a personal loan
Your loan purpose is the reason you want to borrow money. When you fill out a loan application, you might come across a section that asks for the purpose of the loan. Some lenders do this to match you with the right product. They can also use your loan purpose to assess risk and assign loan terms.
There are many reasons you may want to consider taking out a personal loan, including:
- Emergencies: If you need to pay bills right now and don’t want to be late, you can take out an emergency loan to cover those costs. If you lose your job, get your work hours reduced or have an emergency medical bill, a personal loan can meet your needs in the short term.
- Debt consolidation: You can save money on interest payments when you consolidate high-interest credit card debt with a personal loan. The average credit card interest rate right now is around 16 percent — versus personal loan interest rates, which average less than 11 percent. If you have stellar credit, you could secure the lowest interest rate available, which is oftentimes much less than that of a credit card.
- Home improvements or repairs: If a water pipe bursts or your air conditioning goes out, a home improvement loan can pay for repairs if you don’t have the cash and don’t want to use your credit card.
- Child-related costs: If you want to expand your family, a personal loan can cover the costs of fertility treatments, adoption expenses or hospital bills that come from labor and delivery. While it can also help cover needs after your child comes home, a personal loan is usually best for fixed costs.
- Major life milestones: If you’re planning a big move for a new job or helping a grown child pay for a wedding, you may need extra cash.
- Funeral and end-of-life needs: A personal loan can pay for the funeral, burial and related end-of-life costs when a loved one dies.
- Large purchases: You can use a personal loan to buy a recreational vehicle such as a boat, an RV or a private jet — or to improve your quality of life. You can also use a personal loan to spread out the costs of purchases that would take a significant chunk out of your budget, such as dental bills, new appliances and veterinary expenses.
Does the reason for taking out a personal loan matter?
Your reason to get a personal loan can impact the type of loan you take out, as well as the loan amount and interest rate you get.
Some lenders have a specific type of borrower they will lend to. For instance, Payoff is a lender that serves only borrowers with credit card debt. If you’re looking for a debt consolidation personal loan, that might be a lender to consider. But if you’re looking for a home improvement loan, you’ll need to look elsewhere.
LightStream has interest rates based on your loan purpose. For instance, as of December 2021, a new auto loan purchase has rates as low as 2.49 percent APR, but personal loans for a kitchen remodel start at 3.99 percent APR. Other lenders have a minimum amount you can borrow depending on your loan purpose.
To make sure you’re getting the best deal, compare interest rates, terms and fees from lenders that are offering personal loans that match your needs. Review credit requirements, such as your credit score, history and income qualifications.
The 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 one offers the best deal based on your needs. Avoid borrowing more money than you need, and find a lender that has a sensible repayment plan.
Frequently asked questions
What’s the best reason to give for a loan?
The best reason is exactly what you plan on using the loan for. Being honest is the only surefire way to make sure you get your funds in a timely fashion and don’t end up running into trouble down the line.
Can I use my loan for anything?
For most lenders, you can use your personal loan for just about anything. Some lenders base your personal loan rate on your loan purpose, like LightStream mentioned above. Some lenders have restrictions on how you can use your loan. For instance, some might not allow you to use funds to pay for higher education or business purposes.
What happens if I use my loan for a different purpose?
Sometimes things change from when you applied for a personal loan to when you plan to use the funds. Say you took out the money to pay for a child’s wedding, but the wedding got postponed or cancelled. You could use the funds for other needs, like paying down debt or funding other ventures, like a vacation. But before you use the funds, make sure there are no restrictions from your lender on how you can use those funds. If you’re worried about mishandling the funds, contact your lender to see if your new loan purpose is covered.