The reason for taking out a personal loan doesn’t affect your interest rate

2 min read

Dear Personal Loan Adviser,
When I look at the online sites for personal loan applications, I get confused by the categories the lenders offer for why I’m borrowing the money.

Why would I use a personal loan versus a car loan, for example? Why wouldn’t I use a home equity loan to finance home improvements instead of a personal loan? Does the category I pick for the loan influence how much I can borrow and the interest rate?
— Karly Curious

Dear Karly,
The answer is that most borrowers don’t use personal loans for car purchases or home improvements. In a personal loan blog post using statistics provided by online lender Avant, only 5% of its borrowers used a personal loan to finance a home improvement. Car purchases didn’t show up in the statistics as a reason consumers took out a personal loan.

RATE SEARCH: Compare rates on personal loans to find the best.

Mortgage lenders want you to have some skin in the game, so they won’t do high loan-to-value (LTV) home equity loans or lines of credit (HELOC). Need a new roof, and you don’t have enough equity to take out a home equity loan? That’s when you consider a personal loan.

Getting closer to being debt-free

The most popular reason to borrow money using a personal loan is for debt consolidation. Restructuring your debt to lower the overall interest expense lets more of your monthly payment go toward the repayment of principal, getting you that much closer to being debt-free.

Lenders will take into account the loan amount you request in the decision to approve the loan. Lenders also have proprietary credit-scoring models that may consider the reason why you’re borrowing the money in the decision to approve your credit.

Since the loans are unsecured, lenders typically can’t control for whether you actually use the money for the reason you stated when you apply.

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