When you apply for a personal loan, you’ll be asked about how you’ll use the funds. But what happens if you later change your mind about the purpose of your personal loan?
Even if your plans change, that doesn’t mean your loan situation will, too. Find out what happens when your personal loan’s purpose changes.
What’s my personal loan’s purpose?
Personal loans can be used for various reasons, such as to pay off medical expenses, consolidate credit cards, or stay up-to-date on bills.
Your personal loan’s purpose is how you plan on using the funds. Lenders will request this information when you apply, so you should have an idea of why you want a loan before applying for one.
Why do banks ask for the purpose of a personal loan?
Richard A. Muskus Jr., president of Patriot Bank, said lenders ask for your personal loan’s purpose to cover themselves for any liabilities.
“[It’s] primarily to assess whether the loan represents an acceptable and advisable risk for the bank,” Muskus said.
Even though one of the major reasons to get a personal loan is to consolidate debt, if banks determine you’re too much of a liability, they could decline your loan application.
“If someone is taking out a loan to pay off an extravagant credit card bill or to invest in a dubious venture, the bank may not want to make that loan,” he said.
Lenders can’t monitor how you spend your money, though. It’s up to you to spend the funds responsibly. For example, avoid spending your loan money on stock market investments or a vacation.
Does your reason affect your approval rate?
Your reason — or the one you changed it to — won’t impact your loan approval or your loan once you have it. Be careful which loan you choose, though. A personal loan might not be the right product for you.
“Typically, borrowers would not use a high rate personal loan to purchase a car or make material home improvements,” Muskus said. “There are other loan types that have more advantageous rates for those purposes.”
If you need money for major purchases, such as a car or home, consider loans offered specifically for those items. You can finance a car with an auto loan and make home improvements with other kinds of loans.
“With auto loan rates being much lower than personal loan rates, you would not take out a personal loan for an auto purchase,” Muskus said. “Home equity lines [of credit] or loans would also come into play in most cases for material home improvements due to rates versus personal loans as well as associated possible tax benefits.”
What happens if your personal loan’s purpose changes?
Banks, credit unions, and online lenders ask about your personal loan’s purpose but don’t have any way of making sure you use the funds appropriately. However, they might have some restrictions on how you can spend the money. For example, Upgrade doesn’t allow personal loans to be used for college costs.
Since lenders can’t track your spending, they rely on the honor system. But if you take out a personal loan for credit card consolidation and suddenly need the money for medical bills, that’s OK. Muskus said your personal loan funds are for your own use.
“Customers are required to state what the particular use is, but the ability to track the actual application of funds is not a metric that’s applied,” he said. “When a customer states a loan use or purpose there are typically no consequences if the reasons are amended. However, it is always assumed that use of funds be for a legitimate and legal use.”
It’s OK if your circumstances change
While you might worry about using your loan money for something else, you don’t need to freak out. As long as you continue to make payments on time and in full every month, you shouldn’t have any issue with how you use your loan.
If you’re concerned about how you’re using loan funds, you can contact your lender and ask. In some cases, a lender might disagree with the new purpose for your personal loan. So keep yours up-to-date on any developments if you’re unsure. That way, you won’t have any qualms about spending your funds.
Interested in a personal loan?
Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. .
|7.73% – 29.99%||$1,000 – $50,000|
|5.90% – 15.24%1||$5,000 – $100,000|
|5.96% – 35.97%*||$1,000 – $50,000||Visit Upgrade|
|8.00% – 25.00%||$5,000 – $35,000|
|4.99% – 29.99%||$10,000 – $35,000||Visit FreedomPlus|
|5.99% – 18.99%*2||$5,000 – $50,000||Visit Citizens|
|15.49% – 34.49%||$2,000 – $25,000||Visit LendingPoint|
|5.99% – 35.89%||$1,000 – $40,000||Visit LendingClub|
|5.49% – 18.24%||$5,000 – $75,000||Visit Earnest|
|9.95% – 35.99%||$2,000 – $35,000||Visit Avant|
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