Are There Consequences for Changing the Purpose of Your Personal Loan?
18:20 17 September 2019
According to Experian, personal loans are the fastest-growing consumer debt. According to data from the leading credit bureau, outstanding personal loan debt hit a whopping $291 billion in the last quarter of 2018.
This represented an 11.9% rise in the same period in 2017. In fact, the rise is twice that of credit cards, which stood at 5.9%. Why are many Americans taking out personal loans? Well, the reasons vary and the initial reason may change along the way after receiving the funds.
Lenders will want to know the purpose of the loan but what will happen if you change the purpose afterward? Read on to find out.
Purposes for Taking Out Personal Loans
There are several reasons why you’d take out a personal loan. Here are some of them:
1. To Cover Medical Emergencies
You or your loved ones can fall sick at any time. Even though you may have a life insurance policy to take care of the medical bills, it can only cover the cost to a certain limit. If you exceed the limit or if the policy doesn’t cover a certain treatment, you’ll be forced to take out a loan. A personal loan will be the first one that’ll pop in your mind.
2. Debt Consolidation
If you have several loans, making payments on all of them can be a daunting task and chances are you may forget one of them. For that, there’ll be late payment fees and you risk damaging your credit score. To avoid this, consider debt consolidation by taking out a personal loan.
3. Home Improvements and Renovations
You’ll need to improve your house at some point but this will be at your own peril. For a home repair, however, circumstances may force you into it. For instance, a strong wind may blow your roof away.
By all means, this is an emergency because you literally don’t have a roof over your head. Of course, you’ll need funds for the repair but what if you don’t have the money? That’s where a personal loan comes in handy because it allows you to pay fixed monthly installments.
Why Banks Ask for the Loan’s Purpose
The loan business is a risky one, especially if it’s unsecured. Personal loans come in two options, secured and unsecured. The latter means you don’t have to put up collateral against nation 21 loans- more info here but you’ll be slapped with high-interest rates to cover the associated risks.
Having said that, banks will minimize risks at all costs and this includes asking the purpose of the personal loan. They will assess your intentions and compare them against their levels of risk tolerance. This way, they’ll be able to protect themselves against any liability.
“What about debt consolidation?” Well, it may be one of the reasons why consumers take out personal loans but if the bank deems your situation as too risky, they may turn down the application. If the borrower intends on using the funds from the loan to invest in a volatile business, the bank may not want to take on such a risk.
Nevertheless, lenders don’t have the power nor the means to monitor your spending behavior. It’s all about mutual trust, that you’ll keep your word.
Does the Loan Purpose Affect Your Approval Chances?
It doesn’t matter the reason you gave the lender or what you change it to afterward, the bottom line is your chances of getting approved won’t be affected. However, you want to be careful when choosing a loan. Personal loans aren’t always best suited for every financial situation.
For instance, it wouldn’t be wise to take out a personal loan for a car purchase or a home improvement. The rates are just too high. Besides, there are more suitable loans for such purposes.
For example, if you want to purchase a car, consider taking out an auto loan. For home renovations, consider using a home equity line of credit. Both loans come with reduced rates and for HELOC, there are potential tax benefits.
What if You Change the Loan’s Purpose?
Again, online lenders, credit unions, and banks will ask about your intentions for the personal loan but they don’t have systems to track usage on the ground. However, they may impose certain restrictions on usage. A good example is Upgrade, which doesn’t permit borrowers to use personal loans on college-related expenses.
What’s left for lenders is to bank on trust but then there’s no problem if you suddenly change the loan’s purpose to cover an emergency medical bill if you initially indicated debt consolidation as the main reason. Personal loans are meant to cover personal financial issues, so there’s nothing to worry about.
Also, borrowers aren’t in danger of facing any consequences if they change their minds down the road. Nevertheless, lenders assume that the borrower will use the money for legal and legitimate reasons.
Lenders are only interested in two things. Are you able to make the monthly payments? Are you making on-time payments? As long as you can put these two issues to rest, you’ll have nothing to worry about regarding how you use the funds.
However, if you feel uneasy about the new purpose of the loan, you can inquire from the lender. Chances are the lender won’t have a problem unless if it’s too risky for them.