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You can use the funds from a personal loan for almost any purpose, such as debt consolidation or home improvements. But personal loans do not cover these 4 expenses. (Shutterstock)
Personal loans can be a good option when you need extra money to pay for almost any expense. while some personal loans are designed for specific uses, such as debt consolidation, many lenders offer personal loans that you can use for almost any purpose.
But no matter how flexible your lender is, there are some expenses you can’t pay with personal loan funds.
If you need a personal loan to consolidate debt, Credible makes it easy view your prequalified personal loan rates from multiple lenders, all in one place.
1. Pay for college
You generally cannot use personal loan funds to pay for college tuition. This can be risky for a lender, as many student borrowers have little or no credit history and are not employed.
You may be able to use a personal loan to pay for other expenses while you’re in school, like housing or transportation, but a federal student loan is most likely a cheaper option, since it has flexible repayment plans.
If you take out a personal loan for education expenses, make sure you can afford the monthly payment while you’re in college.
If you need a loan to pay for college, start with federal loans and then use private student loans to fill in any gaps in education costs. After you graduate, you can consolidate federal student loans or refinance student loans, possibly getting a lowest interest rate or monthly payment.
STUDENT LOAN REFINANCING VS. CONSOLIDATION: WHAT IS THE DIFFERENCE?
2. Make a down payment on a house
You will not be able to use a personal loan to finance the down payment on your new home. Conventional lenders, as well as the Federal Housing Administration (FHA), have strict guidelines about where you get the money used for a down payment.
The U.S. Department of Housing and Urban Development (HUD) lists acceptable sources of funds for down payments and closing costs, including:
- Down Payment
- Funds from your bank account
- Money in hand
- private savings club
- savings bonds
- IRA or 401(k)
- Stocks and Bonds
- Gifts
- Sale of personal property
- Commissions of a sale
- Grants and loans (specifically for down payments)
- Employer Assistance Programs
Unacceptable loan sources include:
- Unsecured Signature Loans
- Cash advances on credit cards
- Loan against your home or other property
- Other unsecured financing
When you apply for a conventional or FHA mortgage, you will need to document the source of all the money you will use to purchase your home. The lender will verify each source before approving you for a mortgage loan.
If you need help with your down payment on your mortgage, visit the HUD website to see what programs are available in your state.
NEED HELP WITH YOUR DOWN PAYMENT ON YOUR MORTGAGE? CONSIDER THESE OPTIONS
If you already own a home and are considering a personal loan to finance a home improvement project, visit Credible for compare personal loan rates from various lenders.
3. Some business expenses
Many small business owners take advantage of personal loans to cover expenses. You may be able to use personal loans for some business-related expenses, but lenders may restrict other ways you spend the funds. Since the rules vary by lender, you should talk to your lender about why you’re getting the loan and ask about any restrictions before you apply.
Getting a personal loan instead of a business loan to cover business costs has some risks. you will trust your personal credit score a qualify and your credit score could be affected if you have trouble paying the loan.
Plus, many loan options through the Small Business Administration offer favorable payment terms and more flexibility. SBA loans may take longer to process, but you may qualify for a higher loan amount than you would with a personal loan. And the interest you pay on an SBA loan may be tax deductible.
Other alternatives to a personal loan for business expenses include a business credit card, a business line of credit, and grants.
PERSONAL LOANS FOR SMALL BUSINESSES: WHAT TO KNOW
4. Gambling and illegal activities
When you apply for a personal loan, lenders are likely to have a clause stating that you cannot use the funds for gambling or illegal activities. Lenders will not finance gambling as it is a very high risk activity and they could lose your money if you cannot repay your loan.
Lenders may not knowingly make loans for illegal purposes, or they may face legal problems. Money laundering is prohibited, so lenders cannot legally lend money for illicit activities.
If you need a personal loan for an unexpected expense or to consolidate debt, Credible makes it easy. view your prequalified personal loan rates from multiple lenders, all in one place.