You may be wondering, does your loan purpose matter for a loan? When taking a loan, we’re often asked what the loan is needed for, whether for medical reasons, to pay bills, or for education. Some lenders only offer loans for specific reasons or several reasons. While most lenders won’t prevent you from taking a loan, you need to explain the purpose of the loan or why you need it.
If you are taking a personal loan, your reason for the loan doesn’t matter to the lender. Most people take personal loans because they have no restrictions on why, when, how, and where they intend to use the loan funding. Personal loans can be used for legitimate reasons like travel expenses, medical bills, and even home renovation. Aside from personal loans, other lenders have restrictions on your loan purpose, making it matter.
What Does Loan Purpose Mean?
Loan purpose is the specific reason a borrower is taking a loan. It tells the lender what the loan is needed for. This helps the lender determine whether or not they offer loans for that purpose. It is often required by most lenders, except for personal loans.
Why Does Your Loan Purpose Matter?
There are several reasons why your loan purpose matters. It matters because the lender needs to determine whether or not it offers loans for your specific purpose. This is because some lenders only offer loans for certain reasons; they have restrictions on what a borrower can use the loan for. While stating your loan purpose can be tiring, it helps both the lender and the borrower determine whether they can offer a loan for certain reasons. However, your loan purpose can affect the loan terms, amount, and interest rate you are eligible for.
Other Reasons Why Your Loan Purpose Matters
Other reasons why your loan purpose matters include the lender’s choice, loan amount, repayment term, and interest rates.
Lender’s Choice
As previously stated, some lenders offer loans for certain purposes. For example, mortgage loans only offer loans for home purchase, renovation, and other home-related expenses. You will not be granted a loan if you intend to cover car expenses with your home loan.
Loan Amount
Providing a loan purpose doesn’t guarantee that you will be granted a large loan. Some lenders, like LightStream, grant up to $100,000 on loans to borrowers who are taking loans for large purchases or home improvement projects. If you need a loan for a smaller expense like a vacation, you would most likely not be eligible for the maximum loan amount of the lender even with an outstanding credit. However, before taking a loan, consider using the best loan purpose for loan approval along with your preferred loan terms and amount.
Repayment Term
It is important to determine the repayment term when taking a loan. The repayment term is a factor that it may affect as well as your monthly payments. For instance, lenders like LightStream offer repayment terms of up to 12 years for home improvement loans and less than that for other loans. Before taking a loan, ensure you consider the repayment term to confirm if you can repay it comfortably.
Interest Rate
Comparing interest rates of different lenders helps you select the right interest rate for your loan. Based on credit score, loan terms, and loan amount, most lenders determine interest rates. Some lenders consider it when determining interest rates. If you intend to use the loan for debt consolidation, some lenders may charge higher rates than when it is needed for a specific need.
Can You Take A Loan For A Different Purpose?
Yes, loans can be used generally to meet several needs, although some lenders have restrictions on it. However, personal loans are types of loans that can be used to cover a wide range of loan purposes. This includes unexpected expenses, debt consolidation, and other large expenses, as well as purchases. With personal loans, you can take a loan to cover different purposes.
What Happens If I Use My Loan for a Different Purpose?
The need for a loan can change due to certain circumstances after taking a loan for a reason. For instance, if you took a loan for a vacation and it gets postponed or canceled, you can use the funds for other expenses. However, before doing so, ensure there are no restrictions on how you can use the funds for your lender.
Does Your Loan Purpose Affect Approval Odds?
Just as your loan purpose can affect your loan terms, it can also affect your approval odds. Depending on how you intend to use the funds, some lenders may restrict your loan repayment term or loan amount. Meanwhile, others may not allow such uses completely. This can also affect your interest rates, which increase how much repayment you’d make over the life of the loan.
