One of the most significant advantages of applying for a personal loan is that you are not required to justify why you need the money. Of course, your loan company might inquire during a casual conversation about your intended use for the borrowed funds. Or you can decide to share because you require immediate personal financing.
But, generally, disclosing the loan purpose Personal Loan is not an eligibility criterion to apply or even get approval. In short, reliable lenders understand, ‘It’s personal!’
Some lenders have restrictions on what you can use your loan for, so you’ll want to make sure that your loan purpose qualifies before completing the application. Your purpose of loan credit score and credit history will affect whether you are approved or not and what rates and terms are offered to you.
Common Purpose of A Personal Loan
When you fill out a loan application, you may come across a section that asks you to specify the purpose of the loan. Some lenders do this to give you the right product. They may also use your loan objective to assess risk and specify loan terms.
There are several reasons you might consider taking out a Personal Loan. Most people have something special on their minds when they decide to borrow money. Three out of every four people considering taking out a Personal Loan say the decision is driven by a specific upcoming need or life event.
Although each person considers himself and his personal needs unique, it turns out that the reasons for taking out a personal loan fall into this list which is as follows:
Emergencies
If you need to pay bills now and don’t want to be late, you can take out an emergency loan to cover those costs. If you lose your job or have an emergency medical bill, a personal loan can meet your needs in the short term.
Debt Consolidation
You can save a good amount of money on interest payments when you consolidate high-interest credit card debt with a personal loan. The average credit card interest rate is around 16 per cent per annum right now versus personal loan interest rates, which average less than 11 per cent. If you have an excellent credit score, you can get the lowest interest rates available, which are much lower than credit cards.
Major Life Milestones
If you’re planning a big move to a new job or helping your friend pay for a wedding or your wedding, you may need extra cash.
Big Purchases
Want to Buy a Recreational Vehicle (RV)? Maybe the latest gym equipment? Maybe you want to tour the world? Whatever your end goal, personal finance can help you fund all the big-ticket purchases seamlessly. And the best part is that you pay them in monthly instalments!
Home Improvement
Whether it’s a complete renovation, a home upgrade such as new flooring or paint, or something more significant such as new plumbing or roofing;you can make use of your Personal Loan for home improvement.
Higher Education of Children
Every parent wants to give a good education to their children. And, sometimes, the money you’ve saved for their education may run out. In such a situation, you can complete your studies by opting for personal finance. Doing so ensures that you don’t delay your child’s tuition fees.
Does the Reason for a Personal Loan Matter?
Banks consider several factors apart from the reason for the loan, such as the amount sought and the credit and employment history of the applicant, among others. The purpose of including such information on the loan application is to enable the bank to assess the potential risk of lending money to an individual.
The reason the borrower needs a loan can be a factor, such as how much money is needed and how the loan can be repaid. The purpose of the loan can also inform the final decision on whether to borrow money after the cost has been calculated. Certain reasons for taking out a loan – such as paying for improvements that increase the value of the home or education that can increase earning power – can provide benefits that over time exceed the cost of borrowing.
The more time spent considering the specific reasons for applying for a loan, the better equipped a person will be able to get the best loan for their needs and financial situation.
To make sure you’re getting the best deal, you should always compare interest rates, terms and fees from lenders that are offering Personal Loans that match your needs. Review credit requirements, such as your credit score, history, and income eligibility. Your reason for getting a Personal Loan is yours, but your potential lender can determine the key credit factor based on that logic. Avoid borrowing money excessively and find a lender who has a comfortable repayment plan.
The best reason is exactly what you plan to use the loan for. Being honest is the only surefire way to make sure you get your money on time and don’t end up with trouble down the line. For most lenders, you can use your loan for almost anything. While some lenders base your loan rate on your loan objective, some lenders have restrictions on how you can use your loan. For example, some people may not allow you to use the money to pay for higher education or business purposes.
Sometimes, your personal situation changes between the time you apply for a loan and the time you use it. Suppose you withdraw money for a child’s wedding, but the marriage is postponed or cancelled. You can use the money for other needs, such as paying off debt or funding other undertakings, such as a vacation. But before you use the funds, make sure there are no restrictions on the way your lender can use those funds. If you are concerned about the mismanagement of funds, check with your lender to see if your new loan objective is covered.
To Conclude
Your reason for getting a Personal Loan is completely yours, but the lender may also determine the key credit factor based on that logic. Regardless of your purpose of loan application, you should always compare the lenders to see which one offers the best deal based on your needs. Avoid borrowing more than you need and find a lender that has a sensible repayment plan. The best purpose is exactly what you plan to use the loan for.
Loan Purpose – FAQs
What is the purpose of Personal Loans?
Personal Loans are unsecured loans that can be used for a wide range of purposes. You can use Personal Loans for financing big-ticket expenses, funding a wedding, planning a vacation, covering medical expenses during emergencies, home renovation, and debt consolidation. Personal Loans come with no end-use restrictions, which means you can use the funds availed as per your requirement.
What is a loan purpose letter?
A loan purpose letter is used to improve your Personal Loan application so that the lender gets to know that the loan is being taken for legitimate purposes. You can include your purpose, loan amount, and tenure in the letter, along with your basic personal details. You can also highlight how you are planning to repay the loan.
What’s the best reason to put in for a Personal Loan?
A Personal Loan can be used as per your requirement. Unlike secured loans such as home loans and auto loans, Personal Loans are unsecured and can be used for fulfilling a wide range of purposes. There are no end-use restrictions on the funds. The lender or financial institution will not investigate your purpose once the funds are disbursed.
