Can You Spend a Personal Loan on Anything?

A personal loan can come in handy for many different reasons. You may need to pay for a home repair, or consolidate your debt, etc. And applying for a loan is often a more practical way to access funds in a hurry than simply saving money over a protracted period of time. 

A personal loan is a versatile type of funding that can be used for many different purposes. However, it is not a go-to-funding source that should be used to cover all types of or miscellaneous expenses. They do come with certain limitations, and that will, in part, depend on the lender. 

Personal loans can be a viable way to pay for non-discretionary expenses like purchasing a car, new furniture, and for a home improvement project. But be aware that there are specific kinds of expenses that it is not appropriate for. 

In this article, we will look at four types of expenses that you should avoid using a personal loan for. By not using a one for these types of expenses, you’ll potentially save considerable money and a lot of aggravation.

4 Types of Expenses to Avoid Using a Personal Loan for

1)  College Tuition 

The majority of lenders prohibit using personal loans to cover the cost of college tuition, as well as school fees. Also, most lenders will not permit you to utilize a personal loan to pay off existing student loans. 

One major reason that you should avoid using personal loan funds to pay for college is that personal loans usually have shorter repayment terms than private student loans. Normally, you have up to seven years to pay off a personal loan, however, you could have as many as 20 years to pay off a private student loan. This translates into higher monthly payments. 

A personal loan also poses a disadvantage of a higher interest rate than what you’ll find for a private student loan. Also, when you take out the loan, you’ll have to begin repaying it right away. But for a private student loan, you will likely have the option of deferring repayments while you are still in school. 

2)  Downpayment on a Home 

You’ll find that the vast majority of lenders do not allow you to use a personal loan for a new home downpayment. The reason for this is that it might increase your debt-to-income (DTI) ratio. The DTI is the amount of recurring monthly debt you have relative to your income. 

When they examine your loan application, mortgage lenders usually prefer to have your DTI ratio to be lower than 43 percent. Some mortgage lenders even want to see that number be less than 36 percent. Taking out a personal loan could result in an increase in your DTI or perhaps push it over a lender’s preferred threshold. This means your mortgage application may be denied. 

What’s worse, by using a personal loan for a downpayment, it disqualifies you from taking out an FHA (Federal Housing Administration) loan or a conventional loan. 

Most banks will not even accept this money for a downpayment on a home because it indicates to them that you may not be a reliable borrower. 

3)  Investing 

Although some lenders will permit you to use a personal loan for investment purposes, it is not a good idea to do so. You could be acting against your own financial interest because you’ll decrease the overall return on your investment. The money you’ll earn in dividends will have to be used to pay off the interest from your loan. 

The longer you pay on your loan, the more interest you will pay – and that will further drain your investment funds. 

Taking out a personal loan poses more problems when you consider what you’ll have to do if your income changes, or if the market underperforms. These factors further complicate your plan as you scramble to find more money to compensate for changes to your financial circumstances. 

4)  Basic Living Expenses 

You’ll want to avoid taking out a personal loan when you’re strapped for cash or if you need to cover ordinary monthly expenses. By using personal loan funds for basic living expenses, you create a major problem in the long term as you’ll have to repay all that money you borrow, in addition to the interest. 

If you need assistance in paying for rent or covering the cost of your cable bill, for example, a personal loan is just a temporary fix that leaves you paying back the loan for years to come. You’re better off finding other means of financial assistance or charities that won’t rack up your debt or leave you saddled with substantial loan paybacks.

Look to California Community Credit Union to Set Up Your Personal Loan

The California Community Credit Union personal loan is a quick and easy option when you are in need of extra funds for a variety of reasons. Whether you will be using these funds for an unexpected expense, or to buy an appliance, go on vacation or to consolidate debt, a California Community Credit Union loan can be a great help.

We’ll also guide you as to the best uses of your loan so you enjoy optimal value for your borrowed funds.

When you are ready to take out a personal loan in California, just contact us and we will get started right away.