You should not use a loan to fund weddings, vacations, other luxuries, monthly bills, or investments because doing so can quickly lead to overwhelming debt. In addition, you shouldn’t use loan proceeds for purchases that will violate your loan terms, which may include gambling, tuition, a house down payment, or anything illegal.
Personal loans are helpful for spreading out the burden of a large emergency expense or home improvement purchase, for example, but they’re not free money. Treating loans seriously and applying only when necessary will help you avoid getting overwhelmed by debt that you can’t afford to pay back.
Purchases You Should Not Use a Personal Loan For
- Weddings and other parties. It may be the biggest day of your life or the party of the year, depending on the occasion, but it’s not worth getting into debt over. Interest will make your wedding or other celebration end up costing far more than you may have planned for, and taking on debt too often can lead to you becoming unable to afford all of your monthly payments.
- Vacations and other luxuries. Vacations aren’t necessities, as restorative as they may be, so it’s best to pay for them with your savings. Any high-dollar purchase that you don’t truthfully need, like expensive clothing and jewelry, could be considered a luxury. All personal loans come with the added cost of interest, so carefully consider whether a luxury is worth the extra money if you have to borrow to buy it.
- Anything beyond your means. Personal loans can be helpful for spreading out the cost of an expense, making it possible for you to pay for large expenses over time. However, it’s easy for those monthly payments to become unmanageable if you take out too big of a loan or too many at one time.
- Monthly bills. Make sure your normal monthly living expenses are covered by your income, or else your debt can quickly get away from you. Loans aren’t a good solution to ongoing budget problems.
- Investment opportunities. Taking out a loan to fund investments means taking on a definite financial burden just for the potential of making some profit. It’s best to use your income and savings for these opportunities to minimize your risk.
Common Purchases You Cannot Use a Personal Loan For
- Gambling and illegal activities. It’s worth noting the obvious: You can’t use a personal loan for illegal purchases. It’s likely that your loan prohibits gambling, too, even if it’s legal where you live.
- Tuition – usually. Many lenders don’t allow you to use your personal loan for student expenses because of the strict regulations that educational loans must follow by law. You’ll usually find a cheaper rate from federal student loans, anyway.
- A house down payment. Putting borrowed money toward obtaining a mortgage is forbidden by conventional and FHA lenders because they know that using a debt to fund a bigger debt is an extremely risky financial decision. Instead, consider a high-yield savings account to grow your down payment quickly.
- Business expenses – sometimes. Rules for business use vary by lender, so be honest with your lender during the application process if you plan to take out a personal loan for business expenses, to avoid accidentally violating the loan terms.
Purchases Allowed and Prohibited by Other Types of Loans
Mortgages, auto loans, and student loans are all intended for very specific uses. Still, you can typically use a student loan for school-related costs besides tuition, like books and living expenses, and it’s possible to borrow extra on your mortgage to cover moving expenses, home repairs, and furniture.
On the other hand, home equity loans can be used for almost anything, just like a personal loan. In addition, lenders of small, quick loans – like payday loans, for instance – may not even ask your reason for borrowing at all.
Though certain types of loans may not have specific prohibited uses, it’s important to read your loan terms carefully before accepting the loan to avoid violating your lender’s terms of use.
To learn more, check out WalletHub’s guide to the best personal loans.
This answer was first published on 12/01/23. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
FAQs
In addition, you shouldn't use loan proceeds for purchases that will violate your loan terms, which may include gambling, tuition, a house down payment, or anything illegal.
What things should you not use a loan for? ›
8 Things Not to Use a Personal Loan For
- Paying College Tuition.
- Investing.
- Putting a Down Payment on a Home.
- Starting a Business.
- Covering Basic Living Expenses.
- Planning a Vacation.
- Discretionary Purchases.
- Gambling.
Personal loans can be used to pay for almost anything, but not everything. Common uses for personal loans include debt consolidation, home improvements and large purchases, but they shouldn't be used for college costs, down payments or investing.
What should you not use a loan to purchase a house tuition for higher education, a car airline tickets to your dream vacation? ›
Final answer: You should not use a loan to purchase airline tickets to your dream vacation as it does not constitute an investment or provide a return on investment, unlike loans for houses or tuition which can increase in value or earning potential.
When should I not take a loan? ›
If you're already struggling to afford your existing monthly payments, now is not the time to take on additional debt. While it's tempting to use a personal loan to help pay off high-interest debt such as credit cards, it still comes with the risk that your monthly payments will remain unaffordable.
What should you not purchase with a loan? ›
Purchases You Should Not Use a Personal Loan For
- Weddings and other parties. It may be the biggest day of your life or the party of the year, depending on the occasion, but it's not worth getting into debt over. ...
- Vacations and other luxuries. ...
- Anything beyond your means. ...
- Monthly bills. ...
- Investment opportunities.
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.
Can I use a personal loan to buy a car? ›
You can use a personal loan to make many types of purchases, including a car. Auto loans tend to have lower interest rates than personal loans and longer repayment periods. Auto loans generally have lower interest rates because they use your car as collateral.
How much would a monthly payment be on a 50000 loan? ›
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
Can you use a school loan for anything? ›
Student loans can be used for a variety of expenses — anything your college considers part of its cost of attendance calculation can generally be paid with student loan funds. That said, it's not always wise to hold onto excess disbursem*nt money.
Some lenders will not provide a personal loan to cover tuition costs because the 2008 Higher Education Opportunity Act placed several requirements on lenders offering private education loans, including special disclosures, a rumination period and an option to cancel the loan up to three days after disbursem*nt.
What can you not buy with student loans? ›
Debt: Don't use your loan to pay off credit cards, a car note, or other debt. You also can't use it to pay for a down payment on a new house or condo. Non-school services: You can't use your loan for hiring cleaners, paying gym fees, or any other non-education services.
How to pay off $5000 in debt in 6 months? ›
If you can afford to pay off your debt during the promotional APR period, a balance transfer card may be your best bet. For example, with $5,000 of debt, a six-month intro APR balance transfer card would allow you to pay off your debt interest-free with $833.33/month payments.
What two types of loan should you avoid? ›
Here are six types of loans you should never get:
- 401(k) Loans. ...
- Payday Loans. ...
- Home Equity Loans for Debt Consolidation. ...
- Title Loans. ...
- Cash Advances. ...
- Personal Loans from Family.
Technically, you can, but a personal loan isn't a great option for purchasing a home or making a down payment in most cases. Instead, you'll generally be much better off with a traditional mortgage. However, a personal loan might be a good option if you're looking to purchase a mobile home.
What are unacceptable loan purposes? ›
For example, many lenders don't allow their personal loans to be used to cover education costs or business expenses. Be sure to read the lender's fine print to verify that you intend to use the money from your loan for an approved purpose. Otherwise, your application could be denied.
Does it matter what I use a loan for? ›
Debt consolidation, making large purchases or emergency expenses are all common uses for personal loans. But some lenders have specific use restrictions. The purpose of your loan may also impact the amount, interest rate and terms you qualify for.
What can a loan be taken against? ›
This loan against property is offered in which a commercial or residential property like a residential flat, office, plot or shop is used as security for borrowing from a bank or other financial service provider. It can be used by the creditor to fulfill both personal and business purposes.
