If you’re in the market for a personal loan, you likely need some extra cash to make large purchases. Regardless of why you need the money, one of the most important factors in determining your loan approval will be your reason for taking out the loan in the first place. In other words, does the purpose of your personal loan affect the approval? Yes, it does. But how? What types of purposes are more likely to get approved than others?
Home Improvement
Buying a house is expensive, even more so when you need home improvement. If you are looking to reduce your monthly payment by adding to your home or buying an older home that needs work, you may be able to pay for it using a personal loan. While most banks will allow you to borrow up to 100% of your home’s value (no private mortgage insurance), other lenders have looser standards and may approve loans on lower down payments.
Education Expenses
You may also be able to deduct interest paid on student loans, which can help offset tuition payments or costs for room and board. Students can claim a personal loan interest deduction on IRS Form 1040 as an adjustment to income. To claim it, you’ll need Form 1098-E from your lender showing that you made qualifying payments during 2021.
Big Purchases
If you’re looking to apply for a personal loan, you likely need some extra cash. Before filling out an application, consider how much money you need to cover your expenses—and how much you can afford to pay back. If your monthly expenses add up to $3,000 per month, don’t ask for $4,000 just because it feels like extra money in your budget. There is no point in going into more debt than necessary.
Health Issues
The purpose of personal loans is simple: to help people in need by giving them money that they can use for any purpose. These financial products exist to allow people with low credit scores to access money when they need it. However, your health or disability status could determine whether you get the approval for a loan.
Financial Emergencies
One big reason why people get personal loans is to cover financial emergencies. So whether it’s your car that broke down, your air conditioner went out in the middle of summer, or you just lost your job and need some time to figure out how to replace it—you can use these short-term loans to take care of any sudden costs.
Taxable Investments
According to Lantern by SoFi, ” If you use personal loan proceeds to buy taxable investments, such as certain stocks, bonds, or mutual funds, you may be able to deduct the interest you pay for the loan. This isn’t allowed, however, if you use the loan to buy tax-advantage investments, such as tax-exempt bonds. “
Why Does the Purpose of a Personal Loan Matter?
Many people choose to take out personal loans to help pay for big purchases, such as buying a car or making home improvements. Consumers have sought personal loans: debt consolidation, paying off high-interest credit card bills, and paying for college tuition. One of the most important factors in receiving approval on your loan is that you can prove why you need it and how you plan to use it.
There Are Few Limits to How Much Money You Can Borrow for Some Purposes
Most personal loans are unsecured, meaning they’re not backed by collateral like a mortgage or car loan. However, that doesn’t mean there aren’t any restrictions on how much you can borrow. All personal loans fall into one of three categories: purchase, cash-out refinance, and home equity.
Although it’s important to choose an appropriate purpose for your personal loan, don’t let that intimidate you from applying. As long as you have an acceptable reason, lenders will usually approve your application.
