4 Expenses Personal Loans Don’t Cover

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You can use the funds from a personal loan for almost any purpose, such as consolidating debt or improving your home. But personal loans do not cover these 4 expenses. (Shutterstock)

Personal loans can be a good option when you need extra cash to pay almost any expense. While some personal loans are designed for specific uses, like debt consolidation, many lenders offer personal loans that you can use for almost any purpose.

But no matter how flexible your lender is, there are a few expenses you can’t afford with personal loan funds.

If you need a personal loan to consolidate your debts, Credible allows you to view your prequalified personal loan rates from various lenders, all in one place.

1. Pay for college

You generally cannot use funds from a personal loan to pay tuition. This can be risky for a lender, as many student borrowers have little or no credit history and are unemployed.

You may be able to use a personal loan to pay for other expenses while in school, such as housing or transportation, but a federal student loan will likely be a cheaper option because it has flexible repayment plans.

If you take out a personal loan for your education costs, make sure you can afford the monthly payment while you’re in school.

If you need a loan to pay for college, start with federal loans and then use private student loans to fill gaps in tuition fees. After you graduate, you can consolidate federal student loans or refinance student loans, possibly getting a lower interest rate or monthly payment.


2. Put a down payment on a house

You will not be able to use a personal loan to finance the down payment on your new home. Conventional lenders, as well as the Federal Housing Administration (FHA), have strict guidelines on where the money used to pay your down payment comes from.

The U.S. Department of Housing and Urban Development (HUD) lists acceptable funding sources for down payments and closing costs, including:

  • honest money deposit
  • Funds in your bank account
  • Cash
  • Private savings club
  • Savings bonds
  • IRA or 401(k)
  • Stocks and bonds
  • Gifts
  • Sale of personal property
  • Commissions on a sale
  • Grants and loans (especially for installments)
  • Employer Assistance Programs

Unacceptable sources of lending include:

  • Unsecured Signature Loans
  • Cash advances on credit cards
  • Borrow against your home or other property
  • Other unsecured financing

When you apply for a conventional or FHA mortgage, you will need to document the source of all the money you will use to purchase your home. The lender will verify each source before approving you for a mortgage.

If you need help with the down payment on your mortgage, visit HUD website to see what programs are available in your state.


If you’re already a homeowner and considering a personal loan to finance a home improvement project, visit Credible for compare personal loan rates from various lenders.

3. Certain business expenses

Many small business owners take advantage of personal loans to cover expenses. You may be able to use personal loans for some business-related expenses, but lenders may restrict other ways you can spend the funds. Since the rules vary by lender, you should discuss with your lender why you are getting the loan and ask them what the restrictions are before applying.

Taking out a personal loan instead of a business loan to cover business expenses involves certain risks. You rely on your personal credit score at to qualify and could face an impact on your credit score if you have trouble repaying the loan.

In addition, many loan options through the Small Business Administration offer favorable repayment terms and more flexibility. SBA loans can take longer to process, but you may qualify for a higher loan amount than with a personal loan. And the interest you pay on an SBA loan may be tax deductible.

Other alternatives to a personal loan for business expenses include a business credit card, business line of credit, and grants.


4. Gambling and Illegal Activities

When you take out a personal loan, lenders will likely have a clause stating that you cannot use the funds for gambling or illegal activities. Lenders won’t fund gambling because it’s a very high risk activity and they could lose their money if you can’t repay your loan.

Lenders cannot knowingly grant loans for illegal purposes, otherwise they could face legal problems. Money laundering is prohibited, so lenders cannot legally lend money for illicit activities.

If you need a personal loan for an unexpected expense or to consolidate your debts, Credible allows you to view your prequalified personal loan rates from various lenders, all in one place.

About Judith J. George

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