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.
