A personal loan is a multi-functional financial instrument that can be applied for a wide variety of personal circumstances without any conditions on its use. Unlike home loans or car loans, which are specific-purpose loans, personal loans give borrowers the freedom to spend the money on their own terms.
Your personal loan eligibility is pretty much unaffected by the loan’s purpose. The lender may have a right to question you about the purpose of the loan, but you are not obliged to be too detailed. However, the possibility of loan approvals can be increased if you present a clear purpose and a feasible financial plan. The article covers the connection between loan purpose and approval.
Why does the purpose of personal loan matter?
Providing a reason for loan may prove relevant for a number of reasons. Primarily the lenders introduce limitations on how and where the loans are used. Personal loans are frequently utilised to cover debt consolidation expenses, buying big items or taking a holiday. However, some lenders may not permit the use of funds to pay for education or to pay off loans.
Additionally, lenders may prohibit people from utilising personal loans for investment or deposits to their houses. In order for the lender to be assured that the borrower will use the loan for its approved usage, lenders need to make sure that the loan is meant for the designated purpose.
Also, the target of the loan determines the rate of interest a borrower gets. Even though other aspects such as credit score, loan amount, and term determine interest rates, some lenders give consideration to the purpose for which the loan is being sought when deciding on rates. Borrowing money for debt consolidation implies a higher interest rate compared to making a big purchase.
Must Read: What Is Personal Loan & How It Works?
Reasons to apply for a personal loan
The loan purpose is the reason why you need excess funding. This purpose will be assessed before the loan is approved. Below are a few reasons to borrow a personal loan:
Debt consolidation
One of the most common uses for personal loans is the consolidation of high-interest debts in one payment. Through this strategy, borrowers can reduce the interest rates of several loans and have a single repayment schedule.
Home improvements
Whether you want to finance small repairs or do a big remodel, personal loans support home improvement projects. These loans can be used to repair a leaky roof, update kitchen appliances or add a backyard deck. Personal loans provide flexibility and ease of application.
Medical expenses
Emergency medical bills may outrun spending ability. Personal loans provide a safety net to pay for treatment, surgery, or other health expenses not fully covered by insurance.
Education expenses
Personal loans can fill the gap in the financing of education fees including tuition fees, books or certification training. With competitive interest rates, these loans may be an alternative to traditional student loans.
Weddings & special occasions
The planning of a dream wedding or milestone celebration almost always requires a large amount of money. Personal loans can help you get these funds to make these moments unforgettable without asking anyone in the family.
Travel & Vacations
Wherever you want to go on your next holiday, personal loans can cover travel costs. Borrowers have the option of paying for their vacations through instalments.
Restricted personal loan uses
Despite the fact that personal loans are usually flexible in usage, some lenders can limit you to spending the money on particular purposes. These restrictions include:
Home down payment
Lenders perceive taking a personal loan for a down payment, especially with a mortgage, as a high-risk financial product. This might mean that the borrower is in poor financial condition and therefore more likely to default.
Educational expenses
The Higher Education Act’s regulation limits the use of personal loans for educational purposes. Plus, student loans provide more favourable terms and help them save for higher education.
Business expenses & gambling
Some lenders do not allow the use of personal loan money for business or gambling spending. However, for some lenders, such limitations apply, thus, before borrowing, you should find out if there are any restrictions.
Must Read: Types Of Personal Loans Available In India
When should you not use a personal loan?
Personal loans can be a quick solution to financial needs, but they are not always economical. It is also significant to check whether the loan purpose justifies the corresponding interest rates.
For significant expenses like car or home purchasing, auto loans or mortgages offer lower interest rates and more favourable terms. Besides, when you do not need something immediately and urgently, it is probably wiser to save money and avoid unnecessary debt.
However, people with poor credit reports should consider whether they can afford the relatively high-interest rates that usually come with personal loans.
Therefore, before taking out a personal loan, evaluate your options, assess the long-term financial effects, and ensure the loan's usefulness in the long run.
Conclusion
The purpose of a personal loan mainly influences the process of your loan application and its terms. Lenders determine this criterion in order to assess the level of risk involved. Although personal loans are flexible with their usage, displaying your objective can affect the success rate of your application.
Openness about the borrowing reason develops a trusting relationship with lenders and presents responsible financial behaviour.
If you are looking for a personal loan, Kotak811 offers attractive interest rates and repayment structures that are in line with your budget. Start your application today and move one step closer to having your financial dreams come true with confidence.
FAQs
1. What purpose should I state for my loan application?
Make sure you indicate clearly your legitimate purpose for allocating the funds. Honesty makes processes possible and prevents any problems later.
2. Am I allowed to use the loan amount for my personal needs?
Kotak811 is lenient regarding the usage of personal loan funds. Nonetheless, certain lenders might view the terms of your loan based on the stated purpose. Be mindful of the limits imposed by your lender.
3. What if I change my mind when the loan has been provided?
Situations might change from loan approval until funds utilisation. However, if your purpose changes, say, a postponed event, make sure to check with us about any restrictions on alternative uses. Our customer care executives can guide you with the right steps to follow in such circumstances.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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