4 expenses that personal loans do not cover

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You can use the funds from a personal loan for almost any purpose, such as debt consolidation or home improvement. But personal loans don’t cover these 4 expenses. (Shutterstock)

Personal loans can be a good option when you need extra money to pay for almost all of your expenses. While some personal loans are designed for specific uses, such as 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 some expenses that you cannot pay with personal loan funds.

If you need a personal loan to consolidate debt, Credible makes it easy see prequalified personal loan rates from various lenders, all in one place.

1. Pay for college

It is generally not possible to use personal loan funds to pay college tuition. This can be risky for a lender, as many student borrowers have little or no credit history and are not employed.

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

If you take out a personal loan for school expenses, make sure you can afford the monthly payment while you are in school.

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


2. Make 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 to find the money used to make the down payment.

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

  • Deposit deposit
  • Funds from your bank account
  • Money in hand
  • Private Savings Club
  • Savings coupons
  • IRA or 401 (k)
  • Stocks and bonds
  • Gifts
  • Sale of personal property
  • Commissions from a sale
  • Grants and loans (in particular for advances)
  • Employer assistance programs

Unacceptable loan sources include:

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

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 check each source before approving you for a mortgage loan.

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


If you already own a home and are considering a personal loan to finance a home improvement project, visit Credible for compare personal loan rates from various credit institutions.

3. Some business expenses

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

Taking out a personal loan instead of a business loan to cover business costs presents some risks. You will rely on yours personal credit score to qualify and you may face a blow to your credit score if you are having trouble repaying the loan.

In addition, many loan options through the Small business administration offer favorable repayment terms and greater flexibility. SBA loan processing may take longer, but you may qualify for a higher loan amount than a personal loan. And the interest you pay on an SBA loan can 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 taking out a personal loan, lenders will likely have a clause specifying that they cannot use the funds for gambling or illegal activities. Lenders will not finance gambling as it is a high risk business and they may lose their money if you fail to repay your loan.

Lenders cannot knowingly provide loans for illegal purposes, or they may face legal problems. Money laundering is prohibited, so lenders cannot legally lend money for illegal activities.

If you need a personal loan for an unexpected expense, or to consolidate a debt, Credible makes it easy for you see prequalified personal loan rates from various lenders, all in one place.

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