Purpose Of Personal Loan

Unlike other types of loan such as car loan or a home loan where the purpose of the loan is pre-decided, the one distinct factor about a personal loan is that it is multi-purpose in nature. This means the purpose of personal loan does not need to be decided, and as the name suggests can be used for personal purposes.However, when applying for a personal loan, every financial institution enquires the reason to avail the same. What happens when you apply for a loan, but you change your mind and hence change the purpose of personal loan? Let’s find out the importance of the purpose while approving the loan.

Personal loans are commonly used for medical emergencies, credit card consolidation, house renovation or repairs, wedding expenses, or even travelling. The purpose of personal loan is how you to plan to use the funds after loan disbursement.

The primary reason to ask for the purpose of personal loan is to assess whether the loan is an acceptable and advisable risk for the bank or not. The lenders ask for the reason to cover themselves from any liabilities and avoid build-up of non-performing assets. Additionally, the purpose also enables them to assess whether the loan amount will be used for dubious activities such as gambling or for risky investments.

Although it is not part of the primary factors for loan approval, the reason for you to apply for a personal loan can play a vital role in the approval process. This is because the reason helps the lender assess the risk taken to approve the funds for the borrower.

It depends. Although banks or any other type of financial institutions do ask about the personal loan purpose, there is no strict process for them to ensure that the funds are used properly. However, as mentioned above, there are certain activities for which the funds should not be used.Applying for a personal loan for one reason and later using it for another purpose will not make any difference unless one uses it for dubious activities such as gambling or investments. However, applying for a personal loan for debt consolidation but using it for a medical emergency will not create any problem. It is whether the purpose of personal loan risky or not that matters.The final answer is that it is okay if the purpose changes. When a lender approves a personal loan, it is assumed that the money is used for legal and legitimate use. In case you are still concerned, consulting your lender directly can give you a better understanding.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.