6 things you shouldn’t use your loan for
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Monday 15th May 2023
Borrowing money can be a great way to get your hands on the things you need sooner, by allowing you to spread the cost over time. However, there are some restrictions when it comes to spending the money you borrow.
This is because personal loan providers like us have a duty to lend responsibly. We never want our customers to end up in financial difficulty, which is why it’s so important for us to conduct comprehensive checks to ensure that accepted applicants are not at risk of borrowing more than they can afford.
In this guide, we’re sharing what you can’t use a personal loan for…
1. Starting a business
We aren’t able to offer a loan for business purposes. Personal loans can only be paid to individuals, and they are liable for the repayments. If, for any reason, you can’t repay your loan you will be personally held responsible. Late or missed repayments will be recorded on your credit report, which could affect your ability to borrow in the future.
If you require funding for your business, a business loan or start up loan may be a better option as these loans are specifically designed for commercial use.
2. Investments
Investments are, by their very nature, a risk. The money you gain or lose through investments can vary dramatically – yet you will still be required to pay back your loan each month regardless. You need to make sure you’re able to cover your repayments comfortably, and you simply can’t guarantee that when you’re using the money to invest.
Using a loan to fund a potentially risky investment could result in you losing money (as you’ll be paying interest on top of paying back the money you borrowed) or not being able to pay back your loan at all.
Just as we won’t lend money for gambling, we won’t accept applications for those looking to invest using their loan.
3. Cryptocurrency
Buying cryptocurrency can also be risky and there are no guarantees you’ll get your money back. If you do lose the money you spend on cryptocurrency, you’ll still need to repay your loan. Then you’ll be responsible for paying a fixed amount each month (including interest charges) with nothing to show for it, potentially landing you in debt you simply can’t afford.
Those who don’t have enough personal funds to invest in cryptocurrency are perhaps not in a position to withstand financial losses, hence why it’s never advised to get yourself into debt in order to invest.
Understandably, for these reasons, it’s a risk most reputable personal loan lenders are unwilling to take.
4. House deposits
Using a personal loan to fund a house deposit essentially means you’ll be taking out a 100% mortgage which can be risky – and you probably wouldn’t be accepted anyway.
Mortgage providers, like most lenders, will assess your credit risk and affordability. This will likely involve looking at your debt-to-income ratio – which essentially compares how much you earn with how much debt you owe each month.
When a personal loan is used to fund a house deposit, it will increase the amount of debt you have. This could affect your mortgage application as too much debt indicates you might not have enough disposable income leftover to afford any further repayments.
Many mortgage providers will ask for proof of deposit funds, too, and won’t accept your application if you’ve used unsecured borrowing (aka a personal loan) to fund your deposit. Even if you are accepted (which is unlikely), you will probably be offered an extremely high interest rate which will make your mortgage repayments more expensive.
5. Everyday living expenses
Personal loans should never be used to assist with day-to-day costs, such as household bills. Remember, you’ll need to repay your loan plus interest, so taking out a fixed-rate loan as a temporary measure will result in you paying back more than you borrowed in the first place. This could land you in financial difficulty in the future.
6. Any illegal activity
This is hopefully obvious, but no reputable loan provider will lend money to be spend on illegal activities or purchases.
So, what can you use a loan for?
A personal loan should be used to help you access the funds you need to get the things you dream of sooner.
Are you ready to apply for a personal loan?
If you’re looking for a more manageable way to spread the cost of a big purchase, a personal loan could be for you. Buy the things you want now rather than waiting for your savings to grow or use a loan to top-up your funds to take your purchase to the next level.
With Novuna Personal Finance, you can borrow between £1,000 and £35,000 at competitive rates from as low as 6.9% APR (£7,500-£25,000).
Written by
Sophie Venner is a Yorkshire-based content writer specialising in crafting content for the financial services industry. She’s written over 300 articles on finance, but she’s covered everything from insurance to digital marketing trends. Her content has been featured in the likes of Semrush, Digital Marketing Magazine and Insurance Business.