Find Out What’s Legal and What Isn’t When It Comes to Your Loan Money
When you apply for a student loan or mortgage, you’re asking for money to cover very specific costs. The lender assumes the money they lend to you will be used to cover the cost of your tuition or home.
In some cases, you may end up with more money then you need. This is common with student loans, auto loans and home refinancing.
When that happens, many borrowers use the money to cover other costs – but is that legal? The answer lies within your loan agreement.
There are some loans that come with restrictions, while other loans allow you to spend the money as you need to.
There are some cases where people take out loans without any intention of using the money the way the lender assumes they will. Instead of using it to cover tuition or a new home, they use the money to pay for every day expenses.
The type of loan you request determines how you can use the funds. Some lenders put restrictions on how funds can be used, because interest rates are calculated based on risk. Risk is assessed by looking at the purpose of the loan. Riskier loans have different terms and often higher interest rates, as is the case with short-term installment loans.
Less-risky loans often have better terms and lower interest rates. Lying to a lender about how you plan to spend your money means putting the lender in a riskier situation than they agreed to, and are financially prepared for.
Loans with a Purpose
Many traditional loans have a specific purpose. Home loans are meant to be used to purchase a home or refinance an existing one. It’s very difficult to get approved for a home loan unless you’re closing on a home or currently own one. Home loans are low-risk loans, because the lender can foreclose and sell your property if you fall too far behind on payments.
If you need cash for other expenses, you can use your home as equity. This is known as a home equity loan. With a line of credit or home equity loan, you can use the funds on whatever you choose.
Auto loans are also low-risk loans, because the lender can take away your vehicle should you miss payments. Loan terms on auto loans tend to be less strict than home loans, because the balance is much lower. You may be able to borrow up to 110% of the car’s value to help cover the cost of other expenses like registration and similar expenses.
One of the most confusing loans are student loans. Many students use their loans to cover expenses beyond tuition. That can include housing, books, school supplies, food and
transportation. The government subsidizes some student loan interest costs, because they believe in investing in an educated population. Banks offer better loan terms to college students, because they believe college-educated adults will be able to make repayment.
However, with a student loan, borrowers see large sums of money deposited into their accounts. There’s no one watching to confirm how the funds are being used.
Unsecured personal loans provide borrowers with freedom. Getting personal loans online is easier than other types of loans, because personal loan companies don’t require the same qualifications. You can use your money on a variety of expenses, and lenders don’t require you to disclose what the money is for.
Short-term installment loans are a type of personal loan. They are considered higher-risk, because collateral is not required. The lender assumes more risk, so interest rates are higher – but borrowers have more freedom when it comes to spending.
Is it Illegal?
While it’s not technically illegal to use your loan money for alternative reasons, you put yourself at risk for legal action by your lender if you default on your loan.
Be financially responsible and use your loans on what they’re intended for. Personal loans can provide the funding you need for other general expenses.