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The Issue On Personal Loans and Secured Loan

The Issue On Personal Loans

When it comes to personal loans and especially unsecured personal loans, there are no particular requirements as to what the use of the money should be. Thus, the money you obtain from a personal loan, even if you have requested it for a particular purpose, can almost always be used for any other purpose you can think of. Most personal loan contracts have no stipulations whatsoever regarding the use of the money.

Nevertheless, certain personal loans that are issued only to consolidate consumer debt (mainly to pay off credit card balances), can include among the loan contract clauses a stipulation requiring that the money has to be used only for that purpose or else, the whole loan becomes immediately overdue and has to be canceled. Thus, when it comes to these loans, you need to pay special attention to the fine print of the loan contract.

The Issue On Secured Loans

When it comes to secured loans, the scenario is significantly different. The requirements for approval on secured loans may be lesser in terms of credit and income but considerably harsher in terms of security, documentation, and other formal requirements. Thus, the use that the money will receive is almost always part of the loan contract and it even varies the terms of the loans.

For instance, even though there are home equity loans that provide amounts that can be used for any purpose, home equity loans that are designed for home improvements require that the money is actually used for that purpose because the advantageous terms that these loans feature are justified by the fact that the property’s value will increase due to the improvements. The value of the property increases and thus, the asset securing the loan has a higher equity further protecting the lender.

Home mortgage loans for home purchases also require a specific use for the money (the purchase of the property) and generally speaking all secured loans that feature special rates require for approval a commitment from the borrower to use the money for that specific purpose and nothing else. The suggestion is then to read the loan contract carefully and if you are not sure you will need the whole amount, opt for a regular loan and a lender that does not include in the contract, clauses that restrict the use of the money.