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If you’ve ever filled out an application for a loan or another financial product, you may have come across a question asking you for the intended use. Responding to this question can be scary because you don’t want to risk approval – especially in dire situations. Although honesty really is the best policy when it comes to loan applications, lying could land you in a worse financial situation. To learn more about personal loans, how to answer the intended use question and common uses for personal loans, continue reading below.
A personal loan is an unsecured form of financing which means that collateral is not required. A personal loan term tends to be short to medium in length with varying interest rates. The extended interest rate depends on the lender and the borrower’s financial situation. Once a borrower is approved for a loan, they start making installment payments that consist of both interest and principal amounts.
The best reason to give when applying for a personal loan is the truth. In the end, it won’t benefit you or the lender to lie so transparency and honesty are ideal. Lenders may seem intimidating on the outside, but in most cases they want you to achieve your financial goals with their help. If you lie, it will be challenging for lenders to help you achieve your goals because they won’t have an accurate picture to work off of.
Personal loans aren’t restricted to a specific purpose the way a mortgage or a car loan is. For this reason, there are essentially infinite potential uses for a personal loan. However, there are some common themes for personal loan use, let’s take a look at what they are below.
Now that we’ve had the opportunity to look at common and reasonable uses for personal loans, it’s time to consider events where using a personal loan is a bad idea. In some instances, using a personal loan could cause you more financial struggle, as listed below.
The initial effect on your credit when you apply for a personal loan is a hard inquiry. A hard inquiry indicates that a potential lender has pulled your credit report to assess your creditworthiness. This inquiry will cause your credit score to dip slightly but will replenish after several months, given that everything else stays relatively the same with your finances.
The long-term effects of taking out a personal loan surround loan payments. If you make full, timely payments, your credit score will improve. On the other hand, if you frequently miss payments or make partial payments, your credit score will suffer. Failing to repay your debt as agreed upon with the lender is the most common cause for credit score decline – make sure to manage your debt responsibly.
Whether or not a personal loan is right for you depends on your unique financial situation. It’s ideal to use savings that you have before taking on a loan, but this isn’t always an option. If you need to use a personal loan, ensure that you can afford the payments and won’t be worsening your financial situation. If you decide that a personal loan is right for you, Loans Canada can help find you the option based on your needs.
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