The Purpose of a Loan

The Purpose of LoansWhat can I use my loan money for?

It’s a common situation when people take more money on a loan than they really need. Some borrowers don’t have any clear purposes for taking a loan. Other people want to earn a ‘spread’, that is to invest the funds and earn more money on the interest rate difference.

As a rule, the creditor is interested how the money will be used. Loan interest rates generally
reflect the risk that the creditor takes borrowing money to a certain individual. Loans with high
risk and less-risky loans have different regulations.

For instance, in case of a loan for purchasing a home – if you are not able to make your payments, the creditor can become the owner of the home and sell it. Student loans are supposedly used for educational purposes. Certain student-loan interest is subsidized by the government as it is considered to be a profitable investment into the future of the country. Besides, banks provide attractive student loans due to the fact that college graduates are more likely
to earn good money and cancel a credit.

If your loan agreement requires to point out its purpose, it implies that you should use the money in a certain way otherwise you may violate the terms of the agreement. In case you fail to follow the terms, the creditor has a right to break an agreement and return the money. Returning the funds to the creditor without cost and urgently may be problematic. For instance, you might need to cover a penalty on early distribution from a CD.

In fact, you may use funds for ‘alternative’ aims. But in this case there is a possibility that the creditor will resort to legal action against you (if they learn that you’ve used the funds differently than you intended).

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