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What Purchases Are Okay to Make with Loans?
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What Purchases Are Okay to Make with Loans?
Can you use your loan for alternative costs?

After taking out a loan, it is possible to end up with more money than you needed. This can be unintentional and is a common occurrence in some cases, such as with student loans. So what purchases are okay to make with loans?

Check your agreement

If you have any doubts about whether you can spend loan money on something other than what you took it out for specifically, check your contract or agreement. You might be able to get away with spending your loan money on unrelated purchases, but not without taking a big risk.

“If you fail to keep your end of the bargain, the lender may choose to end the agreement and demand that you return the money (in other words, you’d have to repay the loan in full immediately),” warns Justin Pritchard, financial author and expert, in a September 2017 article for TheBalance.com.

“Technically, using your loan money for ‘alternative’ purposes might not be illegal. However, there is a risk that your lender will take legal action against you (if they find out that you’ve used the money in a way that's different from what you promised and you default).”

Student loans

When you get a student loan from the government, you agree to use the money you borrow only to pay for expenses that are included in the cost of attending school. This usually applies to private loans as well. This includes housing, food, books, transportation and miscellaneous personal expenses—even a computer. However, the line between what is and isn’t acceptable can easily become blurred. For example, rent is an acceptable expense, but there is no clear rule about whether you should or shouldn’t move into an expensive place.

“The trick is not to get carried away in defining what’s a necessity,” advises Stephen Dash, investment banker, in a December 2016 article for Forbes.com. “Rent, utilities, and groceries? Those are things you can’t do without. Streaming movies, drinks at the bar, spring break trips? Those probably aren’t expenses that you want to pay for with grants or student loans, even if you’re able to get away with bending the rules.”

At the end of the day — or the semester — it’s important to remember that while you may be able to get away with spending student loan money on more than just education-related expenses, any extra money you spend is money you will need to pay back with interest after you’ve earned your degree.

Auto loans

Unlike with student loans, it is improbable that you will be able to take out an auto loan and get far more money in your pocket than you needed to buy the car. “You might be able to get a check for as much as 110% of the car’s value, leaving some extra money for registration and similar expenses,” says Pritchard.

To try to borrow more money than you need to boost that percentage past 110 is also not advisable. “If you borrow too much, you’ll find that you owe more on the vehicle than it is worth (also known as being upside down),” Pritchard writes. “As a result, you’ll have a hard time selling the vehicle—you’ll have to write a check to get rid of it—or you’ll end up making payments long after the car is worthless.”

Personal loans

When taking out a personal loan, there is virtually no limit to what you can do with the money. They are used for everything from getting married or buying a boat, to traveling abroad or fixing your house. However, there are still a few exceptions to the rule. “There are only a few things most lenders won’t let you use a personal loan for, including for investing, illegal activities and gambling,” says Mike Cetera, editor for Bankrate.com, in a June 2016 article. “Many lenders also won’t let you spend the cash on college expenses, including tuition, books and room and board.”

As a general rule, you should only spend money on what it was borrowed for in the first place. If you find that you want or need to spend it on something else, make sure to read the fine print first, or consult your financial institution for advice.


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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.
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