What can you use a personal loan for?
Written by
Joe Towner
Reviewed by
Amy LancashireYou can use a personal loan to fund many things, from consolidating debt to buying a car or covering a big one-off cost. Because it’s unsecured it’s linked to your credit history rather than a specific asset. However, there are a few things you’re not allowed to use it for, like a house deposit, business costs or investing.
Here's what a personal loan can and can't cover, and what to keep in mind before you apply.
What can I use a personal loan for?
A personal loan gives you a lump sum that you pay back in fixed monthly instalments, and because it's unsecured, you're usually free to spend it on most personal costs. Common uses include:
Consolidating debt - combining several debts into one monthly payment, which can lower your rate, but if paid over a longer term can mean paying more interest overall.
Buying a car - because the loan isn't secured against the vehicle, you own the car outright from the start.
Home improvements - paying for a new kitchen, an extension or other work on your home.
A wedding - spreading the cost of a wedding over a set term.
Unexpected costs - one-off bills for an emergency like a boiler repair or a vet bill
What can't I use a personal loan for?
Personal loans are flexible, but lenders set some limits in the loan agreement. You typically can't use one for:
Business costs - a personal loan is meant for personal spending, so using one to fund a business will break the terms. If you need money for a business, a business loan is the right product.
A house or mortgage deposit - mortgage lenders won't normally accept a deposit made up of borrowed money, because it adds to your debt and affects your ability to afford the mortgage
Investing - most lenders won't let you use a loan to buy shares, cryptocurrency or other investments. If the investment loses value, you still have to repay the loan in full.
Gambling - loans should not be used to fund gambling.
Anything illegal - no lender will finance unlawful activity.
Should I use a personal loan for everyday costs?
It's best not to. Borrowing to cover routine bills or day-to-day spending means paying interest on costs you'd have had anyway, and relying on credit for essentials can be a sign of wider money trouble. If you're in that position, free and impartial help is available from MoneyHelper.
What happens if I use a personal loan for something it's not meant for?
When you take out a loan, you agree to the lender's terms, and those terms usually set out what the money can and can't be used for. Using it for a restricted purpose means breaking that agreement.
In practice, a lender generally won't track every purchase you make. But if they find the loan was used for something they don't allow, they could ask you to repay it in full, and it could affect your ability to borrow from them again. Being honest about why you're borrowing also helps make sure you end up with the right type of loan in the first place.
Does what I use it for affect my application?
Usually it will to some degree. You're normally asked to give a reason for borrowing when you apply for a loan, such as a car, home improvements or debt consolidation. Lenders use this to check if the loan suits your needs, and in some cases it can influence the decision or the rate you're offered.
If your loan covers more than one thing, choose the purpose that makes up most of the amount. For example, if you're borrowing £10,000, with £6,000 for a car and £4,000 for home improvements, you'd select the car.
When is a different type of borrowing better?
A personal loan isn't always the right choice:
To buy a home or put down a deposit, you'll need a mortgage
For business costs, a business loan is designed for the job and can offer features a personal loan can't
To borrow a larger amount, often at a lower rate, a secured loan uses an asset like your home as collateral, though your home is at risk if you don't keep up repayments
If you're trying to clear a mortgage early, see our guide on using a personal loan to pay off a mortgage
A credit card or overdraft might be suitable for short-term expenses and can be cheaper as long as you pay them off, in full, as soon as you can.
Personal Loan Uses FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
