When applying for a personal loan, a question that often comes up is whether you need to specifically tell the lender what you will use the borrowed money for.
With so many potential uses for personal loans today, from financing vehicles, home improvements and weddings to medical expenses, holidays, or unexpected bills, does declaring your intended loan purpose actually make any difference to the application process or your chances of approval?
Here at Consolidation Expert, we can provide clarity on this situation. In this article, we will outline how lenders assess loan applications, what details they require from borrowers, and most importantly – whether you should be completely transparent if you plan to use the loan for consolidating existing debts. Taking the right approach can lead to a smoother application process and potentially lead to you getting the right loan terms for you.
Do Lenders Need to Know Your Exact Loan Purpose?
When you apply for an unsecured personal loan from a bank, building society, online lender or other regulated provider, their priority is assessing two key criteria, namely affordability assessment and borrowing amount. It is not always necessary to declare how you are planning to use the loan, but in some instances it can help you application.
Lenders need to confirm you can realistically afford to repay the loan within the requested term based on factors like your income, current debts and credit history. This important affordability check is a legal requirement enforced by the Financial Conduct Authority to protect borrowers from unserviceable debt.
By law, lenders cannot approve loans if repayments would make you over-indebted or struggle to make ends meet. As such, this assessment is extremely important.
Lenders also want to ensure the amount you are looking to borrow fits within their own lending policies and criteria based on your needs and circumstances.
Unlike secured loans like mortgages where the purpose is obvious, personal loan uses can vary greatly – from financing a car purchase to funding weddings, overseas holidays, home improvements, medical bills or even just covering everyday unexpected expenses.
Therefore, lenders typically won’t force you to reveal your precise intended use for the loan unless it is pertinent to them approving lending. Disclosing your exact purpose is generally optional.
Should I Disclose If the Loan Is for Debt Consolidation?
If your intention is to use the personal loan to consolidate and refinance existing debts like credit cards, store cards, payday loans or overdrafts into one manageable monthly payment, being upfront about this to lenders is usually recommended.
There are a few good reasons to be transparent if taking a loan for consolidating debts:
01. It Demonstrates Responsible Borrowing
Clearly stating that debt consolidation is the purpose for requiring a personal loan shows financial maturity and prudence. It demonstrates you are committed to proactively taking control of your debts in a constructive manner.
Using loans for less essential purposes like luxury purchases or leisure activities may not indicate as much responsibility to lenders, especially if you are already in significant debt.
02. Allows Accurate Affordability Assessments
By being open about using the loan to refinance debts, the lender can appropriately factor the eventual impact of consolidation into their detailed affordability calculations.
This transparency allows them to make more precise assessments of your situation and may lead to more positive outcomes or suitable offers.
03. Provides Access to Regulation Protections
There are specific financial regulations, consumer protections and guidance in place governing the use of loans explicitly for debt consolidation purposes.
Being transparent that consolidation is your goal means you will fall under relevant oversight and be better covered compared to taking a standard loan.
04. Get Better Guidance from Consolidation Expert
Lenders and brokers can provide more tailored guidance on prudent repayment terms, amounts and other consolidation best practices when they understand your needs. By being completely honest on you Consolidation Expert application, you may be able to get a debt consolidation loan which is right for your situation, potentially helping you to reduce monthly payments, lower your interest rate and simplify your debts.
Could a Debt Consolidation Loan Suit You Better?
While an ordinary unsecured personal loan from a bank, credit union, or online lender can certainly be used to consolidate and clear existing borrowing, for many borrowers a dedicated debt consolidation loan may be a more suitable product.
There are several advantages that specialist consolidation loans can offer compared to standard personal loans:
01. Specifically Designed for Debt Consolidation
The entire design of these loans is focused on streamlining the refinancing and repayment of multiple outstanding debts. Their core purpose aligns precisely with this need.
02. Specialist Lenders Fill Eligibility Gaps
Mainstream lenders often restrict personal loans to applicants with top credit. Specialist consolidation lenders may better cater to those with poorer scores and existing debt burdens.
03. Lower Interest Rates Than Debts Being Cleared
The interest rate on consolidation loans is often lower than rates on credit cards, store cards, payday loans and overdrafts – making them effective for saving money.
04. Longer Terms Available
Specialist lenders may offer longer maximum repayment terms than typical 2-7 year personal loans. This can make consolidating debts more affordable.