When applying for a personal loan, you’ll most likely have a specific purpose in mind for which you plan to use the money you’re requesting to borrow.
Personal loans are one of the more flexible loan types available to borrowers, which means there is a wide range of loan purposes that may be considered for approval including covering medical expenses, paying for a wedding or even furnishing your home.
But are you required to disclose this information on your application?
In a word, yes. And it’s largely to do with obligations of responsible lending.
How does responsible lending relate to disclosing my loan purpose?
In Australia, banks and lenders must be covered by an Australian credit license in order to engage in credit activities such as providing credit under a credit contract – or in other words, providing a loan.
According to the Australian Securities and Investments Commission (ASIC), credit licensees are obliged to comply with the responsible lending conduct obligations set out in the National Consumer Credit Protection Act 2009.
The long and short of it is that credit licensees mustn’t enter into a credit contract with a consumer if the contract could be considered financially unsuitable for the consumer.
Credit licensees are required to decide how they will meet the responsible lending obligations, which according to ASIC involve the following:
- Making reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;
- Taking reasonable steps to verify the consumer’s financial situation; and
- Making an assessment about whether the credit contract is ‘not unsuitable’ for the consumer.
Put simply, lenders are responsible for assessing how much you want to borrow, why you want to borrow that amount – i.e. your loan purpose – and how it will affect your financial situation.
Lenders require you to disclose your loan purpose to provide them with the information they need to make a comprehensive assessment of whether the loan can be deemed suitable for you, and thus meet the obligations of responsible lending.
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What are some examples of eligible loan purposes?
There is a wide variety of reasons why a borrower may want to take out a personal loan. Some that will generally be considered by most lenders include the following:
- To pay for a wedding
- To pay for a holiday
- To buy a car
- To buy a bicycle
- To buy solar panels for your home
- To renovate your home
- To furnish your home
- To cover medical bills
- To consolidate your debts
- To pay for educational expenses
- To cover funeral expenses
It is important to keep in mind, however, that just because a lender may consider these acceptable loan purposes doesn’t mean that will be the case for every borrower. Lenders assess each application individually, and what’s right for one borrower won’t necessarily be suitable for the next.
For example, someone with excellent credit history, a good income and minimal debt may be approved for a personal loan to furnish their house. This could be because the lender has determined that this borrower is unlikely to face difficulties making repayments on the loan.
In contrast, someone who has multiple credit cards, a subpar credit score and an unsteady employment history may have their application for a personal loan to furnish their house rejected. In this case, the lender likely made the assessment that the loan could put the borrower in a position of financial strain due to their personal circumstances.
Remember that taking out a loan can be a significant financial commitment, so it’s important to take your time shopping around and comparing your options before making a decision.
Consider talking to a financial advisor for information specific to your personal situation.