Why Do Personal Loans have Restrictions?

There are many different types of loan. Each one comes with its own conditions for borrowing, which include restrictions on what the loan can be used for. For things like business loans, these restrictions are fairly clear. The loan can only be used for a business purpose and this has to be stated clearly at the time of making an application.

Personal loans, on the other hand, come with much fewer restrictions than business loans. Personal loans can be used for almost anything, from cars to clothes or even food. But personal loans still have restrictions, which can seem confusing to some people.

Dealing with Different Lenders

All lenders will enforce their own restrictions on what their loans can and cannot be used for. Personal loans, as the most flexible of all loan types, can generally be used for almost everything. However lenders do still exert restrictions on personal loans and these restrictions can vary between providers.

The most common reason for restrictions is to ensure that the lender does not become complicit if the personal loan is used for illegal purposes. When you go to take out a personal loan, you will find that you are asked what your loan will be for, as well as the amount that you wish to borrow. Not only does this protect the lender, but it also helps for them to keep their records and documentation in order.

No Security Means Higher Risk

Another reason for why personal loans have restrictions is that they do not require a security to be provided in the same way that other loans do. This means there is extra risk for the lender. Some lenders, such as The 1st Stop Group Limited, will mediate this risk by restricting the amounts they offer for first time borrowers. This amount is then increased as the borrower is able to prove that they are responsible and can be trusted to repay the full loan amount. This is also why you will find that a personal loan often comes with a higher interest rate than any other type of loan – this is to ensure that the lender is able to recoup any potential losses ahead of time.

Using a Personal Loan for Business

Using a personal loan for business reasons is a grey area. Some lenders won’t mind, whereas others will specifically state that it cannot be used for this purpose. If you are unable to repay the loan this may affect your business, so it’s in your best interests to make sure that you are able to pay the higher interest rates that a personal loan demands before considering one for your business. It’s usually the case that you will be advised to take out a business loan instead, which will be more suited to your purposes.

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