A personal loan can be used for most expenses, with a few important exceptions. You are free to spend the money you borrow on a holiday, a car or home improvements. However, there are expenses you should not use a loan for and expenses that lenders will refuse to fund. In this article, we will cover what you can use a personal loan for and what you will need to fund in another way.
| Can use a personal loan | Cannot use a personal loan |
| Home improvements | Starting a business |
| Home repairs | A house deposit |
| Energy efficiency improvements | Investments |
| Debt consolidation | Household bills |
| A car | Everyday spending |
| A big purchase | Higher education |
| A wedding | A gift |
| A holiday | Gambling |
What can you use a personal loan for?
Here are a selection of common ways to use a personal loan, though keep in mind that it will not always be the perfect option.
Home improvements
A personal loan for home improvements could be used for converting a loft space, adding a conservatory, renovating a bathroom or any other renovations. You can get the money you want to improve your home without the need to put the property up as collateral, which would be a requirement with a secured loan. A secured loan comes with the risk that the collateral could be sold if you do not meet the monthly repayments, while a personal loan carries less risk.
If you choose to pay for your home improvements with a personal loan, you can benefit from spreading the overall cost across several months or years. This means you would not need to use your savings in order to make a lump sum payment.
The key limitation of using a personal loan to fund home improvements is that you will likely not be able to borrow enough money to fully fund some big projects. Most major providers will only lend up to £25,000, though some borrowers may be able to get more.
Home repairs
While some homeowners may be looking to borrow money to improve their property, others will be thinking about how they can fund the cost of keeping their home running. This could be fixing a broken boiler, making repairs caused by a leak or replacing a damaged roof. You can spread the cost of fixing any damage by repaying your loan over many months, rather than forking out for the full amount upfront.
The downside is that you do not always know how much repairs will cost until they have been completed. This can make judging how much to borrow difficult. A more flexible borrowing option, such as a credit card, may seem like a better option. However, there are limitations to what you can pay for with a credit card and in some cases, your repair bill may be higher than your available credit limit.
Energy efficiency improvements
Improving your home’s energy efficiency can save you money in the long run. Better insulation, an alternative heating system and modern windows could all cut down the amount of energy you use and even increase the value of your home. However, you will need to weigh up these benefits with the costs of getting the work done and paying interest on your personal loan.
If you do decide to go ahead with the work, a personal loan could be a good funding option as you will be able to spread the cost and use the money you save through improved energy efficiency to help clear the debt.
Debt consolidation
Personal loan debt consolidation involves paying off multiple debts through one new form of borrowing. You can take what you owe across credit cards, overdrafts or loans and combine them into one monthly payment. This can make managing your finances much easier and save you money on interest.
Personal loans can be a great debt consolidation tool because you can typically borrow more than with a credit card. Interest rates can be more competitive too, though you will not be able to access the 0% interest offers that come with many credit cards.
You can read more about debt consolidation in our article ‘What is the best way to consolidate my debt?’.
Buying a car
There are a variety of different ways to finance a car purchase, and taking out a personal loan is certainly one to consider. Compared to other car finance options, you will own the car outright from the start and not need to worry about mileage limits or the risk of losing your car if you miss payments.
Taking out a personal loan can also be a cost-effective way to purchase a car compared to other forms of finance, especially if you have a good credit history and can access a low APR deal. It is worth using an online eligibility checker before you apply for the loan, which will give you a good idea of whether you are likely to be accepted and at what rate, without leaving a mark on your credit file.
One downside is that as you will own the car outright from day one, you will need to pay for repairs and servicing throughout the time you have that car. Additionally, as with using cash, you will miss out on the Section 75 protections that come with a credit card purchase. This means that you will not have the same level of legal recourse if the car is faulty, though all dealerships do have an obligation to make sure the car isn't faulty and is fit for purpose under the Consumer Rights Act.
Big purchases
You can use a personal loan to spread the cost of a big purchase, such as a new washing machine, sofa or carpet. This will save you having to pay the full cost upfront and instead allow you to spread the bill over several months or years. However, there may be more cost-effective ways to spread the cost of a big purchase. For example, using a credit card with a 0% purchase period will enable you to spread the cost of your new purchase without having to pay any interest, if you clear the balance before the offer period ends. Additionally, many retailers now offer 0% finance and so it is worth doing your homework before you commit to a personal loan for a big purchase.
Paying for a wedding
Weddings are expensive, so using a personal loan to pay for the whole day, or a just few particular expenses – such as the venue, catering, photographer or clothes – can be a useful way to spread out the cost. You may find that it allows you to budget more efficiently and cut down on some of the stress that comes with planning your big day. Many lenders will offer loan amounts of up to £25,000 to certain borrowers, which will be enough for some weddings, though others will cost considerably more. Also keep in mind that not everyone will have a good enough credit history to get the full amount they need at the best rate.
In some cases, paying for each expense with a credit card as it crops up can be a cheaper and easier system. You will be restricted by your credit limit on how much you can spend before you need to clear your balance, but you can benefit from valuable rewards and 0% interest periods.
Paying for a holiday
You could choose to spread the cost of a holiday using a personal loan, however, it will only be the best option in select circumstances. This is because a credit card will likely be a cheaper option and will likely provide better purchase protection if something goes wrong. A loan will usually only be a better option than a credit card if you do not have a high enough credit limit to pay for the full holiday. A personal loan will typically allow the borrower to access more money than they could with a credit card, but you cannot earn rewards or benefit from 0% interest offers with a loan.
What can’t you use a personal loan for?
Below, we explain the expenses you should avoid using a personal loan to pay for as well as the types of purchases that loan providers will refuse to fund.
Starting a business
Personal loans are for individuals, not businesses. If you need to borrow money for a new business venture or to finance an existing company, you should think about a specialist business loan or a startup loan. Lenders will usually reject your application if you specify that you intend to use the loan for business purposes.
The basic structure of a business loan is similar to a personal loan. You will have to show the lender proof of your income, credit history and how you intend to repay the debt. If your business is set up as a sole trader, this evidence will come from your own credit history and personal finances. If your business is set up as a limited company, it is the business’s credit file that is usually assessed - though the lender may want to review your credit report as well.
House deposit
Your loan application will likely not be approved if you state that you plan to use the money as a deposit for a mortgage.
Mortgage providers will assess your affordability when you apply for a mortgage to buy a house. Part of this will be looking into what existing credit obligations you have and asking how you have funded your deposit. If you have a loan that needs to be repaid, that will be taken into account when the lender decides how much it thinks you can afford to borrow. The repayments will be considered as an expense alongside your other outgoings and assessed against your income, known as your debt-to-income ratio. If this is too high, it will reduce what the lender believes you can afford as a maximum monthly mortgage payment.
Many mortgage providers will ask for proof of how your deposit has been funded and will not accept your application if you have used unsecured borrowing, such as a personal loan. This is because if you were to use a personal loan as your full deposit, you will be borrowing 100% of the value of that property. This is a risky proposition for the lender as a small drop in value would leave you in negative equity. Therefore, your mortgage deposit should consist of cash you do not need to pay back.
Investing
Your application will usually be rejected if you plan to use the money for an investment. When you apply for a loan, the lender will need to make sure that you can repay the debt as agreed. If you plan to use the money for an investment, there is a chance that you could end up losing the cash that you put in. Investments carry risk and can go up or down, so most lenders will be unwilling to take the risk, as you may end up losing a considerable amount of money and struggle to repay the debt.
Household bills
If you are struggling to pay household bills, a loan is unlikely to solve your problems. Instead of owing money to utility companies, you will owe money to the lender. This just moves the issue rather than solves it. There are ways to manage challenging household bills without putting yourself into more debt that you may struggle to pay back.
The best option for anyone struggling with their household bills is to get free, impartial advice. The financial experts at organisations such as Citizens Advice or National Debtline will be able to explain the best ways to manage your bills and access any financial support available.
Everyday spending
A credit card is likely to be a more flexible and cost-effective option when it comes to managing everyday spending. A personal loan will involve borrowing a fixed sum and repaying it with interest, whereas credit card spending can be interest-free if you repay the money within a certain period.
You also have the flexibility to borrow more or less depending on what you need. Taking out a loan involves committing to a fixed sum that you need to pay interest on, whether you spend the cash or not. Credit cards only charge interest on the money you spend and you'll not be charged interest if you clear the balance before the interest-free period ends.
We cover more on the difference between loans and credit cards in our article 'Is it better to get a credit card or a personal loan?'.
Paying for higher education
Student Loans from the government are likely to be more efficient for most people looking to fund their higher education. Personal loans have to be repaid, no matter how much money you earn. If you lose your job, face an unexpected bill or a sudden jump in living costs, you will still need to pay back your personal loan each month. Any missed payments could damage your credit score and leave you having to pay more overall. However, Student Loans only need to be repaid once you start earning over a set amount. If your income goes down, you will pay less or nothing at all if it drops below the repayment threshold. You can use a Student Loan to pay your university fees and living costs, with higher loan amounts available to lower-income households. Keep in mind that the system varies across the nations of the UK.
We go over the full details of how the UK Student Loan system works in our article ‘Student debt: What you need to know about repaying your student loans’.
As a gift
Loan providers are unlikely to approve your application if you plan to use the money as a gift. This is because it is your individual finances and credit history that are being assessed to approve the loan, not those of someone else. If you know someone who needs money, but cannot get a loan, you should suggest they get some free debt advice rather than apply for credit on their behalf. If you want to give a friend or relative a gift, but don't have the cash yourself, the best option is to start saving. Even a small amount every month can quickly build into a useful sum through regular savings.
Gambling
Your personal loan application will not be approved if you inform the lender that you plan to use the money for gambling. This is because there is too great a risk that you will lose the money and not be able to afford repayments. UK lenders are required to lend responsibly, so approving loans for someone with a gambling problem would likely compromise this.
Illegal activity
This may seem pretty obvious, but no lender will agree to a loan to fund any kind of illegal activity.
