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banks often have specific reasons for granting loans, according to financial experts.
When you borrow money, you may end up with more cash than you actually need. This is especially common with auto loans, study loans and personal loans. This can happen intentionally or by accident. When that happens, what can you do with the money, are you allowed to spend it on anything you want? Questions often arise whether it is illegal to find an “alternative use” for the loan.
Financial and banking experts say that in order to find out what’s allowed, you need to check your loan agreement. In some cases, there are restrictions, but other loans allow you to do whatever you want with the money.
Some people even take out loans without any intention to use the money the way the bank thinks they will, according to www.thebalance.com.
The most brazen borrowers invest the money, hoping to earn more than they pay in interest. Others simply use the funds for daily living: paying bills, buying groceries, and so on.
Loans for a specific purpose
With some loans, lenders want to restrict how the funds are used. Loan interest rates typically take into account the risk that the lender expects to take, and that depends in part on the purpose of the loan. Riskier loans have different terms and are more expensive than less-risky loans.
You may not even be able to get certain loans unless the money goes toward a specific purchase, according to www.thebalance.com.
Auto loans are similar to home purchase loans; the vehicle you buy secures the loan so the lender takes less risk. You generally don’t get a clear title in those cases; your lender has a lien on the vehicle until you pay off the loan. This makes it harder for you to sell the car for cash. That said, auto loans tend to be smaller than home loans, so lenders are not as strict. You may be able to get a cheque for as much as 110 per cent of the car’s value, leaving some extra money for registration and similar expenses.
Study loans are especially tricky. The federal or state governments may subsidise some student loan interest costs because an educated population is considered a good investment. Furthermore, banks are willing to offer attractive study loans because university graduates will be more likely to have the income needed for repayment.
Home loans (or mortgages) are generally used to purchase a home or refinance an existing home loan. It’s virtually impossible to get that money unless you go through a closing process, which involves using the property as collateral for the loan.
That way, if you stop making payments, the lender can foreclose and sell the property to get their money back.
What about taking cash out? If you have significant equity in your home, you can borrow against it, but you risk losing your home if you can’t repay the loan. Taking cash out in the form of a home equity loan or line of credit allows you to use the funds for almost anything.
With study loans, you end up with a large sum of money in your bank account, and nobody watches to see what you do with the funds. You’re supposed to spend that money on expenses related to higher education, but what does that mean? Tuition and fees are obviously acceptable expenses, as is rent (but should you rent an expensive place?). A vacation or a new TV is usually not an acceptable expense, because you don’t need those things to complete your education.
Business loans are also likely to come with restrictions. For example, small business loans can only be used to operate your business. You can’t use them to pay off other debts, buy something in hopes of an increase in value, or for any purpose that is not considered to be a sound business purpose as determined by the bank or the Central Bank of Nigeria.
Personal loans can be used for pretty much anything. You don’t pledge collateral, nor do you agree to use the money for a specific purpose. Personal loans include credit cards and signature loans from your bank. Loans from online lenders and peer-to-peer lenders are often personal loans as well. However, this type of online loan is not yet common in Nigeria.
Check your agreement
If your contract/agreement says that you must use the funds for a certain purpose, you’re taking a risk by doing something you agreed not to do, according to www.the balance.com.
If you fail to keep your end of the bargain, the lender may choose to end the agreement and demand that you return the money (in other words, you’d have to repay the loan in full immediately). Getting the money back quickly and without cost may be a challenge.
Is it illegal to use bank loan for alternative purposes?
Technically, using your loan money for “alternative” purposes may not be illegal. However, there is a risk that your lender will take legal action against you (if they find out that you’ve used the money in a way that’s different from what you promised and you default).
Complications
Getting creative with your loan money can result in several problems. First, you may find yourself deep in debt, and you’ll have to repay those loans at some point. Study loans can be especially troublesome. Those debts are hard to wipe out, even in bankruptcy, so they’ll haunt you for life if you get in over your head.
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