Know Your Limits: What You Can’t Do With a Personal Loan

Coming up with the funds to pay for sudden expenses like a funeral or major home repairs can be tough. That’s particularly true for people whose emergency funds are either already wiped out by the situation or who didn’t have one in the first place. Thankfully, it’s possible to take out personal loans.

Revisiting What a Personal Loan Is

Personal loans are a popular loan product because they typically have low interest rates and competitive features like application fee waivers. They’re also easy to qualify for because they’re generally based on your credit history.

Basically, it’s money borrowed from lenders that gets repaid in monthly installments with interest. The repayment amount is usually fixed and incremental. If you’re preparing for a large expense that you’ll have to pay for in the not-too-distant future, a personal loan could be a great option for you. Just make sure to shop around for a loan and a lender that suits your needs to ensure you get the best deal on a loan that you can afford.

Common reasons for taking out a personal loan include:

  • Emergencies
  • Expenses for the death of a loved one
  • Hefty medical bills
  • Wedding
  • Vacation

What some people may not know, however, is that there are restrictions as to what the money can be used for. It would not be wise to take out a personal loan pretending it’s for one thing and using it elsewhere; breaching loan terms is risky. The lender can (and most likely will) ask for the full amount plus interest to be repaid right then and there.

No, it’s not just illegal activities and gambling that can’t be done with personal loans. Read on to learn more about what you can’t do with a personal loan:

1. Business Expenses

The rules for this depend on the lender that’s issuing it. If the lender’s restrictions don’t blatantly disallow the use of the personal loan for small businesses, that should do the trick. Double-checking is always ideal, though.

2. Home Down Payment

Mortgage lenders, both in the conventional and FHA sense, do not allow personal loans to be used as a home down payment. That would essentially be two debts: personal loan repayments and mortgage payments, both running at the same time.

3. Paying for College Tuition

Most personal loans are not available for use in an educational context. The law is directly tied to this since there are federal regulations around such loans. These are some of the terms under the 2008 Higher Education Opportunity Act for lenders:

  • Give borrowers the option to cancel over three days of fund disbursement
  • Make special disclosures
  • No school affiliations
  • Provide a 30-day rumination period

Some lenders don’t meet these requirements and prohibit using their personal loans to pay for tuition as a result.


Personal loans are a great way to get a big amount of money fast, making them ideal for emergencies. Contrary to popular belief, they can’t be used for every single thing. Restrictions include paying for college tuition, business expenses, and a home down payment.

Need to take out a ,personal loan? Mid-Town Finance Company Huntsville is here for you! We’ve been serving the greater Huntsville area for over 20 years with straightforward, honest, fair loans.