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Personal loans can be used for almost anything — here are expenses they can't cover

Select breaks down some expenses you can't use a personal loan to pay for.

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When it comes to paying for large expenses like a costly home repair or a funeral, it can be tough to come up with all the money you'll need to cover the bill — especially if your emergency fund can only get you so far. That's where personal loans can come in. The money you borrow gets repaid to the lender in smaller, fixed monthly installments (with interest, of course). So instead of trying to slowly scrape together tens of thousands of dollars for a home repair you need right away, for example, you can apply for a personal loan to get the money fast then pay it back over time in small, less intimidating installments.

You can generally use a personal loan for almost anything, including a wedding, a vacation, a medical bill, an emergency circumstance and more. However, there are also some expenses a personal loan usually can't be used to cover. It's better to make sure you aren't breaching any loan terms; using a loan for prohibited purposes could result in the lender forcing you to repay the full amount plus interest immediately.

Aside from gambling and illegal activities, here are some other things you generally can't use a personal loan to pay for.

Paying college tuition

Some personal loans can be used for educational purposes, but many cannot. It really comes down to which lenders follow the federal regulations around loans for educational use.

Under the 2008 Higher Education Opportunity Act, lenders providing private education loans must make special disclosures, provide a 30-day rumination period, must give borrowers the option to cancel within three days of disbursing the funds and cannot affiliate themselves with schools. These are just some of the regulations that loans for educational use must follow.

Not all lenders offer personal loans that meet all of these requirements. Since they don't follow these strict regulations, many lenders actually prohibit the use of their personal loans for tuition-related expenses.

Before you apply for a personal loan to pay college tuition, double check with the lender to see if this is prohibited. Also, make sure you exhaust your options for funding your education through federal student loans first.

Federal student loans typically carry a lower interest rate compared to most personal loans — especially since most students likely haven't built up enough of a credit history to qualify for the best interest rates on a personal loan. And, federal student loans are usually repaid over the course of 10 to 20 years whereas personal loans repayment terms are usually limited to seven years.

Making a down payment on a home

Coming up with the money for a down payment on a home purchase can be daunting and sometimes feel far out of reach. Borrowing the money and repaying it in small amounts every month can seem more doable, however, you generally won't be able to use the money from a personal loan towards your down payment.

Conventional mortgage lenders and FHA mortgage lenders forbid the use of personal loans as a down payment for a home. If you were to take out a personal to use as a down payment, you'd be on the hook for two debts — the mortgage payments and repayments for the personal loan. From a lender's perspective, this could increase the risk of a borrower defaulting on their payments, which is why conventional lenders and FHA lenders don't allow you to use a personal loan for a down payment.

When saving for a down payment, you may consider doing so in a high-yield savings account since these accounts offer higher interest rates compared to traditional savings accounts. You might not earn hundreds of dollars per month, but the interest you do earn can still go a long way in helping you build your down payment quicker. Select ranked the Marcus by Goldman Sachs High Yield Online Savings as the best overall, and the Ally Online Savings Account as best if you want a savings and checking account combo.

Business expenses

Similar to the rules around using a personal loan for paying tuition, the rules around using a personal loan for business expenses can vary by lender. If a lender has no restrictions on using their loan for your small business, you will be able to use the loan for any of your business needs. However, some lenders do not allow you to use their personal loan for any type of business expense.

Again, it will be important for you to double check this with the lender before you apply to the loan. If the terms of the loan aren't clear, you should be honest about your intentions as a borrower and make sure the lender knows that you may use the money for your business.

However, in some cases it might actually be better to apply for a small business loan from the Small Business Administration (SBA) if your business requires more upfront capital. Personal loans have a borrow limit of $100,000, but with a small business loan you can borrow up to $5 million.

And if you won't necessarily need hundreds of thousands of dollars for covering business expenses, you may instead consider using a business credit card to cover costs. Cards like the Capital One Spark Cash Select - Excellent Credit* offer you cash back and free cards for any employees of your business. Other cards like the Chase Ink Business Preferred® Credit Card let you earn extra points for paying for items related to your business, like shipping costs, internet and social media advertisements. Plus, some credit cards (including business cards) offer introductory 0% APR periods, which can help you finance projects without having to pay any interest on balances you carry for a certain amount of time — usually 12 to 18 months.

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Read more about Select's picks for the best personal loans

Bottom line

While a personal loan can be a useful tool for funding costly projects, repairs and even large surprise expenses, there are still some costs they can't be used to cover. While some lenders may be more lenient on the use of the loan, you should always double check the terms to make sure you'll be in the clear.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

*Information about Capital One Spark Cash Select for Excellent Credit, Marcus by Goldman Sachs High Yield Online Savings has been collected independently by Select and has not been reviewed or provided by the banks prior to publication. Goldman Sachs Bank USA is a Member FDIC.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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