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Should the Purpose of a Personal Loan Affect the Interest Rate?

[Nov 3, 2009.]


Personal loans can be used for a variety of purposes, including debt consolidation, income tax payments, and wedding expenses.

Typically, because a personal loan is unsecured--that is, the lender has no collateral to take if the loan is not repaid--the personal loan is extended based on the credit of the borrower. Increasingly, though, lenders are looking for ways other than credit score to measure risk.

Should the purpose of a personal loan be one of the risk factors considered by a personal loan lender?

China Thinks So

As the economy of China has continued to thrive even during this global slowdown, the economic braintrust of the Chinese economy has seen fit to pay more attention to financial regulation.

One recent bit of legislation that caught our eye was the move by China to tighten the rules for personal loans. Under the new rules, lenders will have to more rigorously verify the identity of loan recipients, and be aware of the purpose of the personal loan.

Why is this last requirement necessary? Because 1.16 trillion yuan worth of personal loans were invested in the Chinese stock market in the first five months of 2009. And that is how "bubbles" are created.

And bubbles, as any red-blooded American should know by now, can be utterly disastrous.

American Lenders Agree, Albeit Unofficially

The purpose of a personal loan does, in reality, matter to whether or not a borrower is approved for a personal loan, and at what interest rate. This is especially true for bad credit personal loans--lenders are understandably unwilling to make personal loans whose funds will be used for frivolous purposes.

However, conventional bank lenders do not necessarily advertise the fact that they are evaluating borrower reasons for wanting a personal loan. Rather, many conventional lenders view the purpose the loan as an "influencing factor," but not a primary consideration.

At a social lending site such as LendingClub.com, by contrast, personal loan purpose can be the entire reason a lender makes a loan to a borrower, or not.

Purpose-Driven Personal Loans Have a Better Chance of Approval

The upshot of all this, for the person looking for a personal loan, is to make sure to have a good and worthy purpose for taking out a personal loan.

Frivolous borrowing is so 2005.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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