4 expenses that personal loans don’t cover

Personal loans are a financial tool that can help you pay for a variety of expenses. But they don’t cover everything.

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You can use the funds from a personal loan for nearly any purpose, like debt consolidation or home improvements. But personal loans don’t cover these 4 expenses. (Shutterstock)

Personal loans can be a good option when you need extra cash to pay for nearly any expense. While some personal loans are designed for specific uses, like debt consolidation, many lenders offer personal loans you can use for almost any purpose. 

But no matter how flexible your lender is, there are a few expenses that you can’t pay for with personal loan funds. 

If you need a personal loan to consolidate debt, Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

1. Paying for college

You typically can’t use personal loan funds to pay for college tuition. This can be risky to a lender, as many student borrowers have little or no credit history and aren’t employed.

You may be able to use a personal loan to pay for other expenses while you’re in school, like housing or transportation, but a federal student loan will most likely be a cheaper option since it has flexible repayment plans.

If you take out a personal loan for educational expenses, make sure you can afford the monthly payment while you’re in school. 

If you need a loan to pay for college, start with federal loans and then use private student loans to fill in any gaps in education costs. After you graduate, you can consolidate federal student loans or refinance student loans, possibly getting a lower interest rate or monthly payment.


2. Making a down payment on a home

You won’t be able to use a personal loan to fund the down payment on your new home. Conventional lenders, as well as the Federal Housing Administration (FHA), have strict guidelines about where you source the money used to put toward your down payment. 

The U.S. Department of Housing and Urban Development (HUD) lists acceptable sources of funds for down payments and closing costs, including:

  • Earnest money deposit
  • Funds from your bank account
  • Cash on hand
  • Private savings club
  • Savings bonds
  • IRA or 401(k)
  • Stocks and bonds
  • Gifts
  • Sale of personal property
  • Commissions from a sale
  • Grants and loans (specifically for down payments)
  • Employer assistance programs

Unacceptable loan sources include:

  • Unsecured signature loans
  • Cash advances on credit cards
  • Borrowing against your house or other property
  • Other unsecured financing

When you apply for a conventional or FHA mortgage, you’ll need to document the source of all the money you’ll use for your home purchase. The lender will verify each source before approving you for a mortgage loan. 

If you need help with the down payment on your mortgage, visit the HUD website to see what programs are available in your state. 


If you’re already a homeowner and you’re considering a personal loan to fund a home improvement project, visit Credible to compare personal loan rates from various lenders.

3. Some business expenses

Many small-business owners take advantage of personal loans to cover expenses. You may be able to use personal loans for some business-related expenses, but lenders may restrict other ways you spend the funds. Since rules vary by lender, you should talk to your lender about why you’re getting the loan and ask them about any restrictions before you apply. 

Taking out a personal loan instead of a business loan to cover business costs has some risks. You’ll rely on your personal credit score to qualify and could face a hit to your credit score if you have trouble repaying the loan. 

Further, many loan options through the Small Business Administration offer favorable repayment terms and more flexibility. SBA loans may take longer to process, but you may qualify for a higher loan amount than you would with a personal loan. And the interest you pay on an SBA loan may be tax deductible. 

Other alternatives to a personal loan for business expenses include a business credit card, business line of credit, and grants. 


4. Gambling and illegal activities

When you take out a personal loan, lenders will likely have a clause that specifies that you can’t use the funds for gambling or illegal activities. Lenders won’t fund gambling since it’s a very high-risk activity, and they could lose their money if you can’t repay your loan. 

Lenders can’t knowingly provide loans for illegal purposes, or they could face legal problems. Money laundering is prohibited, so lenders can’t legally loan money for illicit activities. 

If you need a personal loan for an unexpected expense, or to consolidate debt, Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.