Lender Asks for Purpose of a Loan? Best Answer to Boost Your Approval Chance

We all have situations in life that require extra financial resources to resolve. Personal loans can be of great help in these circumstances.

Consumer Credit in the Philippines increased (1) from 722.46 Php billion in the fourth quarter of 2023 to 744.70 Php billion in the first quarter of 2024.

However, there are specific criteria a person has to meet to ensure loan approval. One factor that can define the outcome is the purpose of the loan. In the article below, we will tell you more about how it matters and why.

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Why Lenders Care About the Purpose of the Loan

While it might seem counterintuitive why a lending institution would care about the purposes for which you use borrowed money, you must remember that lenders carry financial risks by giving out loans. That’s why they must ensure that money is used for a lawful cause and will most likely be repaid.

The reason for the loan directly affects the lender’s approval chances. Considering your purposes, the lender will determine repayment conditions, interest rate, term, and available amount.

The logic behind it is fairly simple: if you have a clear and legitimate goal to fulfill with the money and a feasible payment plan, you are viewed as a reliable and capable borrower, and the lender will consider giving you money a profitable endeavor. Hence, it will increase your chances of being approved.

Loan Purpose Samples

Imagine a client applying for a loan to invest in a new cryptocurrency. He has no investing experience and only has a project job as a source of income.

Another client also freelances as a graphic designer but is applying for a loan for a medical emergency: his vision is getting worse, and he struggles to focus and looks at the computer screen for too long.

Which of these clients will have a higher chance of loan approval? Both have freelance jobs and a reason to borrow money, but which makes a more convincing case?

A lender has to evaluate the potential risks of non-repayment. Therefore, the company must consider the client’s motivation to get and pay back the loan. The second client is getting a tangible procedure done that will have long-lasting effects on his health and ability to perform professionally. It is a viable investment. The first client is taking chances and participating in a high-risk, high-return activity.

Besides, speculative investments — high-risk ventures like cryptocurrency trading or unregistered investment schemes — may lead to rejection.

Therefore, the lender will most likely reject the first borrower and approve the second one.

Best Answers About Loan Purposes to Improve Your Approval Chances

Below is the list of goals for which the loan will most likely be approved.

✅ Medical Emergencies

Health is arguably the most important thing we have. Its value is recognized worldwide, and people will go to great lengths to protect it.

With medical expenses increasing yearly in the Philippines, it is reasonable to consider taking out a loan in case of a medical emergency. Loans are more flexible and offer lower interest rates than credit cards.

While medical issues are a very valid purpose for a loan, remember that the lender will still assess their risks: the amount you need to cover medical assistance costs, the severity of your condition (regarding repayment prospects), and so on.

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✅ Large Purchases

Technology makes our lives easier and our work more productive. But acquiring something like this can also be quite expensive. It can be electronics, like high-speed computers, video equipment for freelance editing, specialized equipment, heavy-duty machinery for farming, for example, or even home appliances.

A large purchase is usually a big decision. So, before getting a loan, try to evaluate if:

• it is something of a true necessity to you;
• you can buy it with your savings without getting yourself into debt;
• you can afford monthly payments;
• this is going to impact your general financial situation.

✅ Utility Bills

Loans for utility bills allow lenders to cover overdue payments for essential services such as electricity, water, gas, and internet. By providing immediate funds to settle outstanding bills, these loans can help prevent service disconnection during financial hardships.

There are different types of utility bill loans:

• Personal loans. Offered by banks, credit unions, and online lenders, these loans can be used specifically for utility bills. They typically have flexible repayment terms and quick approval processes.
• On-bill loan programs. Some utilities offer on-bill financing or repayment programs that allow customers to borrow money for energy improvements or to pay overdue bills. The money is repaid through the utility bills. These programs may feature low or zero interest rates.
• Emergency loans. Specialized loans that provide quick funding for urgent needs, including utility payments, often with fast approval times and minimal documentation requirements.

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✅ Home Improvement or Repair

It is another very valid purpose for a loan. Our home is a direct representation of our quality of life, and it is vital to people.

Whether it is an entire home renovation, repair of pipes, flooring, installment of air conditioning, or another home improvement, a personal loan can help you. Sometimes, a major home renovation is required after a natural disaster, which the islands are no stranger to.

But if you want to expand your living space, remember that using the loan money as a downpayment for a new house is likely not a good purpose by the lender.

✅ Debt Consolidation

Debt is a very significant issue nowadays, and it can be quite challenging financially to get oneself out of it, especially if multiple high-interest loans are involved.

Usually, taking out loans to pay off other loans is not a good idea. While it might seem like a solution in the short term, you can get yourself into a vicious circle: you borrow money to pay off the debt and get yourself into even more debt. Now, you have to pay interest for several loans, which worsens your financial well-being.

However, consolidating multiple high-interest loans into one loan with lower interest can help improve one’s financial situation in the mid to long term. Stating debt consolidation as a loan purpose can communicate your accountability and dutifulness to the lender.

Besides, there are special loans for debt consolidation. Consider such options if you have several loans, as they can help streamline your payments and reduce your overall interest costs.

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✅ Education and Tuition Fees

It’s worth noting that not all lenders hand out personal loans to pay for higher education. This is partly because students usually don’t work while they study, and the lack of a steady income source creates additional risks for the lender.

At the same time, education can significantly improve a person’s income range, which will be profitable for the lender. Plus, nowadays, the demand for various skills is only getting stronger, so more and more people are considering education an actual investment.

Special student loans are available for lenders who are getting professional education. Such loans feature lower interest rates and longer repayment terms, giving borrowers enough time to complete their studies and secure employment before starting repayments.

✅ Groceries and Daily Essentials

In the Philippines, loans for groceries and daily essentials have become increasingly important as many individuals and families face financial challenges. These loans provide a means to cover basic household needs when funds are limited, ensuring that essential items like food, toiletries, and other necessities can be purchased without undue stress.

There are several types of loans for groceries and daily essentials:

• Buy Now, Pay Later (BNPL) Programs. They enable consumers to buy and pay for products later, often without interest, if payments are made on time.
• Credit Lines allow borrowers to withdraw money up to a predetermined limit and pay interest only on the amount used, making them a versatile option for managing cash flow.
• Cash Advances. Various services offer same-day cash advances specifically for grocery expenses. Cash advances are typically obtained without extensive documentation.

✅ Vacation and Traveling

Vacations can be costly, especially nowadays, but they are a great way to learn about other cultures and educate oneself. Experiences like this are crucial to maintaining our mental health, directly affecting productivity. Plus, traveling and learning about other people’s way of life can boost personal and professional growth. So, delaying them until you finally get the chance to save enough to afford them can result in missed opportunities.

When getting a loan to cover travel and vacation costs, one should have a clear plan for repaying the borrowed money. One should also consider the traveling experience itself so that it could be enriching and educational rather than merely entertaining.

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✅ Vehicle Purchase

A vehicle is essential to any person’s life, as it ensures mobility. It also expands one’s job opportunities, especially for people in remote areas. So, it can be viewed as an investment into one’s financial well-being.

A personal loan to buy a car or a motorbike may not be the first choice, as there are car loans for that. However, a personal loan has one significant benefit in this regard: the new owner will own the title to the vehicle and will not have to use it as collateral in case of inability to continue making payments. A car loan may have lower interest rates, to compare, but it is typically secured by the car itself.

Loans with collateral are generally easier to approve because the collateral reduces the lender’s risk. When borrowers offer valuable assets — such as real estate, vehicles, or savings accounts — as security for the loan, lenders feel more confident in their ability to recover the loan amount in case of default. This increased security often leads to lower interest rates, higher borrowing limits, and easier approval.

✅ Starting a Small Business

As an aspiring entrepreneur, you will need financial assistance at the beginning. The business opens endless opportunities but also carries significant risks.

Starting a small business can be an excellent purpose for a personal loan, as it can be very profitable for both the entrepreneur and the lender. However, here are a couple of things you need to consider to increase your chances of approval:

• ensure your credit score looks reliable;
• provide proof of another source of income;
• prepare a detailed business plan and other related documents.

List of Loan Purposes That May Decrease Chances for Approval

Some loan purposes listed on the loan application may actually reduce your chances of approval. Again, it depends on the lender. We suggest looking at some of them.

Gambling

Gambling debt is extremely difficult to overcome, so it is strongly advised against taking loans for this purpose. It is a high-stakes, high-risk investment, and virtually no lender will be willing to risk their money like that.

At the beginning of the article, we mentioned that the purpose of a loan should be lawful. Certain forms of gambling are legal in the Philippines, but not all forms are. It is very important to be specific to avoid misinterpretation and risks.

In any way, gambling, even in its legal form, is still a very risky way of using or making money, and it is not a sustainable way of life.

Illegal Activities

Philippine law strictly prohibits loans for illegal activities, such as funding unauthorized businesses or engaging in illicit trade.

The list of common illegal lending practices includes the following:

• Loan sharks — individuals or entities that lend money at exorbitant interest rates and often use intimidation or harassment to collect debts.
• Unregistered lending companies — any companies providing loans without SEC registration.
• “Five-Six” lending — the practice that involves lending money at outrageously high interest rates (5% interest per month), which is considered usurious.

Individuals involved in illegal lending can face serious legal repercussions, including substantial fines and imprisonment. Engaging in illegal activities can also severely damage personal and business reputations, making it difficult to secure legitimate financial opportunities in the future.

Unstable Business Ventures

Lenders view loans for unstable business ventures cautiously. These businesses often lack solid business plans or collateral, making them high-risk candidates for financing.

Many traditional lending institutions, including banks and microfinance organizations, typically decline loan applications from businesses deemed too risky. This is primarily because lenders prefer to minimize their exposure to potential defaults, which can occur when enterprises need a proven track record or sufficient assets to secure the loan.

Lenders often look for businesses that have been operational for at least two years and can show a profitable track record. This requirement ensures that the company has a sustainable model before extending credit. New ventures or those without substantial financial backing face significant hurdles in securing loans. Even government-backed programs designed to support startups typically require some form of collateral or evidence of prior business activity.

Luxury Purchase

The same goes for buying luxury items. Generally, buying them is fine, but if you need to get a loan to obtain them, there may be better ideas. They have little to no practical use other than proof of status.

Something else to remember when considering a luxury purchase is that not only is buying it expensive, but maintenance costs a fortune, too. This creates additional financial pressure on the borrower in the long run.

Wedding

Weddings are very expensive these days. Sometimes, one of the happiest days in a young family’s life can be the most stressful for their financial stability and well-being.

In the Philippines, a wedding can cost between 100,000 and 500,000 Php, which can be quite a challenge if your family needs help with the expenses.

Most couples want to make this day special and share the celebration and happiness with as many people as possible. But in the Philippines, taking loans to cover wedding costs is not welcome. Philippine culture believes a wedding is about family values and tradition, and getting a loan for it may be seen as a way to demonstrate status rather than honor the tradition. So, it might be a sensitive issue and actually lower your chances of approval here.

Plus, it is a no-return investment, so there may be better ideas for a new family to use the money for.

How to Choose the Best Lender for Different Loan Purposes

Now that we have covered all major loan purpose reasons let’s discuss choosing the best lender for your specific needs.

The first thing to look at would be interest rates. They fluctuate and can differ from lender to lender, but they are never below the policy interest rate. Comparing the loan interest rates on the market will help you pick the best offer. But remember that the lowest rate does not automatically mean the best offer. You need to take an integrated approach and study all the loan terms.

Some lenders include fees in their loans, another term to consider when choosing a personal loan option. For instance, a lender can ask the borrower to pay an origination fee, also known as an up-front commission. The lender charges this fee for processing a new application and related services, like opening a bank account.

Some lenders also impose penalties for not making payments on time. This is another kind of fee that will increase the total amount of the loan.

Once you have reviewed the loan terms, it is time to see if the offer can satisfy your financial needs and purposes. Most lenders will have limits for personal loan amounts. The limits depend on a person’s credit profile, but not only. The amounts available also depend on the lender’s scale, reliability, and financial capacity.

If you find a company that satisfies the first three criteria, you should see if you meet its approval standards. A lender will usually judge your profile based on your credit score, income rate, job and educational background. These are the primary factors that determine eligibility.

Special offers are another factor to consider when choosing a lender for a personal loan. To attract clients, companies often provide discounts, credit monitoring, privacy protection, and even insurance in case of unemployment.

Finally, the company’s reputation also plays a role. Learn more about the company, its history, market dynamics, and other customers’ experience. Read different reviews to get a more objective opinion and make the right choice.

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Conclusion

Personal loans are a crucial financial resource for individuals facing various challenges that require immediate funding. The purpose of the loan significantly influences the likelihood of approval as lenders assess the associated risks and repayment potential. Valid reasons for borrowing, such as medical emergencies, home improvements, or debt consolidation, generally enhance approval chances. Conversely, loans sought for weddings, luxury purchases, or gambling are often viewed unfavourably due to their perceived lack of necessity and higher risk of non-repayment. When applying for a personal loan, present a clear and legitimate purpose to demonstrate your reliability and responsibility to the lender.