When you borrow money, you might end up with more cash than you need—whether it's intentional or an accident. It's especially common with student loans. If that happens, are you allowed to spend the money on anything you want? The answer depends on the terms of your loan. Some loan agreements may restrict your use of the money, while others may not.
Check Your Agreement First
If your loan agreement, or contract, says you must use the funds for a certain purpose, then you'd be taking a big risk if you decided to use them for something else. You'd likely be considered in breach of your contract if the lender found out. The lender could then take legal action and hold you liable for not only the original amount of the loan, but legal costs and other fees. If you couldn't pay back the money, then the lender could even liquidate your property and other assets in order to recoup its funds.
The likelihood of being able to use your loan money for any purpose can also depend on the type of loan you're receiving, whether it's a mortgage, car loan, student loan, business loan, or personal loan.
Mortgages are used to purchase a home or refinance an existing home loan. If you're purchasing a home, it's virtually impossible for you to get that money directly, because it goes straight to the seller. In addition, the lender can take ownership of the property and sell it if you don't make payments or meet the terms of your agreement. So in this case, you're not left with extra money to spend on anything.
However, if you're already making mortgage payments, you may be able to take cash out in the form of a home equity loan or line of credit. When you get this type of cash-out refinancing you can usually spend the money on anything you wish to spend it on.
Auto loans are similar to home purchase loans. The vehicle you buy secures the loan, so the lender takes less risk. In most cases, the money will go straight to the seller, and your lender will have lien on the vehicle until you pay off the loan.
But just like with a mortgage, you can also do cash-out refinancing for your car. That means you're getting a new loan and borrowing against the same car, usually for an amount beyond what the car is worth—sometimes up to 125%. You can use that extra money however you choose, but the lender will still have a lien on the car and can repossess it if you miss payments.
Student loans are especially tricky. The government subsidizes some student loan interest costs because an educated population is considered a good investment. Furthermore, banks are willing to offer student loans because college-educated adults will be more likely to have the income needed for repayment.
With student loans, you end up with a large sum of money in your bank account, and nobody watches to see what you do with the funds. You're supposed to spend that money on expenses related to higher education, but what does that mean? Tuition and fees are obviously acceptable expenses, as are textbooks and rent. A vacation or a new TV is usually not an acceptable expense because you don't need those things to complete your education.
Business loans are also likely to come with restrictions. For example, Small Business Administration (SBA) loans can be used only to operate your business. You can't use them to pay off other debts or buy property, but you can use them to purchase new equipment, refinance existing debt, establish a line of credit, and other uses outlined by the SBA.
You can use personal loans for most anything, unless the terms of your agreement outline a specific use. In general, you don't usually pledge collateral, nor do you agree to use the money for a specific purpose. Personal loans include credit cards and signature loans from your bank or credit union. Loans from online lenders and peer-to-peer lenders often are personal loans as well.
Complications and Consequences
Using your loan money for alternative purposes might not be illegal, but there is a risk that your lender will take legal action against you if they find out that you’ve used the money in a way that's different from what you promised and you default.
Getting creative with your loan money can also result in other problems, such as increased debt. Student loans can be especially troublesome because they are difficult to wipe out. Even an auto loan can cause trouble. If you borrow too much, you'll find that you owe more on the vehicle than it is worth, also known as being upside down. As a result, you'll have a hard time selling the vehicle or you'll keep making payments long after the car is worthless.