What Is Loan Purpose?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 May 2020
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"Loan purpose" is a term used to describe the underlying reasons that the applicant is seeking some type of loan financing. Defining the purpose for the loan often has an impact on the terms and conditions that lenders will apply as part of the loan arrangement, and may even play a role in determining the type of interest rates that the lender is willing to extend to the applicant. Loan purpose is important to the process of obtaining mortgages or business loans that are connected with specific types of business activities.

One of the reasons that loan purpose is so important to lenders is that identifying the reason for the financing helps to provide important information that aids in determining risk. Since the level of risk has a direct impact on whether or not a loan is approved, and in the event of an approval the interest rate that is extended, the lender is able to protect his or her interests with greater efficiency. For example, when the purpose for the financing is to purchase a piece of real estate, the lender can assess if there is reasonable grounds to believe that the debtor can repay the loan according to terms.

Applicants also often benefit from loan purpose. This is because declaring the purpose can often lead to enjoying a lower interest rate for the duration of the loan period, possibly obtaining more advantageous repayment terms, and even trimming the fees and related charges that apply to the granting of the loan itself. Assuming that the applicant can provide information that convinces the lender that the financing is highly likely to be repaid in full, and that the value of any collateral attached to the loan agreement will have sufficient worth to settle the outstanding debt in the event the debtor becomes unable to service that debt, the opportunity to secure the best possible terms is present.

Loan purpose is important for any type of lending situation, ranging from personal loans to mortgages on property and even to business-related financing options. In each case, providing details about the intended use of the proceeds from the loan can make an impact on the amount that the lender is willing to extend, the interest rate that will apply, and even the terms that will govern the loan for its duration. For this reason, taking the time to become acquainted with the risk-based pricing factors that are relevant to the financing will aid in expediting consideration of the loan and hopefully provide an outcome that is agreeable to both the loan applicant and the lender.

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