Getting approved for a personal loan can be a lifesaver for borrowers who need fast cash. But just because personal loans can be approved and funded quickly doesn’t mean the lender won’t look carefully at the information you provide. Lying on a loan application – including a personal loan application – constitutes loan fraud, which can have serious consequences.
Learn more about why lenders ask about your personal loan purpose, things that borrowers sometimes lie about, how lenders discover falsities, and what happens if you get caught lying.
Why Be Honest When Applying for a Personal Loan?
It’s always best to be completely truthful and precise when providing information on a personal loan application or when responding to any follow-up questions from the lender.
“Honesty in a personal loan application is critical because it ensures a fair evaluation of your financial situation,” says Dennis Shirshikov, a finance and economics adjunct professor at City University of New York, Queens College. “When you provide accurate information, the lender can give you a loan with terms that are appropriate for your risk level. Misleading lenders – by inflating income, understating debts, or misrepresenting the purpose of the loan – can lead to approvals for loans that you cannot afford, ultimately setting you up for default.”
Additionally, honesty fosters a trusting relationship with lenders, which is advantageous for future borrowing needs. Consider that a good borrower history can lead to better loan offers and conditions in the future.
Carl Holman, director of communication and content for A&D Mortgage, seconds those sentiments.
“Being truthful when applying is essential because lenders base their decisions on the information you provide,” Holman says. “Inaccuracies or lies can lead to loan denials, higher interest rates, or the cancellation of loan agreements.”
Why Do Lenders Ask About Your Personal Loan Purpose?
Lenders inquire about the purpose of the personal loan you seek because they may set limitations on how their funds can be utilized. Case in point: Personal loan funds might not be allowed for buying a home, covering college tuition, seeding a new business, or refinancing student loans. Therefore, when applying for a personal loan, it’s crucial to have a reason that fits within the lender’s approved uses.
Additionally, the purpose of the loan can affect the amount you qualify to borrow, as well as the interest rate and repayment term. It also helps the lender assess the risks associated with lending, ensuring they don’t overexpose themselves to high-risk borrowers.
“A loan for debt consolidation, for instance, signals that the borrower is managing high-interest debt, which can indicate financial instability. A loan for home improvement may suggest an investment that enhances property value,” says Shirshikov. “By understanding the purpose, lenders can tailor their underwriting process – determining whether the loan aligns with the borrower’s financial profile.”
What Are Some Things Personal Loan Borrowers Lie About?
The most common things borrowers are untruthful or inaccurate about include job status, income and assets, existing debts, the intended use of the loan, and residency status (in the case of non-U.S. citizens).
“For example, someone might inflate their income to qualify for a larger loan or claim they will live in a property that is actually for investment. These lies are used to get better loan terms or larger amounts, but they significantly increase the borrower’s risk,” says J.D. Koontz, an independent banking consultant.
Others may underreport debt obligations, hiding existing loans to make their financial picture look more favorable.
“A borrower might also misstate their employment, perhaps claiming they are employed when they are actually in between jobs. These deceptions often stem from a desire to either secure loan approval or access more funds than they would otherwise be eligible for,” Shirshikov says.
Another use a borrower may misrepresent is using a personal loan to pay off student debt. You may be allowed to use a personal loan to pay off your student loans, provided your lender permits it and so long as the lender complies with the regulations outlined in the Higher Education Act. But numerous lenders have rules in place that prevent personal loans from being used to repay student loans.
Suppose that you were hoping to pursue bankruptcy due to financial difficulty and a high accumulation of debt, including student loan debt. Student loans can’t be easily discharged in bankruptcy, but personal loans can – which is why some borrowers attempt to refinance their student loans with personal loans. However, the existence of student loans can be easily detected when the lender checks your credit report. If you didn’t disclose this purpose when applying for your personal loan, you could face serious consequences (more on that later).
How Do Lenders Find Out if You Lie About Your Personal Loan?
According to Koontz, lenders use several methods to detect fraudulent information, such as verifying details through tax returns, employers, and credit reports.
“They also use advanced fraud detection tools like behavioral analysis, machine learning algorithms, and device fingerprinting to flag inconsistencies,” Koontz says.
A personal loan lender will most likely discover discrepancies by the time they reach the underwriting process, which is when they verify your employment, income, and credit history.
“Red flags can also arise if any third-party verifications contradict the borrower’s claims,” says Holman. “Even after closing, lenders can review your loan if irregularities come to light, potentially leading to further investigations.”
Koontz agrees that you could get caught long after receiving your funds.
“Fraud can also be uncovered after the loan closes during random audits or routine loan portfolio reviews, so deception may be detected months or even years later,” Koontz says.
What Happens if You Get Caught Lying on a Loan Application?
Lying on any loan application is illegal and considered fraud. If your lie is discovered, the lender can deny loan approval. If the loan has already been approved and the funds are disbursed, the lender can declare the loan in default and immediately demand full repayment.
But the consequences don’t stop there. Your credit score could also suffer, making it more difficult for you to secure a loan down the road.
“The lender may also report the fraud to law enforcement, resulting in fines, lawsuits, or even prison time — depending on the severity of the case,” says Koontz.
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You Lied About What You’re Using Your Personal Loan For: Will Your Bank Find Out? originally appeared on usnews.com
