When you apply for a loan, you have to give the lender a good reason why you need the money. But what happens if you use it for something else? Using the loans funds for other purposes is generally illegal. If your lender finds out, they may even files a legal action against you. There are lots of possible outcomes in this situation, and we'll take a look at some of them in this article, as well as check out some of the things you can do without lying, if you really need a loan.

It may seem very restrictive, but there's a good reason why a lender wants to know how you're spending your loan funds. Generally, loans are made against some form of collateral, such as a house or car. The lender likes to have a solid asset backing their loan, because they can sell off that asset if you default, and so regain most, if not all of the funds they lent to you.

However if you start wasting your loan funds on things they didn't approve, they will more than likely consider that their risk level has gone up. Higher risk borrowers are usually charged higher fees and interest rates, and so they won't be happy if you've snuck into the high-risk category without telling them. For example, if you borrowed extra against your home in order to do renovations, then went and blew the lot at a casino, the lender would definitely be more exposed. If you'd remodelled your home, it would have been worth more, and so their risk would have been lowered. So naturally they're not going to be happy about that.

Loan documents vary from lender to lender, and not all of them will set down in writing exactly what purpose the funds are being borrowed for. However such clauses are becoming more common, particularly with certain types of loans, so if you're not going to do what the contract says, be aware of the repercussions.

Depending on when the lender finds out you're lying, you may either have to give back the loan money, or alternatively you will be forced to pay it back straight away along with penalty charges. There are also likely to be some hefty fees involved because you've broken the terms of the contract. If the amount is substantial, you may find yourself involved in legal action. All of these possibilities have one thing in common - they cost money! Lawyers aren't cheap, and when you're found to be at fault, you'll be paying the legal costs for both sides.

Of course, there are other types of lies apart from lying about what you plan to do with the loan funds. Plenty of people think that it's okay to lie about their financial situation on a loan application, figuring that as long as they make the repayments, the lender won't care. Perhaps not, but if they find out, you could find yourself being charged with fraud. You may end up with a criminal record, and receive a fine, a term of community service or even jail. It's fair to say that it will be a LONG time before you credit record recovers, and no other lender will touch you with that sort of black mark on your credit.

If you're in need of a loan, you will probably be better off applying for a personal loan. Yes, they generally cost more in interest, but the good thing is that the lender is unlikely to be very fussy about what you do with the money. Because the lender in this situation isn't as concerned about their equity in an asset, they charge higher fees and interest and so reduce their risk that way. So you can go and buy that big screen TV, catch up on some bills, go on holiday or anything you want. Remember, too, that you can shop around for the best deal, and might even manage to pay a fairly low rate of interest, or organise flexible repayments.

In the end, the possibility of wrecking your credit record and perhaps even facing criminal charges means that lying on your loan application, or lying about what you're going to use the loan funds for, just isn't worth it. Yes, it might cost a little more to borrow with a personal loan, but in the long run you will find it much easier to sleep at night. And that's worth a lot more than a bit of extra interest.