Consumer vs. Business Purpose Loans

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Question:

A borrower wishes to borrow $20,000. The money will subsequently be given to a third party who will use it to start a small business. Is this a consumer purpose loan or a business purpose loan? The argument I am receiving is that it is a consumer purpose loan because the borrower’s purpose is to make a gift.

Answer:

If the borrower and third party have a history of partnership ventures, that’s a good argument that this is a business purpose loan. On the other hand, if the loan facilitates a gift or an arm’s length investment, I would call it a consumer purpose loan.

First published on BankersOnline.com 5/16/11