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A credit score is one factor used in a lender’s assessment of your creditworthiness when you apply for a lending product, such as a loan, line of credit, or credit card. It can also be a factor in lease approval, new utilities setup, and insurance rates. You can have more than one credit score, depending on what credit scoring model a lender uses.

One type of credit scoring model is the FICO^® Score, which is used in 90% of lending decisions in the U.S. Since it’s such a widely used determiner, consumers are wise to pay close attention to their own score.

What Is a FICO Score?

The FICO Score is a trademark of the Fair Isaac Corporation. It was the first widely used, commercially available score of its type. FICO Scores essentially compress a person’s credit history into one algorithmically determined score.

Because FICO scores (and other credit scores like it) are based on analytics rather than human biases, the intention is to make it easier for lenders to make fair lending decisions.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

What Is the FICO Score Range?

FICO’s base range is 300 to 850: The higher the score, the lower the lending risk a lender might consider you to be.

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

Recommended: What Is Considered a Bad Credit Score?

How Is a FICO Score Calculated?

There are five main components of your base score, each having a different weight in the calculation:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

About two-thirds of your base FICO score depends on managing the amount of debt you have and making your monthly payments on time. Each of the three major credit bureaus — Experian, Equifax, and TransUnion — supply information for the calculation of your credit score, so it can vary slightly even if your creditworthiness doesn’t fluctuate.

The base FICO Score range may not be the range used in all credit and lending decisions. There are also industry-specific scores, such as one specifically for auto loans (FICO Auto Scores), others for credit card applications (FICO Bankcard Scores), and multiple FICO scores used by mortgage lenders.

Industry-specific FICO scores range from 250 to 900, compared to the 300 to 850 range for base scores.

What Is a Good FICO Score?

Strictly referencing the base FICO Score range, a “good” score is between 670 and 739 on the overall scale of 300 to 850.

But what’s considered acceptable for credit approval might vary from lender to lender. Each lender has its own requirements for credit approval, interest rates, and loan terms, and may assign its own acceptable ranges. Lenders may also use factors other than a credit score to determine these things.

Recommended: Average Personal Loan Interest Rates & What Affects Them

Why Is a FICO Score Important? What Is a FICO Score Used For?

As mentioned above, the FICO Score is used in 90% of lending decisions in the U.S. When a consumer applies for a loan or other type of credit, the lender will look at their credit report and credit score. If there are negative entries on the credit report, which may be reflected in a decreased FICO Score, the applicant may not have a chance to explain those to the lender. Especially in mortgage lending decisions, the lender may have a firm FICO Score requirement, and even one point below the acceptable number could result in a denial.

But what if you’re not applying for credit in the traditional sense? Your FICO Score is still an important number to pay attention to because it’s used in other financial decisions.

•   Renting an apartment. Landlords and leasing agents generally run a credit check during a lease application process. They may or may not look at the applicant’s actual credit score — landlords have a lot of flexibility in how they make leasing decisions — but they do tend to look at the applicant’s credit history and how much debt they have in relation to their income — factors that go into a FICO score calculation.

A few late payments here and there may not affect your ability to rent an apartment, but a high debt-to-income ratio may. If you have a lot of income going toward debt payments, the landlord may be concerned that you won’t have enough income to pay your rent.

•   Insurance. One of the industry-specific FICO Scores is formulated for the insurance industry (think auto insurance and property insurance). Insurers will typically look at more than just a person’s FICO Insurance Score, but it is one factor that goes in determining qualification for insurance and at what rate. The assumption is that a person who is financially responsible will also take more care when it comes to their home and car.

•   Utilities. You may not think of a utility bill as a debt, but since utilities like gas, electric, and phone are billed in arrears, they technically are a form of debt. “Billed in arrears” means that you are billed for services you have already used. Utility companies want to make sure that you will be able to pay your monthly bill, so they may run a credit check, which may or may not include looking at your FICO Score.

Recommended: What Credit Score Is Needed to Rent an Apartment in 2024?

What Affects Your FICO Score?

We briefly touched on how a FICO Score is calculated, but what goes into those different categories? Let’s look at those in more detail.

Payment History (35%)

Do you tend to pay your bills on time or do you have a history of late or missed payments? Your payment history is the most important factor in the calculation of your FICO Score. Perfection isn’t necessary, but a solid track record of regular, on-time payments is important. Lenders like to be assured that a borrower will make their payments, and a past payment history tends to be a good predictor of future payment habits.

Both installment (personal loans, mortgage loans, and student loans, for example) and revolving credit such as credit cards can affect your payment history. Since it’s such an important factor, how can you make sure it’s a positive one for you?

•   Making payments on time, every time, is the best way to make sure your payment history is a positive one. Having a regular routine for paying bills is a good way to accomplish this.

•   Automating your payments may help you make at least the minimum payment on credit accounts.

•   Checking your credit report regularly for errors or discrepancies can help catch things that might have a negative effect on your FICO Score if left uncorrected. You can get a free credit report from each of the three credit bureaus once per year at AnnualCreditReport.com.

Amounts Owed (30%)

The amount of debt you owe in relation to the amount of debt available to you is called your credit utilization ratio, and it’s the second-most important factor in the calculation of your FICO Score. Having debt isn’t at issue in this factor, but using most of your available debt is seen as relying on credit to meet your financial obligations.

Credit utilization is based on revolving debt, not installment debt. If you’re keeping your credit card balance well below your credit limit, it’s a good indicator that you’re not overspending. If you have more than one credit card, consider the percentage of available credit you’re using on each of them. If one has a higher credit utilization than the others, it might be a good idea to use that one less often if you’re trying to increase your FICO Score.

Length of Credit History (15%)

This factor’s percentage may not be as high as the previous two, but don’t underestimate its importance to lenders. As with payment history, lenders tend to look at a person’s credit history as predictive of their credit future. If there is no credit history or short credit history, a lender doesn’t have much information on which to base a lending decision.

Since the amount you owe is such an important factor in your FICO Score, you might think that paying off and closing credit accounts would have a positive effect on your score. But that might not be the best strategy.

Revolving accounts like credit cards can be a useful tool in your financial toolbox if used responsibly. A credit card account with a low balance and good payment history that has been part of your credit report for many years can be an indicator that you are able to maintain credit in a responsible manner.

Installment loans like personal loans are meant to be paid off in a certain amount of time. The account will remain on your credit report for 10 years after it’s paid off.

Paying off a personal loan is certainly a positive thing, but paying off a personal loan early could cause the account to stop having that positive effect earlier than it otherwise would.

Recommended: 11 Types of Personal Loans & Their Differences

Credit Mix (10%)

Having multiple types of credit can have a positive effect on your FICO Score. Being responsible with both revolving and installment credit accounts shows lenders that you can successfully manage your debts.

•   Revolving accounts are those that are open-ended, such as a credit card. You can borrow money up to your credit limit, repay it, and borrow it again. As long as you’re conforming to the terms of the credit agreement, the account is likely to have a positive effect on your credit report and, therefore, your FICO Score.

•   Installment accounts are closed-ended. There is a certain amount of credit extended to you and you receive that money in a lump sum. It’s repaid in regular installments over a set period of time. If you need additional funds, you must take out another loan. A personal loan is one example of an installment loan.

Credit mix won’t make or break your ability to qualify for a loan, but having different types of debt indicates to lenders that you’re likely to be a good lending risk.

New Credit (10%)

Though lenders like to see that a person has been extended credit in the past, too much new credit in a short amount of time can be a red flag to lenders.

When you apply for a loan or other type of credit, the lender will typically look at your credit report. This is called a credit inquiry and can be a hard inquiry or a soft inquiry. A soft inquiry may be made by a lender to pre-qualify someone for credit or by a landlord for a lease approval, for example.

During a formal application process, a lender might make a hard inquiry into your credit report, which can affect your credit score. FICO Scores take into account hard inquiries from the last 12 months in your credit score calculation, but a hard inquiry will remain on your credit report for two years.

💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

FICO Score vs Credit Score

These two terms — FICO Scores and credit scores — are often used interchangeably. More accurately, though, is that a FICO Score is one type of credit score, the one most often used by lenders when making their decisions. There are multiple types of credit scores, each of them using analytics to create a rating that illustrates a person’s creditworthiness.

The Takeaway

Your FICO Score is affected by how you manage your personal finances, whether that’s a personal loan, line of credit, credit card, or other type of credit product. Although it’s not the only credit score lenders use, it is the one used in the majority of lending decisions in the U.S. Personal loans are one financial tool that can be used to add some variety to your credit mix. If managed responsibly with regular, on-time payments, your FICO score could be positively affected by having an installment loan like this in the mix.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you’ve owned your car for several years, it may be a source of cash even if you don’t want to sell it. Enter auto equity loans, which lets you turn the equity you have in your car into a loan you can use for any purpose.

While the risks and interest rates may not be suitable for every borrower, a strategic approach to this loan can quickly get you the cash you need. Here’s how to tell if a car equity loan makes sense for you.

How Auto Equity Loans Work

Vehicle equity loans depend on how much a borrower’s car is worth versus how much they owe on the car. For example, say your car is worth $15,000. You’re almost finished paying off your car loan and only owe $1,000 on it. So, you have $14,000 of equity you can leverage with an auto equity loan.

Your equity in your vehicle is the basis for a loan, and terms vary by lender. For example, some lenders may loan a maximum of 100% of your auto equity, while others loan 125%.

Like any loan, a car equity loan comes with terms and conditions. This includes the interest rate, repayment schedule, and loan fees.

However, the unique aspect of auto equity loans is the vehicle serves as collateral. The advantage is that you can obtain better terms and rates than an unsecured loan. The downside is that the failure to repay the loan gives the lender the right to repossess the vehicle to recoup their losses.

Auto Equity Loan vs. Auto Title Loan

Auto title loans and car equity loans sound similar, but they have stark differences with severe implications for borrowers. Auto equity loans allow you to turn the equity you have in your car into a loan you’ll repay over the coming months or years. Defaulting on the loan can result in repossession, but the loan terms are typically affordable enough for borrowers to avoid this outcome.

Auto title loans also use equity in your car but have harsher terms and rates. Typically, auto title loans give the borrower one month to repay the loan with higher interest rates than auto equity loans.

The sole upside is that these loans have minimal credit requirements, making them accessible to more borrowers. The downside is that the loan terms are so stringent that borrowers often fail to repay the loan within 30 days, default, and lose their vehicle.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

How to Get an Auto Equity Loan

Getting an auto equity loan means assessing your equity, finding a lender, and applying. Here’s the step-by-step guide:

Check Your Equity Level

Get an accurate estimate of your car’s current market value. An online tool, such as Kelley Blue or Edmunds, can help. Once you know the value, subtract any outstanding loan balance on your car from it. The result is your equity. Remember, lenders use the equity amount to determine the maximum loan amount you can receive.

Shop for a Lender

Look for reputable lenders that offer auto equity loans. Specifically, auto lenders, credit unions, and online lenders offer these loans. Peruse customer reviews and gather offer information, including interest rates and loan fees. In addition, lenders have different eligibility requirements, such as equity amount and credit score standards.

Apply for the Loan

Once you choose your lender, prepare the required documentation for the application, including proof of income, identification, vehicle title, and proof of insurance. Then, you can apply using your lender’s website, visiting a physical location, or contacting the lender by phone.

If approved, carefully review the loan terms before accepting. Pay attention to interest rates, repayment schedules, and any fees associated with the loan.

Pros and Cons of an Auto Equity Loan

Like any financial decision, getting a car equity loan has advantages and disadvantages. Here are some potential pros of auto equity loans:

•   Competitive interest rates: Because you secure the loan with your vehicle, you’ll likely get a lower interest rate than an unsecured loan or credit card.

•   Less-stringent approval: Because a car secures the loan, borrowers with lower credit scores or a less-than-perfect credit history are more likely to qualify.

•   Quick funding: Auto equity loans often provide a faster funding process than traditional loans. In some cases, borrowers can receive funds within a day of approval.

•   Customizable terms: Some auto equity lenders may offer flexibility in repayment schedules, allowing borrowers to customize the loan terms to better suit their financial situation. For example, you can shorten the term to reduce how long the loan lasts, reducing total interest costs.

However, consider the following cons as well:

•   Risk of losing your car auto equity: Auto equity loans are secured loans, meaning the vehicle serves as collateral. If you fail to repay the loan according to the agreed-upon terms, the lender can repossess and sell your car.

•   Full-coverage insurance requirements: Many auto equity lenders require borrowers to maintain full-coverage insurance on the vehicle throughout the loan period. This coverage costs more than minimum liability insurance.

•   Uncommon among lenders: While auto equity loans are available, they might not be as common or widely offered as other types of loans. This drawback can limit the options available to borrowers. In addition, your current auto lender might not offer this loan, meaning you’ll end up having auto loans with multiple lenders.

Auto Equity Loan Alternatives

A vehicle equity loan is just one way to get the financial assistance you need. Other loan tools are available. Here are some to consider.

Personal Loans

Personal loans can be used for various purposes, including financing a car or covering regular expenses. Unlike car equity loans, personal loans are unsecured, meaning they do not require collateral like your vehicle.

Interest rates on personal loans can vary based on your creditworthiness and may be higher because they don’t have collateral. However, borrowers with higher credit scores generally qualify for lower interest rates. Personal loans usually have fixed monthly payments over a predetermined term.

New Credit Card

Credit card companies frequently offer credit cards with low or no APR to draw new customers. So, you can apply for a new card and take advantage of the promotional interest rate. For example, if you get a new card with 0% APR for one year, you only have to make the minimum payment on the balance each month for the first 12 months.

This feature allows you to accrue debt without paying it back immediately. Just remember that when the promo period ends, any balance will start accruing the card’s regular APR.

In addition, credit cards are unsecured, so no collateral is needed.

Home Equity Loan

A home equity loan is like a car equity loan, but it uses the equity in your home instead of your vehicle. It is a secured loan because your home serves as collateral, and the debt becomes a second mortgage.

Home equity loans typically have fixed interest rates and fixed monthly payments over a specific term. The loan amounts can be larger because homeowners can build up hundreds of thousands of dollars of equity to tap.

Plus, interest rates on home equity loans are often lower than those on unsecured loans. However, you could lose your home if you default on the loan.

Auto Loan Refinance

Car loan refinancing involves replacing your existing auto loan with a new one, usually with better terms such as a lower interest rate or an extended repayment period. Doing so usually lowers your monthly payment, making your loan more affordable.


💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.

The Takeaway

Car equity loans leverage a vehicle’s equity for access to cash with low waiting times. While offering advantages such as potentially lower interest rates and quick funding, they can also pose significant risks, including possibly losing the car. Full-coverage insurance requirements and the relative uncommonness of these loans among lenders add to their drawbacks.

Individuals considering auto equity loans should carefully assess their financial situation and alternatives, exploring options like personal loans, credit cards, home equity loans, or auto loan refinancing. Thorough research into reputable lenders is crucial to making an informed decision that aligns with their financial needs and goals.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Is it good to have equity in your car?

It’s good to have equity in your car because you can use it as collateral to get an auto equity loan or sell your car for a profit.

Can you cash out auto equity?

You can turn the equity you have in your car into cash with a cash-out refinance from a lender. Doing so will provide you with a lump sum equal to your equity amount and replace your current auto loan with a new loan with an accordingly larger balance.

Is it a good idea to get an auto equity loan?

If you have thousands of dollars in equity and can’t access other forms of debt, a vehicle equity loan can provide a quick solution. However, it’s crucial to carefully evaluate if you can afford the monthly payments before deciding. Otherwise, you may lose your car if you fail to repay the loan.

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Photo credit; iStock/sturti

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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One factor lenders look at during loan processing is the applicant’s credit score. It’s a good idea to review your own credit reports before applying for a loan to see if there are any errors that can be corrected and possibly increase your credit score, if needed.

If your credit score is not as high as you’d like it to be, it may seem counterintuitive to consider taking on debt to increase it. But it’s a method that has some merit. Making timely payments on a personal loan may have a positive effect on a person’s credit score. Let’s take a look at what factors go into calculating a credit score and how taking out a personal loan can affect it.

Do Personal Loans Help Build Credit?

If a borrower makes on-time, regular payments on a personal loan — or any loan, for that matter — that information will typically be reflected in their credit history and can be one way to build credit. It’s a good idea to ask the lender if they report payment history to the three major credit bureaus: Experian, Equifax, and TransUnion. If the lender doesn’t report the information, it won’t affect the borrower’s credit positively or negatively.


💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

When Does a Personal Loan Help You Build Credit?

Someone who doesn’t have much of a credit history or wants to improve their credit score because they understand the importance of good credit might wonder if a personal loan will build credit. It certainly can be one method to do so, but only if handled responsibly. A personal loan to build credit can be an effective tool if the payments are made regularly and on time.

The terms “credit” and “credit score,” while closely related, are not the same. Generally, when the term “credit” is used, it’s referring to a credit report, which is a summary of a person’s financial history. The information contained in a credit report is what affects your credit score. So, while the two are different, they’re used together in lending and other credit matters.

To find financial areas needing improvement, you can review your credit report for individual elements that figure into the calculation of your credit score. Credit score updates can happen every 30 to 45 days, depending on when lenders report payment information to the credit bureaus, and small fluctuations are normal.

Recommended: 11 Types of Personal Loans

Your Payment History

The way you handle debt is the most important factor in determining your credit score. It accounts for 35% of a person’s FICO® Score. How you’ve repaid — or not repaid — debt in the past is considered a good indicator of how likely you are to repay future debt and is something lenders look at closely.

Missing payments or late payments on a personal loan might hurt your credit score.

Your Credit Utilization Ratio

Second only to payment history, having a large debt-to-credit ratio, also called your credit utilization ratio, can damage your credit score. It accounts for 30% of the total FICO Score and takes into account both revolving debt (e.g., credit cards) and installment debt (e.g., personal loans).

This ratio is calculated by dividing how much you currently owe by the total credit available to you. Credit cards offer a good example: If you have a monthly limit of $10,000, and typically carry a balance of $9,000 on your card each billing period, your utilization ratio would be 90%.

The Age of Your Credit History

Since the age of your credit history is a factor in your credit score, the ideal situation is to start building credit early. That’s not always feasible, though. If you don’t have much of a credit history yet, a personal loan to build credit can be useful.

As long as the loan’s payment history is positive, the longer a loan is listed on your credit report, the more likely it is to have a positive effect on your credit score.

Adding Different Types of Credit

An additional factor that can impact your credit score is the mix of different types of credit you might have, such as credit cards, student loans, and mortgage loans. In general, your credit score will benefit from a healthy mix of different kinds of debt on your credit report.

Having both revolving debt, like credit cards or lines of credit, as well as installment debt, such as a personal loan, can have a positive effect on your credit score if you’re making regular, on-time payments on the debts.

If you currently have only credit cards, adding a personal loan to your credit mix can go a long way in establishing multiple types of credit and potentially boosting your credit score.

Recommended: Personal Lines of Credit vs Credit Cards

When Doesn’t a Personal Loan Help You Build Credit?

We’ve covered some of the ways a personal loan can help build credit, but there are situations in which a personal loan might have a negative effect on your credit.

Late Payments

Making late payments on any type of debt, including a personal loan intended to build credit, will likely have the opposite effect. Lenders place a great deal of importance on a person’s payment history. If a lender sees a lot of late or missed payments on your credit report, they are probably more likely to see you as a credit risk.

Short-Term Loan

Short-term loans can be predatory loans. They are meant to help someone make ends meet until their next paycheck, but they can be next to impossible to actually pay off because of the extraordinarily high interest rates typically charged.

Lenders of these types of loans may not report payments to the credit bureaus, essentially negating any effect your responsible repayment might have. If you’re thinking of taking out a personal loan to improve your credit score, a short-term loan is probably not the best option.


💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

Personal loans have many direct benefits, such as access to cash, predictable payments, and consolidating high-interest debts. But can a personal loan help you build credit? Possibly. A loan’s secondary impact on your credit score can be meaningful for your borrowing future. Making your personal loan payments on time may help you improve your credit score and your future borrowing options.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Do personal loans raise credit scores?

If repaid on time with regular payments, a personal loan is one financial tool that might have a positive effect on a person’s credit score. There are a variety of factors that go into the calculation of a credit score, though, and it’s wise to pay attention to all of them.

How long does it take to build credit with a personal loan?

Building credit means building a history, which doesn’t happen overnight. It might take about six months to see results from diligently making on-time personal loan payments.

Is taking out a personal loan bad for credit?

Taking on new debt can have a temporary negative effect on your credit score. But over time, as long as you make regular, on-time payments, a personal loan has the potential to help your overall creditworthiness.

Which types of personal loans typically help build credit?

There are many different types of personal loans you can use to build up your credit. If you have no credit history, you may want to explore a credit builder loan or secured credit card. Both can help you establish a positive credit profile. But keep in mind, the type of loan you take out is not as important as how you manage the debt.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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When researching personal loans, you may see the terms APR (Annual Percentage Rate) and interest rate used interchangeably. However, they are not the same thing. The interest rate refers to the cost of borrowing money, expressed as a percentage of the principal amount, but it doesn’t include any other fees or charges.

APR, on the other hand, includes not only the interest rate but also other fees and charges you may incur when borrowing money. This makes the APR a more important number to look at that interest rate.

Read on for a closer look at APR vs interest rate, what it means when these two numbers are different, and what it means when they are the same.

What Is Interest?

Interest is the cost you pay for the privilege of taking out a loan — the money you’ll owe along with the principal, or the amount of money you’re borrowing.

Interest is expressed in a rate: a percentage that indicates what proportion of the principal you’ll pay on top of the principal itself. Interest may be simple — charged only against the principal balance — or compound — charged against both the principal balance and accrued interest itself. Typically, personal loan rates are an expression of simple interest.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

Loan APR vs Interest Rate

So what’s the difference between an APR vs. an interest rate?

APR stands for Annual Percentage Rate and specifically designates how much you’ll spend, as a proportion of the principal, over the course of one year. Furthermore, the APR includes any additional charges on top of interest, such as origination or processing fees, which a straight interest rate does not.

In other words, APR is a specific type of interest rate expression — one that’s more inclusive of additional costs.

Interest Rate	APR
Expression of how much will be paid back to the lender in addition to repaying the principal balance	Expression of how much will be paid back to the lender in addition to repaying the principal balance
Includes interest only	Expresses cost of the loan over one year including any additional costs, such as origination fees

Why Is My Personal Loan APR Different Than the Interest Rate?

If your personal loan’s APR differs from its interest rate, that indicates that there are additional fees, such as origination fees, included in the total amount you’re being charged. If there were no fees, the APR and interest rate would be identical.

How Important Is APR vs Interest Rate?

A loan’s APR is generally more important than its interest rate because APR reflects the true cost of the loan — it accounts for interest as well as any fees tacked on by the lender. Looking at APR also allows you to compare two loan offers apples to apples. One loan may have a lower interest rate than another loan but if the lender tacks on high fees, then it may not actually be the better deal.

APR vs Interest Rate on Revolving Credit Accounts

Personal loans aren’t the only financial product that involve APR and interest rate. Revolving credit accounts — including credit cards — also have interest rates expressed as APR. However, with credit cards, these two rates are one and the same: APR is just the interest rate, and the terms can be used interchangeably.

Credit card issuers may charge other fees, e.g., cash advance fees, late fees, or balance transfer fees as applicable to individual usage. But it’s impossible to predict the type or amount of fees that might be charged to any one card holder.

Although these two expressions are the same, it’s important to understand that the interest rate on credit cards and other revolving credit accounts is usually compound interest, which is precisely why it can be so easy to spiral into credit card debt. When interest is charged on the interest you’ve already accrued, the total goes up quickly.

A single credit card account can have multiple APRs, depending on how the credit is used.

•   Purchase APR: the standard APR for general purchases.

•   Cash advance APR: the rate charged for cash advances made to the card holder.

•   Balance transfer APR: may begin as a low or zero promotional rate, but increase after the introductory period ends.

•   Penalty APR: may be charged if a payment is late by a predetermined number of days.

💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

What Is a Good Interest Rate for a Personal Loan?

The interest rate on your personal loan — or any financial product — will vary based on a wide variety of factors, including your personal financial history (such as your credit score and income) as well as which lender you choose, how big the loan is, and whether or not it’s secured with collateral.

The average personal loan rate is currently about 12% APR. However, the rate you receive could be higher or lower, depending on your financial situation and the lender you choose.

Getting a Good APR on a Personal Loan

To get the best rate on your personal loan, there are some financial factors you can influence over time. Here are some action items to consider.

Improving Your Credit

It’s been said before, but it’s true: the higher your credit score, generally the better your chances are of achieving favorable loan terms and lower interest rates — not to mention qualifying for the loan at all. While there are loans out there for borrowers with bad credit and fair credit, improving your credit profile can make borrowing money more affordable.

Paying Down Your Debts

One way you may be able to improve your credit is to pay down your debts. And along with the opportunity to bolster your credit, paying down debt can also improve your chances of being approved for a loan because your debt-to-income ratio is one factor lenders look at when qualifying you for a loan. What’s more, paying down debt can make keeping up with your monthly loan payments a lot easier, since you’ll have more leeway in your budget.

Be Careful When Applying for Credit

Applying for too much credit at once can be a red flag for lenders and ding your credit score, so if you’re getting ready to apply for a personal loan, auto loan, or mortgage, try to limit how many times you’re having your credit score pulled. Typically, prequalifying for a loan involves a soft credit pull, which won’t impact your credit.

While credit scoring models do allow for rate shopping, it’s still a good idea to compare multiple lenders over a limited amount of time — a 14-day period is recommended — to find the lender that works best for your financial needs. If done in a short window of time, multiple hard credit pulls for the same type of loan will count as just one.

Recommended: Soft vs Hard Credit Inquiry

The Takeaway

Personal loans and other financial lending products come at a cost: interest. That’s the amount you’ll pay on top of repaying the principal balance itself. Interest is expressed in a percentage rate, most commonly APR, which includes both the interest and any other fees that can increase the cost of the loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Why is my personal loan APR different than the interest rate?

If the annual percentage rate (APR) on your personal loan is different from the interest rate, it means the lender is charging additional fees, such as origination fees or others.

How important is APR vs interest rate?

The annual percentage rate (APR) is generally the more important figure to look at, since it includes additional costs incurred in getting the loan, such as fees. The APR will give you a more holistic picture of the price of the loan product.

What is a good APR and interest rate for a personal loan?

Personal loan interest rates vary widely but currently average around 12% APR. Depending on your personal financial history, the type and amount of the loan you’re borrowing, and your lender, the rate you receive could be higher or lower.

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Photo credit: iStock/Charday Penn

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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When someone applies for a personal loan, there are a lot of moving parts and key players involved. While each lending institution will have their own unique process in place, loan applicants can expect to come across a loan officer, loan processor, or an underwriter.

There’s a decent amount of overlap in these roles, so to get some more clarity on who does what, let’s take a look at a loan officer vs. loan processor vs. underwriter.

What Is a Personal Loan Officer?

A loan officer evaluates loan applications and determines whether or not to recommend them for approval. A personal loan officer is a specific type of loan officer that focuses on personal loans. Personal loan officers are generally employed by credit unions, banks, and financial institutions.

Generally, a personal loan officer takes on the following job responsibilities:

•   Contact potential borrowers to see if they need a loan.

•   Work with loan applicants to gather information required for the application.

•   Walk applicants through the different loan types available to them and their unique terms.

•   Collect, verify, and review an applicant’s financial information (e.g., credit score, income, and other factors).

•   Review any loan agreements to confirm they are in compliance with all state and federal regulations.

•   Approve loan applications or pass them onto management for a final decision.

A major part of a personal loan officer’s responsibilities happen during the underwriting process. This process is used to determine if an applicant qualifies for the loan they are applying for. Once a loan officer collects and verifies all of the necessary personal and financial information about an applicant and any corresponding documents, the loan officer will assess the applicant’s need for a loan and their ability to repay it on time.

A loan applicant working with a loan officer can turn to them about any questions they have about what a personal loan is or about the application process. A personal loan is a type of consumer loan and consumer loan officers may use a fully automated underwriting process using software or they may complete it themselves (which is more often the case with smaller banks and credit unions).


💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

What Is a Personal Loan Processor?

A personal loan processor, also known as a loan interviewer or loan clerk, is responsible for interviewing applicants and other necessary parties to obtain and verify the financial and personal information required to finish the personal loan application. Once the applicant is approved for the loan, the personal loan officer will prepare any documents required for the appraisal and the closing of the personal loan.

Recommended: Where to Get a Personal Loan?

What Does a Personal Loan Processor Do?

The personal loan processor serves as a liaison between the financial institution issuing the loan and the applicant to make sure that qualified applicants can secure a loan in a timely manner. The loan processor will also help applicants decide which loan product is the best fit for their financial needs and goals. For example, if an applicant is experiencing financial hardship, the loan processor can help them set up debt payment plans.

Review Your Application

A loan processor receives, collects, distributes, and evaluates applicant information required to complete the loan application. They can approve or deny an applicant.

Verify Your Information

Personal loan officers are tasked with interviewing applicants and other necessary parties in order to verify any financial and personal information that must be evaluated during the application process.

Request Documents

As a part of the verification process, they will also request and collect any necessary documents from the applicant. They are also responsible for preparing any documents required for the appraisal and closing process.

Third Party Reports

In addition to collecting documentation from the applicant, the personal loan processor will work with third parties to obtain any necessary documents and reports, such as the applicant’s credit report.

Is a Personal Loan Processor the Same as an Underwriter?

While there is some overlap between what a personal loan processor and an underwriter do, these are two different roles. A loan underwriter focuses on evaluating how creditworthy an applicant is by collecting and evaluating an applicant’s financial information. Typically, they then use loan underwriting software to make an approval or denial recommendation.

A loan processor also reviews how eligible an applicant is for a loan by collecting and verifying important information and documents, but they don’t use underwriting software to make a decision. The loan processor has the ability to approve or deny an applicant.

Loan Processor	Underwriter
Collects and verifies applicant information	Collects and verifies applicant information
Makes approval decision	Uses underwriting software to determine eligibility
Prepares documents for appraisal and closing

Is a Loan Officer or Loan Processor Responsible for Your Personal Loan Approval?

When it comes to loan processor vs. loan officer, both loan officers and loan processors have the ability to reject or deny a loan application or, at the very least, make a recommendation for whether or not an applicant should receive a loan.


💡 Quick Tip: With lower fixed interest rates on loans of $5K to $100K, a SoFi personal loan for credit card debt can substantially decrease your monthly bills.

When Does a Personal Loan Processor or Officer Get Involved?

When someone applies for a personal loan, they’ll connect with a personal loan processor or officer when they submit their initial application. Either one can start the process of collecting personal and financial information and supporting documentation from the applicant.

What Happens During Personal Loan Processing?

During the personal loan processing stage, the applicant will work with the personal loan processor to provide them with any personal information, financial information, or documentation that the personal loan processor needs to finish their application.

Recommended: How Much of a Personal Loan Can I Get?

Getting Approved for a Personal Loan

Getting approved for a personal loan requires going through the underwriting process which assesses how qualified a loan applicant is. Some firms use underwriting software to make a decision whereas others make the decision without the aid of software.

The Takeaway

When comparing a loan officer vs. loan processor, it’s clear that both loan processors and loan officers play an important role in the personal loan application process. Their roles often overlap and where they work determines the exact role they take on.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Is a personal loan processor the same as an underwriter?

No, a personal loan processor is not the same as an underwriter, although they share similar responsibilities. A loan underwriter determines whether or not an applicant is creditworthy. A loan processor collects and verifies any personal and financial information required to complete loan applications.

What does a personal loan processor do?

A personal loan processor works with personal loan applicants to gather the information and documents needed to complete their applications. A personal loan processor also prepares appraisal and closing documents.

When does a personal loan processor or officer get involved?

A personal loan processor or officer gets involved once a consumer starts the application process. They can help guide the applicant through that process.

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Photo credit: iStock/Delmaine Donson

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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