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Who doesn’t want to retire early? If you have $1 million stashed away by age 55, you may feel like you have enough to leave the rat race and ride out your golden years. Unfortunately, it may not be enough.

It all depends on your lifestyle and location. For some professionals, asking whether $1 million is enough to retire on may be downright naive. As people live longer and prices continue to rise, many of us can end up needing much more.

If sitting on a cool million at 55 makes you feel like you’re ahead of the game, it’s probably a good idea to slow your roll and take some key factors into consideration.

How Far $1 Million in Retirement Will Realistically Take You

One million dollars sounds like a lot of money — surely enough to last the rest of your life, right? But how far will $1 million really take you in retirement? There’s no single answer that applies to everyone. The nest egg that you will need depends on the following variables:

•   Where you’ll live when you retire

•   The lifestyle you want to lead

•   Whether you have dependents

•   Your health care costs

•   Other retirement income

•   Investment risk

•   Inflation

Considered another way, the answer comes down to your withdrawal rate — how much money you regularly withdraw from your accounts to live on — and how long you end up living. A conservative withdrawal rate, for example, is 3%. So, if you’re eating up 3% of your savings per year (with inflation on top of that), you’ll want to make sure you have enough to last for a few decades. Tools such as a money tracker can help you monitor your spending.

This is complicated stuff, and it may be best to consult a financial professional to help you plan it all out. At the very least, run some numbers yourself to figure out, “Am I on track for retirement?”

Recommended: Average Retirement Savings by State

Why You May Need a Lot More if You Retire Early

Financial experts often say that you’ll need around 80% of your pre-retirement annual income for each year of retirement. That means that if your pre-retirement annual income is $80,000, you should plan on saving around $64,000 per year of retirement.

In that scenario, if you hope to retire at 55, you would need almost $2 million. That amount would last you for around 30 years, until you’re 85. As you may have noticed, this is considerably more than $1 million.

Even then, you have to think about what happens if you live until you’re 95, or even 105. That’s 50 years of retirement — and $1 million is probably not going to last half a century. If you’re planning on retiring early, you will likely need a lot more than $1 million.

How Much You Should Ideally Save for Retirement

Again, the amount you should ideally save for retirement will depend on the kind of lifestyle you want during your retirement years. Because there are so many unknowns and variables to consider, many people simply aim to save as much as they can.

To get to a ballpark figure, though, ask yourself the following questions when crunching the numbers:

•   At what age would you like to retire?

•   What kind of lifestyle do you want to have?

•   Will you work part-time? If so, what kind of work will you do, and what is the average pay for that type of work?

•   Will you have passive income (such as rental income from a real estate property)?

•   What other sources of income will you have (Social Security, etc.)?

•   Where will you live when you retire, and what is the cost of living in that location?

•   How big of a safety net do you want for unforeseen circumstances?

•   Do you hope to leave an inheritance for your loved ones, or are you happy spending down your nest egg to zero?

Once you’ve thought about how you want to live your retirement, you can plan for that scenario. Create the budget you would like to have, then calculate the cost per year and the number of years you plan on being retired.

While we don’t know how long we will live, expecting a longer lifespan is a smart way to plan for retirement. You don’t want to outlive your savings and be too old to go back to work.

So, how much you should save for retirement varies significantly from person to person. Perhaps the simplest answer is to save as much as you can.

Factors to Consider When Saving for Retirement

In addition to your cost of living, you should consider the effect of inflation on retirement. Adjust your yearly cost of retirement with an inflation calculator to learn the change in value of your savings over time. For perspective, inflation, historically, has averaged just over 3%.

Fortunately, the stock market has grown faster than the inflation rate over time, so you can do some stock portfolio tracking to see whether your investments help you stay ahead of inflation.

Lastly, life expectancy is higher than it used to be. Americans are living, on average, until 79 years of age. With that in mind, plan for a longer lifespan. That way, you won’t feel as though you’re running out of money later in retirement.

Recommended: Typical Retirement Expenses to Prepare For

How to Determine the Right Amount to Retire for You

If you want to keep your current cost of living and lifestyle, take your current salary and multiply it by the number of years you’re planning on living off your retirement and then multiply the figure you get by around 80%. Then, adjust that amount for inflation using an online calculator. Finally, add a cash cushion for unforeseen events.

It involves a bit of math, but this should give you a ballpark idea of your needs. You can always use a budget planner app or a retirement calculator.

The Takeaway

Long story short: It is possible to retire with $1 million at 55. However, it may not be enough for most people. You’ll need to create a customized financial plan based on your lifestyle goals — there’s no magic formula or one-size-fits-all plan. Identify what matters to you, and then plan based on your ideal type of retirement.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

How much money do I need to retire at 55?

The amount of money you’ll need to retire at 55 will depend on the kind of lifestyle you want to lead during retirement. If you’re planning on living off of $60,000 per year and hoping to live for another 30 or so years, you’ll need almost $2 million.

Can you live on $1 million in retirement?

One million dollars is not going to be enough for most people in the US to retire on. Whether it’s enough for you will largely depend on the kind of lifestyle you want. If you’re planning on receiving a pension and/or Social Security, that will help stretch your savings.

Can I retire with $1 million in my 401(k)?

Depending on your lifestyle, $1 million in your 401(k) may not be enough. When combined with other savings and investments, it can be, but it’s probably best to consult with a financial planner who can help you determine how to best use your 401(k) savings.

What withdrawal rate should I use in retirement?

The recommended withdrawal rate is usually around 3%, meaning you should use up to 3% of your savings each year. Using a lower withdrawal rate can help your money last longer, which is important if you plan to retire early.

How does inflation affect early retirement savings?

Inflation can reduce your purchasing power over time, which means your retirement savings may not stretch as far as you expect. Planning for inflation can help ensure your money lasts throughout your retirement.

Photo credit: iStock/LaylaBird

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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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No matter what you do, it generally costs you money to borrow money. In the case of credit cards, you’ll pay interest on any balance remaining after your statement due date, and you may also be subject to other fees, including an annual fee.

Understanding how much a credit card costs is important, as it can help you compare cards and choose one that’s right for you at the right price. Read on to learn more about the potential costs of a credit card.

How Much Does It Cost to Get a Credit Card?

The application process for a credit card is free. The process starts by choosing a card that offers the right terms, interest rates, and rewards, if applicable. For example, you may want a card that offers cash back on certain purchases, or if you travel frequently, you may want to choose a credit that offers airline miles.

Once you’ve decided on a card, the application will typically ask you for the following:

•   Name: Credit card companies will need your full legal name.

•   Address: Most credit card companies will require you to have a U.S. address.

•   Social Security number: The credit card company will use this to make a “hard pull” inquiry on your credit report, which will help it determine how risky it may be to extend credit to you.

•   Employment status and income: This will help the credit card company determine how large a line of credit you can afford.

•   Country of citizenship and residence: Not all companies will offer cards to noncitizens.

•   Financial assets and liabilities: The credit card company will want to know what other debts you are currently paying off.

Though applying for credit doesn’t cost anything, that doesn’t mean that credit cards are free. Once approved, you do have to pay for having a credit card in certain circumstances.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

Cost of a Credit Card: What to Consider When Choosing a Credit Card

The costs associated with maintaining a credit card are some of the most important points of comparison when choosing between different cards. Here’s how they can stack up:

Interest Rates

Credit cards work by charging you an interest rate, also known as annual percentage rate (APR). Interest applies when you carry a balance from month to month. If you pay off your balance each month, you won’t owe interest.

The average commercial bank interest rate on credit card plans for all accounts is 20.97%, according to the latest data released by the St. Louis Federal Reserve. However, interest rates tend to vary from applicant to applicant, largely depending on their credit score.

The better your credit score, the lower the interest rate you may be offered. Banks tend to see individuals with lower scores as at greater risk of defaulting on their loans, so they tend to offer the applicants higher interest rates to offset some of that risk.

Balance Transfer Fees

A balance transfer credit card allows you to transfer the balance on your existing card to another card with a lower interest rate or no interest for a period of time. Most balance transfer cards will charge a fee from as low as 3% to as much as 5% in order to do so.

If you’re transferring a large balance, this fee can quickly add up to a hefty sum, so be sure to carefully compare the cost of the balance transfer to the amount you’d be saving on interest by switching to the new card.

Recommended: What Is the Average Credit Card Limit

Extra Charges When Spending Overseas

Foreign transactions fees are a surcharge that credit card companies tack on to purchases you make overseas that require the processing of foreign currencies or that are routed through foreign banks. These fees are typically around 3%, and if you’re a frequent traveler, they can start to add up.

Check the fine print in the terms and conditions before signing up for a card to see how much you’ll be charged. In some cases, your card may not charge anything.

Late Payment and Credit Limit Fees

Though you can carry a balance on your credit card, there is still a monthly credit card minimum payment that you’ll have to make. Do everything you can to make this payment on time. Not only can missed payments hurt your credit score, but your credit card company may also charge a fee. Miss another payment and that fee could go up. For example, while the late payment charge on your first missed payment could be $28, the second could jump up to $39. Typically, the late fee cannot be more than the minimum amount due on the account. You can learn more about the finer points of credit cards by exploring this credit card guide.

Another potentially painful side effect of missing a payment: Your credit card company could increase your interest rate, increasing the cost of your unpaid balance and making future borrowing more expensive.

Annual Fees

Annual fees help credit card companies cover the costs of whatever perks and rewards they offer their customers. They may range from $50 to around $800, although there are cards that advertise no annual fee. The more perks a card comes with, the higher the annual fee may be. This fee is typically charged as a lump sum once per year, usually in the same month in which you opened your card, and you’ll pay it off as part of your regular credit card bill.

Convenience Fees

Sometimes you’re charged fees (called credit card convenience fees) for using your credit by businesses where you make a purchase.

Recommended: How Do Credit Card Payments Work?

Tips for Using Your Credit Card Responsibly

Credit cards are what’s known as revolving credit. They allow you to carry a balance from month to month, making only the minimum payment, and that balance can increase as interest gets added. The bigger your balance, the more money you’ll owe in interest, and your debt can quickly grow out of control. That’s why it is important to use your credit card responsibly.

Here are a couple credit card rules to consider in order to do so:

•   Always aim to pay off your credit card balance in full each month. For most cards, you will not owe any interest on purchases if you do, eliminating one of the biggest costs of having a credit card.

•   Avoid making purchases you won’t be able to pay off each month. Sometimes these expenses are unavoidable, especially in an emergency. If you can’t pay off your debt within a month, aim to do so as quickly as possible.

•   Make a point to review your credit card statement. While it might seem like a slog, reviewing your credit card statement can offer helpful insight into your spending habits. It can also ensure you notice any unauthorized credit card usage or a billing error, in which case you may be able to request a credit card chargeback.

The Takeaway

Maintaining a credit card typically comes with a variety of costs. In some cases, you can avoid credit card fees and interest, such as by paying off your balance in full and on time each month. Also be aware that interest rates and fees are often negotiable. If you’re a longstanding customer or have a particularly good credit, you may have a chance at having a few fees waived or at least lowered.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

Do you have to pay for a credit card?

It is typically necessary to pay for a credit card, but how you pay may differ depending on the card issuer and type of card. Credit card companies may charge a variety of fees including annual fees and late payment fees. You will also have to pay interest on whatever balance you carry from month to month.

How much are credit card fees monthly?

Credit card fees are typically not charged on a monthly basis. Credit card fees are more often charged as a lump sum once each year and typically range from $50 to around $800. You may incur other fees, like late payment fees, only when you miss a payment.

Can I use a credit card for free?

There are credit cards that charge no annual fee. If you obtained one of these cards and paid off your balance each month (thus avoiding interest charges), you might be able to successfully use a credit card for free.

Photo credit: iStock/Meranna

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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 Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Borrowing money from family members (or lending it to them) can be risky. Though all debt is chancy, family loans pose different risks.

While family lenders don’t have to worry about pulling (or affecting) anyone’s credit score, private loans may put a strain on otherwise strong relationships. Depending on the loan amount, there may also be tax implications to consider.

That said, there are ways to thoughtfully issue and receive family loans. Here are our best tips for lending with family and keeping your relationships intact.

What Are Family Loans?

Family loans are those given and received within a family group, rather than in a typical lending situation, such as a bank or credit union, or even a payday lender.

Someone who may not qualify for a traditional loan might be inclined to ask a family member for a loan. A family loan can be in both parties’ interests. For example, the borrower might receive a better interest rate than they would from a bank, and the lender might realize a higher interest rate than they would from a savings account.

Reasons someone might ask a family member for a loan are similar to those for considering a personal loan: They might need cash for emergency medical expenses, unexpected home repairs, or adoption or fertility treatment costs.

💡 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.

How Do Family Loans Work?

At a basic level, family loans work similarly to traditional loans: One person requests a loan, and another approves it. While that’s an oversimplification, the concept is the same. There is usually less paperwork involved in a family loan, with no application or credit check necessary, although experts recommend a formal contract detailing each party’s rights and responsibilities.

Terms for the Lender to Include in a Family Loan

•   Amount loaned

•   Interest rate, if the lender charges interest

•   Payment amount (often monthly)

•   Penalties for non-payment

Terms for the Borrower to Include in a Family Loan

•   Amortization schedule, with principal and interest amounts clearly stated

•   Ability to pay the loan off early without penalty

•   Periods of payment suspension in cases of hardship

Risks and Benefits of Family Loans

There are risks and benefits to family loans, no matter which role you’re assuming. However, while both the borrower and lender may put a strain on the family relationship involved, the lender is likely to bear the greater financial risk — after all, it can be difficult to recoup your losses when you have no official financial authority.

Risks of Family Loans

One of the biggest dangers of family loan arrangements is the potential for conflict within the relationship. People tend to have strong emotions tied to money. However, some risks lie solely with the borrower or lender.

Risks for the Borrower

•   The relationship may be endangered if the loan repayment plan falls through.

•   Although avoiding a credit check — and possible negative credit consequences — is a plus, family loans also fail to help borrowers build their credit history since they’re not reported to credit bureaus.

Risks for the Lender

•   The relationship may be in jeopardy if the loan repayment plan falls through, which puts the lender into a particularly tricky situation if they need the cash back for their own finances.

•   It’s easy for family lenders to lose their money outright if the borrower constantly defers to an IOU.

•   It can be difficult to recoup losses or enforce any substantial consequences for borrowers who go into default since family lenders don’t have any financial authority or backing.

•   If the loan is interest-free and for an amount in excess of the IRS gift tax exclusion, it may trigger the need to file a gift tax return (and potentially pay taxes on the gift).

Benefits of Family Loans

Despite the risks, family loans do have some attractive qualities.

Benefits for the Borrower

•   Family loans present a potentially low-cost alternative to traditional credit options. Family lenders usually don’t assess fees and may not charge interest.

•   Family loans can carry much easier approval standards than their traditional counterparts. At a financial institution, borrowers are subject to credit checks, employment history verification, income verification, and more. A family member is unlikely to run those checks.

•   Family loans often employ more flexible repayment standards than traditional loans do, and family lenders may be more lenient if the borrower faces extenuating circumstances that make it difficult to make payments.

•   Failure to pay private family loans promptly — or at all — won’t impact the borrower’s credit score the way such behavior would with a traditional loan.

Benefits for the Lender

•   It can be rewarding to help out a family member in need, particularly if they’re putting the money toward a major life goal such as home ownership.

•   If the lender chooses to charge interest on the loan, they can earn interest as the borrower repays the loan.

Tax Implications of Family Loans

It may be surprising to learn that loaning money to a family member could be consequential enough to land on the IRS’s radar.

Fortunately, most family loans fall outside the IRS’s purview. It’s only when they exceed IRS-defined amounts and are interest-free that lenders must report them on their tax returns.

If a family lender offers an interest-free loan to a family borrower, the IRS still treats the transaction as a loan and assumes the interest that should have been charged counts as a gift to the recipient. The government publishes minimum interest rates every month.

That’s no big deal if the loan is for, say, $300. But if the unpaid interest — or unpaid loan balance — exceeds the annual gift-giving exclusion (which is $19,000 ($38,000 for married couples) for 2026), the lender might be responsible for filing a gift tax return and potentially paying taxes on the gift.

The IRS might also count the should-be (imputed) interest toward the lender’s gross income, even if they don’t charge or receive interest. Again, this isn’t a big deal on loans of just a few hundred dollars, but a large enough loan could impact the lender’s finances.

Making a Family Loan Legitimate for Tax Purposes

The main thing that makes a family loan legitimate to the IRS is a family loan agreement that specifies repayment terms. If an agreement is not in place, the agency may treat it as a gift rather than a loan.

The federal government sets minimum interest rates (as noted above) that lenders can charge on private loans, such as family loans. If the lender charges less than the minimum interest rate, the IRS may assess taxes on any unpaid interest that is deemed payable.

Keeping records of payments made will also show the IRS that the lender was tracking the debt and that there is an expectation of repayment.

Recommended: Paying Taxes on Personal Loans

Tips to Successfully Borrow From or Lend Money to Family

If you’re considering lending money to or borrowing money from a family member, adding some structure to your loan can help minimize risks while still allowing everyone involved to reap the benefits.

Planning Your Family Loan-Out

A family loan frequently takes place in a single, impromptu transaction: The borrower asks for some money, and the lender gives it.

A better idea is to make a concrete plan together that specifies all the loan’s terms, such as repayment installments and timing. Lenders might want to consider charging interest, especially on large loans, due to the tax implications outlined above. Even a low family loan interest rate can motivate a borrower to take repayment seriously.

Recommended: What Happens If You Default on a Personal Loan?

Making a Family Loan Official

Clear communication and boundary-setting skills make pulling off a family loan a positive experience for all involved, and oftentimes, the best way to achieve those goals is to write things down.

Drafting a formal money-lending contract also makes your loan official in the eyes of the IRS, which can help prevent it from being classified as a gift for tax purposes.

Terms to incorporate in your family loan agreement include:

•   The amount loaned

•   The loan’s repayment terms, such as frequency and amount, as well as a due date for when the borrower must repay the loan in full

•   The loan’s interest rate and fees, if any (for instance, the lender may decide to charge late fees if the loan repayment terms are not honored)

•   Clauses concerning what happens if the loan is repaid early, such as a prepayment penalty, or what happens if the borrower goes into default for any reason.

Family Loans vs Gifts

If a family lender has the financial ability and willingness to make a monetary gift rather than a loan, they can do so without tax implications for amounts of up to $19,000 in 2026.

There are various reasons someone might choose to give a gift rather than make a loan, or vice versa.

Alternatives to Family Loans

If all these caveats and warnings make family loans sound like a less-than-prudent idea, consider alternatives before asking family members for a loan. Remember, if a family member asks you to borrow money, you’re allowed to say no and steer them in a different direction.

Obviously, the ideal financial strategy for making a big purchase is to save money so you don’t have to go into debt. Although this isn’t always possible or realistic, it might be worth taking a second look at your budget, working on a promotion, or starting a side hustle to generate cash.

Unsecured personal loans are available from certain banks and financial institutions, and you can use them to fund a wide variety of expenses upfront. Of course, these may come with higher interest rates and more stringent qualification requirements than family loans.

You might also consider asking a family member to cosign on a loan with you instead of loaning you the money. They would be responsible for making the loan payments if you, the primary borrower, default, but they wouldn’t have to immediately withdraw money from their own bank account to help you.

If you need to borrow money for business purposes, a small business loan may be an option. The Small Business Administration is an excellent resource for business loans. The agency works with lenders to help small business owners find funding for a wide range of amounts and terms, with competitive interest rates.

💡 Quick Tip: Generally, the larger the personal loan, the greater the lender’s risk and the higher the interest rate. As a result, one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

While borrowing or lending money to a family member can be tempting, it can have long-lasting effects on interpersonal relationships and the lender’s finances. Drafting a structured family loan agreement can help, but you may also want to explore a traditional personal loan from a bank, credit union, or online lender.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a loan from a family member called?

A loan from a family member is often called a family loan, an intra-family loan, or a friends-and-family loan.

Can family loans help your credit?

Since a family member is not likely to formally check your credit report or provide payment information to the credit bureaus, a family loan probably won’t help (or hurt) your credit.

Are family loans considered debt?

Yes, a loan from a family member is considered debt, but it’s unlikely to be reflected on your credit report. For tax purposes, a family loan is treated as debt if it meets certain criteria.

Photo credit: iStock/Ridofranz

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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.

SOPL-Q126-028

What a person does with their money is their business, right? Not always. Lenders are indeed interested in how borrowers plan to use the funds they’re loaned — in fact, the reason for a loan is one of the application questions.

But does loan purpose really matter? Yes. In some cases, your loan purpose can impact whether you receive the loan, as well as your loan terms.

Here’s what you need to know when it comes to different types of personal loans and their uses, and the best reasons to give for the purpose of your loan.

What Is the Purpose of a Loan?

At its most basic, the purpose of a loan is the reason the applicant wants to borrow money. Even though there are many acceptable uses of personal loan funds, including consolidating debt, paying for a large purchase, or covering the cost of a home renovation, the loan application will likely include a section asking why the applicant is requesting the loan.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Why Does the Purpose of a Loan Matter?

Banks consider a number of factors when evaluating an applicant for a loan, such as the amount requested and the applicant’s credit and employment history, to assess the potential risk of lending money to that individual.

The borrower’s reason for needing a loan can be a significant factor, too. One reason is that many financial institutions have certain limitations on how the money they lend can be used. For example, a lender may not allow the proceeds of a personal loan to be used to pay for college tuition, repay another student loan, purchase a home, or start a business. As a result, the best reason to give when applying for a personal loan is one that the lender allows.

The purpose of the loan you’re seeking can also impact the size of the loan the lender will grant, the interest rate, and the term of the loan.

Recommended: What Are the Common Uses for Personal Loans?

How Does Loan Purpose Affect Your Loan?

Your reason for getting a personal loan not only helps determine whether you’ll be approved but can have an influence on the type of loan you can get, as well as the loan amount and even the interest rate.

Some lenders focus on loans for certain purposes, such as credit card consolidation, while others offer an array of personal loan products that are each tailored to specific uses, such as home improvement loans, medical loans, wedding loans, or IVF loans. Each loan type will have loan amounts and terms designed to fit that particular need.

Does the Purpose of a Loan Influence Interest Rates?

It can. Some lenders may set interest rates based solely on the loan amount, the loan term, and the creditworthiness of the applicant. Other lenders might use those factors, plus have interest rate ranges for different loan purposes. For example, a lender might offer better rates (and longer terms) for home improvement loans than they do for debt consolidation loans.

To make sure you’re getting the best deal, you’ll want to shop around and compare interest rates, terms, and fees from lenders that are offering personal loans that match your needs. It’s also a good idea to review credit requirements, such as your credit score, credit history, and income qualifications, to ensure you meet the lender’s minimums.

Common Reasons for Getting a Loan

People typically have something particular in mind when they decide to borrow money. And while every person sees themselves and their individual needs as unique, the reasons for taking out a personal loan tend to fall into some fairly common buckets. Here is a closer look at some of the most common reasons for getting a personal loan.

Debt Consolidation

The goal of debt consolidation is to save money on interest payments by consolidating high-interest credit card debt with a personal loan with a lower interest rate. If you have strong credit, you may be able to get a debt consolidation loan for a significantly lower rate than you are paying on your credit card balances.

Medical Bills

While health insurance can help pay for expected and unexpected medical bills, it usually doesn’t cover everything. And even when a medical expense is covered, insurance can still leave you with a significant portion of the bill to pay on your own. If that’s money you don’t have on hand right now, a medical loan can help ease the strain on your personal finances.

If you already have several medical debts, a low-interest personal loan could be a good way to consolidate those payments.

Home Improvements

While you may first consider a home equity loan or line of credit to cover a home repair or improvement, in some cases, a personal loan might be a better choice. This could be the case if you only need a smaller amount, or you need cash quickly (say your air conditioning or heating system goes out), since you can often get the funds from a personal loan within a few days.

Home improvement loans are also unsecured, making them less risky than home equity loans or credit lines, which use your home as collateral.

💡 Quick Tip: With home renovations, surprises are inevitable. Not so with SoFi home improvement loans. There are no hidden fees required, and no surprises.

Something Else

There are many other reasons for taking out a personal loan, such as helping a family member, funding a move, or paying for a wedding or funeral.

Planned vs Unexpected Expenses

Some expenses can be expected and planned for accordingly, while others come out of nowhere and require a sudden influx of cash. Either way, a personal loan can be a convenient way to finance these expenses without disrupting your savings or relying on high-interest credit cards.

What to Consider

Planned expenses, such as home renovations, weddings, or vacations, can benefit from a personal loan’s predictable repayment schedule. You can budget for the monthly payments and avoid dipping into your savings or using high-interest credit cards. However, you’ll want to factor the cost of the loan into the total cost of your purchase or project to see if it makes sense to finance it now or wait until you have enough savings.

Unexpected expenses, on the other hand, by nature arise suddenly and without warning. Medical emergencies, car repairs, or home repairs are examples of unexpected expenses that may require immediate financial assistance. Personal loans can provide a quick source of funds to cover these expenses, but it’s essential to carefully review the terms and conditions of the loan.

Smaller vs Larger Expenses

How much money you can borrow with a personal loan will depend on the lender, your credit score, income, debt-to-income ratio, and other factors, but the max amount you can typically borrow ranges from $500 to $100,000. This wide range can make a personal loan a viable source of financing for both small and large expenses.

What to Consider

When using a personal loan for smaller expenses, it’s important to borrow only what you need and can afford to repay. You generally want to avoid taking out any more than needed, as this can lead to unnecessary debt. It’s also a good idea to compare loan offers to find the most competitive interest rates and terms.

For larger expenses, such as home renovations or debt consolidation, personal loans can provide a lump sum of money with a fixed interest rate and repayment term. This can help you budget for the expense and avoid the pitfalls of high-interest credit card debt. Always be sure to compare loan offers and choose the one that best suits your needs.

Recommended: 11 Types of Personal Loans and Their Differences

One-time vs Ongoing Expenses

Personal loans can be used to cover one-time expenses, such as a major purchase. They can also be used to cover ongoing expenses, like a wedding, medical bills, or home renovation. However, for ongoing expenses, you might want to consider a personal line of credit as opposed to a personal loan.

What to Consider

Funds from a personal loan are disbursed in one lump sum, and interest is paid on that sum according to a fixed repayment schedule.

If the loan purpose is an expense that is ongoing or variable, a personal line of credit might make sense financially, since interest is only charged on the amount drawn at any one time, and money borrowed can be repaid on a more flexible basis. Lines of credit tend to come with variable instead of fixed interest rates, however, so the overall amount due may be hard to predict.

Loans to Pay Off Other Loans

A common use for personal loans is to consolidate high-interest debt. By taking out a personal loan to pay off other loans or credit card debt, you can potentially lower your overall interest rate and simplify your monthly payments.

What to Consider

When using a personal loan to pay off other loans, consider any origination fees or prepayment penalties associated with the new loan. It’s also important to calculate the total cost of the new loan, including interest rates and fees, to ensure that it offers a better financial solution than your existing debt. Additionally, consider your repayment ability to ensure that you can comfortably afford the new loan payments.

Personal Loan Approval

The length of time from application to personal loan approval varies by lender. Online lenders can typically provide same-day approval, while banks and credit unions can generally take up to three business days to approve your personal loan application.

Some things that can make this a quicker process are making sure your credit report is free of errors and having the required documents ready when the lender requests them. Loan applications that don’t have unusual circumstances, e.g., self-employment income verification or a high debt-to-income ratio, are more likely to be approved faster than those that do.

Once a personal loan application has been approved by the lender, the funds may be made available to the borrower in just a few days or up to a week, depending on the type of lender. Some online lenders may disburse funds the same day as approval.

The Takeaway

There are, indeed, different types of loans for different purposes. Applicants may have their own reasons for wanting a loan, but lenders will want to know what the funds will be used for. There may be certain loans better suited to certain funding needs than others, and a lender will likely want to make sure the loan suits the purpose.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Why is it important to know the purpose of a loan?

Lenders may want to know the purpose of a loan so they can assess the risk of lending. Also, some lenders have limitations on how the money can be used. Borrowers will also want to consider the purpose of a loan to make sure they apply for the right type of loan for their needs.

What are examples of the purpose of a loan?

There are many reasons why people apply for personal loans. These include debt consolidation, medical and dental expenses, IVF treatment, home repairs/improvements, weddings, large purchases (like appliances or furniture), car repairs, and more.

What happens if I use my loan for a different purpose?

Some loans are meant to be used for a certain purpose, such as auto loans or mortgages. Personal loans, however, can be used for many purposes, and a lender may not check to see if the funds are being used as intended on the loan application. It’s a good idea to review the loan application to understand any restrictions on the use of the funds.

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.

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At some point, there may come a time when you need to ask the question: Does filing for unemployment benefits affect your credit score? The answer is no, fortunately.

Losing your job can be like a kick in the stomach. It can deflate you and leave you scrambling to figure out what to do next. The last thing that many people need, in addition to firing up a job search, is a hit to their credit score, too. If you do lose your job, many financial professionals will tell you that the first thing you should do, if you qualify, is to file for unemployment so that you still have some income as you revise your resume and start interviewing.

The good news, again, is that you don’t need to worry about a potential ding to your credit. More information below!

Why Your Credit Score Matters

Your credit score is, in a sense, your financial reputation. It can give lenders or creditors a quick and easy summary of your creditworthiness — or, how likely it is you will pay back a loan on time and in full. Everyone has a credit report, and you can think of your credit score as a truncated version of your credit report.

Your credit score matters because it’s used by lenders to gauge how risky you are as a borrower. It’s used to measure not only whether a lender would be willing to give you a loan, but how much they’d charge you for the privilege — or what the effective interest rate would be for borrowing.

When it comes to some of life’s bigger purchases, such as a car or a home, that can be very important. A couple of percentage points can mean that a borrower ends up paying tens or even hundreds of thousands of dollars more in interest over the years. As such, when a lender sizes up your credit application and takes a look at your credit score, the higher your credit score is, the better.

But what factors affect your credit score? It’s a mixture of things: your payment history, total debt balances, credit utilization, credit history (how long you’ve had accounts), credit mix, and inquiries from lenders.

Recommended: Should I Sell My House Now or Wait?

Unemployment Won’t Appear on Your Credit Report

You may be concerned that if you lose your job, filing for unemployment may affect your credit score. But there’s no cause for concern. Not only will filing for unemployment not affect your credit score, it also won’t appear on your credit report. Your credit report contains information relating to your past borrowing activity, not your employment status.

Unless there’s been a change in your credit history — say, you apply for a new line of credit or close an old credit card — your credit report won’t change. That said, your credit report may contain information relating to past employers, but the only things that should have an effect on your credit score are items relating to financial accounts.

That may become an issue if, for example, you were issued a company credit card at a previous job. But for most people, your employment status, or past employers, aren’t likely to have an impact on your credit report or credit score.

Remember: Your credit score is a snapshot of your financial reputation, not your employment status!

How Unemployment Can Affect Credit Scores Indirectly

With all of that in mind, your employment status — or filing for unemployment — may have an effect on your credit score in an indirect way.

As mentioned, your employment status isn’t a part of your credit score’s calculation, and neither is whether or not you received unemployment assistance. It’s really all about paying back, or down, your debts on time and on schedule. However, if you do lose your job and file for unemployment, you may find yourself in an income crunch. Your unemployment check is most likely going to be smaller than the paycheck you’re accustomed to receiving, and that may make it difficult to keep up with your payments.

You may also be tempted to start using your lines of credit more while unemployed as a way of making ends meet. For example, you might start using your credit card at the grocery store as a way of keeping money in your bank account, with the thought that you’ll pay off your balance once you get another job and a regular paycheck again. Some individuals may also look into personal loans for unemployed persons, too.

One of these options may suit your situation. However, they may also increase your credit utilization and overall debt, which can lower your credit score.

Finally, if you find that you can’t keep up with your minimum payments due to the resulting cash crunch of losing your job, that, too, will ding your credit score. That’s why it’s important to maintain a line of communication with lenders. If you can’t make your payment, let them know, and they may be willing to work with you. Tools like a money tracker app may be helpful as well.

Remember, if you do have a company credit card or some other type of financial account with an employer and you lose your job, that credit line could be severed. That, too, could affect your credit score, as it ultimately lowers your total available credit.

Recommended: What Is the Difference Between Transunion and Equifax?

How to Protect Your Credit Score When Unemployed

To protect your credit score while unemployed, the most important things you can do are to try to keep your debt balances low and to keep an open line of communication with your creditors. Of course, a loss in income will probably spur you to change your spending habits by cutting back in certain areas. But in terms of maintaining your credit score, the best course of action is to keep doing what you’re doing: making your payments.

That means continuing to make your payments (at least the minimum) as scheduled. And, since it bears repeating, if you’re going to struggle to make those minimum payments, call your lender and let them know. Some will be willing to make accommodations, such as offering forbearance, extensions, or deferred payments, although there’s no guarantee.

If you feel that you need more help, you can also work with a credit counselor to help you evaluate your options and even negotiate with your lenders. You may also want to set up free credit monitoring, too, so that you can see any changes to your score.

The Takeaway

If you lose your job and file for unemployment, there shouldn’t be a direct effect on your credit score. That said, there may be indirect factors that could lower your score. The most important thing you can do to maintain a strong credit score is to keep making your payments and try to keep your debt balances to a reasonable level.

And remember that if you’re really struggling, it may be worth it to reach out to a professional for personalized advice.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Can I apply for a credit card while I’m unemployed?

It’s possible to get a credit card while unemployed, but keep in mind that a creditor’s main concern is whether or not you can make your payments. As such, your approval for a credit card may hinge on your income and other debts or financial obligations.

What if my credit score goes down?

Credit scores go up and down all the time, but if you do experience a fall in your credit score while unemployed, you’ll likely know why — and it’s probably because you missed payments or saw your credit utilization go up. The good news is that you can always work on increasing it again.

What personal information does your credit report include?

The short answer? A lot of it. That includes your name, aliases, birth date, Social Security number, address (and former addresses), phone number, and possibly your employment history, among other things.

Photo credit: iStock/sorrapong

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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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