SoFi

You might be wondering how easy it is to get approved for a $5,000 personal loan. In most cases, the process is straightforward and no collateral is required — though you might pay more in interest if your credit is poor. Overall, a $5,000 personal loan is a good way to access cash for unexpected bills and necessary expenses.

Learn more about the typical terms and requirements for a $5,000 personal loan.

Pros of a $5,000 Personal Loan

A personal loan is money that you borrow from a bank, credit union, or online lender that you pay back in regular installments with interest, usually over about two to seven years. Personal loans have several advantages over high-interest credit cards, making them a good option for a variety of borrowers.

Popular uses for personal loans include consolidating debt, covering medical bills, and home repairs or renovations. Here’s a look at some of the pros of taking out a $5,000 personal loan.

💡 Quick Tip: Planning a getaway? You can use a personal loan to cover travel expenses. Explore vacation loans with competitive rates and flexible terms to make your dream trip a reality.

Flexible Terms

With $5,000 personal loans, you can often choose the repayment terms to fit your budget. For example, you may be able to opt for a longer repayment term with a higher interest rate but a lower monthly payment, or you might be able to choose a shorter repayment term with a lower interest rate and a higher monthly payment.

No Collateral

Most personal loans are unsecured, meaning you aren’t required to provide collateral to be approved. That said, using collateral on a personal loan can increase your approval odds, especially if your credit is poor. Doing so could result in a larger loan amount, lower interest rate, and better terms.

Fixed Payments

The interest rate on a $5,000 personal loan is usually fixed, meaning your payments will stay the same for the life of the loan. Fixed payments are typically easier to budget for.

Cons of a $5,000 Personal Loan

Small personal loans of $5,000 or so also have disadvantages that should be considered before you apply.

Debt

You’ll be going into debt when you take out a $5,000 loan, which is the biggest downside. If you struggle to repay the loan, you can end up in a worse financial position than before you took it on.

Origination Fees

Personal loans can have many fees, including origination fees. This fee is separate from the interest the loan charges and has no direct benefit to you as the borrower.

Some origination fees can be high, up to 15% of the loan principal. Even just a 5% fee on a $5,000 loan is $250 — just to receive the money. Fortunately, there are ways to avoid loan origination fees.

Interest Rates

While personal loan interest rates are usually lower than credit cards’, they can cost you hundreds (or even thousands) over the life of the loan. When evaluating loan options, it’s helpful to compare personal loan rates with other common financing options, such as the average car loan interest rate, to ensure you’re securing the most cost-effective borrowing solution.

💡 Quick Tip: Compare options to find the lowest personal loan rate and secure the best terms for your $5,000 personal loan.

Requirements for a $5,000 Personal Loan

Requirements for a $5,000 loan vary by lender. But in general, you should have at least Fair credit, which is a score of 580 or above. Lenders may also look at other factors, such as your income and your debt-to-income ratio (DTI), during the application process.

Recommended: The Credit Score Required To Get a Personal Loan

$5,000 Personal Loan Terms

Repayment terms for a $5,000 personal loan are usually in the range of two to seven years. The length of the repayment term will play a role in determining the monthly payment amount and the interest rate.

Your credit score will also affect the interest rate. For example, the average interest rate for personal loans is 10.73%-12.50% for those with Very Good or Excellent credit. However, if you have Fair credit, the average jumps to 117.80%-19.90%.

If you’re looking for ways to secure a lower interest rate, programs like SoFi Plus offer eligible members a rate discount on new personal loans, helping to reduce borrowing costs.

Payment on a $5,000 Personal Loan

The payment on a $5,000 personal loan depends on the interest rate and the loan term. You can use a personal loan calculator to estimate your monthly payments based on different rates and terms. For example, a two-year $5,000 personal loan with a 7.80% interest rate results in your paying $226 per month. This means you’ll pay $416.34 in total interest over the life of the loan.

If, on the other hand, you take out a three-year $5,000 loan at an interest rate of 15%, you’ll pay $173 per month. In this case, you’ll pay a total of $1,239.76 in interest over the life of the loan.

Recommended: Personal Loan vs Credit Card 

The Takeaway

Many lenders offer $5,000 personal loans with competitive interest rates and flexible terms. However, you are still charged interest and often additional fees, so you’ll want to shop around for the best deal you qualify for.

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 credit score do I need for a $5,000 personal loan?

In most cases, the credit score needed for a personal loan is at least 580, considered a Fair credit score. If your score is lower than that, your borrowing opportunities will be limited. Lenders may also look at other factors, such as your income and your debt-to-income ratio (DTI), during the application process.

How much is the monthly payment for a $5,000 personal loan?

The amount you will pay per month on a $5,000 personal loan will depend on the loan’s interest rate and term (length of the loan). As an example, the monthly payment on a $5,000 personal loan with a 13% interest rate and a three-year term will be $168.

How can you get a $5,000 personal loan?

Getting a personal loan generally involves checking your credit, comparing lenders (including banks, credit unions, and online lenders), getting prequalified, and then submitting your application. 

Photo credit: iStock/SDI Productions

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.

SOPL0222012

When taking out a personal loan, one of the key decisions you’ll have to make is what term to select. A loan’s repayment term (i.e., how long you have to pay it off) can significantly impact your monthly payments, the total amount of interest you pay, and how quickly you become debt-free. Understanding how different term lengths affect loan repayment can help you make an informed choice that aligns with your budget and financial goals.

Below, we walk you through how personal loan term lengths work, and the pluses and minuses of going with a shorter- versus a longer-term loan. 

What Does Personal Loan Term Length Mean?

Put simply, the term length of a personal loan is how long you have to pay it off. More specifically, it’s a period of time that starts when you receive the loan funds and ends when your final payment is due. 

Personal loan terms vary depending on the lender and the amount of the loan, but typically range from two to seven years. Lenders will often give you a choice of loan terms. The length you choose will determine your monthly payment amount and the total amount of interest you’ll pay over the life of the loan. It can also impact the interest rate you’ll pay.

How Do Personal Loan Terms Work?

When you take out a personal loan, you’ll receive the full amount of the loan (called the principal) up front. Typically, you need to start paying back the principal, plus interest, in monthly installments within 30 days. These monthly payments will continue throughout the term of the loan. 

Generally, the larger the loan, the longer the term will be. For example, a $500 personal loan will often have a term of one year or less, while a $15,000 loan might have a three- to four-year term. Loans of $30,000 or more can have terms ranging from five to seven years.

Recommended: How Personal Loans Work

Factors to Consider When Choosing a Personal Loan

There are a number of things to consider when taking out a personal loan. These include:

•   Loan amount: It’s important to take out a loan that’s enough to cover your needs but not more than you’ll need, since you’ll be paying interest on these funds. While you can find personal loans as small as $500, many lenders have loan minimums of $1,000 to $2,000.

•   Interest rate: Rates for personal loans can range anywhere from 5.99% to over 29.99%. The rate you’ll pay will depend on the lender, the loan amount, the loan’s term, and your credit score. Generally, you’ll get a lender’s lowest rate if you have a good or excellent credit score and select the shortest available term.

•   Repayment term: The less time you’re in debt, the less time interest has to accrue. Thus, going with a shorter loan term can lower the overall cost of a personal loan. However, it means your monthly payments will be higher. Repayment terms can also impact personal loan rates, with longer terms typically linked to higher rates, since they pose more risk to the lender.

•   Collateral: Personal loans are typically unsecured, which means you don’t have to pledge a valuable asset (collateral) to back up the loan. There are some secured personal loans, however. Since collateral lowers a lender’s risk, secured loans tend to have lower interest rates than unsecured loans. However, should you fall behind on payments, the lender can seize your collateral to recoup their losses.

•   Origination fee: Some lenders charge origination fees to cover the processing costs of the loan. These fees can range from 1.00% and 8.00% of the total loan amount. In some cases, you need to pay this fee in cash at closing; in others, the lender adds it to the amount you’re financing or subtracts it from your loan before it’s dispersed. Some lenders, however, don’t charge origination fees for personal loans.

•   Prepayment penalty. If you pay off your personal loan early, a lender might charge you a prepayment penalty to make up for the loss in interest. But not all lenders charge a prepayment penalty.

Pros of Short Term Loan Length

Here’s a look at some of the advantages of taking out a personal loan with a shorter repayment term.

Faster Debt Repayment

One of the main advantages of a short-term loan is that you can become debt-free more quickly. By committing to higher monthly payments, you reduce the loan balance faster, which can free up your income for other uses sooner.

Lower Total Interest Costs

Because you are paying off the loan more quickly, there is less time for interest to accrue. As a result, shorter-term loans typically result in lower total interest costs, saving you money in the long run.

Potential for Lower Interest Rates

Since shorter terms reduce risk to the lender, you may be able to get a lower interest rate by choosing a shorter loan term. This can further decrease the overall cost of the loan.

Cons of Short Term Loan Length

Short-term personal loans also have some downsides, Here are some to keep in mind.

Larger Monthly Payments

One of the main drawbacks of a short-term loan is that you’ll have higher monthly payments. This might be challenging if your budget is already tight. It also means you’ll have less money to save and invest. 

Less Financial Flexibility

With higher monthly payments, there is less room in your budget for unexpected expenses. This can be problematic if you encounter financial difficulties or need to redirect funds for emergencies.

Smaller Loan Amounts

Short-term personal loans tend to be for smaller amounts and may not be sufficient to cover your expense.

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

Pros of Long Term Loan Length

Here’s a look at some of the advantages of choosing a personal loan with a longer term. 

Smaller Monthly Payments

A longer term spreads the repayment over a more extended period, resulting in lower monthly payments. This can make the loan more manageable, especially if you have a tight budget or your income fluctuates.

Frees Up Funds

Lower monthly payments give you more flexibility in your budget, freeing up funds for other goals, such as saving, investing, or covering other expenses. This can be beneficial if you anticipate future financial needs or want to maintain a comfortable lifestyle while repaying the loan.

Larger Loan Amounts

Longer-term personal loans typically give you access to larger loan amounts. This can work well if you have a big expense, such as consolidating credit card debt, a wedding, or a home renovation.

Cons of Long Term Loan Length

There are also some disadvantages to going with a longer loan term. Here are some to keep in mind.

Higher Costs

While longer terms generally make monthly payments smaller, extending the time you take to repay a loan typically leads to higher overall interest costs.

Extended Debt Duration

A longer loan term means you’ll be in debt for many years. This prolonged commitment could potentially become a drag on your budget or impact your financial planning, such as saving for retirement or other long-term goals.

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

Potential for Higher Interest Rates

Longer terms lead to increased risk for lenders. As a result, they may charge higher interest rates, which can further increase costs.

Choosing the Best Loan Term Length

When deciding on the best term length for a personal loan, you’ll want to factor in your monthly budget, financial goals, and the total cost of the loan. Here are some tips to help you decide on the best term length for a personal loan.

•   Assess your financial situation: You might start by taking a look at your current monthly income, expenses, and savings targets. From there, you can determine how much you can afford to pay each month without compromising your lifestyle or future goals.

•   Compare interest rates: It’s a good idea to shop around for lenders offering the best interest rates for different term lengths. A slightly higher interest rate might be acceptable if it results in more manageable monthly payments.

•   Calculate total costs: There are online calculators that can help you compare the total interest paid for different term lengths. Understanding the long-term cost implications can help you make an informed decision.

•   Consider flexibility: Check if the loan allows for early repayment without penalties. This flexibility can be handy if your financial situation improves and you want to pay off the loan faster.

The Takeaway

The right personal loan term length for you will depend on several factors, including your budget and future goals. Generally, going with a shorter term makes sense if you can afford a higher payment, want to save money on interest, and prefer to get out of debt quickly. However, you might be better off with a longer term if you need a more affordable monthly payment and want more flexibility, since you can typically pay your loan off ahead of schedule (just watch for any prepayment fees). 

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

Can personal loans be 10 years?

Yes, personal loans can have terms up to 10 years, although they are less common. Long-term personal loans typically range from two to seven years, but some lenders offer 10-year terms for specific purposes or higher loan amounts. 

While a 10-year term can provide lower monthly payments, it often results in higher total interest paid over the life of the loan. Before you sign a long-term loan agreement, you’ll want to carefully consider the total cost and your ability to commit to such an extended repayment period.

Is it OK to pay off a personal loan early?

Yes, it’s generally okay to pay off a personal loan early, and can even be beneficial. Paying off your loan ahead of schedule can save you money on interest and free up money for other goals. 

However, it’s important to check your loan agreement for any prepayment penalties. Some lenders charge fees for early repayment to compensate for the lost interest. If there are no penalties or the savings outweigh the fees, early repayment can be a smart financial move.

Do personal loans hurt your credit?

Personal loans can have both positive and negative impacts on your credit. Initially, applying for a loan results in a hard inquiry, which can temporarily lower your credit score. Taking on new debt may also affect your credit utilization ratio.

However, consistently making on-time payments can benefit your credit over time by demonstrating responsible credit behavior. Taking out a personal loan may also diversify your credit mix, which could also positively impact your credit. The key is to manage the loan responsibly and avoid missing payments to maintain or improve your credit profile.

Photo credit: iStock/Pekic

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.

SOPL-Q324-002

Zombie debt is old, settled, or long-forgotten debt that has suddenly come back to life and is now threatening to wreak havoc on your finances. These debts are often purchased on the cheap by third party debt collection agencies, who then try to collect on them by scaring or tricking unsuspecting consumers into paying up.

While zombie debt can, indeed, be scary, you don’t necessarily have to pay anything to make it go away. In many cases, zombie debt has already been settled or is too “old” to be collectible. It’s also possible the debt doesn’t even belong to you but has your name attached due to an error or identity theft. Here’s what to do if a collector is hounding you for an old or unfamiliar debt.

Zombie Debt Definition

Zombie debt is generally defined as debt that is more than three years old that has either been settled, forgotten about, or belonged to someone else. While a debt collector is allowed to contact you about this debt, they are not allowed to harass you.

If a zombie debt collector contacts you about a debt that has expired or already been paid or settled, you do not need to pay it, and they cannot take you to court to collect the money.

Types of Zombie Debts

Zombie debts often fall into the following categories:

Settled Debts

If you’ve filed Chapter 7 bankruptcy, some of your debts might have been discharged, which means you’re no longer on the hook for paying them back. If a debt is settled, you should have a written agreement that makes it clear you’re no longer legally liable for the debt.

Recommended: Getting Approved for a Personal Loan After Bankruptcy

Debt That Isn’t Yours

Debt that a scammer racked up under your name (by stealing your identity) can come back to haunt you as zombie debt, even though it doesn’t really belong to you. It’s also possible for a collection agency to mistakenly think a certain debt is yours and be going after you due to an error.

Time-Barred Debt

In many states, there is a statute of limitations on debt (with the exception of federal student loans). This means that, after a certain time frame, a collector can no longer take legal action to collect the debt. The exact time limit will depend on a number of factors, including the state law that’s noted in your credit agreement and the type of debt it is (such as credit card debt, a car loan, a personal loan, etc.) but it’s typically three to six years.

Depending on the state, the statute of limitations period may begin once the first required payment is missed, or it might start from the point when the most recent payment was made, even if that payment was made during collection.

It’s important to note that even if a debt is past its statute of limitations, making any type of payment or acknowledging you owe an old debt can restart the clock.

Debt That’s Fallen Off Your Credit Reports

Negative items on your credit report, such as a late payment or a debt in collection, can stay there for up to seven years. After that, the debt falls off your reports. If, however, you make (or agree to make) a payment on an expired debt, the debt collection agency can report the debt to the credit bureaus, resetting the seven-year clock.

How Does Zombie Debt Work?

Zombie debt is typically older debt. Generally, the original creditor has given up and sold the debt to a third party collection agency. These agencies often buy up zombie debts in bulk for pennies on the dollar. Even if the debt is past the statute of limitations and they cannot legally collect, they will often still try in the hopes that some consumers will pay out of fear. It’s essentially a numbers game — even if just a few people pay something, the business model can be profitable.

Some tactics that these collectors will use include:

•   Telling you that if you make a partial payment, they will leave you alone

•   Calling themselves a “litigation firm”

•   Threatening to take you to court if you don’t pay

•   Harassing you with excessive calls and verbal abuse

If you’re on the receiving end of a zombie debt collection, you’ll want to be careful. There is no upside in paying anything on a debt that is past the statute of limitations. In fact, doing so can restart the clock and make it possible for a collector to sue you for the debt and put it back on your credit report.

Recommended: What to Know About Debt Settlement Companies

How to Deal with Zombie Debt Collectors

If a debt collector contacts you about a debt you don’t remember or thought was settled long ago, here are some steps to take.

•   Verify it’s a legitimate debt. By law, a collector has to give you details about the debt, either when they first communicate with you or within five days of the first contact. These details must include the name of the creditor you owe it to and how much money you owe (written out to include interest, fees, payments, and credits). If they don’t, you’ll want to request a debt validation letter. It’s also a good idea to get a free copy of your credit report at AnnualCreditReport.com to see if the debt is listed there.

•   Follow up on suspected identity theft. If you believe that your zombie debt is a result of identity theft, you’ll find tips and sample letters to help you dispute it at IdentityTheft.gov.

•   Know your rights. No matter where you live or the form of debt, you have rights. Under the Fair Debt Collection Practices Act (FDCPA), zombie debt collectors are allowed to reach out to you, but they are not allowed to do the following:

◦   Contact you before 8 a.m. or after 9 p.m. without your consent

◦   Reach out to you at work if you’ve requested they stop

◦   Contact you via text or email, or DM you on social media if you’ve asked them to stop

◦   Call more than seven times within a seven-day period

•   Don’t ignore lawsuits. If a debt collector files a lawsuit against you to collect a zombie debt, it’s important that you respond to the lawsuit, either personally or through your lawyer, by the date specified in the court papers to preserve your rights.

•   Don’t accidentally reset the clock. If you make — or even agree to make — a payment on a time-barred debt, the statute of limitations clock may reset. If that happens, the collector can then sue you for the full debt amount, plus interest and fees. Also be wary of collectors that ask if you want to enroll in a “Fresh Start Program,” as this can also reset the clock on the debt.

•   Dispute the debt if it’s not legitimate. If the debt is not something you legitimately owe (say, it has already been settled, is time-barred, or is not yours), you’ll want to send a dispute letter explaining why you do not owe the debt, ideally via certified mail. The Consumer Financial Protection Bureau offers sample letters that you can use as a guide.

•   Negotiate if you do owe. If the debt in collection is legitimate and you do need to pay it, consider negotiating with the collector for a reduced amount. If they agree, be sure to get the new terms in writing (in case the debt comes back to haunt you — yet again — in the future).

Protecting Yourself from Zombie Debt

To prevent any of your current debts from becoming zombie debts, you’ll want to be sure to make all of your payments on time and in full and keep records of your payment history. If you have multiple high-interest debts and are finding it difficult to keep up with payments, you might consider getting a debt consolidation loan, ideally at a lower interest rate.

Other debt payoff strategies include getting a no-interest balance transfer card, paying off the most expensive debts first (known as the avalanche payoff method), and negotiating interest rates and payment terms with your lender.

The Takeaway

Zombie debt can rise from the grave to haunt you, but you don’t have to head for the hills or hide in fear. When you know your rights, you can protect yourself against old or expired debt that collectors are trying to cash in 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. See your rate in minutes.

FAQs

Can you ignore zombie debts?

Ignoring zombie debts, which are old debts that have resurfaced, is generally not a good idea. While these debts may be past the statute of limitations, debt collectors can still attempt to collect them. Ignoring their attempts can lead to persistent harassment and, if the debt is legitimate, potential legal action.

A better route is to ask for a verification letter that includes all of the details of the debt. If the debt has timed out or is not actually yours, you can inform the collector in writing and request that they no longer contact you.

How can zombie debt collectors legally contact you?

Zombie debt collectors can legally contact you via phone call, letter, email, and even text messages. However, the Fair Debt Collection Practices Act (FDCPA) regulates these communications, requiring collectors to respect certain boundaries. For example, they cannot contact you early in the morning or late at night and are not allowed to harass you. They must also identify themselves and provide information about the debt.

What is the zombie debt statute of limitations?

The statute of limitations for zombie debts varies by state and type of debt but often ranges from three to six years. This period defines how long a creditor or debt collector has to file a lawsuit to collect a debt. Once the statute of limitations expires, the debt becomes time-barred, meaning the collector can no longer sue you to collect it. That said, the debt still exists, and collectors can still attempt to recover it through other means, such as phone calls or letters. It’s important to verify the specific statute of limitations in your state.

Photo credit: iStock/skynesher

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.

SOPL-Q324-005

In general, there’s no “right” number of credit cards to have. Some might suggest having at least two credit cards, preferably from different networks — say, a Visa and an American Express, or a Mastercard and a Discover card — and strategically choosing them for the best combination of rewards. Others will recommend making this determination based on how many credit cards you can effectively handle, or how many is optimal for your credit score.

At the end of the day, the ideal number of credit cards depends on your personal financial situation. Learn more about how many credit cards you should have, and whether it will be good for you to have multiple credit cards.

How Many Credit Cards Does the Average Person Have?

Cardholders in the U.S. have an average of 3.9 credit card accounts, according to a review of national credit card data by the credit bureau Experian®.

The data also found that the number of credit cards someone has tends to increase the older they get. For instance, Baby Boomers (ages 59-77 currently) and Gen Xers (currently ages 43-58) held an average of 4.3 credit cards, whereas Millennials (ages 27-42 currently) had just 3.5 credit cards on average.

How Many Credit Cards Are Too Many?

There isn’t a set number of credit cards that tips you over into the territory of having “too many.” As long as you can stay on top of all of your accounts and manage them responsibly, having a number of credit cards won’t negatively affect your credit.

That being said, even just two credit cards could be too many if it becomes challenging for you to remember to make on-time payments on both accounts or you’re overspending. The more credit cards you have, the more credit card terms you’ll have to keep track of, which can get complicated. You may also run into paying multiple annual fees, and costs can add up quickly there — especially if you’re not using a credit card enough to justify the cost.

Even if you do think you can manage having multiple credit cards, you’ll want to watch out for applying for too many new cards within a short window of time. Doing so can lower your credit score temporarily, and that in turn could raise a red flag for lenders. Issuers have even begun to introduce rules to prevent cardholders from attempting credit card churning, which is when you repeatedly open and close credit cards to earn welcome bonuses.

Does Having Too Many Credit Cards Affect Your Credit Score?

Having multiple credit cards can either help build or hurt your credit score, depending on how responsibly you use your cards and how well you understand how credit cards work. However, if you’re in a situation where you’re starting to feel like you have too many credit cards, this could lead to negative effects on your credit score.

Multiple credit cards mean multiple due dates to juggle, which can make it easier to miss payments or make them late. Because payment history accounts for 35% of your FICO® score, this can have big implications for your credit.

Secondly, opening a number of new accounts can lower the average age of your credit, which matters since credit history length accounts for 15% of your score. Applying for a credit card also requires a hard inquiry, which can temporarily ding your score.

On the flipside, having multiple credit cards does offer you more access to credit. If you don’t increase your current outstanding balances, this could positively impact your credit utilization rate, which compares your outstanding balances to your total credit limit. Further, a new credit card could benefit your credit mix, which comprises 10% of your FICO score.

Recommended: When Are Credit Card Payments Due?

Potential Reasons to Apply for Another Credit Card

Trying to figure out what is a good amount of credit cards to have? Here are some potential reasons you might consider applying for an additional card.

Potentially Raise Your Credit Score

Getting an additional card can help build your credit. This might be the case if your newly opened card increases your overall credit limit. If you keep your total credit card balances the same, your higher limit will lower your credit utilization rate, which is one of the factors that affect your credit score.

Other ways that getting another credit card can have a positive impact on your credit is if the new card adds to your existing credit mix and if you consistently make on-time payments.

Maximize Rewards

Perhaps the top reason that people open multiple credit cards is to maximize the rewards they can earn. For instance, another card might be worth adding to your arsenal if it optimizes rewards in a category in which you don’t currently earn much. Or, for example, you might pair a basic cash-back rewards credit card for your everyday spending with a travel rewards card that can help you cover the cost of flights and enjoy perks while traveling.

Ensure You Can Pay If One Card Is Lost or Stolen

Having more than one credit card in your wallet can also act as an insurance policy of sorts. Say one of your cards gets stolen or is unexpectedly frozen due to fraudulent activity. That can leave you in a lurch at checkout if you don’t have any cash on you. By applying for an additional credit card, you’ll ensure that you always have a backup in case anything were to happen.

Pay Off a High-Interest Card with a Balance Transfer

You also might opt for an additional credit card if you have debt to pay off and qualify for a 0% APR introductory offer. These promotional offers allow you to move over a balance and pay it off interest-free within a certain period of time.

Just keep in mind that you’ll usually need solid credit to qualify for these offers, and a balance transfer fee will apply. Other pros and cons of no-interest credit cards include the fact that you’ll likely want to ensure you can pay off your debt before the promo offer ends — and a higher interest rate kicks in.

Secure a Higher Overall Credit Limit

Another possible benefit of opening an additional credit card account is that doing so can increase your available credit limit. Even if this card’s credit limit isn’t that different from those of your other cards, adding another card can help you keep your credit utilization rate from getting too high, as your overall credit limit will go up.

Recommended: What Is the Average Credit Card Limit?

Potential Drawbacks of Getting Another Credit Card

As mentioned, opening multiple credit cards within a short period of time can lower your credit score. But even if you don’t do that, there are possible issues that can arise when you have multiple cards — in other words, it isn’t always better to have more credit cards.

Potential to Lower Credit Score

Perhaps the biggest potential issue of having multiple credit cards is the possibility of harming your credit score. If you’re missing payments because you’re finding it hard to juggle multiple due dates, or are overspending and driving up your credit utilization ratio, your credit score will likely suffer.

Plus, even if you’ve paid off your accounts, having a large number of credit cards open can make you look risky to lenders, possibly lowering your score.

Fees

Another possible downside to having a number of credit cards is the fees you could face. Depending on the credit cards you have, you could end up paying multiple annual fees. These could become harder to manage. You might have a harder time keeping track of which cards charge which fees. This can make it more challenging to dodge unnecessary fees.

Harder To Keep Track Of

It’s likely that all of your credit cards could start off with a different due date, which can make it that much easier for a payment to slip through the cracks. Plus, you’ll have multiple different websites or mobile apps to check in on and visit in order to make your payment.

To make it easier on yourself, consider automating your payments or changing your due dates so they all fall on the same day. This can make it easier to adhere to one of the cardinal credit card rules of always making on-time payments.

Could Get Into a Cycle of Debt

When you have an array of credit cards in your wallet to choose from, it can feel easy to keep swiping. Plus, by using a number of different cards, you’ll be spreading your charges out, which can make it more challenging to track how much you’re actually spending in total.

To keep your spending in check, don’t spend more on your credit cards than you can actually afford to pay off in cash. Ideally, you’ll be able to pay off all of your credit card balances in full each month. Otherwise, interest charges can add up quickly, which is one of the reasons why credit card debt is hard to pay off.

More Difficult to Spot Fraudulent Activity

When you have just one credit card, checking your credit card balance regularly is pretty easy to do. But once you start growing your number of cards, it will take more legwork and effort to stay on top of your statements and check for any suspicious charges. This can make it harder to spot any potentially fraudulent activity and report it in a timely manner.

Determining How Many Credit Cards to Have

Now that you know the potential upsides and drawbacks to having multiple credit cards, you’re left with the question: How many credit accounts should I have? As mentioned before, the ideal number of credit cards varies from person to person. Here’s what to consider as you make this determination for yourself:

•   Do you have a history of responsible spending? If you think that applying for another credit card will lead to spending beyond your means, you might be better off skipping an additional card.

•   What’s your reason for getting another card? Opening up another card can help you maximize rewards, increase your purchasing power, or even assist in building credit. However, if you’re seeking another card because you’re low on funds and want to be able to fund more purchases, that could lead to a cycle of debt.

•   Are you confident you’ll be able to pay off your balances in full each month? Credit card interest can add up quickly if you’re not paying off your balances in full on a monthly basis (just check out our credit card interest calculator for proof). Before taking on an additional credit card, ensure you’re in a good financial position to pay off your balances regularly and in full.

•   Have you built your credit score since you last applied? A better credit score generally translates to better rates and rewards and higher credit limits. To make applying for a new card worth your while, it generally helps if you’ve done work to positively impact your credit since you last applied.

•   Do you have any other upcoming loan applications? If you know you’ll need to apply for a loan — whether that’s a car loan, a personal loan, or a mortgage — consider whether a credit card application is necessary right now. Applying triggers in a hard inquiry, which temporarily dings your score, making you a potentially less competitive applicant for the loan you need.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

How many credit cards you should have largely depends on your personal financial situation and how many credit cards you feel you can responsibly manage. In the big scheme of things, how you use your credit cards may be more important than how many you have. To determine the ideal number of credit cards for you, you’ll want to weigh the pros and cons of adding another card to your wallet.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Is 5 credit cards too many?

The answer is: It depends. Five credit cards is not too many if you are managing your debt responsibly, paying on time, and not being overwhelmed by interest charges. If, however, you are having trouble handling the debt and the various balances and due dates, those could be signs that five cards are too many for you.

How many cards should I have for good credit?

There is no specific number of cards you need to have for good credit. What can be most important is to manage your cards wisely and not have your debt go too high nor your credit score too low while using them. Some financial experts recommended having several cards ideally so that your credit file isn’t too thin. 

Does canceling a credit card help or harm your credit?

Canceling a credit card could harm your credit score. It could reduce the length of your credit history, which is a negative, as well as lower your overall credit limit and therefore potentially decrease your score. If you have a card you don’t use often, you might keep it open and use it occasionally, once every few months, to avoid these potential issues.

Photo credit: iStock/Drs Producoes

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.

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.

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 .

SOCC-Q324-025

Sometimes you need a loan for a venture that a traditional bank might not approve. In these instances, a peer-to-peer (P2P) loan might be what you’re looking for. Peer-to-peer lending, also known as social lending, rose out of the 2008 financial crisis. When banks stopped lending money as freely as they had in the past, potential borrowers had fewer loan options. At the same time, low interest rates meant lower returns from savings accounts or CDs.

Enter P2P lending sites. P2P lenders essentially cut out the middleman (banks and traditional lenders) and created a space for borrowers and investors to do business. Since then, the concept of lending person-to-person has taken off, with the rise of a number of peer-to-peer lending platforms.

Wondering if a P2P loan is right for you? Or if investing in P2P lending is a smart way to diversify your portfolio? Let’s take a look at some of the pros and cons.

What Is Peer-to-Peer (P2P) Lending?

P2P lending links up people who want to borrow money with individual investors who want to lend money. P2P lending sites like Prosper, Upstart, and Kiva — three prominent P2P lenders — provide low-cost platforms where borrowers can request loans and investors can bid on them.

The most common type of loan available through P2P lending is a personal loan, which provides borrowers with a lump sum of money they can use for virtually any purpose. However, other types of loans, including car loans, business loans, and home loans, are offered.

Personal loan amounts offered on P2P platforms range anywhere from $1,000 to $50,000 and repayment periods are typically 36 to 60 months. Interest rates can vary widely, from around 7.5% to 35.99%, depending on factors including the individual’s credit history and perceived risk, as well as the purpose of a loan.

The lending platforms make money from serving as the intermediary in this process. In exchange for keeping records and transferring funds between parties, they charge a fee — typically 0.5% to 1.5% of the interest earned — to the investors lending the money. Some platforms also charge origination or closing fees to the borrowers, which typically range from 1% to 8% of the loan amount.

Is Peer-to-Peer Lending Safe?

The bulk of the risk of peer-to-peer lending falls onto investors. It’s possible that borrowers will default on their loans, and that risk increases if the investor opts to lend to those with lower credit ratings. If the loan were to go into default, the investor may not get paid back.

Further, peer-to-peer lending is an investment opportunity, and returns are never guaranteed when investing. There is the risk that investors could lose some or all of the amount they invest. Unlike deposit accounts with a traditional bank or credit union, P2P investments are not FDIC-insured.

How Does Peer-to-Peer (P2P) Lending Work?

The basic P2P lending process works like this: A borrower first goes through a quick soft credit pull with the P2P lending platform of their choice to determine initial eligibility. If eligible to continue, the lender likely will conduct a hard credit pull and then assign a borrower a “loan grade,” which will help lenders or investors assess how much of a risk lending to them might be.

The borrower can then make a listing for their loan, including the interest rate they’re willing to pay. With some P2P lending platforms, the borrower has an opportunity to make a case for themselves; they can provide an introduction and describe why they need the loan. A compelling, creative listing might have more luck grabbing a lender’s attention and trust.

Next, lenders can bid on the listing with the amount they can lend and the interest rate they’d be willing to offer. After the listing has ended, the qualified bids are combined into a single loan and that amount is deposited into the borrower’s bank account.

Peer-to-Peer (P2P) Lending Examples

Here are some examples of popular peer-to-peer lending sites:

•   Prosper: Prosper can provide loans in amounts anywhere from $2,000 up to $50,000. Loan terms are two to five years, and funding can happen in as little as one business day.

•   Upstart: Upstart is an AI lending marketplace that can offer borrowers loans of up to $50,000, with loan terms of either three or five years. It’s possible to check your rate in minutes, and most loans are funded within one business day after signing.

•   Kiva: Kiva connects borrowers in need of money to fund their small businesses with a network of lenders who aren’t seeking to make a profit. Kiva requires borrowers to get some funding from one of the microlending partners. Once a certain threshold amount is met, their loan becomes available for public funding.

Peer-to-Peer (P2P) Lending for Bad Credit

It is possible to get a peer-to-peer loan with a bad credit score (meaning a FICO score below 580). However, those with lower credit scores will almost certainly pay higher interest rates.

Additionally, those with bad credit may have more limited options in lenders, though there are peer-to-peer lending platforms for bad credit. Many platforms have minimum credit score requirements, which tend to be in the range of fair (580-669) to good (670-739). For instance, Prosper requires a minimum score of 600.

If you have bad credit and are seeking a P2P loan, you might first work to improve your credit profile before applying. Or, you could consider getting a cosigner, which can increase your odds of getting approved and securing a better rate if you’re finding it hard to get a personal loan.

Peer-to-Peer (P2P) Lenders Fees

Peer-to-peer lending platforms can charge fees to both borrowers and investors. Which fees apply and the amount of these fees can vary from lender to lender.

A common fee that borrowers may encounter is an origination fee, which is typically a percentage of the loan amount. Other fees that borrowers may face include late fees, returned payment fees, and fees for requesting paper copies of records.

Investors, meanwhile, may owe an investor service fee. This is generally a percentage of the amount of loan payments they receive.

Recommended: Fee or No Fee? How to Figure Out Which Loan Option Saves You the Most

Pros of Peer-to-Peer (P2P) Lending

There are upsides to peer-to-peer lending for both borrowers and investors. However, the benefits will differ for both parties involved.

Pros of P2P Loans for Borrowers

•   Easier eligibility: The biggest advantage for a borrower getting a personal loan peer-to-peer is being eligible for a loan they might not have been able to get from a traditional lender.

•   Faster approval and competitive rates: P2P lenders might approve your loan faster and offer a more competitive rate than a traditional lender would.

•   Possible to pay off credit card debt: One way that people are using P2P loans is to crush their credit card debt. People with high credit card balances could be paying up to 24.37% APR or higher in interest charges. If they can wipe it out with a P2P loan at a lower interest rate, it can save them a lot of money.

•   Option to finance upcoming expenses: Those who are facing a lot of upcoming expenses might find it more cost-effective to take out a P2P loan rather than put those expenses on a high-interest credit card.

Pros of P2P Loans for Investors

•   Promising alternative investment opportunity: Some see P2P lending as a promising alternative investment. When you lend money P2P, you can earn income on the returns as the borrower repays you. Those interest rates can be a few percentage points higher than what you might earn by keeping your money in a savings account or a CD. While there is some risk involved, some investors see it as less volatile than investing in the stock market.

•   Option to spread out risk: P2P lenders also offer many options in terms of the types of risk investors want to take on. Additionally, there are ways you can spread the amount you’re lending over multiple loans with different risk levels.

•   Sense of community: For borrowers and investors, the sense of community on these sites is a welcome alternative to other forms of lending and investing. Borrowers can tell their stories and investors can help give their borrowers a happy ending to those stories.

Cons of Peer-to-Peer (P2P) Lending

Though there are upsides to peer-to-peer lending, there are certainly drawbacks as well. These include:

•   Risk for investors: The biggest disadvantage of P2P lending is risk. Since P2P loans are unsecured, there’s no guarantee an investor will get their money back. The borrowers on a P2P site might be there because traditional banks already declined their application. This means investors might need to do extra legwork on their end to evaluate how much risk they can take on.

•   Potentially higher rates for borrowers: While P2P lenders might approve a loan that a traditional bank wouldn’t, they might offer it with a much higher interest rate. In these cases, it could be wiser to search for alternatives rather than accepting a loan with a costly interest rate.

•   Effort and personal exposure for borrowers: There can be a lot of effort and personal exposure involved for the borrower. Borrowers have to make their case, and their financial story and risk grade will be posted for all to see. While we’re used to sharing a lot of our lives online, sharing financial information might feel like too much for some borrowers.

•   Relatively new industry with evolving regulations: Then there’s the risk of P2P lending itself. The concept is still relatively new, and the decision on how best to regulate and report on the industry is still very much a work in progress. Some lending platforms have already hit growing pains as well. As regulations around the industry change and investors are tempted elsewhere, the concept could lose steam, putting lending platforms in danger of closing.

Recommended: 11 Types of Personal Loans & Their Differences

Peer-to-Peer (P2P) Loans vs Bank Loans

When it comes to P2P loans compared to bank loans, the biggest difference is who is funding the loan. Whereas bank loans are funded by financial institutions, peer-to-peer loans are funded by individuals or groups of individuals.

Further, bank loans tend to have more stringent qualification requirements in comparison to P2P loans. This is why those with lower credit scores or thinner credit histories may turn to peer-to-peer lending after being denied by traditional lenders. In turn, default rates also tend to be higher with peer-to-peer lending.

The Takeaway

Peer-to-peer lending takes out the middleman, allowing borrowers and investors to do business. For borrowers, P2P loans can offer an opportunity to secure financing they may be struggling to access through traditional lenders. And for investors, P2P loans can offer an investing opportunity and a sense of community, as they’ll see where their money is going. However, there are drawbacks to consider before getting a peer-to-peer loan, namely the risk involved for investors.

Whether you’re getting a P2P loan or a loan from a traditional lender, it’s important to shop around to find the most competitive terms available to you.

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

Is peer-to-peer lending safe?

There are certainly risks involved in peer-to-peer lending, particularly for investors. For one, borrowers could default on their loan, resulting in investors losing their money. Additionally, there’s no guarantee of returns when investing.

What is peer-to-peer lending?

Peer-to-peer lending is a type of lending wherein individual investors loan money directly to individual borrowers, effectively cutting out banks or other traditional financial institutions as the middlemen. This can allow borrowers who may have been denied by more traditional lenders to access funds, and provide investors with a shot at earning returns.

What is an example of peer-to-peer lending?

Some popular P2P lending sites include Prosper, Upstart, and Kiva. Borrowers can use peer-to-peer loans for a variety of purposes, such as home improvement, debt consolidation, small business costs, and major expenses like medical bills or car repairs.

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.