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Jan

2026

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Student Loan APR vs Interest Rate: 5 Essential FAQs

By Julia Califano | Fresh Out of School, Student Loans, student_loan, Terminology | No Comments

You may have noticed when shopping around for student loans that some lenders display an interest rate, while others show an APR. What’s the difference? The main distinction is that the student loan APR (which stands for annual percentage rate) includes any fees or other charges the lender may add to the loan principal. The “interest rate” does not.

When shopping for a student loan, it’s key to know whether you’re looking at an APR or an interest rate, since this can have a significant impact on the total cost of the loan. Read on to learn more about student loan APR vs. interest rate, what each number includes, and how to compare student loan rates accurately to find the best deal.

Table of Contents

How Do Student Loan Interest Rates Work?
What Is the Student Loan APR, and How Is It Different From Interest Rate?
What Fees / Charges Might Be Included in a Student Loan APR?
If a Loan’s Interest Rate and APR Are the Same, Does That Mean There Are No Hidden Fees?
When Shopping for a Loan, Should I Look at Interest Rate, APR, or Both?
How APR and Interest Rates Affect Student Loan Repayment Over Time
FAQ

Key Points

• Interest rate vs. APR: Interest rate is the cost of borrowing expressed as a percentage of the loan; APR includes the interest rate plus upfront fees (like origination fees), giving a fuller picture of loan costs.

• Federal loans publish only interest rates, not APRs; they also charge origination fees: 1.057% for Direct Subsidized/Unsubsidized loans, 4.228% for Direct PLUS loans.

• Private loan rates vary by lender and creditworthiness; some charge origination fees while others don’t. If no fees are charged, the APR and interest rate will be the same.

• Common fees such as origination, late payment, and insufficient funds fees can increase total repayment costs — but some private lenders may not charge any fees.

• Best comparison metric: APR provides the most accurate “apples-to-apples” comparison across loan offers, since it reflects both interest and fees.

How Do Student Loan Interest Rates Work?

As with any loan, the interest rate represents the amount your lender is charging you to borrow money. It’s expressed as a percentage of your loan amount (or the loan principal) and doesn’t reflect any fees or other charges that might be connected to your loan. Interest rates can be fixed (the same for the life of the loan) or variable (may fluctuate over the life of the loan).

One of the factors that affect student loan interest rates is the type of student loan it is. Interest rates work differently depending on whether a student loan is federal or private. Congress sets the interest rates for federal student loans. The rate is fixed — and it’s the same for all borrowers. The federal student loan interest rate for undergraduates is 6.39% for new loans taken out for the 2025-26 school year, effective from July 1, 2025 to July 1, 2026.

The interest rate for private student loans works differently. Private lenders set their own rates, which may be higher or lower than rates for federal loans. Interest rates on private loans may be fixed or variable and typically depend on the creditworthiness of the borrower (or the student loan cosigner, if there is one). Those with higher credit scores generally qualify for lower rates, while borrowers with lower credit scores tend to get higher rates.

What Is the Student Loan APR, and How Is It Different From Interest Rate?

A loan’s annual percentage rate (APR) represents a more comprehensive view of what you’re being charged. It tells you the total cost of the loan per year, including any upfront fees, such as an origination fee, which a lender may charge for processing the loan. Because of that, a loan’s APR may be higher than its interest rate.

Looking at the APR helps you compare different loan offers and get a real picture of the overall cost you will pay for borrowing money for your education. If a loan doesn’t have any fees, the interest and the APR will be the same.

Federal student loans publish interest rates but not the APRs, so it’s important to keep in mind that the interest rate of a federal student loan is not the total cost of that loan. These loans also charge an origination fee, which is 1.057% for Direct Subsidized and Direct Unsubsidized loans, and 4.228% for Direct PLUS loans (unsubsidized loans for parents and graduate/professional students).

For private student loans, origination fees vary by lender. While some private lenders charge origination fees, it’s possible to find private loans that don’t have these fees.

However, it’s important to keep in mind that private student loans generally don’t come with the same protections as federal student loans, such as income-driven repayment plans and forgiveness programs.

What Fees / Charges Might Be Included in a Student Loan APR?

Fees that may be included in a student loan APR are upfront fees, such as origination fees. Other factors that could impact your loan balance — but are not included in the loan’s APR — are interest capitalization and late fees for missed payments.

Here’s how each of these things plays a role in student loans.

Origination Fees

The most common fee for student loans is the loan origination fee for processing the loan. Whether the loan is federal or private, this fee is typically based on a percentage of the total loan amount and will be deducted from your loan amount before the loan is dispersed. This means that if you borrow $10,000 and the origination fee is 1.057%, $105.70 will be deducted from your total loan amount — so you would actually receive $9,894.30 for the year.

While origination fees can be small, the cost can add up. Because these fees are deducted from the total loan amount, you are paying the fee with borrowed money and you’ll pay interest on the fee paid.

Capitalized Interest

Accruing interest and capitalized interest may affect the cost of your loan. Most student loans begin accruing interest daily as soon as they are disbursed. The exception is federal Direct Subsidized Loans, which the government covers the interest on until you are required to start making payments. That’s one of the major differences between subsidized vs. unsubsidized loans: For unsubsidized loans, the interest continues to accrue, increasing the amount the borrower will need to repay.

In addition, in certain situations, including deferment and during the six-month grace period after graduation, unpaid interest on your federal student loans may capitalize. That means the interest is added to your principal balance, and you’re charged interest on the new higher amount. Capitalization can increase the total balance of your loan.

Private lenders may have other or different situations when interest on student loans capitalizes, so it’s important to find this out when reviewing loan offers.

Late Payment or Returned Payment Fees

Both private and federal student loans may also have late fees and returned payment (or insufficient funds) fees, both of which add to the total amount you must repay. However, you can avoid these fees by always paying your bill on time and making sure you have enough money in your bank account to cover the payment.

Fees vary widely from one lender to the next, and some private lenders may not charge any fees.

Recommended: Average Student Loan Interest Rate

If a Loan’s Interest Rate and APR Are the Same, Does That Mean There Are No Hidden Fees?

Typically, if a student loan’s interest rate and APR are the same, it means there are no hidden fees. However, there are still a few things to watch out for that could affect the cost of your loan.

What to Look for in the Loan Agreement

Be sure to carefully read the loan agreement for your student loan. The agreement should spell out the loan’s interest rate and any upfront fees such as an origination fee.

Keep in mind that interest rates published for federal student loans are not APRs and do not include the origination fee. This fee will come out of the amount of money that is disbursed (paid out) to you while you’re in school.

The student loan APRs listed by private lenders include any additional upfront charges and fees. If the lender doesn’t charge any fees, the APR and interest rate will be the same.

Finally, check the loan agreement to see in what situations interest might capitalize and increase the overall cost of a loan.

Why Some Fees May Still Apply

A student loan may come with other fees, such as late fees for missed or late payments, and returned payment fees if a borrower doesn’t have enough money in their bank account to cover their loan payment. Other fees might include collection fees if a borrower defaults on a loan and the loan goes to collection.

When Shopping for a Loan, Should I Look at Interest Rate, APR, or Both?

As you’re shopping for a student loan, it’s important to look at the APR, if it’s available, as well as the interest rate, to get an accurate picture of what the loan will cost you.

Understanding the Full Cost of Borrowing

Because it includes interest and any fees, a loan’s APR tells the true cost of the loan, so that a borrower will know what the full cost of borrowing the money is. If you only look at the interest rate, you won’t be able to factor in any fees that the loan might come with.

Once you know what a loan will cost you in full, you can calculate student loan payments to determine what your monthly payments might be.

How to Compare Lenders Accurately

Whenever possible, you’ll want to look at the APR of a student loan, since this number allows a more apples-to-apples comparison of loan costs. The APR reflects both the loans interest rates and fees. If you just compare straight interest rates, you can miss the big picture in terms of the total cost of the loan. Sometimes those additional fees can make a big impact.

How APR and Interest Rates Affect Student Loan Repayment Over Time

A loan’s repayment amount — both the monthly payments and the total cost of the loan over time — are significantly impacted by a loan’s APR and interest rate.

Impact on Monthly Payments

A student loan’s interest rate and APR can affect student loan repayment over time in the following ways:

• The percentage: A higher interest rate or APR means a higher monthly payment, and a lower rate means a lower payment.

• How interest accrues: Although the interest rate is the same for federal Direct Subsidized and Direct Unsubsidized loans, the latter loan ends up costing significantly more because interest starts accruing from the time the funds are disbursed. With subsidized federal loans, the interest does not accrue while you are still in school.

For private student loans, interest typically begins to accrue as soon as the loan money is disbursed to your school. The longer interest accrues, the higher your monthly payments may be.

• When interest capitalizes: In certain situations, unpaid interest on your student loans may capitalize and be added to your principal balance. That can increase monthly student loan payments as well as the overall cost of the loan.

Total Repayment Cost Over Loan Term

Your APR can determine the total cost of your loan over time. The higher the APY, the more interest that will accrue on the loan, and the more interest you’ll pay over time. That can lead to a higher overall cost of your loan over the term.

To reduce your payments, and potentially lower the total cost of your loan, one option some borrowers may want to consider is refinancing student loans. With student loan refinancing, you exchange your current loan for a new loan from a private lender with new rates and terms. Ideally, if you qualify, the interest rate on the new loan will be lower.

A student loan refinancing calculator can help you figure out how much refinancing might save you.

You can shop around for student loan refinancing rates to look for the best offer. Just be aware that refinancing federal student loans makes them ineligible for federal benefits like forgiveness, deferment, and income-driven repayment plans.

The Takeaway

A student loan’s interest rate is the cost of borrowing money and is expressed as a percentage of the loan amount. APR includes the interest rate as well as the additional costs and fees associated with borrowing. As a result, it gives you a more complete picture of the total cost of the loan.

Understanding APR vs. interest rate is important when you’re researching best rates for student loans. It will help you make informed decisions that may lower your cost of borrowing. Another option for potentially lowering your payments is through refinancing, if you qualify for a lower interest rate.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

What is a good APR for a student loan?

For new loans taken out for the 2025-26 school year, the federal student loan interest rate is 6.39% for undergraduates (whether the loan is unsubsidized or subsidized). For graduate students it’s 7.94%, and for parents it’s 8.94%. Average private student loan annual percentage rates (APRs) vary by lender. They range from 3.18% to 17.99%, as of January 2026, depending on a borrower’s credit.

Is APR better than interest rate?

The annual percentage rate (APR) gives you a more accurate picture of the true cost of financing. The APR of a loan tells you how much you will pay for a loan over the course of a year after accounting for the interest rate as well as any extra costs, like origination fees. When comparing loan offers, it’s generally better to compare APRs than interest rates, since this allows you to compare loan offers apples to apples.

Can APR and interest rate be the same?

Yes. If no fees are added to your loan amount, the interest rate and the annual percentage rate (APR) will typically be the same.

Why does APR matter when refinancing student loans?

APR gives you the total cost of borrowing, including any upfront fees you’ll incur when refinancing. It provides the true and total cost of borrowing, and it gives you a way to compare loan offers accurately.

How can I lower the APR on my student loans?

One option for lowering the APR on student loans is with student loan refinancing. When you refinance, you replace your existing student loans with a new loan that has new rates and terms. If your credit is strong, you may qualify for a lower interest rate, which would lower your APR.

If you have federal loans and you want to keep them because of the federal benefits they come with, enrolling in auto pay can give you a $0.25% discount on your loan’s interest rate.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

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SOSLR-Q126-002

Jan

2026

Colorful plastic 529 numbers stand atop a stack of books on a table, next to a pink piggy bank.

529 Annual Plan Contribution Limits by State in 2026

By Jennifer Calonia | Going to College, Student Loans, student_loan | Comments Off

A 529 plan is commonly used to help families save for college, but you can use these tax-advantaged plans to save for a range of educational costs throughout your child’s life.

Thanks to changes in the federal tax laws in 2025, it’s now possible to use 529 plan funds to pay for homeschooling costs, and expenses such as books and tutoring for students in K – 12 private schools as well.

Different 529 plans have different tax rules, offer different investment options, and — most important — 529 plans have different contribution limits by state, some of which have changed for 2026. It’s important to look into various plans and decide which one is the best for you and your family.

Table of Contents

What Is a 529 Plan?
529 Plan Max Contribution Limits by State
Tax Benefits for 529 Plans
How to Maximize Your 529 Contributions
FAQ

Key Points

• 529 plans are tax-advantaged savings accounts available in every state except Wyoming.

• 529 plans are primarily for qualified higher education expenses, but now also include K-12 private school and some homeschooling costs.

• Each state sets its own aggregate total maximum contribution limit per beneficiary.

• These plans offer tax-free growth, and some 40 states provide a state tax deduction or credit for contributions.

• While contributions that exceed the $19,000 annual gift tax exclusion for 2026 must be reported, there is typically no penalty for contributing more than the state’s specific plan maximum.

🛈 While SoFi does not offer 529 Plans at this time, families can consider a range of online investing options.

What Is a 529 Plan?

529 plans are tax-advantaged savings plans that are designed chiefly to be used for qualified higher education expenses like tuition, housing, and books at postsecondary institutions such as a college, a trade school, and graduate school.

Thanks to tax law changes in 2025, parents can now withdraw up to $20,000 of 529 funds annually to use for a child’s elementary or secondary school education at a private or religious school. It’s also possible to use 529 funds to cover certain homeschooling expenses.

How a 529 Plan Works

Each 529 plan has a named beneficiary (the student). The account holder — usually a parent or grandparent — contributes savings to the plan up to the allowable 529 limits, which vary by state (see below).

Every state except Wyoming offers its own 529 plan. Although you cannot deduct 529 plan contributions on your federal taxes, some 40 states and the District of Columbia offer a state tax deduction or credit for contributions. California, Hawaii, Kentucky, and North Carolina do not offer a state tax deduction for 529 contributions.

In most cases, but not all, you have to be a resident of that state in order to claim the state tax deduction.

Understanding Contribution Limits

If you contribute over the annual limit for a given plan, you may not get the additional tax deduction, but there typically isn’t a penalty for overcontributing. Some states allow you to carry-forward excess contribution amounts; be sure to check the terms of the plan you’re considering.

The one factor some higher-income families have to consider is whether they are contributing in excess of the $19,000 annual gift tax exclusion. If that’s the case, form 709 has to be filed with the IRS, and the total amount will count toward the individual’s lifetime gift exemption, which is $15 million starting in 2026 (meaning, an individual would have to give over $15 million during their lifetime to owe federal gift tax; $30 million for couples filing jointly).

How Are 529 Plans Invested?

Once contributions are made, the account holder typically has a range of investment options to choose from, including mutual funds or exchange-traded funds (ETFs).

Many 529 plans offer an age-based mutual fund that’s similar to a target-date fund for retirement. These plans adjust their holdings over time to become more conservative. 529 plan investments grow tax free. And qualified withdrawals, including investment earnings, are not subject to federal or state taxes.

There are some 529 plan withdrawal penalties, however. For instance, any amount of money from the plan used for something other than qualified expenses for the student’s education incurs an income tax liability and a 10% penalty upon withdrawal.

Why Are There Maximum Contribution Limits?

In addition to yearly contribution limits for some 529 plans, there are aggregate maximum contribution limits that apply to the total contributions to the plan, for each beneficiary. States sponsor and operate their own 529 education savings plans and set their own aggregate max contribution amounts.

Many states have a total allowable contribution limit of $500,000 per beneficiary, though some states have lower or higher 529 limits. These limits are generally based on the cost to attend a four-year undergraduate or graduate program within the state.

Students who don’t have enough funds in a 529 plan to cover the cost of college can turn to other forms of financial aid, including scholarships, grants, and federal and private student loans.

529 Plan Max Contribution Limits by State

The max contributions to 529 plans vary based on the state plan you’re enrolled in. Below is a list of 529 contribution limits for 2026 in every state, according to Saving For College, a research company focused on educational policies.

State	Contribution Limit
Alabama	$475,000
Alaska	$550,000
Arizona	$590,000
Arkansas	$500,000
California	$529,000
Colorado	$500,000*
Connecticut	$550,000
Delaware	$500,000
Florida	$500,000
Georgia	$235,000
Hawaii	$305,000
Idaho	$500,000
Illinois	$500,000
Indiana	$450,000
Iowa	$505,000
Kansas	$501,000
Kentucky	$450,000
Louisiana	$500,000
Maine	$545,000
Maryland	$500,000
Massachusetts	$500,000
Michigan	$500,000
Minnesota	$525,000
Mississippi	$400,000
Missouri	$550,000
Montana	$396,000
Nebraska	$550,000
Nevada	$500,000
New Hampshire	$621,411
New Jersey	$305,000
New Mexico	$500,000
New York	$520,000
North Carolina	$550,000
North Dakota	$269,000
Ohio	$541,000
Oklahoma	$450,000
Oregon	$400,000
Pennsylvania	$511,758
Rhode Island	$520,000
South Carolina	$575,000
South Dakota	$350,000
Tennessee	$500,000
Texas	$500,000
Utah	$574,000
Vermont	$550,000
Virginia	$550,000
Washington	$500,000
Washington D.C.	$500,000
West Virginia	$550,000
Wisconsin	$589,650
Wyoming	N/A (the state does not offer a 529 plan)

Source: Savingforcollege.com
*Colorado’s Smart Choice College Savings Plan has a limit of $400,000.

States with Highest Aggregate Limits

The states with the highest allowed aggregate 529 contribution limits remain the same from 2025 to 2026:

• Arizona

• New Hampshire

• South Carolina

• Utah

• Wisconsin

These states have a maximum contribution limit greater than $550,000, with New Hampshire allowing the highest 529 limit in the U.S. at $621,411.

States with Lowest Aggregate Limits

State 529 programs that have the lowest total contribution limits (i.e., under $400,000) include:

• Delaware

• Georgia

• Hawaii

• Montana

• New Jersey

• North Dakota

• South Dakota

Georgia’s 529 savings plan has the lowest aggregate contribution limit nationwide at $235,000, while Wyoming doesn’t offer a state-sponsored 529 plan at all.

Tax Benefits for 529 Plans

The advantages to 529 plans go beyond saving for your child’s college education. A 529 might unlock certain tax benefits. For example, earnings in the account grow tax-free and there is no federal or state income tax liability for qualified withdrawals.

More appealing for some families is the opportunity to take a state tax deduction each year you contribute. Some 40 states now allow you to deduct your 529 contributions up to a certain limit from your taxable income. For example, in New York, residents can deduct up to $5,000 in 529 contributions, or $10,000 for those who are married, filing jointly.

But not all states allow you to deduct 529 contributions. For example, California, Kentucky, and Hawaii don’t offer a state tax deduction or credit for 529 contributions on their state income tax returns. However, qualified 529 withdrawals are exempt from income tax in all three of those states.

Eight states (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington) have no state income tax so there is no 529 deduction in those states. As a reminder, although there is no state income tax in Wyoming, this state doesn’t offer a 529 plan currently.

Tax deduction limits and rules vary by state, so check with yours.

529-to-Roth IRA Rollover

Traditionally, a downside to saving money in a 529 plan has been the 10% penalty and potential tax liability incurred on earnings for non-qualifying withdrawals. This might come up if you over-saved in the account, or if your child chooses not to go to college, and you wish to withdraw the funds you’ve saved.

The SECURE 2.0 Act of 2022 has addressed these concerns. Starting in 2024, unused 529 funds can be rolled over into a Roth IRA under the original beneficiary’s name without penalty or tax implications. Excess contributions can also be transferred to another beneficiary, or used later to pay off student loans.

There are some guidelines for a 529 to Roth IRA rollover. The 529 plan must have been active for at least 15 years, and the rollover funds must have been in the account for at least five years.

Finally, the maximum annual rollover contribution permitted for 2026 is $7,500, based on Roth IRA 2026 contribution limits (IRA contribution limits typically change annually).

Despite these rules, the ability to do a Roth IRA rollover gives 529 account holders a penalty-free option, if needed.

How to Maximize Your 529 Contributions

If you’re considering a 529 for your child, you are not limited to choosing a 529 plan from the state you reside in. Many states allow out-of-state residents to open a 529 account. Here are some tips on how to maximize your savings in a 529.

• Explore plans from multiple states and compare their tax benefits, investment choices, and fees to those of your state’s plan.

• Check to see if your company offers 529 plan employee benefits. Some employers now provide these benefit plans, which allow you to contribute directly from your paycheck.

• Many states offer direct-sold plans in which you select the investments in the plan yourself, and broker-sold plans in which a broker selects investments for you. Broker-sold plans typically come with more fees. Consider enrolling in a direct-sold 529 plan to help save on fees.

• Anyone, including grandparents and family friends, can contribute to a 529 plan, so make sure loved ones are aware that you have a 529 for your child to save for college. They may want to make a contribution to the plan as a birthday gift, for instance.

• You can open a 529 as soon as the beneficiary has a Social Security number. Start saving early and set up automatic contributions to the plan. The longer the money is invested, the more time it has to grow.

The Takeaway

A 529 can be a good way to save for your child’s education. The earlier you open a 529, the more time you have to contribute and save, and the more time the money in the plan has to grow. Just be sure to find out the 529 maximum contribution limits for the state in which you have the plan, and consider the tax implications.

FAQ

What happens if you contribute too much to a 529 plan?

Contributing more than your state’s 529 plan allows doesn’t typically incur a penalty. But savers should be aware that a single contribution that’s above the gift tax exclusion of $19,000 for 2026 would reduce your lifetime gift tax exclusion. But given that the lifetime exemption for the gift tax is $15 million, this likely won’t be a concern for many families.

What is the 5-year rule for 529 plans?

To contribute more in one year to a single 529 recipient without impacting your lifetime gift tax exemption, you can front-load up to five years of contributions into the 529. Doing so avoids impacting your lifetime gift tax exemption, but it also means that you can’t make additional contributions to the same beneficiary for the next five years.

What happens to a 529 plan if your child doesn’t go to college?

If your child doesn’t go to college, you have a few options for a 529. You can consider rolling the funds into a Roth IRA for the beneficiary, for instance (be sure to pay attention to the contribution limits on these rollovers). Or you could change the primary beneficiary to another family member, like a younger sibling.

Photo credit: iStock/Melpomenem

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SOIN-Q425-099

Jan

2026

A notebook lies open on a desk, next to a credit card, laptop, and phone, to help an investor address a margin call.

Margin Calls: Defined and Explained

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Margin accounts, which permit qualified investors to trade using borrowed funds, have strict rules about maintaining a minimum amount of cash or securities in the account. The investor could face a margin call if liquid funds drop below that level. In that case, an investor is required to add cash or sell investments to meet the minimum requirement, or the brokerage might do it for them.

Margin trading — which is a form of leverage — is a risky endeavor. Placing bets with borrowed funds may boost gains, but can also amplify losses. Brokers require traders to keep a minimum balance in their margin accounts for this reason.

Margin calls are designed to protect both the brokerage and the client from bigger losses. Here’s a closer look at how margin calls work, as well as how to avoid or cover a margin call.

Table of Contents

What Is a Margin Call?
How Do Margin Calls Work?
Example of Margin Call
Margin Call Formula
2 Steps to Cover a Margin Call
How Long Do I Have to Cover a Margin Call?
Tips on Avoiding Margin Calls
FAQ

Key Points

• A margin call occurs when an investor must deposit cash or sell investments to meet minimum collateral requirements in their margin account.

• Margin trading involves borrowing money from a brokerage firm to enhance trades, but it comes with risks.

• If the equity in a margin account falls below the maintenance margin, a margin call is issued by the brokerage firm.

• Margin calls are designed to protect both the brokerage and the client from bigger losses.

• To cover a margin call, investors can deposit cash or securities into the margin account or sell securities to meet the requirements. If they don’t, the broker may sell securities on their behalf to bring up the account balance.

What Is a Margin Call?

A margin call is when a brokerage firm demands that an investor add cash or equity into their margin account because it has dipped below the required minimum amount. The margin call usually follows a loss in the value of investments bought with borrowed money from a brokerage (known as margin debt).

A house call, sometimes called a maintenance call, is a type of margin call. A brokerage firm will issue the house call when the market value of assets in a trader’s margin account falls below the required maintenance margin — usually 25% of the value of the securities in the account, per Financial Industry Regulatory Authority (FINRA) and New York Stock Exchange (NYSE) rules. This is the minimum amount of equity a trader must hold in their margin account, but a broker may require a higher amount.

If the investor fails to honor the margin call, when trading stocks or other securities, meaning they do not add cash or equity into their account, the brokerage can sell the investor’s assets without notice to cover the shortfall in the account.

A margin account entails a high level of responsibility and potential risk, which is why margin trading is primarily for experienced investors, whether investing online or through a traditional brokerage.

How Do Margin Calls Work?

When the equity in an investor’s margin account falls below the maintenance margin, a brokerage firm will typically issue a margin call. Maintenance margins requirements differ from broker to broker.

Additionally, regulatory bodies like the Federal Reserve and FINRA have rules for account minimums — including the initial margin and the maintenance margin, which are different. These rules exist to limit the risk of loss for investors and brokerages alike.

Regulation T

The Federal Reserve Board’s Regulation T states that the initial margin level should be at least 50% of the purchase price of the securities the investor hopes to trade. For example, a $10,000 trade would require an investor to use $5,000 of their own cash for the transaction.

FINRA

FINRA requires that investors have a maintenance margin level of at least 25% of the market value of all securities in the account after they purchase on margin. For example, in a $10,000 trade, the investor must maintain $2,500 in their margin account. If the investment value dips below $2,500, the investor could be subject to a margin call.

Again, some brokers may impose tighter restrictions on margin accounts. Experienced traders will be sure to note the terms of all margin trades.

Example of Margin Call

Here is how a margin trade works. Suppose an investor wants to buy 200 shares of a stock at $50 each for an investment that totals $10,000. He or she puts up $5,000 in initial margin, while the brokerage firm lends the remaining $5,000.

FINRA rules and the broker then require that the investor hold 25% of the total securities value in his or her account at all times — this is the maintenance margin requirement. So the investor would need to maintain $2,500 in his or her brokerage account. The investor currently achieves this since there’s $5,000 in equity from the initial investment.

If the stock’s value falls to $30 per share, the value of the investment drops to $6,000. The broker is entitled to $5,000 (to repay the margin loan), not including interest or fees, leaving approximately $1,000. That would be below the $1,500 required, or 25% of the total $6,000 value in the account.

That would trigger a margin call of $500, or the difference between the $1,000 left in the account and the $1,500 required to maintain the margin account. Normally, a broker will allow two to five days for the investors to cover the margin call. In addition, the investor would also owe interest and possibly fees on the original loan amount of $5,000.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

*For full margin details, see terms.

Margin Call Formula

Here’s how to calculate a margin call:

Margin call amount = (Value of investments multiplied by the percentage margin requirement) minus (Amount of investor equity left in margin account)

Here’s the formula using the hypothetical investor example above:

$500 = ($6000 x 0.25%) – ($1,000)

Investors can also calculate the share price at which he or she would be required to post additional funds.

Margin call price = Initial purchase price times (1– borrowed percentage / 1– margin requirement percentage)

Again, here’s the formula using the hypothetical case above:

$33.33 / share = $50 x (1 – 0.50 / 1 – 0.25)

In other words, the price per share cannot fall below $33.33 or the investor will risk getting a margin call.

2 Steps to Cover a Margin Call

When investors receive a margin call, there are only two options:

1. They can deposit cash into the margin account so that the level of funds is back above the maintenance margin requirement. Investors can also deposit securities that aren’t margined.

2. Investors can also sell the securities that are margined in order to meet requirements.

In a worst case scenario, the broker can sell off securities to cover the debt, without notifying the investor.

How Long Do I Have to Cover a Margin Call?

Brokerage firms are not required to give investors a set amount of time. As mentioned in the example above, a brokerage firm normally gives customers two to five days to meet a margin call. However, the time given to provide additional funds can differ from broker to broker.

In addition, during volatile times in the market, which is also when margin calls are more likely to occur, a broker has the right to sell securities in a customer’s trading account shortly after issuing the margin call. Investors won’t have the right to weigh in on the price at which those securities are sold. This means investors may have to settle their accounts by the next trading day.

Tips on Avoiding Margin Calls

The best way to avoid a margin call is to avoid trading on margin or having a margin account. Trading on margin should be reserved for investors with the time and sophistication to monitor their portfolios properly and take on the risk of substantial losses. Investors who trade on margin can do a few things to avoid a margin call.

• Understand margin trading: Investors can understand how margin trading works and know their broker’s maintenance margin requirements.

• Track the market: Investors can monitor the volatility of the stock, bond, or whatever security they are investing in to ensure their margin account doesn’t dip below the maintenance margin.

• Keep extra cash on hand: Investors can set aside money to fulfill the potential margin call and calculate the lowest security price at which their broker might issue a call.

• Utilize limit orders: Investors can use order types that may help protect them from a margin call, such as a limit order.

The Takeaway

While margin trading allows investors to amplify their purchases in markets, margin calls could result in substantial losses, with the investor paying more than he or she initially invested. Margin calls occur when the level of cash in an investor’s trading account falls below a fixed level required by the brokerage firm.

Investors can then deposit cash or securities to bring the margin account back up to the required value, or they can sell securities in order to raise the cash they need.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, from 4.75% to 9.50%*

FAQ

How can you satisfy your margin call in margin trading?

A trader can satisfy a margin call by depositing cash or securities in their account or selling some securities in the margin account to pay down part of the margin loan.

How are fed and house calls different?

A fed call, or a federal call, occurs when an investor’s margin account does not have enough equity to meet the 50% equity retirement outlined in Regulation T. In contrast, a house call happens when an investor’s margin equity dips below the maintenance margin.

How much time do you have to satisfy a margin call?

It depends on the broker. In some circumstances, a broker will demand that a trader satisfy the margin call immediately. The broker will allow two to five days to meet the margin call at other times.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q425-022

Jan

2026

A woman wearing glasses, and smiling, reviews the performance of her investments on a computer monitor.

What Is Mean Reversion and How Can You Trade It?

By Matthew Zeitlin | Growing Wealth, invest, Investing, Terminology | Comments Off

Mean reversion is a mathematical concept which holds that over time statistical measurements return to a long-run normal. In investing, mean reversion holds that while a market or an asset may go up and down in the short-term, over time, it should theoretically return to its long-term trend.

If traders anticipate that a market may revert to the mean, they can use that expectation to inform their strategy going forward.

Table of Contents

What Is Mean Reversion?
Mean Reversion Strategies
The Risks of Mean Reversion Strategy
How to Implement a Mean Reversion Strategy
Factors in Creating a Mean Reversion Strategy
FAQ

Key Points

• Mean reversion is a mathematical concept that states assets tend to return to their long-term trends over time.

• Traders may use mean reversion to inform their strategies and expect assets to return to their historical behaviors.

• Mean reversion applies not only to individual stocks, but also to sectors, commodities, and foreign currencies.

• Implementing a mean reversion strategy requires identifying patterns and attempting to time the reversion correctly.

• Mean reversion strategies depend on regularities staying consistent, and there are risks if structural shifts occur in the market or economy.

What Is Mean Reversion?

When stocks revert to the mean, their returns or other characteristics match what they’ve been over a longer period of time than the recent past. This can mean that a stock that becomes highly volatile may revert back to being less volatile; a stock that becomes more expensive (meaning its price far outpaces its earnings) may become cheap; and, quite importantly, the other way around. Mean reversion can work in both directions.

The mean reversion concept not only applies to individual shares, but also to whole sectors of the economy or of the stock market, like, say, consumer product companies or pharmaceutical companies or any other chunk of the market that shares enough with each other to be classed together. Alternative assets, such as commodities or foreign currencies can also revert to the mean.

The theory applies to more than just prices, the volatility of a given asset can mean revert, which can matter for trading and pricing more exotic financial products like options and other derivatives.

Mean Reversion Strategies

With any generality or principle of the market comes the obvious question: Is there a strategy here? Can this be traded?

Mean reversion trading is a strategy based on reversion to the mean happening, basically that stocks or some asset will return to its typical, long-run historical behavior.

Actually working out a mean reversion strategy is not as simple as thinking a certain stock is out of whack and waiting for things to get back to normal, it requires the ability to flag patterns to make an educated guess about when mean reversion will happen.

After all, if you just know that a stock is going to revert to the mean, you can still pile up large losses or miss out on potential returns you can’t time the reversion correctly — go too early and you’ll have to eat the stock being the “wrong” price before reversion to the mean happens, go too late and the gains have already evaporated as the change in price or returns has already occurred.

The Risks of Mean Reversion Strategy

Mean reversion strategies depend on statistical and historical regularites staying, well, regular. There are some that are pretty well validated, although with sharp and scary exceptions, like that stocks tend to go up over time and outperform other asset classes. But mean reversion involves certain relationships between stocks and assets staying true over time.

In some cases, mean reversion never occurs. Companies or sectors can have continually growing returns over a long period of time if there’s some kind of structural shift in the economy or market in which they operate. This can mean that returns increase over time or stay quite high.

This can happen for a few reasons. A company could gain or lose a dominant position in a given market, technological changes can advantage certain firms and disadvantage others, such that returns move permanently (or at least close enough to permanently for a given investment strategy) to a higher level and lower to another. Or there could be a global pandemic that permanently changes the way that companies do business, or long-run inflation that impacts profitability.

How to Implement a Mean Reversion Strategy

There are some basic statistical and financial tools to help create mean reversion strategy. As always, active trading and trying to time the market is risky and sometimes the whole market moves up and down and that can swamp whatever strategy you might have for an individual stock or sector.

Part of implementing a mean reversion strategy is getting a sense of stock trends or a trend trading strategy, whether past movement in a stock up or down might indicate that it may continue in that direction.

This can involve trying to discern bullish indicators for stocks, giving you a sense of when stock returns may have the potential to go up. Often traders combine this strategy with forms of technical analysis, including the use of candlestick patterns.

Alternatively, you will need to have a sense of when a stock is underperforming in order to profit from buying it before it reverts to the mean upwards.

Factors in Creating a Mean Reversion Strategy

There are many factors that institutional and retail investors need to consider when devising a mean reversion strategy.

Determining the Mean

In this case, you’ll need to think about what period of time you are using to determine a stock or sector’s “normal” or “average” behavior. This matters because it will determine how long you decide to hold a stock or when you plan to sell it before or after the reversion to the mean occurs.

Timing

To execute a mean reversion strategy, you have to know when a stock’s price movement may be sufficient to execute the trade. It helps to determine this point in advance.

Determine the Bounds

What is the “normal” behavior, whether it’s price-to-equity ratio, volatility, or some other metric you’re looking at. To determine whether something is far beyond its mean, either high or low, you need a good sense of its normal range.

Qualitative Factors

Mean reversion and trading reversion to the mean is, of course, a quantitative endeavor. You need to compile statistics and make projections going forward in order to implement the strategy. But you also need to know what’s going on in the “real world” beyond the statistics.

If something is driving prices or volatility or some other metric higher or lower that’s likely to persist over time, mean reversion may not be a great bet. If, however, there’s something truly transient that’s the catalyst for large moves up and down that will then revert to the mean, then maybe the strategy is more likely to work.

Exit Strategy

As with most investments, it’s helpful to have an exit strategy determined ahead of time. This can help you limit your losses in the case that the asset ultimately does not revert to the mean.

The Takeaway

Mean reversion refers to an asset’s tendency to stick to typical value increases over time. Again, while volatility may play a role in short-term price or value changes, many assets will follow a long-term appreciation line, and despite short-term rises or falls in price, they may revert to the mean.

Traders who follow mean reversion strategies assume that a specific stock or sector will return to its long-term characteristics. The strategy can be helpful when determining an investing strategy for either individual assets or for a market, overall, though there is no guarantee of future results.

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FAQ

What does mean reversion refer to in investing in simple terms?

In investing, mean reversion holds that while a market or an asset may go up and down in the short-term, over time, it will (theoretically) return to its long-term trend.

Does mean reversion only happen to stocks?

Mean reversion applies not only to individual stocks, but also to sectors, commodities, and foreign currencies.

What factors should investors consider when creating a mean reversion strategy?

Investors should think about or consider variables such as determining the actual mean (or “normal” conditions, they’re comparing the out-of-the-norm price behavior to). They should also consider timing, bounds, various qualitative factors, and an exit strategy.

Photo credit: iStock/LaylaBird

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
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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.

SOIN-Q425-059

Jan

2026

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Can Personal Loans Be Used for Businesses?

By Austin Kilham | Building Your Career, Life & Career, personal_loan, SMB | Comments Off

Table of Contents

What Is a Personal Business Loan?
Personal Business Loans vs Small Business Loans
Benefits of a Personal Loan for Business
Disadvantages of a Personal Loan for Business
How to Get a Personal Loan for Business
What to Consider Before Applying for a Personal Loan for Business
Alternatives to Personal Business Loans
FAQ

Starting a new business requires a good idea, customers who want your product or service, and money to get you off the ground. A personal loan to start a business can be one option for funding your business, especially if you don’t yet qualify for a small business loan.

Let’s walk through the difference between personal loans and business loans, the advantages and disadvantages of using a personal loan for business, and some alternative options to explore.

Key Points

• Personal business loans offer flexibility in spending, but it’s crucial to confirm with lenders whether they will allow you to use the loan for business purposes.

• Your personal loan interest rate is influenced by your financial history, income, and credit score, with higher credit scores leading to better rates.

• Benefits of personal loans for business include ease of qualification, faster funding than business loans, and lower interest rates than credit cards.

• Personal loans can be versatile with few spending restrictions, but they may have lower borrowing limits and shorter repayment terms and can affect your personal credit score.

• Alternatives to personal business loans include small business loans, business lines of credit, business credit cards, and merchant cash advances.

What Is a Personal Business Loan?

Personal loans for business are offered by some banks, credit unions, and online lenders. While many loans will specify what you can spend the money on — a mortgage must be used to buy a house, for example — the sum you receive from a personal loan can be used in several ways. That said, it’s important to confirm with your lender whether its personal loans can be used for business expenses, as some lenders do not allow this.

Your personal loan interest rate is based on various financial factors, including your financial history, income, and credit score. Generally, the higher a person’s credit score, the more likely they are to receive a personal loan with favorable terms and interest rates. Applicants with lower credit scores may have more difficulty qualifying for low interest rates. Lenders tend to see them as at greater risk of defaulting on their payments. To offset that risk, they might charge a higher interest rate.

Personal Business Loans vs Small Business Loans

Borrowing money to pay for business expenses is a decision that takes some consideration. There are different reasons you might want or need a business loan, many lenders to choose from, and different lending options to compare. Some things to think about if choosing between a personal loan for business or a small business loan include:

Factor to Consider	Personal Loan for Business	Small Business Loan
Use of funds	Some lenders may not allow personal loan funds to be used for business purposes.	Specifically for business purposes — cannot be used for personal use.
Qualification	Personal creditworthiness determines approval, interest rate, and loan terms.	Lenders will require business financials, proof of time in business, and other details, in addition to possibly taking personal credit into account.
Interest rate	Depending on your creditworthiness, interest rate may be lower than on other forms of credit, such as credit cards.	Depending on the type of loan, interest rates on SBA loans may be lower than some personal loans.
Loan amount	Up to $100,000 depending on the lender.	SBA maximum loan amount is $5 million. Some lenders may approve working capital loans for up to several million dollars.
Funding time	Depending on the lender, loan funds may be disbursed as soon as the day of approval or in up to seven days.	The SBA loan timeline is between 60 and 90 days from application to disbursement.A working capital loan from a traditional lender may be approved quickly and funded shortly after approval.
Tax deductibility	Interest is not generally tax deductible.	Interest may be tax deductible in some cases.

Benefits of a Personal Loan for Business

Taking out personal loans for business purposes can offer several advantages over other financing options.

Ease of Qualification

If your business is brand new, it can be tricky to get a startup business loan and may be easier to qualify for a personal loan. Banks offer personal business loans based on your personal income and credit score.

By contrast, you’ll be asked for a lot of information during the business loan application process, including your personal and business credit score, annual business revenue and monthly profits, and your length of time in business. The longer your business has existed, the more likely you are to have a record of revenue and profit — and the more likely you are to qualify.

Faster Funding

The length of time it takes to get approved for a personal loan and receive funding will vary by lender. Online lenders are typically faster than traditional banks and credit unions. You are likely to receive funding within seven business days.

By contrast, the process for a business loan can be much slower. For example, it can take 30 to 90 days to receive funding from a Small Business Administration (SBA) loan.

Potential for Low Interest Rates

If you have strong credit, personal loans can have lower annual percentage rates (APRs) than other financing products — such as credit cards. While it can be useful to have a business credit card, you’ll pay a relatively high rate if you carry a balance from month to month.

Small business credit cards may also have penalties and fees that personal loans may not have. These often include penalty APRs that go into effect if you make a late payment, over-limit fees if you spend more than your credit limit, annual fees, and more.

Flexibility and Versatility

Personal loans have few restrictions on how you’re allowed to use the money you borrow. You can use them for anything from debt consolidation to home repairs to a veterinary bill.

Disadvantages of a Personal Loan for Business

Despite the potential advantages of using a personal loan to help you start your business, there are drawbacks.

Some Lenders Don’t Allow Personal Loans for Business

Some lenders place restrictions on how personal loans can be used. It’s wise to be transparent about your intention to use the personal loan for business expenses and confirm if the lender permits it.

In some cases, it may not be. However, it’s far better to be honest about how you plan to use a loan than risk breaching the loan agreement. If you end up using a loan in a prohibited way, your lender could force you to immediately repay the full amount of the loan with interest.

Lower Loan Amount Limits

Personal loans generally offer borrowing limits as low as $1,000. They can go as high as $100,000 for larger personal loans. For small businesses, this might be plenty. But if you own a larger business that needs more money, you might benefit more from a loan specifically designed to meet business financial needs. Small business loans generally have lower interest than personal loans.

Shorter Repayment Terms

Lending periods for personal loans vary. Typically, you can find loans with term lengths of 12 months to five years. Compared to some small business loans, this is a relatively short period. Consider that for SBA loans, maximum terms can be as much as 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory.

Potential to Affect Personal Credit Score and Assets

If you take out a personal loan and can’t make monthly payments, you are putting your personal credit at risk. Missed payments may harm your credit score, which can make it more difficult for you to access funding in the future.

Recommended: What Is Considered a Bad Credit Score?

Fewer Tax Deduction Opportunities

Generally, the interest you pay on a personal loan is not tax deductible, unlike the interest paid on business loans. However, there’s an exception if you use the proceeds of a personal loan for business purposes.

However, this can get a bit tricky, as you may only deduct interest on the portion of the loan used for business expenses. So if you use any of that money to remodel the primary bathroom in your home, for example, interest on that portion can’t be deducted.

How to Get a Personal Loan for Business

Securing a personal loan for business purposes involves several key steps. The process looks like this:

1. Assess your finances: Begin by looking at your personal credit score, income, and overall financial health. This will give you insight into the likelihood of qualifying for a personal loan and the interest rates you might get.

2. Choose a lender: Look for banks, credit unions, and online lenders that offer personal loans suitable for business purposes. Make sure they allow you to use personal loan funds for business expenses. Compare interest rates, loan terms, and fees to find the best lender for your needs.

3. Prepare your documents: Gather documents like proof of income, tax returns, identification, and any business-related information required for your application.

4. Submit your application: Complete the loan application process with your chosen lender. Be honest about your intention to use the loan for business expenses. This transparency helps avoid potential issues in the future.

5. Review loan terms: Once your application is approved, carefully review the loan terms, including the interest rate, repayment schedule, and any associated fees. If everything looks good to you, accept the loan terms to move forward with the funding process.

What to Consider Before Applying for a Personal Loan for Business

When analyzing the benefits and risks of this approach, consider these factors.

• Your personal creditworthiness: Using a personal loan for business mixes your individual finances with the company’s risk. Think about the effects this move might have on your personal credit score and future loans.

• Your business revenues: You’ll want to be sure your business will bring in enough money to cover your monthly personal loan payments. Run the numbers to be sure that paying the costs for this loan won’t force you to skimp on other needed business expenditures.

• The loan’s true cost: Beyond the loan’s interest rate, lenders may charge fees for loan origination, late payments, loan processing, or account maintenance.

• Timing: Funding for a personal loan may be processed faster than for a business loan. That’s an advantage over SBA loans, which can take up to three months to come through, possibly costing you a current opportunity.

• Usage restrictions: Some personal loan agreements forbid using funds for business, so double check that your prospective lender permits it.

• Repayment details: If you do get the green light, you may want to have on hand a solid business plan (showing revenue model and expenses, for example) to show how the loan will be repaid.

There are funding alternatives that could cost you less or give you added flexibility. Those are detailed in the next section.

Alternatives to Personal Business Loans

Personal loans might not be ideal for everyone and aren’t the only funding option for your small business. It may be worth considering small business loans or other types of business loans as alternatives.

Small Business Loans

Small business loans are offered through online lenders, banks, and credit unions. There are various options available, each designed for specific purposes. For example, a working capital loan is designed to help you finance the day-to-day operations of your business. Equipment financing can help you replace aging technology and buy new tools and machinery.

SBA loans are guaranteed by the Small Business Administration, whose aim is to help small businesses start and grow. If you aren’t able to make your payments, the SBA will step in and cover up to 85% of the default loss. By reducing risk in this way, the organization helps businesses get easier access to capital.

Shopping around for the best small business loan rates is a good way to compare lenders and find the one that works best for your unique financial needs.

Business Lines of Credit

A business line of credit is revolving credit, similar to a credit card. You have a set credit limit and only pay interest on the amount you’re currently borrowing, making it a more economical option than a term loan for some business owners. As you repay the funds, they are available to borrow again.

Another advantage to a line of credit over a term loan is the ability to use a check to pay vendors who do not accept credit cards.

Business Credit Cards

Business credit cards can be useful for separating personal and business expenses. They also usually have higher credit limits than personal credit cards, which gives you more flexibility to make larger business purchases. Plus, they may offer rewards, perks, and bonuses. It’s important to keep in mind, however, that credit cards tend to have higher interest rates than other types of business financing.

Merchant Cash Advance

A merchant cash advance (MCA) is an alternative form of financing for businesses that get revenue through credit card sales. With an MCA, a business can borrow a lump sum of money and repay the lender with a percentage of future credit card transactions. The repayment amount is larger than the advance, since the lender charges a fee. In some cases, MCA fees can significantly exceed interest rates on other types of business loans.

The Takeaway

Can you use a personal loan to start a business? Perhaps. Taking out a personal loan may be one way to fund your small business needs. However, some lenders do not allow a personal loan to be used for business purposes. It’s a good idea to explore alternatives, such as a small business loan or line of credit.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

With one simple search, see if you qualify and explore quotes for your business.

FAQ

Can a personal loan be used for business?

Yes, you can use personal loans for business if the lender allows it. It’s important to check with the lender to ensure there are no restrictions on using the loan for business expenses.

Can I write off a personal loan if used for my business?

You can typically write off the interest on a personal loan used for business purposes, but only the portion directly related to business expenses. Personal loan principal repayments are not tax-deductible.

Does the SBA offer personal loans?

No, the Small Business Administration (SBA) does not offer personal loans. The SBA provides various loan programs designed specifically to support small businesses, such as SBA 7(a) loans and SBA 504 loans.

What are the risks of using a personal loan for business purposes?

Funding your business with a personal loan can present a number of risks. The overall risk is that such a loan puts your individual creditworthiness on the line, as personal loans always require a personal guarantee. This means:

• Any missed payments could hurt your individual credit history.

• Even if you pay on time, you’d miss the opportunity to build your business credit score.

• Defaulting on a personal loan could cause lenders to take legal action, meaning you’d probably have to pay for a lawyer to represent you.

• Negative consequences from a lawsuit could include a lien on your home or garnishment of your wages.

Can startups qualify for a personal loan for business?

Generally, the answer is no. Many lenders disallow the business use of a personal loan, for one thing. For another, lenders ordinarily approve or deny loans based on the borrower’s ability to manage repayments — and given the high rate of startup failure (roughly 20% in the first year), both personal and business loans to new entrepreneurs are often seen as too risky.

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