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A promissory note is a written agreement between a borrower and a lender to formalize the lending of money.

Through this legal agreement, both the borrower and the lender consent to clearly defined repayment terms. Promissory notes can be used for a variety of purposes, including personal and commercial transactions.

In this guide you can learn about a promissory note’s definition, common types of promissory notes, how to create one, and when they may be a good option for borrowing or lending money.

What Is a Promissory Note?

Put simply, the definition of a promissory note is a written promise to pay someone a certain amount by a specified time. The type of promissory note and agreement between the issuer and payee dictate the payment schedule and amount. If the borrower is a business, the issuer may wish to see its pro forma income statement when setting up a repayment schedule.

Similar to loans, promissory notes may be secured or unsecured. Unsecured notes are generally issued based on the borrower’s ability to repay, whereas secured notes use collateral such as real estate or a vehicle.

A promissory note may be issued by a financial institution, but this financing is commonly used by individuals and businesses, too. Essentially, promissory notes allow anyone to act as a lender, which can be useful for creating legal documentation of a lending agreement between family members and/or friends.

Core Components

Promissory notes generally include the principal amount, interest rate, date and place of issuance, and signatures from the borrower and sometimes the lender. There may also be provisions for late fees and recourse if a borrower defaults.

Interest Rate and Payment Terms

An important feature of a promissory note is the explanation of the interest rate and how it is arrived at. Bear in mind that your interest rate may be fixed or variable. If it’s fixed, calculating your payments may be relatively straightforward. If your rate is variable, it can change based on an index or benchmark and may be capped at a certain rate. That information should be clearly spelled out in the promissory note.

The payment terms for the loan are also key and should be detailed in the promissory note, as they will determine when and how repayments must be made. The note should include the frequency of repayments and a payment schedule.

Maturity Date and Default Clauses

A promissory note should also include the maturity date, which is the date by which the loan must be fully repaid. The default clauses explain under what circumstances the borrower is considered in breach of contract and what the consequences will be. For instance, some promissory notes have an acceleration clause, which typically states that if a payment is missed, the lender can demand the immediate payment of the outstanding balance.

How a Promissory Note Works in a Loan Agreement

In a loan agreement, a lender issues a promissory note that details the amount that will be loaned, the repayment terms, schedule, and dates, and any conditions about repayment and what can happen if the borrower defaults. When the borrower signs the note, it becomes a legally binding document between the parties.

The Role of the Borrower and Lender

As with any loan agreement, a promissory note involves a person or business borrowing money and a person or business loaning money. However, with promissory notes, the lender may not be a bank or typical lending institution. It’s also worth noting that although the lender may prepare the promissory note, it typically does not sign it, since it’s the borrower who is promising to pay. However, the lender’s legal rights in various situations – if the borrower misses a payment, for instance – should be detailed in the promissory note and the lender typically must abide by those stipulations.

When a Promissory Note Is Used

There are many situations in which it’s possible to use a promissory note, but here are the ones in which it’s the most common:

•   Business loans and seller financing

•   Real estate loans

•   Personal loans (especially between friends and/or family)

•   Student loans

Recommended: Business Loan Calculator

Types of Promissory Notes

There are several types of promissory notes. Usually, the nature of the loan determines the appropriate type. Here’s a closer look at some of the most common varieties.

Line of Credit Promissory Note

Borrowers can withdraw any portion of funds from a line of credit, up to the established maximum loan amount. Once the money is taken out, the borrower is liable for repaying the lender with interest.

A promissory note can be used to guarantee that the borrower repays money withdrawn from the line of credit. The promissory note can specify the interest rate, repayment schedule, and whether the line of credit is secured or unsecured.

Investment Promissory Note

Businesses looking to access capital can sell promissory notes to investors instead of taking out a conventional business loan or a line of credit. As with a conventional loan, however, the company will typically be expected to show the lender its balance sheet indicating that it is solvent.

Through an investment promissory note, businesses receive capital from investors in exchange for fixed repayments. In the event a business is unable to repay, the investors may acquire the company.

Generally, investment promissory notes are sold at a discount to account for the impact of inflation on future payments. Promissory notes may be sold publicly in some cases but are most often purchased by corporate entities and experienced investors with high net worth who can handle the greater level of risk.

Real Estate Promissory Note

Promissory notes can be used in mortgages and other real estate purchases. In practice, borrowers use a home or other property as collateral for a real estate promissory note.

While promissory notes can accompany a mortgage, they are in fact different. The note provides legal documentation of the borrower’s promise to repay the loan, whereas the mortgage outlines the lender’s recourse for foreclosure in case the borrower cannot pay. Qualifying for a mortgage may also require a loan contract and more detailed financial information.

Real estate promissory notes can also be used outside a mortgage. For example, two individuals could create such an agreement. Although the lender may not have the power of foreclosure, they can secure the agreement with the authority to place a lien on the property if the borrower defaults. A property lien creates a public record of a borrower’s unpaid debt.

Keep in mind that real estate promissory notes can be traded through brokerages without the borrower’s consent.

Recommended: What Is Considered a Small Business?

Student Loan Promissory Note

College students will likely be required to sign a promissory note for both private and federal student loans.

For private lenders, each student loan may carry its own promissory note, as terms can vary. Anyone taking out federal student loans must sign a Master Promissory Note to promise repayment of loans, fees, and interest to the U.S. Department of Education. The MPN can cover multiple loans, but is now subject to new rules set by the One Big Beautiful Bill Act of 2025 so it’s wise to check your individual situation with a qualified advisor.

Recommended: Understanding Your Student Loan Promissory Note

Vehicle Promissory Note

A vehicle promissory note creates a binding document that promises a borrower will pay a lender for a car or other type of vehicle. This agreement can be between two individuals or between a borrower and a conventional lender, such as a bank.

In addition to repayment terms and conditions, it’s important to include the vehicle’s make, model, year, body, and VIN in a promissory note.

Personal Loan Promissory Note

It’s not uncommon to sign a promissory note when you’re acquiring a personal loan from a traditional lender.

A promissory note can also be used for a personal loan between friends or family. Formalizing the loan amount and repayment terms through a promissory note can help avoid disagreement and protect both parties down the line. Compared with typical personal loan requirements, a promissory note can be a more flexible financing option.

Having financial information like credit score and proof of income at the ready can streamline getting approved for a personal loan.

Secured vs. Unsecured Promissory Notes

A promissory note may be secured by collateral or unsecured. If the note is secured, the borrower specifies assets that the lender can legally claim if the loan is not paid back. With an unsecured note, the lender might need to go to court to recoup losses if the borrower defaults. Unsecured loans may represent a higher risk level for lenders than unsecured ones.

Promissory Note Repayment Options

Besides type, promissory notes may differ by repayment method. Borrowers can usually expect to repay money and interest through one of the following options:

•   Lump sum: This requires the entire amount to be repaid in a one-time payment on a specific date. Lump-sum payments are more common with small loans.

•   Due on demand: The borrower must repay the loan upon the lender’s request. Due on demand payment is used frequently for promissory notes between friends and family members. Any promissory note without written payment terms is considered due on demand.

•   Installment: Installment payments follow a specified schedule (monthly, for instance) to pay back the loan over a longer period of time. Usually payments are structured in equal amounts and include interest.

•   With (or without) interest: A promissory note can define the interest rate and any related contingencies.

In some cases, a promissory note may employ a combination of repayment options. For example, a vehicle promissory note may include an upfront lump sum followed by installment payments.

Structured Repayment Strategies

Here are some effects of the various repayment plans to consider.

•   Amortized payments: The borrower makes equal payments each month, paying down principal and interest together.

Pro: The consistency makes it easy to plan and budget.

Con: The monthly installments may be costly.

•   Equal monthly payments and a final balloon payment: Installments are likely smaller than with full amortization, because the borrower pays less toward principal; the balloon payment resolves that at the end.

Pro: Lower monthly payments preserve more cash on hand for other needs.

Con: If the borrower plans to refinance the loan before the balloon’s due date, they run the risk that interest rates may go up.

•   Interest-only payments and a final balloon payment: With monthly payments applied only to interest, the borrower owes the entire principal until the final balloon payment.

Pro: This method allows for the lowest monthly payments.

Con: The borrower pays more interest because they have possession of the full principal throughout the term of the loan.

•   Single payment of principal and interest: This is the lump sum method, where everything is paid back on a specified date. For the most part, only friends and/or family members will accept this arrangement.

Pro: Borrowers need not pay anything toward the loan each month (though escrowing money would be wise).

Con: If the business cycle is in a contraction phase when the note comes due, repayment of a large sum all at once could be very tough.

Legal Implications of Repayment

Signing a promissory note makes the borrower legally liable for the loan according to the terms of the note. In many states, defaulting on a promissory note that’s part of a mortgage contract, for example, could allow the lender to foreclose on the house and then sue the borrower personally for any deficiency.

Balloon Payments and Installment Payments

The terms of some promissory notes may include a balloon payment. These are payments that are larger than usual and may often be the final payment owed by the borrower. Having a balloon payment can mean that your monthly payments are lower, but will require you to ultimately make a large payment.

If your promissory note specifies installment payments, a schedule of payments should be included as part of the note. If you have a fixed rate of interest, your payments will all be exactly the same each time, making it easier to budget in advance. In the more unusual case that you have a variable rate, your payments may reflect changes in your interest rate, but are unlikely to rise as high as a final balloon payment.

What Does a Promissory Note Look Like?

There are different laws in every state regarding promissory notes. One common feature of promissory notes is that they must be written down. A verbal agreement between two parties will not qualify as a promissory note or carry the same legal enforceability.

Standard Template

Promissory notes must include language outlining an agreement and unconditional promise for the borrower to repay the loan. Additionally, the repayment must be money, rather than labor, professional services, or other capital.

Other details and elements generally needed in a promissory note include the following:

•   Amount or principal: How much was borrowed and is to be repaid

•   Payor: The party promising to repay the debt

•   Payee: The party lending the money

•   Interest rate: States how much interest is charged and how it will be calculated

•   Start date: The date the promissory note becomes effective and funding is released to the payor

•   Maturity date: When the interest and principal must be repaid in full

Without these elements, lenders may have trouble enforcing the promissory note.

Key Clauses to Review Before Signing

It’s important to understand and be comfortable with all the terms of your promissory note before signing it. You should check that it correctly represents the identity of both parties, the amount of the loan, and whether collateral is involved and, if so, what it is. You’ll also want to check the maturity date, the interest rate and how it’s calculated, the payment schedule, and how the payments are structured. Finally, it’s important to fully understand the default clauses, since they outline the legal ramifications if you default on your payments, which can include the seizure of any collateral you have put up and/or legal action.

Risks and Protections

Like any loan contract, a promissory note involves financial risk for both borrower and lender.

Unsecured promissory notes will likely entail a higher interest rate than secured ones. A higher interest rate makes paying off a loan more expensive, increasing the possibility of default.

Promissory notes secured with collateral tend to have lower rates, but borrowers who can’t pay the debt risk having their collateral seized.

Depending on due diligence, providing capital based on a promissory note may expose the lender to some financial risk if the borrower is untrustworthy. As noted, having collateral helps mitigate that risk.

As for protection, a promissory note safeguards the lender by recording the terms of the loan in a valid and enforceable contract. It protects the borrower by providing documentation of the loan in case of an audit.

Both parties should make sure the note follows state or federal laws governing loans or investments to ensure additional safety.

Recommended: Pros and Cons of an LLC

How to Protect Yourself When Signing a Promissory Note

Remember that even if you are signing a promissory note about a loan you’re getting from a friend or relative, a promissory note is by definition a legal document. It’s important to be sure you understand it and its provisions, as detailed above. It is generally also a good idea to have it reviewed by a trusted lawyer, who may be able to explain anything that’s unclear, spot and address potential concerns, and suggest alterations to protect your interests.

The Takeaway

Promissory notes create a binding promise to repay borrowed money. This financial agreement can be used when you’re borrowing money from individuals, financial institutions, or both. To be valid, the note must contain all the important details about the principal, the loan term and the interest rate, and must be signed by the borrower (or by both parties, if there are specific obligations for the lender included).

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 SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

What makes a promissory note legally binding?

A promissory note is legally binding if it includes the date of the loan, the dollar amount being borrowed, the signature of the borrower, the rate of interest and how it’s determined, any collateral involved, the start date, and the repayment time frame and structure. The note must also comply with any applicable state laws.

How is a promissory note different from a loan agreement?

A loan agreement is more comprehensive than a promissory note, with specific terms and defined rules and restrictions. Promissory notes usually suffice for loans from one person to another. If a business is involved or the loan amount is large, a loan agreement may be more appropriate.

Can a promissory note be transferred?

Yes, it’s possible to transfer ownership of a promissory note. If the borrower defaults, for example, the lender may sell or transfer the note to a debt collector. Or if the lender needs to raise cash, they can negotiate with a buyer and sell the note.

What happens if someone defaults on a promissory note?

If a borrower defaults, the lender usually sends them a demand letter. If the borrower still does not pay, the lender can hire a collections lawyer to sue and get restitution through a court judgment. The lender may also have the right to seize any collateral and sell it at auction.

How long is a promissory note valid?

What a promissory note’s length of validity is depends on your state. The statute of limitations for promissory notes can range from three to 20 years.

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

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

What Is a Credit Score?

Consumers often use the words “credit score” to refer to FICO credit scores, but a credit score could be one of several scores. Generally speaking, credit scores are created with a mathematical formula that weighs different financial behaviors to arrive at a three-digit score that summarizes a consumer’s creditworthiness. Each of your credit scores depends on the formula used to calculate it and they may vary depending on which information about you was pulled into the formula and how different behaviors, such as your bill-paying history and unpaid debt level, were weighted.

What Is a FICO Score?

Let’s look specifically at the FICO Score, since it is so often used by lenders. The FICO Score is a trademark of the Fair Isaac Corporation. It was the first widely used, commercially available score of its type. FICO Scores, like other credit scores, compress a person’s credit history into one algorithmically determined score.

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

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

What Is the FICO Score Range?

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

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

Recommended: What Is Considered a Bad Credit Score?

How Is a FICO Score Calculated?

There are five main components of what affects a FICO Score, each having a different weight in the calculation:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

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

The base FICO Score range may not be the range used in all credit and lending decisions. There are also industry-specific scores, such as one specifically for auto loans (FICO Auto Scores), others for credit card applications (FICO Bankcard Scores), and multiple FICO Scores used by mortgage lenders. There is also an UltraFICO Score for consumers with limited credit histories that factors other banking behaviors into the tabulation.

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

What Is a Good FICO Score?

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

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

Recommended: Average Personal Loan Interest Rates & What Affects Them

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

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

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

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

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

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

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

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

What Affects Your FICO Score?

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

Payment History (35%)

Do you tend to pay your bills on time or do you have a history of late or missed payments? “Payment history makes a bigger impact on a person’s credit score than anything else — 35%,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “So the most important rule of credit is this: Don’t miss payments. Timely payments are crucial, and making at least the minimum payment on a revolving credit line can make a positive impact on a person’s credit score.”

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

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

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

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

Amounts Owed (30%)

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

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

Length of Credit History (15%)

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

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

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

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

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

Credit Mix (10%)

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

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

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

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

New Credit (10%)

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

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

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

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

FICO Score vs. Credit Score

As we’ve seen, these two terms — FICO Scores and credit scores — are often used interchangeably. More accurately, though, is that a FICO Score is one type of credit score, the one often used by lenders when making their decisions. There are multiple types of credit scores, each of them using analytics to create a rating that illustrates a person’s creditworthiness. One of the more commonly used alternatives to the FICO Score is the VantageScore®.

FICO Score vs. VantageScore

You won’t always know which credit score a lender is using to assess your qualifications as a borrower. But if it isn’t a FICO Score there is a good chance it’s the VantageScore. (Some lenders feed both FICO and VantageScores into their own proprietary scoring tool.) The VantageScore was created by the three nationwide credit reporting agencies — Equifax, Experian and TransUnion. Like the FICO Score, it has a range of 300 to 850. The formula for computing a VantageScore is slightly different from that for a FICO Score, but working to polish one will likely have a positive effect on the other.

How to Positively Impact Your FICO Score

Good credit hygiene can have a beneficial effect on your FICO Score that spills over into other types of credit scores as well. As you think about what affects FICO Score, here are some steps to take:

•   Check your credit reports. Request corrections for any errors you find (they do occasionally happen). You can

•   Pay your bills on time. Set up automatic payments from your bank account to make sure nothing slips through the cracks.

•   Avoid maxing out credit cards or lines of credit. If you tend to use one card to the max, put it on ice for a while and reach for a different card, if you have one. Or request a larger credit limit on the card you tend to overuse — assuming, that is, that you are keeping up with your payments.

•   Diversify your credit mix. If you use credit cards for everything, even cash advances, consider a personal loan the next time you need a larger sum for a significant expense. Personal loans often have lower interest rates than credit cards anyway.

The Takeaway

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

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

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

Is a FICO score the same as a credit score?

It’s common to wonder what is a FICO Score vs. a credit score. The two are not the same thing, although a FICO Score is one of the most commonly used types of credit score. Each type of credit score has its own distinctive scoring model. They all aim to distill a consumer’s financial behavior into a number that lenders factor into their decision about whether to loan to the consumer.

What is considered a good FICO Score?

A “good” FICO Score falls between 670 and 739 on a FICO Score range that runs from 300 to 850.

Why do I have multiple credit scores?

Everyone has multiple credit scores because there are different data analytics firms and agencies that compile information about consumers’ credit history. Within many of these organizations, there are also different types of credit reports for different purposes. There are FICO Scores, for example, that are tailored to auto loans and insurance industry needs.

Does checking your credit score lower it?

Checking your credit score — even doing so multiple times — will not damage it. Requesting a copy of a credit report will also not damage your credit score.

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

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

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

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.

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Getting a credit card with no deposit can be easy if you have an established credit history with a good or excellent credit score. But if you’re just establishing your credit history or are trying to build your credit score, it can be much more challenging to apply for a credit card with no deposit.

For some, a secured credit card (one requiring a security deposit) might seem like the only option, but there are other paths to building your credit history. In this guide, we’ll cover how to find and apply for credit cards with no deposit — and what steps you can take to get closer to approval if you’re being denied.

What Is a Credit Card Security Deposit?

Because of their established credit history and decent credit scores, many borrowers can open credit cards with no money down (nor any other kind of collateral). This is called an unsecured credit card. However, if you don’t have any credit history or have a low credit score, you might find that credit card issuers will only offer you a secured credit card — meaning it requires a security deposit.

A credit card security deposit is refundable and often equal to the value of the credit limit on the card. Typically, the deposit amount ranges from $50 to $300.

While going this route can’t help you with unexpected expenses (as with a debit card, you are technically only able to spend money you already have), it can be a good way to build credit. However, you’ll want to ask the card issuer if the company reports to the credit bureaus, just to ensure it does.

Eventually, you may be able to graduate to an unsecured card if you consistently make on-time payments — one of the cardinal credit card rules.

Applying for a Credit Card With No Security Deposit

Applying for a secured credit card requiring a deposit might not be appealing to every potential borrower, especially because you need the money for the deposit upfront. These cards also typically have higher interest rates and fees. Fortunately, you have other options when shopping for a credit card.

Checking Your Approval for a Card

There’s no such thing as guaranteed credit card approval with no deposit. However, if you’re receiving emails or snail mail with credit card offers saying you’re preapproved, you might find success when you apply. You’ll still have to go through the formal application process and could ultimately get rejected, but getting a preapproved offer is a helpful step toward getting a credit card.

You can also proactively check your approval for a credit card online. Take a look at your credit score and then search online for offers for credit cards with no deposit that include your credit score in their target range. Studying this credit card guide can help ensure you understand all the finer points of credit cards before you apply.

Becoming an Authorized User

If you aren’t having success getting approved for a credit card on your own, ask a parent, family member, or trusted friend about being an authorized user on their credit card. As an authorized user, you’ll receive a credit card with your name on it and can use it like a traditional credit card, but you will not be the primary account holder.

The primary account holder is the one responsible for making on-time payments and monitoring credit usage. As an authorized user, you won’t have control over things like credit limit, and the primary cardholder can even set spending limits on your card.

However, if the primary cardholder uses the credit card responsibly — making regular, on-time payments and keeping credit utilization low — you will likely see a positive impact on your own credit score. Eventually, your score might be positively impacted enough for you to try applying for your own card again.

If someone makes you an authorized user on their card, however, it’s important to pay them what you owe each month. Never rack up credit card charges beyond what you’ve discussed with the cardholder. If you abuse your card privileges, it could affect your credit score and the score of the account holder — and the friend or family member will be solely liable for paying off your debts.

Getting a Student Credit Card or a Subprime Card

If the thought of affecting someone else’s credit score as an authorized user makes you uncomfortable, you aren’t out of options. You might be eligible to apply for a student card or a subprime card.

•   Student credit card: Most student cards do not require a security deposit and are designed for students who have no credit history. Some cards might even offer cash-back rewards and no annual fees. However, as the name implies, you must be able to prove you are a student as part of the application process.

•   Subprime credit card: A subprime card is an unsecured card (i.e., no-deposit card) designed for borrowers with bad credit (generally a score below 580 in the FICO^® score model). While subprime credit cards provide a way for bad-credit borrowers to get a credit card with no deposit, they often come with their own drawbacks. Typically, subprime cards charge an application fee; some might have annual or even monthly fees. Credit limits tend to be low.

Transitioning to an Unsecured Card

If you have no luck with a student or subprime card and can’t become an authorized user, you may need to consider applying for a secured credit with a deposit after all. Although it might not be ideal, it can be a good first step toward building your credit history.

If you make regular on-time payments, the credit card issuer might eventually transition you to an unsecured card. Alternatively, you can be proactive: After building your credit history and score over several months with a secured credit card, you can apply for a credit card with no deposit through another issuer. You might find that you’re more successful this time around.

Recommended: When Are Credit Card Payments Due

What to Know About the Effects of Your Credit Score

An unsecured credit card can potentially affect your credit score if the credit card issuer reports to the credit bureaus. Before opening a credit card with a security deposit, ask the issuer if it reports to the bureaus.

If the card issuer does report, regular on-time payment could build your score over time. On the flipside, late or missed payments could adversely affect your score.

Getting a No-Deposit Credit Card: What You Should Know

So, should you get a no-deposit credit card? In general, these unsecured cards offer greater flexibility at the start because you aren’t required to pay a security deposit.

However, opening a credit card of any type is a big decision — and not one to be taken lightly. It’s important to consider the potential effects of opening a credit card and to be aware of how much a credit card costs. For example, if you max out a credit card with a high interest rate, you might find yourself drowning in the fast-growing debt it creates.

Before opening a no-deposit credit card (or any credit card), think about the implications it can have on your finances. You might consider alternate ways of establishing credit, like credit-builder loans or even small personal loans.

However, these options don’t offer some of the same perks and protections that a credit card does, such as credit card chargebacks. If a credit card feels like the right step for you, begin your research process online.

Recommended: What is a Charge Card

The Takeaway

Credit cards without a security deposit, called unsecured credit cards, can be appealing because they require no money down. However, borrowers without a credit history and those who are struggling with bad credit may find it challenging to get approved for a no-deposit credit card. If applying for a secured credit card (i.e., one with a security deposit) is not ideal for your financial situation, you can ask to become an authorized user on someone else’s card or apply for a student or subprime credit card.

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

Enjoy unlimited cash back rewards with fewer restrictions.

FAQ

Do all credit cards require a deposit?

Only secured credit cards require a security deposit. Those with no credit history or bad credit scores might only be eligible for secured credit cards. If you have a good credit score, you can apply for a credit card without a deposit.

Can I get a credit card if I have no credit history?

It is possible to get a credit card with no credit history. A secured credit card requires a security deposit but makes it easier for borrowers with no credit history to get approved. Students can also consider student credit cards, which are often issued to student borrowers without any credit history.

What credit score is required for approval?

While having a good to excellent credit score (typically 670+) is ideal for getting the best credit cards with the lowest rates, some credit card issuers do offer cards for borrowers with fair or even poor credit (meaning scores between 580 and 669). These cards might have higher fees and fewer perks and may require a security deposit.

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Photo credit: iStock/Prostock-Studio

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

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

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.

SOCC-Q126-002

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Generally speaking, the better your credit score, the better your potential loan rates and offers may be. The reason is that your credit score tells lenders how much risk you pose as a borrower. A good credit score may qualify you for what’s known as a prime loan.

Read on to learn what a prime loan is and how it works.

Understanding a Prime Loan

To understand a prime loan, it can help to understand the prime rate. Banks establish the prime rate as the interest rate they give to their most creditworthy customers, generally large corporations that borrow and repay loans on a regular basis. The rate is based on the federal funds rate set by the Federal Reserve.

The prime rate is a critical financial benchmark. Banks and other lenders typically use it to set interest rates for their various consumer products, including credit cards, personal loans, personal lines of credit, auto loans, and home loans. Lenders use the prime rate as a baseline, then add a margin on top of the prime rate to determine a loan’s interest rate. How much more a borrower pays above the prime rate depends on their creditworthiness.

Many loans are based on the prime rate, so it can be a good rate to track if you’re in the market for any type of lending product. For example, if you’re considering a fixed-rate mortgage or personal loan, and the prime rate is currently low, you may be able to lock in a lower rate for the life of your loan. If you’re considering variable-rate debt, such as a credit card or home equity line of credit, your rate might start low but go up if market rates rise. If market rates decline, on the other hand, your rate could go down.

Prime Loan Borrowers

Lenders use the term “prime” to refer to high quality in the consumer lending market — including borrowers, loans, and rates. Prime loans generally have competitive interest rates and are available to borrowers who have a low default risk and good or better credit scores. The opposite of prime is subprime, a term for riskier loans with a higher interest rate.

According to the Consumer Finance Protection Bureau, borrowers with a credit score of 660-719 are generally considered prime borrowers. Those with scores above 720 are considered super-prime borrowers and receive even more favorable interest rates.

Here are the five credit score categories for borrowers:

Category	Credit Score
Deep subprime	Below 580
Subprime	580 to 619
Near-prime	620 to 659
Prime	660 to 719
Super-prime	720 or above

Knowing your credit score can help you assess which category you belong to.

Prime Loan Rates

As of February 2026, the prime rate is 6.75%, according to The Wall Street Journal (WSJ)’s Money Rates table, which aggregates prime rates charged throughout the U.S. and in other countries. The prime rate is typically three percentage points higher than the federal funds rate set by the Federal Reserve.

Each bank has the ability to set its own prime rate, but most base it on the national average listed under the WSJ prime rate.

Prime rates for consumer loans, however, aren’t the same as the prime rate for a bank’s top corporate customers. Since consumers generally do not have the same resources as large companies, banks typically charge individuals the prime rate plus a surcharge based on the product type they want and their qualifications as a borrower. For example, a credit card interest rate might be the prime rate plus 12%.

How Does the Prime Loan Rate Affect You?

The prime loan rate affects everyone. From buying a car to buying a house to opening a credit card, the benchmark prime loan rate influences how much interest you pay. You may be more vulnerable to prime loan rate fluctuations if you have a lot of variable interest loans, such as credit card debt. As the prime rate climbs, so too might the annual percentage rate (APR) of your cards. When you see a prime rate hike, it can mean that your APR will quickly rise as well.

When the prime rate falls, some people take the opportunity to refinance their mortgage or loan, such as a personal loan or an auto loan, to lock in a lower rate.

Because the prime rate affects credit cards, some people who carry a high credit card balance and have good credit may consider using a personal loan to consolidate their credit card debt. This is one popular use of personal loans and can potentially help you save money on interest, depending on the rate.

What Is the Difference Between a Prime Loan and a Subprime Loan?

Prime rates for consumer lending products are what lenders charge individual borrowers with good or better credit scores. Borrowers with lower credit scores are considered subprime borrowers and can apply for subprime lending with higher (or subprime) rates. Here’s a closer look at the differences between prime and subprime loans.

Interest Rates

Interest rates are one of the most obvious differences between a prime and a subprime loan. But even within the prime lending category, there may be subcategories that receive different interest rate offers. For example, a prime borrower with a credit score near super-prime territory may receive more favorable rates than a borrower whose credit is close to subprime.

Recommended: 8 Reasons Why Good Credit Is So Important

Repayment Periods

A subprime borrower may also have fewer options when it comes to repayment periods. They may have a longer repayment period at a higher interest rate than a prime borrower.

Down Payments

A prime borrower may have a low, or no, down payment requirement for a loan. But subprime borrowers may have to make a substantial down payment to qualify for a loan. This is especially true for loans like car loans or mortgages.

Loan Amounts

Prime borrowers may have access to greater loan amounts than subprime borrowers. For instance, prime applicants can often borrow $20,000 or more, whereas subprime applicants may max out at $6,000 or $8,000.

Fees

Non-prime borrowers may have to pay more in loan fees than a prime borrower. This may be due to the types of loans they can access. If they can’t get a loan from a traditional bank, a subprime borrower may seek Payday loans or other loans that come with sky-high interest rates and fees.

What Do You Need to Qualify for a Prime Loan?

You generally need a credit score of 660 or higher to qualify for a prime loan. If your score is 720 or above, you may qualify for a super-prime loan. That said, a lender will typically look at more than your credit score to determine whether you qualify for a prime or better loan. Other factors that can impact your loan rates and terms include your income, employment status, and how much debt you currently carry.

Recommended: Debt-to-Income Ratio (DTI): How to Calculate It

The Takeaway

The prime rate is out of your control. But you do have some control over the interest rate you’ll pay for a loan. One key factor is your credit score. If you’re not currently considered a prime borrower, building your credit before you apply for new credit can help you qualify for the most competitive loan options, whether you’re researching mortgages, credit cards, or personal loans.

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.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

What does “prime” mean in loans?

The term “prime” is used in consumer lending to refer to high-quality borrowers, loans, and rates. Prime loans generally have competitive interest rates and are offered to borrowers who have a low default risk and good or better credit scores. The opposite of prime is subprime, a term for riskier loans with a higher interest rate.

Is there a difference between prime loans and subprime loans?

Yes. Prime loans come with competitive interest rates and favorable terms and are generally offered to people whose credit scores are in the 660 to 719 range. (Borrowers with credit scores above that are considered super-prime borrowers and may be given even better rates and terms.) Borrowers with lower credit scores are considered subprime borrowers and may only be able to access loans with high interest rates and less favorable terms.

What is the current loan prime rate?

As of February 2026, the prime rate is 6.75%, according to WSJ’s Money Rates table. The majority of banks use the WSJ rate to determine their own prime rates.

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Photo credit: iStock/Imagesrouges

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

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

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.

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

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

SOPL-Q126-035

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

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

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

What Is Interest?

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

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

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

Loan APR vs Interest Rate

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

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

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

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

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

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

How Important Is APR vs Interest Rate?

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

APR vs Interest Rate on Revolving Credit Accounts

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

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

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

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

•   Purchase APR is applied to general purchases.

•   Cash advance APR is the rate charged for cash advances made to the cardholder.

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

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

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

What Is a Good Interest Rate for a Personal Loan?

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

The average APR personal loan rate is currently about 12.00%. However, the rate you receive could be higher or lower, depending on your financial situation and the lender you choose.

Getting a Good APR on a Personal Loan

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

Building Your Credit Score

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

Paying Down Your Debts

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

Being Careful When Applying for Credit

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

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

Recommended: Soft vs Hard Credit Inquiry

The Takeaway

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

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

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

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

If the annual percentage rate (APR on your personal loan is different from the interest rate, it means the lender is charging additional fees, such as origination fees or others. No fees mean that the two rates will be the same.

How important is APR vs interest rate?

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

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

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

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Photo credit: iStock/Charday Penn

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL-Q126-040

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