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A certificate of deposit (CD) can be a useful tool for saving money for an upcoming goal. The downside is that you need to wait until the CD matures in order to access your money. If you withdraw some or all of your funds early, you typically get hit with a hefty penalty fee.

If you’re in a pinch and need cash quickly, however, you may be able to get a CD loan. Also known as a CD-secured loan, this is a type of personal loan that uses the value of a CD account as collateral. CD loans are offered by some banks and credit unions. Typically, the lender needs to be the same institution that holds your CD. (Note: SoFi doesn’t offer CD loans at this time, but we do offer unsecured personal loans.)

Here’s a closer look at how CD loans work and how they stack up against unsecured personal loans.

What Is a CD Loan?

A CD loan is a type of personal loan that is secured by the money you have in a CD. Since the collateral lowers the risk for the lender, these loans can be easier to qualify for and have lower interest rates than unsecured loans. However, if you don’t repay the loan, the bank can take the money out of your CD to cover their losses.

Of course, to get a CD loan, you need to have a CD, which is a type of savings account that pays a fixed interest rate over a set amount of time, or term. You must leave the money untouched for the CD term, which can range from three months to five years. If you withdraw your funds before the end of the CD’s term, you usually have to pay an early withdrawal penalty. CDs generally pay a higher annual percentage yield (APY) than regular savings accounts. And the longer the CD’s term, usually the higher the APY. Similar to other types of savings accounts, CDs come with FDIC protection, up to the applicable limits.

Recommended: What Is APY and How Is It Calculated?

How Do CD-Secured Loans Work?

If you take out a CD loan, the lender will charge interest. So you’ll be earning interest on the CD but paying interest on the CD-secured loan. In some cases, a bank or credit union will set the minimum annual percentage rate (APR) on their CD loans at 2% over the CD rate. So if your CD pays 3.00%, your CD loan rate would start at 5.00%. Your actual rate would depend on your credit and the term of the loan, among other factors.

How much you can borrow with a CD-secured loan depends on the lender. Often, you are able to borrow up to 100% of the value of your CD principal. The term of the loan can generally be as long as the term of the CD.

While you can typically access money in a CD if absolutely necessary and pay a penalty, that may no longer be the case if you get a CD loan. Typically, the funds being used as collateral are sealed even in the event of an emergency.

Who Might CD Loans Be Right For?

The idea of paying interest on a loan backed by an interest-bearing CD may seem counterintuitive. However, there can be some logical reasons for taking out a CD-secured loan. One is that you may be able to build your credit by taking out a CD loan and then making a series of on-time payments on the loan. More common ways to do that include getting a secured credit card or becoming an authorized user on another person’s credit card. But if those options aren’t available, and you have a CD, you might use a CD loan for that purpose.

Another reason you might opt for a CD loan is that you need access to your funds for an emergency before it matures. However, you’ll want to first check what your CD’s early withdrawal penalty is. It might be cheaper and easier to simply break open a CD early and pay the penalty. However, if the penalty would be more than what you’d pay in a CD loan’s fees and interest, you might consider a CD loan.

Before taking out a CD loan, it makes sense to weigh the pros and cons.

CD Loan Pros

•   Lower interest rates. CD-secured loans often have lower interest rates compared to credit cards and unsecured personal loans, making them an attractive option for borrowers seeking lower borrowing costs.

•   Building credit. CD loans offer an opportunity to establish or improve your credit history if you currently have limited or no credit.

•   Retaining CD benefits. Despite using the CD as collateral, you can still earn interest on the deposited amount.

•   Fast access to funds. If you apply for a CD loan with the bank or credit union that holds your CD, you can often get approved quickly and receive funds within a day or two.

•   Good for those with bad credit. Borrowers with poor credit often qualify for CD-secured loans.

CD Loan Cons

While CD loans have their benefits, there are also some drawbacks to keep in mind.

•   Frozen funds. The funds in the CD are tied up as collateral, limiting access to the money until the loan is repaid.

•   Potential loss of CD. If you default on the loan, the lender can seize the CD, resulting in the loss of the deposited funds.

•   Limited loan amount. CD loans are typically limited to a percentage of the CD’s value, which might not meet your full borrowing needs.

•   Fees. Your bank may charge fees, such as an origination fee, for issuing you a CD loan.

•   Hard to find. CD loans aren’t as common as other types of personal loan, so your bank or credit union may not offer them.

CD Loan vs Personal Loan

While CD-secured loans and unsecured personal loans have some similarities, they also have some significant differences.

With both types of loans, you typically get a lump sum of money up front and can then use those funds for virtually any type of expense. Both also typically offer fixed interest rates and a set repayment term so payments are easy to predict and budget for.

Unlike a personal loan, however, a CD-secured loan can be hard to find. Also with a CD loan, you need to put your savings on the line to secure the loan. With an unsecured personal loan, you don’t need to provide any funds or personal assets as collateral, making them accessible to borrowers without a CD or other assets.

CD loans also tend to have lower interest rates than unsecured personal loans due to the collateral, while personal loans tend to offer more flexibility in loan amount and repayment terms.

Recommended: Is There a Minimum Credit Score for Getting a Personal Loan?

The Takeaway

CD loans can be a viable option for someone who has a certificate of deposit and needs access to funds while keeping their deposited amount intact. The lower interest rates and potential credit-building opportunities make CD loans attractive for some borrowers.

However, these loans aren’t widely available, and the cost of the loan could potentially exceed the CD’s early withdrawal fee. Also, you could lose the money in your CD if you have difficulty making payments. It’s crucial to weigh the pros and cons, consider your personal financial goals and needs, and compare loan options before deciding on the best borrowing solution. (Note: SoFi doesn’t offer CD loans at this time, but we do offer unsecured 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.

FAQ

Where can I get a CD loan?

CD loans are typically offered by banks and credit unions. It’s best to start by contacting your current financial institution to inquire about their CD loan options. They can provide you with specific details about their loan terms, interest rates, and application process. Typically, you need to take out a CD loan from the same institution that holds your CD.

What are CD loan interest rates?

CD loan interest rates vary depending on the lender, current market conditions, and your qualifications as a borrower. Rates tend to be lower than those of unsecured personal loans, since the loan is backed by the funds in the CD.

Some banks and credit unions will set the minimum annual percentage rate (APR) on their CD loans at 2% over the CD rate. So if your CD pays 3.00%, your CD loan rate would start at 5.00%. Your actual rate would depend on your credit and the term of the loan, among other factors.

Do you get money back from a CD loan?

When you take out a CD loan, you do receive money from the lender. However, it’s important to note that the funds received are borrowed money that you are obligated to repay, typically with interest. The funds from the loan are separate from the funds you have deposited in a certificate of deposit. The CD itself remains intact and continues to earn interest, but it is held as collateral until the loan is repaid. Once the loan is fully repaid, you regain full access to your CD and any interest it has earned during the loan term.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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

SOPL-Q225-013

Laundry rooms are important, but they’re often not the prettiest of rooms. They also tend to be sandwiched into small spaces or hidden in inconvenient areas of the home. No wonder some homeowners consider remodeling them.

But whether you should undertake a laundry room remodel depends on the size of the space, the kinds of new appliances you want to install, and any special décor touches you’d like to add, among other factors.

A remodel might be worth it if it creates a perky and efficient space or a room that has multiple functions.

Before Starting Your Laundry Room Remodel

If you’ve been thinking about giving your laundry room a clean start, you’ve probably got a lot of ideas and inspiration swimming in your head.

Before embarking on your project, think through what you’re hoping to accomplish by asking yourself the following questions.

What’s the Scope of the Project?

Some upgrades involve small improvements like new paint and cabinetry, while others call for tearing through walls, moving plumbing, or even relocating your laundry room to another area of the home.

Appliances should also be considered. Will you need a new washer and dryer, or do you plan on using the ones you currently have?

What Do You Plan to Use Your Laundry Room For?

While most laundry rooms are used solely for handling laundry, others also act as mudrooms and storage for cleaning supplies, sports gear, and bulk shopping items like bottled water, paper products, and pet food.

What your laundry room is used for will affect the laundry room remodel ideas available to you.

Recommended: Guide to Buying, Selling, and Updating Your Home

How Often and When Do You Do Laundry?

If you have a large family and do washing and drying frequently, that will influence the design of your new laundry room. You may need ample counter space for folding, a fold-down ironing board, or bins to hold each person’s clean clothing.

If you tend to do the laundry during the day, you might want to consider adding a window for some natural light. And if you’re more likely to wash clothes in the evening, under-cabinet lighting may help.

What Are Your Must-Haves?

Some homeowners might want bins and baskets to keep things tidy. Others may be looking to add features like a sink or build out their laundry room to accommodate more counter space.

Whatever your desire, it’s a good idea to list the elements that you can’t live without so you can build them into your budget.


💡 Quick Tip: Don’t overpay for your mortgage. Get a great rate by shopping around for a home loan.

How Much Can You Spend?

The scope of your project will dictate your budget and how you plan to pay for your remodel.

Some homeowners could see a laundry room remodel as a way to increase their home’s value and opt to borrow to pay for the project. Others might choose to keep things scaled down so they don’t spend beyond what they have on hand. A home improvement cost calculator can help you figure out how much your project might run you.

Laundry Room Remodel Ideas

Now that you’ve got the foundation of your project mapped out, it’s time to envision how your laundry room remodel will take shape. That will depend on the following factors.

If You Have Limited Space

Small laundry rooms can still pack a punch, thanks to creative ways to maximize your available space. You can do that by tucking laundry baskets under counters, adding a rod under cabinets to hang clothes, and using wall space for hooks to hang laundry bags or baskets that can hold clothespins, detergent, and dryer sheets.

Don’t forget that laundry rooms don’t need to be actual rooms; if you’re short on space, consider tucking your washer and dryer into an unused closet and installing a farmhouse door for easy access.

Depending on its size, you can then use the prior laundry room as a guest room, home office, nursery, or kids’ playroom.

Recommended: What Are the Most Common Home Repair Costs?

If You’ll Be Using the Room for More Than Cleaning Clothes

The list of ways to use a laundry room is endless, and will largely depend on each household’s needs.

•   Got a large dog? You might consider installing a pet-washing station, especially if you are already planning on undertaking plumbing work.

•   Need a quiet place to conduct conference calls at home? A fold-down workstation meets both communication and laundry needs.

•   Larger families may tuck an additional fridge in the laundry room.

•   People who love to entertain may find storage for plates and glassware in the laundry room.

Your Budget

A laundry room remodel can quickly add up if new plumbing, cabinetry, and construction work are involved.

If you find yourself running beyond what you’re willing to spend, think of creative ways to get the laundry room you want without breaking the bank.

That might entail painting cabinets instead of replacing them, using open shelving instead of custom built-ins, and opting for durable paint in place of tiled backsplashes.


💡 Quick Tip: A home equity line of credit brokered by SoFi gives you the flexibility to spend what you need when you need it — you only pay interest on the amount that you spend. And the interest rate is lower than most credit cards.

DIY vs Calling In an Expert

Many homeowners are comfortable with do-it-yourself projects. In a laundry room remodel, these might include painting, replacing cabinetry, and installing shelving and hanging rods.

Other projects — moving water lines, installing new sinks or drywall, and demolition — require hiring a contractor. Mapping out which projects you will need to outsource will affect your budget and may also affect the scope of your project.

Paying for It

Smaller laundry room remodels, like those that require just a new coat of paint or a retrofitting of shelving to maximize storage space, can be done with fairly little outlay, especially if you do it yourself or have a friend or family member lend a hand.

Larger ones, or those that call for extensive demolition, architectural work, or the services of a general contractor, will be more expensive, of course.

The size of the project — and therefore how much money you’ll need—matters, as does your timeline for paying back any loan.
Here are some options:

•   Cash may be a viable choice, especially for smaller projects.

•   A home equity loan allows you to draw on the equity in your house to get a lump sum upfront, which can finance larger or multiple projects.

•   A home equity loan of credit (HELOC) also leverages your house equity but gives you a revolving line of credit you can draw on if and when you need it.

The Takeaway

Laundry room ideas for remodeling range from DIY tweaks to major overhauls. A laundry room remodel may increase the value of your home or simply make life a little easier. Start by listing what you want to achieve and how you’re going to pay for it.

SoFi now offers home equity loans. Access up to 85%, or $750,000, of your home’s equity. Enjoy lower interest rates than most other types of loans. Cover big purchases, fund home renovations, or consolidate high-interest debt. You can complete an application in minutes.

FAQ

Where do I start renovating my laundry room?

Begin with the big picture of your project and its purpose. Consider what you need from your laundry room. Do you want it to maximize efficiency as you wash, dry, and fold? Do you want it to double as storage space for bulk items or out-of-season coats? Do you want it to provide space where you can work on craft projects? Once you work out your needs and priorities, you can focus on the features you’ll need to make the space work for you.

How long does it take to remodel a laundry room?

The length of time remodeling your laundry room requires depends upon how extensive your remodel is, whether you need professional help or can do it yourself, and whether permits are required for the work you want, among other factors. If you’re repainting or adding a few shelves, you may be able to do it in a weekend. If you’re hiring contractors for work that involves your plumbing or electrical systems or requires them to move walls, it could take as much as four to six weeks.

How much does it cost to move a laundry room?

The price tag for moving your laundry room can vary a lot, depending on where you live and how well set up the new location is for plumbing and electricity — and, of course, what you want to have in your laundry room. The cost can run from $500 to $5,000 or more.

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Thinking about installing a new deck, replacing a front door, or even adding an extra bedroom to your home to help increase its resale value? Considering that your home is one of the biggest investments you’re likely to ever make, it makes sense that you’d be interested in increasing its value with some upgrades.

But as you probably guessed, not all remodeling projects provide the same return on investment (ROI).

Using Remodeling Magazine’s Cost vs. Value 2024 report, which compares the average cost of 23 remodeling projects in 150 housing markets, let’s look at some of the most popular home improvements based on estimated ROI, time commitment, and cost.

Things to Consider Before Starting a Home Improvement Project

It’s important to note that national averages only tell part of the story. Labor and supply costs, styles, and consumer preferences can vary by location. So before you dive into a project, you might want to consider hiring a contractor, real estate agent, or appraiser to come to your house and give an opinion on which upgrades might provide the most value based on where you live.

You may also want to factor in any immediate needs that a remodeling project can help satisfy. Let’s say, for instance, you’d like to add an extra bathroom. While you may only recoup part of your expenses, having an additional washroom may be worth the cost of a renovation.

Top Home Improvement Projects to Help Increase Your Home Value

Looking to prioritize your wish list? These remodeling projects earned top spots on the Cost vs. Value report.

Garage Door Replacement

Average Cost: $4,513

Resale Value: $8,751

Costs Recouped: 193.9%

General Time Commitment: A few days

Removing an old garage door and replacing it with an attractive, sturdy new one could return every dollar of your initial investment — and then some, according to the Cost vs. Value report. It’s an effective way to improve your home’s appearance from the outside while increasing your home’s functionality for years to come.

With an average cost of $4,513, which includes the door and the cost of labor, it’s also a relatively affordable renovation. While most homeowners would likely hire someone to help install the new garage door, it is something that you could potentially do on your own (with the help of a friend) over the course of a weekend.

If you hire someone to install the door for you, they will likely come to your home twice: first, to take measurements and give you a quote, and then again to install the door.

Entry Door Replacement (steel)

Average Cost: $2,355

Resale Value: $4,430

Cost Recouped: 188.1%

General Time Commitment: One week

A new, safe front door is an attractive quality to prospective homebuyers. Replacing your entry door and jambs with a steel door, “including clear dual-pane half-glass panel, jambs, and aluminum threshold with composite stop,” should get you a good bang for your buck, according to the Cost vs. Value report.

Even better, you and a friend can probably handle installation on your own, though you can certainly hire an installation expert. If you decide to go the pro route, they’ll likely need to come to your home to take initial measurements and then return for the installation. Another option is to measure and order the door yourself and just get help with the installation.

Recommended: 32 Inexpensive Ways to Refresh Your Home

Manufactured Stone Veneer

Average Cost: $11,287

Resale Value: $17,291

Cost Recouped: 153.2%

General Time Commitment: One month

Removing the vinyl siding and adding a stone veneer to the bottom third of your home’s street-facing façade is an effective way to help increase the value of your home, returning 102.3% of the cost of renovation. First impressions matter when it comes to selling a home, and stone veneer is a popular look right now.

Whether you tackle this project yourself or hire a handyperson to help with the installation, this project will take several days to complete. If you choose to hire someone, understand that the construction days might not be successive, so the exterior of your home could be under construction for several weeks to a month or longer.

Minor Kitchen Remodel (Midrange)

Average Cost: $27,492

Resale Value: $26,406

Cost Recouped: 96.1%

General Time Commitment: Four to eight months

When it comes to kitchen remodels, less may be more, at least when it comes to ROI. According to the Cost vs. Value report, major kitchen remodels recoup anywhere from 38% to 49.5% of costs. Meanwhile, a smaller upgrade recoups 96.1% of costs.

What does a minor remodel include? Think faster-turnaround jobs like installing a new sink and faucet or replacing items like cabinet fronts, cooktop, oven range, refrigerator with new models, countertops, or floors.

When creating your budget, you’ll probably want to factor in the cost of expert help, such as an electrician, plumber, and contractor. You’ll also want to be realistic about how long you can devote to the project — and be without a working kitchen. Expect several months at minimum for a remodel.

Wood Deck Addition

Average Cost: $17,615

Resale Value: $14,596

Cost Recouped: 82.9%

General Time Commitment: Three to six months

Nothing beats enjoying family and friends on a deck in your backyard on a sunny day. Potential buyers are typically rightfully happy to pay extra for a deck, and a wooden deck installation could recoup half of what you spend. And ideally, you’ll get the chance to enjoy the deck before you sell your home.

A deck installation is a pretty large project. It will likely need to pass an inspection and adhere to your city’s building codes, and it could increase your property taxes and home insurance costs. So it pays to get the job done right the first time, which may mean enlisting the help of a designer or architect. These pros can map out an initial plan, and a contractor can handle the building.

An online home renovation cost calculator can help provide you with a rough idea of how much a wooden deck — and any other home upgrade project — could cost.

HVAC Conversion/Electrification

Average Cost: $18,800

Resale Value: $12,422

Costs Recouped: 66.1%

General Time Commitment: Anywhere from 1-2 days up to several days, depending on whether your home requires structural changes

Replacing a fossil fuel-burning HVAC system with one that runs on electricity isn’t cheap. Nor is it one to try to DIY. But according to the Cost vs. Value report, you could stand to get back roughly two-thirds of what you put in. Homeowners who decide to make the conversion may also notice a savings in their heating and cooling bills. And there are environmental benefits to consider as well.

Unless you’re a licensed HVAC technician, this is a project best suited for the professionals. Consider speaking with a few different HVAC installation teams to compare potential systems and cost options.

Remodeling Projects With the Lowest Potential ROI

While these upgrades may not deliver the biggest returns, they could still be worth exploring if they fit your budget and lifestyle needs.

Primary Bedroom or Bathroom Addition

Average Cost: $164,649 for midrange; $339,513 for upscale

Resale Value: $58,484 for midrange; $81,042 for upscale

Cost Recouped: 35.5% for midrange; 23.9% for upscale

General Time Commitment: Four to eight months

Adding on a primary bedroom or bathroom may enhance your living experience, but it might not add much to your bottom line. Despite the project’s hefty financial and time commitment, it generally fails to deliver even one-third of the investment.

However, while not a great return, a home addition project of this size could change to the value of your home. For example, a $300,000 home that adds a primary suite for $164,649 could potentially return about $58,000 on the investment. A home that sells for $358,000 instead of $300,000 is a 19.3% increase in the home’s value. If you were to get enough use from the addition to justify the other cost you can’t recoup, it could still be a fine investment.

Again, these figures are purely hypothetical, and the value of expanding your home can depend on a multitude of factors. And if you decide to move ahead with a primary bedroom or bathroom addition, you’ll want to think through how you’ll finance the project. Some options include applying for a home improvement loan, using home equity, dipping into your savings, or using credit cards.

Recommended: Homebuyer’s Guide

Bathroom Addition

Average Cost: $58,586 for midrange; $107,477 for upscale

Resale Value: $20,334 for midrange; $34,997 for upscale

Cost Recouped: 34.7% for midrange; 32.6% for upscale

General Time Commitment: Four to eight months

A bathroom remodel tends to be cheaper than a primary bathroom addition, and it generally sees a slightly better potential ROI. But again, a bathroom addition or any large remodeling project should be considered in terms of both ROI and what you want to get out of your home while you are living in it. And that’s a calculation that only you and your family can make.

The Takeaway

Home renovation shows make upgrades look quick and easy. And while sometimes they can be, in many cases, renovations can be costly and time-consuming. As you consider which ones to make, you will likely want to factor in your return on investment (ROI).

Not all remodeling projects provide the same level of ROI. Projects such as replacing a garage door or adding a stone veneer to your home’s façade tend to see better ROI than adding an extra primary bedroom or bathroom. But ROI is only one consideration. You should also need to consider what you want to get out of your home and whether the time and cost of taking on a big project are worth it.

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

FAQ

What home improvements offer the most value?

According to the Remodeling Magazine’s Cost vs. Value 2024 report, the top three home improvement projects that have the best ROI are: replacing the garage door (193.9% of costs recouped), replacing the entry door with a steel version (188.1% of costs recouped), and adding manufactured stone veneer to the home’s exterior (153.2% of costs recouped).

Which home improvement is least likely to increase the value of your home?

Wallpapering, built-in electronics, wall-to-wall carpeting, and a swimming pool are examples of projects that typically don’t increase the resale value of your home.

Does new flooring increase home value?

New flooring can potentially boost the value of your home, especially if your current flooring is worn or in poor condition. Hardwood flooring often provides significant ROI, though luxury vinyl plank and tile flooring can also add value.

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

SOPL-Q225-016

Your personal loan agreement is the document that contains everything you need to know about the deal you’re making with your lender, including your rights and responsibilities as well as theirs. It’s a fairly long and complex form, but breaking it down can make it easier to understand.

Here, take a closer look at personal loan agreements.

Personal Loan Agreements Defined

A personal loan agreement, as mentioned above, is a document that details exactly what is being agreed to on both sides of a personal loan — lender and borrower. At the very least, it will state how much money is being loaned and the terms and conditions of the borrower’s repayment responsibilities.

But what about a personal loan that is not with a traditional lender? Private lenders can be individuals or organizations that make loans to individuals, sometimes without the qualification requirements of traditional lending institutions. A private personal loan agreement is drafted as part of a private personal loan — one made between a private lender and a borrower.

Any personal loan agreement is a legally binding document, so it’s important to understand it in full before you apply your signature.

Key Elements of a Personal Loan Agreement

Say you’ve applied for a personal loan. If you qualify, you’ll move along to a personal loan agreement. Among the key elements of a personal loan agreement are:

•   Parties involved: The lender and borrower, including their legal names and addresses.

•   Loan amount: The amount of money being borrowed, also known as the principal.

•   Interest rate: This is typically expressed as an annual percentage rate (APR), which reflects the total cost of borrowing over a year.

•   Repayment terms: How and when the loan will be repaid, including the payment schedule, payment frequency, and loan term.

•   Default provisions: The consequences of failing to make payments, such as late fees and potential actions the lender can take. Also, you may want to be sure severability clauses are spelled out, stating what happens if one aspect of the agreement is deemed unenforceable.

•   Governing law: Specify which jurisdiction’s laws will govern the agreement in the event that there are disputes.

•   Signatures and date: These are needed from both the lender and borrower.

You might also include details on any loan collateral, late and early payment (prepayment) penalties, and guarantors or cosigners, as needed.

Why Is a Loan Agreement Needed?

A personal loan agreement is essentially a protective document. It protects both the lender and the borrower by laying out, in clear terms, exactly what is being agreed to. If either party fails to uphold the agreement, action can be taken — such as the lender seizing any assets offered as collateral or sending the account to collections — both of which, obviously, would be bad for the borrower.

But the document works both ways. Lenders, too, are subject to lender liability and can be taken to court if they fail to uphold their end of the loan agreement. Although these cases are far less common than borrower default, the loan agreement is a document that can be used for the borrower’s protection as well.

How to Write a Personal Loan Agreement in 5 Steps

Here are the usual steps to writing a personal loan agreement.

1. Decide Whether to DIY It or Hire a Lawyer

Loan paperwork is often created by the lending institution. For private loans, depending on the specifics of your loan and situation, you could write up a simple agreement by hand or draft it on your computer and then print it out for signing, if you are working toward a private loan. Or you might download a template from a reputable site, which can be a popular option. These are often free or are sometimes available for a small fee.

However, if the loan is complicated or you don’t want to handle the agreement yourself, you could look into hiring a lawyer to draw up the paperwork. Either way, a personal loan agreement will be a legally binding arrangement. Hiring a lawyer will likely be a costlier proposition.

2. Gather the Necessary Personal Details

You will need the legal names and addresses of both parties. This ensures the lender can’t ask you for anything beyond the borrowed principal (plus interest, which will also be listed).

3. Agree to and Spell Out the Loan Terms

The loan agreement should list the payments that will be expected each month and the expected date of the conclusion of the loan term.

The interest rate for the personal loan should also be on the personal loan agreement, likely expressed as an APR, which shows what percentage of the loan principal you’ll end up paying back in the course of one year including interest and any additional fees that may be packaged into the loan.

The interest rate will vary based on your credit score and other financial factors. If you have decent credit, you’ll likely be able to qualify for a personal loan. But generally speaking, the higher your score, the lower your rate.

Recommended: Personal Loan Calculator

4. List Payment and Legal Details

A personal loan agreement should also include the following, as noted above:

•   The loan agreement may list which types of payment are acceptable, such as check, bank transfer, or credit card.

•   The personal loan contract should also list specific repayment conditions, including when payment is due and whether or not additional principal can be applied without penalty.

•   A complete personal loan agreement should include details on how any disputes will be handled between the parties involved.

•   Some personal loan documents may include the option to change your loan’s term (the period over which the loan is repaid).

•   Personal loan contracts in the United States should stipulate which state’s laws will be used to govern and interpret the agreement if the borrower lives in a different state than the lender is headquartered.

•   Severability is a clause that states that even if one part of a contract is found to be unenforceable or otherwise rendered null and void, the remainder of the agreement will still hold.

•   Penalties associated with the personal loan, such as any late fees that may be assessed, at what point the loan will go into arrears or default, or other scenarios, should be listed in the contract as well.

5. Sign the Document

Finally, the contract for loaning money must be signed by the borrower and the lender in order to be made legally binding.

Recommended: Comparing Personal Loans vs Business Loans

Other Personal Loan Documents

Along with the signed personal loan agreement, other typical personal loan requirements include the following:

Proof of Identity

Your driver’s license or some equivalent form of photo ID will likely be necessary in order to verify your identity.

Income Verification

Lenders will consider your income when qualifying you for a loan — after all, they have good reason to be interested in whether or not you’ll be able to repay the debt. Along with asking you to list your annual income, verifying documents such as tax returns may also be required.

Proof of Address

In order to prove your residence, and therefore eligibility for any type of personal loan, you may need to provide utility statements, bank statements, or other official documents.

The Takeaway

If you’re considering a personal loan, reading the loan agreement in depth is a good way to understand for sure what you’re agreeing to. That loan agreement will contain many details about funds borrowed and how they will be repaid, and it serves to protect both the lender and the borrower.

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

FAQ

Does a personal loan agreement need to be notarized?

No, a personal loan agreement does not need to be notarized to be legally binding — it simply needs to be signed by each party to the agreement.

What is a private personal loan agreement?

A private personal loan agreement is the binding legal contract between a borrower and a private lender for a personal loan.

Why do you need a loan agreement?

The personal loan agreement serves to outline the specific terms of the loan and protect both parties in case either fails to uphold the agreement.

Can a personal loan agreement be legally enforced?

Yes, a written and signed agreement for a loan can be legally enforced. It’s a binding contract.

What happens if a borrower defaults on a personal loan agreement?

If a borrower defaults on a personal loan, they will face negative impacts to their credit score, potential legal action from the lender, and they might find that their account is turned over to collections. They might also be charged late fees and a higher interest rate on the remaining balance due.

Photo credit: iStock/Chaay_Tee

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

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Payday loans are also called cash advance loans, deferred deposit loans, post-dated check loans, or check advance loans. They are short-term, high-interest loans. People who use these loans tend not to have access to other types of lending, and this is a last resort to get them through to the next paycheck.

Many states consider these loans predatory because of their high interest rates and financing fees. Some states place caps on the fees and interest rates or ban this type of lending completely.

Read on to find out what a payday loan is, how they work, and other options for those who need a short-term loan or cash advance.

What Is a Payday Loan?

Payday loans, also known as cash advances, are high-interest, short-term loans, typically for $500 or less. They are notorious for having very high interest rates and fees. There are few payday loan requirements, but borrowers typically need to be over 18, have a checking account in good standing, and show that they earn a secure income.

Consumers can find these types of loans through online lenders, apps, and local brick-and-mortar merchants. The loan amount is typically paid back by direct debit once the borrower receives their next paycheck. Alternatively, loans may be secured with a post-dated check.

How Does a Payday Loan Work?

Consumers fill out an application with a lender and show proof of identity, a recent pay stub, and a bank account number if required.

Borrowers have to secure the loan with a post-dated check or agree to have the funds debited from their account when they are paid, usually in two weeks. Loans are usually between $50 and $1,000, and funds are deposited within a day or two. Borrowers can also receive cash.

People with bad credit and access to better financing tend to use these loans to help them get by temporarily. However, payday loan problems are well-known: High interest rates and exorbitant fees can trap someone in spiraling debt if they cannot repay the loan on time.

The Consumer Financial Protection Bureau states, “More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter.” Borrowers then face even higher financing fees and interest rates compounding their debt load.

Many states place caps on the interest rates and fees charged for payday loans; some states, such as New York, have outlawed them completely.

What Are the Requirements for a Payday Loan?

Most working adults qualify for a payday loan. Here are the most common standards.

Age

Borrowers must be at least 18 years of age.

Proof of Income

Applicants have to show proof of income, such as a pay stub.

Citizenship

Consumers may have to show proof of U.S. citizenship.

Bank Account

Borrowers need to have a bank account that is in good standing.

Payday Loan Interest Rates

Depending on the state, interest rates for payday loans can carry a 400% annual percentage rate (APR) or more.

In states that cap interest rates on payday loans, lenders may instead charge a fee that is a percentage of the amount loaned. Finance charges can be between $15 and $30 for each $100 borrowed.

Payday Loan Amounts

Payday loan amounts are usually $100 to $1,000. In some states, a borrower is allowed only one payday loan at a time. Other states, like Texas and Nevada, offer unlimited payday loans for customers.

Alternatives to a Payday Loan

Rather than take out a high-interest payday loan, there are better options for people in a precarious financial situation.

Credit Cards

If the borrower has a credit score, using a credit card is a safer bet than a payday loan. The average credit card interest rate is around 21%, while payday loan interest can be over 400%. However, if the borrower needs the cash to pay bills such as rent or utilities, that is often not possible with a credit card.

Cash Advance Loans

A cash advance loan puts cash immediately into your bank account. These loans are offered by online lenders, such as Earnin. These companies don’t charge loan financing fees but ask for “tips.” So, a borrower might tip between 5 and 15% of the advance. These apps are often marketed as payroll benefits, and they charge membership and service fees.

TSP Loans

A TSP account is a tax-deferred retirement savings and investment plan that offers Federal employees the same tax advantages as a 401(k) retirement plan. If you have a TSP retirement account, you can take out a loan from that plan without having to pay tax or penalties. However, you must pay the amount back to the account within five years with interest (which will be much lower than the interest on a payday loan).

Personal Loans

For consumers with a good credit score, banks and online lenders offer unsecured or secured personal loans. Unsecured loans are not backed by any collateral and will have a higher interest rate than a secured loan, but not as high as a payday loan.

Unexpected expenses can be paid for with a personal loan and at a lower interest rate. Many people take out personal loans to pay off credit card debt because the interest rate on a personal loan is less than the interest rate paid on their credit card debt. Getting approved for a personal loan can be easier if you have good credit.

Loan payback terms can be between two to seven years, with loan amounts typically between $1,000 and $50,000 or higher. If you manage the payments on a personal loan responsibly, you can build up a strong credit history. That is not the case with a payday loan, which is not typically reported to credit rating bureaus.

The Takeaway

Payday loans are short-term loans that cash-strapped consumers use to get by until their next paycheck. The borrower is expected to repay the loan on their next payday, or they may submit a post-dated check. Interest rates are extremely high because of the risk to the lender that the borrower will default. Unfortunately, this is often the case, and borrowers can find themselves spiraling into debt as interest and fees accumulate. For this reason, some states have banned payday 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.

FAQ

What are the requirements to get a payday loan?

Most working adults qualify for a payday loan. A borrower needs to be 18 or over, show proof of income (a paystub) and citizenship, and have a bank account.

Is proof of income a requirement for a payday loan?

A lender requires proof of income because they want to know you have the means to pay the loan back. A recent pay stub or similar documentation is typically enough.

Is taking out a payday loan a good idea?

Basically, no. A payday loan should only be used as a last resort, and if you are sure you can pay back the loan in two weeks. Even then, the interest you will pay will be much higher than a cash advance or a short-term loan from an online lender.

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

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