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Buying a car is often a major purchase, whether you opt for new ($48,000 on average) or used (typically about $26,000). If you’re in the market, you may well be exploring your financing options, which could include a loan. In fact, you may be deciding between a car loan and a personal loan.

If that’s your situation, it’s worth taking a closer look at your options and the pros and cons of each. Here, you’ll learn more about this topic, so you can make the best decision for your situation and needs.

Types of Loans That Can Be Used to Buy a Car

Can you use a personal loan to buy a car? Yes. But is it the right option? There are a few things to take into consideration when thinking about buying a car with a personal loan or a car loan.

•   Are you buying a new car or a used car?

•   Are you buying a car from a private individual or a dealership?

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars. While SoFi does not offer auto loans at this time, we do offer personal loan options with other use cases.

Are You Buying a New or a Used Car?

If you’re buying a new car from a dealership, the benefits of using dealer financing might outweigh the drawbacks. Automakers offer financing on cars purchased through their dealerships, with low or sometimes even 0% annual percentage rates (APRs) for well-qualified buyers in an effort to compete with banks and other financial institutions.

Is the Seller an Individual or a Car Dealer?

An individual who is selling a used car is not likely to offer financing, so a car buyer in that situation would likely need to find their own source of funds. As the name implies, a personal loan can be taken out for a variety of personal expenses — including to pay for a car. In this way, personal loans to buy a car can work well if you’re shopping from friends, neighbors, or other individuals.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars. While SoFi does not offer auto loans at this time, we do offer personal loan options with other use cases.

Getting a Personal Loan for a Car

Funds from a personal loan can be more flexible than funds from an auto loan — they can be used not just for purchasing a car but for the other costs of owning a car as well.

Personal loans can be secured or unsecured, with either fixed or variable interest rates. If you choose to purchase a car with an unsecured personal loan, collateral is not needed. There is no asset for a lender to seize in the case of default, as with a secured personal loan, although lenders can pursue you in court.

Car buyers who have a personal loan approval in hand before they go to the dealership can negotiate, knowing exactly how much they can spend. If you don’t think your income would qualify you for an auto loan from a dealership, you could consider looking for personal loans based on income.

Refinancing a car loan with a personal loan might be an option in some cases. Perhaps your credit score was bad when you purchased your car, but you’ve built it since taking out your car loan and you can now qualify for a lower interest rate. Or you’d rather have a shorter-term loan than you currently have, and refinancing with a personal loan might accomplish that.

Recommended: How Does Collateral Work with a Personal Loan?

Determining the Value of a Car

Whether the car you’re considering is new or just new to you, there are a number of well-respected pricing guides to consult for an appropriate price range once you narrow down your car choices. Having an idea of the car you’re considering buying may give you more confidence while negotiating a price.

•   Edmunds offers a True Market Value guide.

•   Kelley Blue Book has suggested price ranges for various cars (particularly useful for used cars).

•   J.D. Power offers information about new and used cars, including classic cars.

•   Consumer Reports provides detailed reviews and reports about specific makes and models.

These resources simply provide a price range for the car you want. Calling car dealers for price quotes or estimates and looking for any purchase incentives or dealer financing offers are good ways to be prepared as you consider your financing options.

Pros and Cons of Using a Personal Loan for a Car

Once you know which car you want and what you can afford, how do you pay for it? If you’re considering different ways to get a car loan — and a personal loan is one option — there are some pros and cons to weigh. Here, details that can help when you know that you can use a personal loan to buy a car but wonder if it’s the right move.

Pros of Using a Personal Loan for a Car	Cons of Using a Personal Loan for a Car
Prequalification for a personal loan means you know exactly how much you can spend.	Capping your spending at the amount of your personal loan will limit the pool of cars you can afford.
You don’t need a downpayment.	Interest rate may be higher than for an auto loan.
Funds can be used for other expenses, not just the car purchase.	May be more difficult to qualify for than an auto loan.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

Pros and Cons of Using an Auto Loan To Buy a Car

In essence, a car loan works much like a mortgage. It’s a secured loan paid for in monthly installments, and the asset isn’t fully yours until the final payment is made. The car is the asset that secures the loan, which means if you default on payments, the lender could seize your car. The car’s title typically remains with the lender until the loan is paid in full.

Pros of Using an Auto Loan To Buy a Car	Cons of Using an Auto Loan To Buy a Car
May be easier to qualify because it’s a secured loan.	If you default on the loan, the lender can repossess your car.
Auto loans are structured specifically for vehicle purchases.	Lenders may restrict purchase to a newer car.
May be easier to qualify for an auto loan than a personal loan.	May need a good or excellent credit score to qualify for favorable interest rates.

Things to Consider When Using a Personal Loan to Buy a Car

After comparing the general factors of using a personal loan vs. using an auto loan to buy a car, you might want to look at some more specific things. “Can you get a personal loan for a car?” is a question that can be answered differently depending on your financial situation and other factors. Learn more about the ins and outs of personal loans for cars here.

Credit Score

Since a personal loan for a car is an unsecured loan, you typically need a higher credit score to qualify for a favorable interest rate. Unsecured loans are generally riskier for lenders than secured loans because there is no collateral to back the loan.

Bank Account

Having a bank account may make it easier to get a personal loan. Lenders tend to see a bank account as evidence that an applicant has sufficient cash flow to make payments. Getting a personal loan with no bank account may mean having a higher interest rate or less favorable terms — or both.

Interest Rate

Generally speaking, personal loan applicants who are approved for lower interest rates have higher credit scores. Personal loan interest rates tend to be higher than auto loan interest rates because there is no collateral to secure the loan.

Other Fees

Personal loan fees that potentially can be charged are usually higher than auto loan fees. Origination fees are one example — they’re commonly included in personal loans and can range from 1% to 10% of the loan amount. Some auto loans may include an origination fee, but the range is typically lower than the personal loan range, at 1% to 2% of the loan amount.

Loan Term

The term of a loan is the length of time the lender allows for repayment of the loan. Personal loan terms tend to be shorter than auto loan terms. One reason for this is due to the unsecured nature of a personal loan. If a lender doesn’t have an asset to secure a loan, they may want to make sure they get their money back as soon as possible. Personal loan terms typically range from two to seven years.

Collateral

Personal loans are usually unsecured, which means no collateral is required. As mentioned before, however, that tends to equate to higher interest rates and shorter terms than secured loans offer. Collateral gives a lender more confidence that the borrower is serious about repaying the loan.

Ease of Application and Approval

Online applications for personal loans are fairly common. Completing an online application is usually quick and easy, especially at the pre-qualification stage. After that, a lender will likely ask for more detailed information to move forward in the process.

At this point, the lender will likely run a hard credit check on your credit report, which will affect your credit score (in contrast to a soft credit check, which doesn’t affect your credit score). You may be asked what the purpose of the loan is, and you’ll need to fill out a complete loan application. Lenders will also ask you to provide proof of identity, Social Security number, and current address, and will verify your employer and income.

Down Payment

Typically, a down payment is not required when using a personal loan to purchase a car. This factor can be the deciding one for some people looking for auto financing. If you’re getting a personal loan for part of the cost of the car and paying for the remainder with your own funds, you could think of the latter as your unofficial down payment.

The Takeaway

Choosing what type of loan — auto loan or personal loan — generally corresponds to what type of car you’re buying, what interest rate and terms you might qualify for, and what works best for your specific financial situation. Getting prequalified for a personal loan before you begin shopping for a car may help direct your car search toward vehicles that are affordable and fit your lifestyle.

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.

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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.

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.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc’s service. Vehicle Identification Number is confirmed by LexisNexis and car values are provided by J.D. Power. Auto Tracker is provided on an “as-is, as-available” basis with all faults and defects, with no warranty, express or implied. The values shown on this page are a rough estimate based on your car’s year, make, and model, but don’t take into account things such as your mileage, accident history, or car condition.

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Home prices are on the rise again, especially in large metro areas, after a lull leading into 2023. Seven cities, including Atlanta, Charlotte, Detroit, and Miami are at all-time highs as measured by the Case-Shiller U.S. National Home Price NSA Index. So saving for a down payment for your first house can be tough. This is especially true if you’re trying to buy that first home while you also have student loans to pay off. And if you’d like to purchase that home super fast before prices soar higher, it can feel impossible.

But here’s the good news: It’s definitely doable, even within just 12 months, if you accelerate your savings and prepare wisely. Follow our strategy below to take that big step into home ownership fast.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

Months 1–3: Save Like You’ve Never Saved Before

Do the Math

The median home price in the U.S. in late 2023 was $431,000. Saving 10% for a down payment on a home at that price is far more manageable than following the old 20%-down school of thought, especially when you have student loans to pay off. To succeed at saving $43,100 in a year’s time, you’ll need to save $3,592 a month, which seems slightly more plausible if you take a breath and break it down into 52 weeks, at $829 a week. Of course, you’ll want to crunch the numbers for the type of home you’re looking to purchase. If you can find a well-priced property and put even less than 10% down, you may need significantly less cash on hand.

But don’t put your calculator away yet.

In addition to saving for the down payment, you’ll need to factor in closing costs, which typically amount to about 3% of the home price. So for a home that costs $431,000, you would need to add $249 to your weekly savings goal.

Yeah, that’s a big chunk of change. But don’t panic; the first step is always the hardest. Just imagine yourself landing your first job or hosting your first big party. You managed that and you’ll manage this too. And remember to consider student loan refinancing, which can help lower your interest rate, monthly payments, and ultimately save you money.

Revise Your Budget

Hunker down and take a hard look at your budget. If you’ve decided to refinance your student loans, don’t forget to adjust your monthly fixed expenses to account for your lower payments. Compare your income and expenses to get a clear view of your spending habits, and then make the necessary changes to meet your weekly savings goals.

Look closely at your expenses to see what you can give up to increase your savings, and what costs you can cut back on. Can you join a rideshare group to save on gas? Part with a streaming subscription or two? Also, consider setting limits on eating out and buying clothing or gadgets you don’t really need.

Recommended: Home Affordability Calculator

Flex your Negotiation Muscles

Put your savvy bargaining skills to use to get lower interest rates on existing credit cards and auto loans, or discounted rates on subscription services.

Start a Home Fund

Open a savings account just for your down payment, and avoid dipping into it. This will help you keep careful tabs on your progress.

Reach out to Your Family and Friends

Within your 12 months of saving, you’ll have a birthday and celebrate gift-giving holidays. Let your friends and family in on your major goal of buying a house, and ask that they contribute money toward a down payment in lieu of material presents.

Just remember that if you receive unusually large sums or a large number of deposits in the months leading to your home purchase, you may need gift letters from the generous people in your life, indicating that there is no expectation of repayment. Depending on the mortgage loan, rules vary when it comes to how much of your down payment can come from gifts.

Months 3–6: Keep Saving. And Focus on Earning More

Ramp up Your Income

Think of creative ways to use your expertise and skills to boost your income. You did invest a substantial amount of time and money in your education, after all, so maximize the ROI to rake in some extra cash to put toward your home fund.

Perhaps you can roll out an e-course or teach a professional seminar at your local community college. Or look for a way to make extra money from home. And, if the time is right, ask for a raise.

Months 7–9: Build Your Credit (and Keep Saving)

Review Your Credit Report

Check your credit report to make sure it is error-free and that your credit score is as high as it can be. And mind the cardinal rule of credit scores: Pay your credit cards, student loans, and bills on time.

Check your credit utilization ratio (the amount of your credit card balances against their limits), too; you want that number to be low.

Now is also the time to be wary of applying for new lines of credit, as that will result in lenders doing a “hard pull” on your credit. Too many of these within a 6-month time frame could ding your credit score.

Recommended: First-Time Homebuyer Guide

Keep an Eye on Your DTI

Make sure your debt-to-income ratio (DTI) is as low as possible. Your DTI is a key part of securing a home mortgage loan, and while the lower the better, it should fall below 36% — although for certain types of mortgage the DTI can be as high as 43%.


💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as low as 3.5%.

Months 10–12: Learn About the Mortgage Process (While You Keep Saving)

Do Your Mortgage Application Prep

Your mortgage company will require quite a bit of paperwork to get your loan approved. Familiarize yourself with the mortgage loan application process. Also check your credit score once more to make sure it’s still solid.

Explore Homebuyer Assistance Programs

There are many different programs designed to help first-time homebuyers gain access to home ownership. A loan from the Federal Housing Administration, for example, may help you purchase a home even if you haven’t saved a heap of cash for a down payment or if your credit score isn’t at the highest level.

If a fixer-upper is your goal, a HUD loan may be worth exploring. And depending on where you’re looking to buy, you might find city- or state-specific homebuyers assistance programs.

The Takeaway

Saving for a down payment and the associated costs of buying a home is a big endeavor, but with persistence and discipline, both in terms of your spending and your home-search process, you can find a home and have the down payment necessary to purchase it. The same careful planning that got you to college and helped you secure a student loan will help you achieve your dream of becoming a homeowner.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

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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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

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Popular wedding sites claim the average wedding costs $29,000. Countless media reports have repeated that number while leaving out an important caveat: Averages can be misleading. Even one extravagant wedding may skew the average to be significantly higher than what most people actually paid.

SoFi wanted to know: How much does a wedding really cost? We surveyed 1,000 men and women across the country and then crunched the numbers. Read on to find out what we discovered.

50% of respondents’ weddings cost less than $10,000

Total wedding budget breakdown:

•   Less than $10,000: 50%

•   $10,000 to 19,999: 18%

•   $20,000 to 29,999: 12%

•   $30,000 to $39,999: 10%

•   $40,000 to $49,999: 6%

•   $50,000 or more: 4%

Half of respondents to our wedding survey spent less than $10K on their ceremony and reception. That’s considerably less than the $29K figure that’s been popularized as “average.”

We’re not saying that the $29K budget is inaccurate — after all, half of respondents paid more than that. However, averages in general are notoriously confusing. Only 22% of couples in our survey spent about $29K (between $20K and $39K). And just 10% paid more than that.

But why does this matter?

There’s a concept in behavioral economics called anchoring. It describes how numbers can influence consumer decisions by unconsciously becoming our reference point for what’s standard or “normal.”

Let’s say you’re in the early stages of wedding planning. If you stumble across an authoritative $29K estimate, from then on you may view anything less than that as a “low-budget” wedding. And when figuring out your own wedding budget, you may make decisions that bring you closer to that total — even if a $10K wedding is more aligned with your savings and taste.

The most common wedding regret? Spending too much money.

15% of respondents said their biggest wedding regret was spending too much money. Other common wedding regrets:

•   Type of wedding (traditional, elopement, courthouse): 10%

•   Letting other people dictate wedding decisions (guest list, location, bridal party): 10%

•   Drinking too much the night of the wedding: 9%

•   The guest list: 8%

You may have heard of a phenomenon called the “vacation mindset,” which drives travelers to splurge on special purchases they wouldn’t consider on their home turf. Well, a similar wedding mindset can push couples to indulge an uncharacteristic desire for luxury. “It’s a once-in-a-lifetime event! Your wedding should be as big as your love for each other!”

After the wedding, as the bills roll in, so does buyer’s remorse. And now, other big-ticket goals that took a backseat to the wedding — buying a home, having kids, expanding a business, or saving for the long term — now feel more urgent.

Nearly half (46%) of respondents who got married in 2020 or later had a nontraditional wedding (they eloped or got married in a courthouse).

•   9% of people eloped. Of those, 6% had a reception with friends and family later.

•   25% of respondents got married in a courthouse. Of those, 18% had a reception with friends and family later.

The pandemic likely drove many couples to forgo big group events in favor of smaller celebrations. But there are other reasons behind the popularity of nontraditional weddings, according to several wedding vendors we spoke to:

Financial goals:
“It’s no surprise that couples might want to scale back their wedding,” says Jim Campbell, founder of Honeymoon Goals. “They don’t want to spend years saving for an elaborate event when they could be saving for other things instead, like traveling together.”

Time:
“The last few years have shown people how much they value their free time,” observes Maddie Ward, of Sonnet Weddings. “Elopements and courthouse weddings are definitely lower-cost, but there’s also much less of a time investment in planning. The prospect of spending a year or more involved in a time-intensive endeavor with your partner has many people looking at alternatives.”

Stress:
“The No. 1 reason to scale back to a micro wedding or elopement is stress!” insists Lee Ramsay, of Lee Ramsay Events. “More guests means more money, and more money means more problems. Save your dollars, and avoid the headache of attempting to make everyone happy.”

The venue (23%) was among the biggest wedding expenses.

Of those who said the venue was the most expensive, the most commonly reported cost was $10,000 (11% of respondents). The most expensive venue cost reported? $500,000.

It’s safe to say that those who spent $10K on their venue had higher overall budgets. Those with smaller wedding budgets often got creative about the venue, choosing a park, beach, or private home or yard.

Other common ways people saved money on their wedding venue were:

•   Limiting the number of guests: 31%

•   Using buffet or family-style food service: 29%

•   Booking a venue that didn’t require additional rentals (chairs, tables, tents): 26%

Nearly two-thirds (62%) of respondents had expenses pop up that they weren’t prepared for.

The most common fee that snuck up on people? Marriage license and officiant fees: 23%.

Other common surprise costs reported by respondents:

•   Taxes and service charges: 17%

•   Pre-wedding events like the rehearsal dinner or welcome party: 15%

•   Meals for vendors: 13%

•   Overtime charges for vendors: 13%

•   Gratuities for vendors: 12%

•   Postage for stationery (invitations, RSVPs, thank you cards): 12%

82% of respondents who had a wedding planner said their planner helped them save money.

“Wedding planning is a lot like cooking. The more you do it, the better you get at it,” explains Jim Campbell. “The more weddings you plan, the better you get at saving money.”

According to The Knot, the average cost of a wedding planner is about $1,900. But a planner’s fee can vary widely widely depending on a number of factors:

•   Location: A destination wedding requires more coordination than a hometown ceremony.

•   Services required: A full-service planner costs more than someone hired to manage certain elements, such as the seating chart or budget.

•   Fee structure: Planners may charge a flat fee, hourly rate, or a percentage of your overall budget.

Only 25% of our respondents hired a wedding planner. (Another 13% said a planner was included with their venue.)

Ryan Mayiras, of Candid Studios wedding photography, thinks many couples don’t need a wedding planner. “Believe it or not, we recommend that most of our customers skip the wedding planner step. Good vendors will go out of their way to help couples plan their wedding,” he says. “We have a collection of timeline templates that we send to our customers for reference. They can skip the planner and go with a day-of coordinator instead. A coordinator is more affordable and will keep the event on schedule, so the couple doesn’t need to worry during the wedding itself.”

Who paid for the wedding?

39% of respondents said the couple paid for the total cost of the wedding on their own. Of this group:

•   70% said their wedding cost less than $10,000.

•   88% said it cost less than $30,000.

45% of respondents said their parents helped pay for the wedding. 27% said their partner’s parents helped pay.

Of those who said the food and drinks were the most expensive, the most commonly reported cost was $10,000 (10% of respondents). The next most commonly reported cost for food and drink was $1,000 (8% of respondents).

Those who said the rings were the most expensive reported a wide range of dollars spent. Regardless of the total wedding budget, many couples (35%) splurged on their rings. Here were some of the most commonly reported costs:

•   $300: 5%

•   $500: 7%

•   $1,000: 8%

•   $2,000: 7%

•   $2,500: 5%

•   $3,000: 6%

•   $5,000: 7%

Popular money-saving tactics

The most common ways people saved money on their wedding attire:

•   Shopped around for deals: 33%

•   Bought a dress off the rack: 26%

•   Rented suits: 23%

18% of people said they didn’t try to save money on attire.

The most common ways people saved money on their wedding vendors:

•   Did their own hair and makeup: 38%

•   Hired a friend to do photography/videography: 32%

•   Didn’t provide transportation for wedding party or guests: 30%

The most common ways people saved money on their wedding decor, stationery, and gifts:

•   DIYed decor: 26%

•   Didn’t give gifts to parents: 25%

•   Didn’t give gifts to out of town guests: 24%

Ashley Meyer of Meyer Photo Video offered other money-saving tips:

•   “Skip traditional paper invitations and stamps, and opt for email invitations.

•   “Save a few hundred dollars by asking a close friend or family member to get ordained online to officiate your wedding.

•   “Join local bridal Facebook groups to buy discounted wedding items from couples who already tied the knot. Couples sell everything from their wedding dress and veil to candles and signage.”

What couples splurged on

The most common splurge was the rings (35%). Other wedding items that respondents splurged on:

•   The food: 32%

•   The dress: 27%

•   The drinks: 23%

•   The venue: 20%

Many wedding planners we spoke with recommended splurging on photos. Yet only 17% of respondents said they splurged on photography/videography.

The real takeaway? Couples don’t have to splurge on anything. You may feel better after your big day if you save your splurging for a new home or fat retirement account.

Financing a Wedding

Should you need a bit of financial assistance to put your wedding savings over the top, a personal loan is a better option than high-interest credit cards. With low rates and no fees required, SoFi can put those final funds at your fingertips the same day as your approval. That way, rather than anticipating how you’ll pay the bills, you can relax and enjoy your wedding.

Learn how SoFi can help you finance your big day.

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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.

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.

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.

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Margin loans are a type of loan that an investor takes out from a brokerage to buy investments. An investor typically borrows from a brokerage if they don’t have the cash balance in their trading account to cover the cost of a trade or investment – so, they use credit from their brokerage to cover the costs.

While there are risks associated with using margin and margin loans, they can also increase an investor’s purchasing power and bolster potential returns.

What Is a Margin Loan?

A margin loan is a loan from your brokerage to pay for securities that you can’t cover with cash. Similar to any other loan, you must apply for the account and be approved before you can borrow funds; and your brokerage will charge interest on any funds you borrow.

Having a margin account by definition enables you to take out a margin loan (the two are synonymous in many ways). Having the flexibility to buy securities on margin gives many traders the ability to take positions they might not have been able to afford otherwise. In fact, margin loans are a cornerstone to putting together effective day trading strategies, for advanced investors.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Understanding Margin Loans

Understanding margin trading can be tricky, but for the average investor, all you really need to know is that a margin loan is essentially a short-term financing solution. If you want to buy securities, but don’t have the cash in your account, your brokerage may allow you to buy those securities using credit. It’s similar to a line of credit, in that way.

So, that’s what margin debt is: The result of a margin loan, in which a trader borrows money to buy securities.

How Margin Loans Work

While we’ve mostly been discussing margin loans in terms of trading and investing, they could be used for any purpose. But almost always, a margin loan is used to buy securities.

As for the process of how they actually work: A margin loan is more or less like any other loan. To get one, you’ll need to apply and qualify for margin on your brokerage account (typically called a “margin account”).

Margin Accounts and How They Work

Like other forms of lending, margin loans have strict criteria. In addition, these accounts are governed by industry regulations as well as the policies of individual institutions, so be sure to understand how your desired margin account works. Each brokerage has different rules and eligibility requirements, and FINRA, for example, also requires you to deposit a minimum of $2,000 or 100% of the security’s purchase price, whichever is less. This is the “minimum margin.” Some firms may require you to deposit more than $2,000.

If you’re approved for a margin account, you’re able to trade using a margin loan — up to a certain amount. According to Regulation T of the Federal Reserve Board, you may borrow up to 50% of the purchase price of securities that can be purchased on margin.

This is known as the “initial margin.” Some firms require you to deposit more than 50 percent of the purchase price. (Also be aware that not all securities can be purchased on margin. Only those deemed “marginable” can be traded on margin.)

If you have $5,000 in your brokerage account, and you want to buy stock X, which is valued at $50 per share, with a 50% margin you could buy 50% more than your cash balance: 200 shares instead of 100. But half of those (100 shares) would’ve been purchased on margin — so, you’d need to settle up your account at some point, if or when you decide to sell your shares (hopefully for a profit).

How Margin Interest Works

The other important thing to remember about margin loans is that they are, like pretty much all loans, subject to interest charges. Your brokerage is going to charge you for the money you borrow.

Margin interest is a big topic unto itself, but the key takeaway is to know that you’ll be on the hook for paying your brokerage back for the money you borrow, plus interest charges.

You’re probably thinking: “Can I avoid paying margin interest?” The answer is that it depends on how fast you can pay your margin balance back. Most brokerages will charge interest by the day and add the charges to your account monthly. So, if you have cash or can sell securities and pay your balance off before interest accrues, it’s possible.


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Margin Loan Pros and Cons

Marginal loans can be highly useful for traders and investors. But like almost any financial instrument, margin loans have their pros and cons.

The biggest upside of margin is that it can open up a new swath of investing choices for traders. That means increasing their buying power, and allowing them to buy securities that may have otherwise been too expensive. This can increase potential profitability, too.

Conversely, traders who aren’t careful can’t quickly find themselves in debt if one of their trades backfires.

There are also interest charges to consider, as discussed. And if things really go sideways, some traders may experience a “margin call,” which is when your brokerage sells your assets without warning to settle up or get your account balance back within its requirements.

Here’s a quick rundown:

Margin Loans: Pros & Cons

Pros	Cons
Increased trading capacity	Traders can accumulate debt
Traders can buy pricier securities	Interest charges
Increased potential gains	Potential margin calls

Typical Margin Loan Rates

Margin loan rates, or, the interest rate charged by a brokerage for using margin, vary. Brokerages make the information available to traders and investors, so finding what types of margin loan rates you’re subjected to usually just requires a little research (or a call to your broker).

As mentioned, a brokerage will probably charge different interest rates depending on your overall margin balance, and how much you’ve borrowed. Lower balances are typically charged higher interest rates.

Here are some hypothetical examples: Let’s say Brokerage ABC’s margin interest rates vary between 4% and 8%, depending on the trader’s balance. Traders using up to $24,999 in margin will be subject to the highest interest rate (8%), whereas traders with more than $1 million in margin debit are subject to the 4% rate.

Brokerage B, however, has a different scale, with traders in margin debt up to $24,999 subject to 8.5% interest, and those with balances between $500,000 and $999,999 subject to 6.5%.

So, while brokerages do vary in what they charge for margin loan rates, they tend to be similar. To know your exact rate, contact your brokerage, or look up the current rate schedule on the company’s website.

The Takeaway

Margin loans are similar to any other type of loan, but are typically used for the purpose of buying stocks or other securities. Once you’ve applied for and been approved for a margin account, which is akin to adding a line of credit to your existing brokerage account, you’ll have the flexibility to buy more investments than if you were relying only on cash.

That said, you’re on the hook for repaying the money you’ve borrowed, with interest. If you’ve made a profitable investment, this shouldn’t be a problem. But if you invest in stock X on margin, say, and the price drops, you would still owe the full amount you’d borrowed to buy the stock, plus interest.

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FAQ

Can you withdraw a margin loan?

Yes, it’s possible to withdraw a margin loan, although the specifics will depend on an individual brokerage, as will any applicable interest charges.

Are margin loans a good idea?

Margin loans can be useful for many investors and traders, and whether or not they’re a good idea will depend on the specific individual considering taking one out. They do have risks, but upsides, too.

How do I pay back my margin loan?

The simplest ways to pay back margin loans are to either deposit cash into your brokerage account to get the balance back to zero, or to sell holdings that will result in a positive or neutral balance.

How much collateral is required for a margin loan?

The collateral required to take out a margin loan depends on a specific brokerage, but it’s not uncommon for brokerages to require somewhere between 30%, 40%, or 50%.

What happens if you can’t pay back a margin loan?

If you can’t pay back a margin loan, the brokerage will likely reach out to see what can be done, or lock you out of your account. Further, it could end up liquidating securities in your portfolio in order to cover the debt.

Photo credit: iStock/Sergey Nazarov

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

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

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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