If you’re considering a small business loan, it’s important to familiarize yourself with the different types of small business loan fees. In addition to interest rates, fees can impact how much a small business loan ultimately costs.
Lenders charge fees on small business loans to cover a variety of costs, such as loan application and origination, check processing, and underwriting, and you could also face fees for late payment or prepayment. Which types of fees apply will vary depending on which lender you use and the type of loan you get.
Keep reading to learn more about the different types of small business loan fees and additional funding options available for small businesses.
Key Points
• Types of small business loan fees include application fees, origination fees, underwriting fees, and servicing fees.
• Origination fees are typically charged as a percentage of the loan and are deducted from the total loan amount.
• For Small Business Administration (SBA) loans, borrowers may be responsible for a guaranty fee, which covers the government’s guarantee of a portion of the loan.
• Some lenders charge a fee if you repay your loan early. While early repayment saves on interest, prepayment penalties can offset those savings, so it’s essential to review your loan agreement carefully.
• In addition to small business loans, businesses can acquire funding through family and friends, crowdfunding, or by using credit cards.
Why Choose a Small Business Loan?
No matter how fantastic an idea may be, in most cases, it can’t become an actual business without the working capital to get it off the ground. If you’re not yet ready to pitch investors and don’t have the personal funds to bootstrap your business, you may want to learn about how a small business loan can help you turn your business idea into a reality.
Of course, small business loans are for more than just startups. Whether you’re looking to hire more employees, purchase more equipment or inventory, or just scale your idea from your bedroom to a coworking space, small business loans can provide the capital to make it happen.
Some reasons a small business loan may be right for you include:
• You want to build business credit, potentially allowing you to qualify for larger loans in the future.
• You want to scale your business.
• You want to make your business more efficient with new equipment.
• You want to purchase more inventory.
• You want to hire and train more employees.
Before taking out a small business loan, though, it’s important to ensure you have the financial foundation to manage your loan debt.
Lenders incur certain fees when processing your application (e.g., credit checks and property appraisals). This fee covers those costs, and it will apply regardless of whether your application is approved.
Origination Fee
Lenders charge origination fees to cover their administrative costs, such as phone calls, emails, and interviews necessary to finalize a small business loan. The amount of this fee varies from lender to lender.
Check Processing Fee
If you make your loan payments via check, you may be charged a fee to cover the time and labor it takes to process a check. You may want to keep this in mind when deciding how you’ll make your loan payments.
Guaranty Fee
If you’re taking out a loan through the Small Business Administration (SBA), you’ll likely have to pay a guaranty fee. While the SBA guarantees loans, it doesn’t make loans, and thus generally assesses this SBA loan fee for its involvement.
Late Payment Fee
Like many loans, small business loans typically charge a fee when you make a late payment. You’ll want to ensure you set up a plan to make your loan payments on time to avoid this fee.
Underwriting Fee
The process of underwriting can be tedious — your lender needs to comb through your business’s finances and review market research and historical trends. The underwriting fee covers the cost of performing this task. It could either be charged as a percentage of the loan amount or a flat fee.
Prepayment Fee
Some lenders charge you for paying your loan off too early. They may do this for a variety of reasons, but one might be because they lose money in interest charges when you pay your loan principal before it’s due. This is an important fee to be aware of when mapping out your payment plan.
If these fees don’t sit well with you, there are other options to consider that may make funding your business more accessible to you.
Family and Friends
Many people start their business with family loans, which is essentially money borrowed from family and friends. Using these individuals as initial investors can help you stay out of commercial debt, meaning that you can wait to apply for a small business loan when you might need to borrow a larger sum.
However, going into business with loved ones could be a risk. It might sour the relationship if things go south.
Crowdfunding
A number of small businesses have successfully been funded through sites such as Kickstarter, GoFundMe, and Indiegogo. A great idea with a strong marketing plan could generate enough excitement and financial support to get things going.
Keep in mind that crowdfunding sites generally require a percentage of the funding received. Additionally, there could be a risk of idea theft or plagiarism by putting your idea out there early.
Credit Card
You could turn to credit cards as a quick route to getting capital for your business without a lengthy application process. However, interest rates may be high. Further, carrying significant credit card debt could potentially impact your credit score, affecting your future chances of qualifying for loans.
Small business loans can charge a variety of fees, including application fees, origination fees, underwriting fees, guaranty fees, and others. Some fees are avoidable, including bypassing check processing fees by opting for another payment method and steering clear of late fees through consistent on-time payments. Which fees will apply will ultimately depend on the lender and loan type, but fees can play a role in how much a small business loan ultimately costs.
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FAQ
What are the most common fees associated with small business loans?
Common fees include application fees, origination fees, underwriting fees, guaranty fees, and administrative fees. These charges can vary depending on the lender and loan type. It’s important to review the fee structure before committing to a loan.
How do origination fees impact the total cost of a loan?
Origination fees are typically charged as a percentage of the loan amount and are deducted from the loan proceeds. This means you’ll receive less than the total loan amount, effectively increasing the cost of borrowing.
What is a guaranty fee, and when is it applicable?
A guaranty fee is commonly associated with Small Business Administration (SBA) loans and is charged to cover the government’s guarantee of a portion of the loan. This fee is usually a percentage of the guaranteed portion and can add to the overall loan cost.
When comparing a personal loan vs. personal line of credit, both sources of funding can be used for a variety of expenses and typically require a hard credit check during the application process. However, there are also differences: specifically, in how the loan funds are disbursed to the borrower and how the credit is repaid.
Here, learn more about a personal line of credit vs. personal loan and how to decide which option might be right for you.
Key Points
• Personal loans offer a lump sum with fixed interest and payments, ideal for large, one-time expenses.
• Personal lines of credit provide flexible, ongoing borrowing with interest rates and fees assessed.
• Responsible borrowing includes timely repayments, low credit utilization, and avoiding high debt levels.
• Consider financial needs, interest rates, fees, and credit impact when choosing between options.
• Use calculators to compare total costs and make the best financial choice.
What Is a Personal Line of Credit and How Does It Work?
A personal line of credit (PLOC) is a type of revolving credit similar to a credit card. But funds are usually accessed by writing checks provided by the lender or requesting a funds transfer to your checking account instead of by using a card.
A PLOC typically allows the borrower to withdraw funds repeatedly, up to the credit limit. Any funds that are withdrawn are subject to repayment with interest. When they are repaid, they can be accessed again up to your particular credit limit. There may be a limit on the number of years the line of credit is available.
Note: SoFi doesn’t offer unsecured personal lines of credit at this time. However, we do offer personal loans and home equity lines of credit.
Additional points to know:
• Some lenders may assess fees associated with a PLOC. There may be a maintenance charge for inactive accounts. There may also be ongoing fees, monthly or annual, even if the PLOC is being used. Additional expenses may include application fees, check processing fees, and late fees, among others. It’s important to be aware of potential fees before you sign a PLOC agreement.
• Personal lines of credit are usually unsecured, although you may be able to put up collateral to get a lower interest rate. A home equity line of credit, or HELOC, is an example of a secured line of credit. In this case, the collateral is the equity you have built up in your home.
• Typically, a PLOC will be offered by a bank or credit union, and you might be required to have another account with the lending institution to be considered for a PLOC.
• If your line of credit is unsecured, the interest rate will probably be variable, which means it could go up or down during the loan’s term, and your payments could vary. But you’ll only be charged interest on the amount you withdraw. If you’re not using any PLOC funds, you won’t be charged interest.
If you expect to have ongoing expenses or if you have a big expense (like a wedding or home renovation) but don’t know what your final budget will be, this type of borrowing might be a useful financial tool.
A PLOC also may be the right fit if you need some flexibility with your borrowing. For example, self-employed workers who know they’ll be paid by a client but aren’t sure exactly when, can tap into their line of credit to pay expenses while they wait. They can pay that money back when they receive payment from the client, and they won’t have to use high-interest credit cards or borrow from other savings to make ends meet.
Of course, there are downsides to that easy-to-access money. Here’s a closer look:
• Since unsecured lines of credit are considered by lenders to be riskier than their secured counterparts, it can be more difficult to qualify at a lower interest rate.
• Once you have access, it may be tempting to use the funds for purposes other than originally planned. Keeping in mind the intended purpose for the funds may help you stick to it and not use the funds for other purchases.
Pros and Cons of Personal Lines of Credit
Having funds that can be accessed as needed can be helpful. But there are also some drawbacks to consider. Take a look at how the pros and cons stack up for a personal line of credit.
Pros of Personal Lines of Credit
• Easy access to funds.
• Open-ended vs. one-time distribution of money.
• Minimal limits on use of funds.
• Can be useful for ongoing expenses.
Cons of Personal Lines of Credit
• May have a higher interest rate than other forms of credit.
• Typically unsecured, so may be more difficult to qualify for than other forms of credit.
• Interest rate could be variable, presenting a budgeting challenge.
How Personal Loans and Lines of Credit Are Similar
Both a personal loan and a PLOC are typically unsecured, so borrowers aren’t putting an asset at risk if they use this form of financing. Both borrowing methods also involve paying interest and, in some cases, fees. And, as noted above, the application process for a personal loan vs personal line of credit is similar and involves a hard credit check.
A personal loan is a fixed amount of money disbursed to the borrower in a lump sum. If the loan has a fixed interest rate, as is typical for personal loans, the payments are in fixed installments for the term of the loan. If the loan has a variable interest rate, the monthly payments may fluctuate as the interest rate changes in accordance with market rates.
Because personal loan interest rates are typically lower than rates for credit cards, they’re often used to pay off other debts such as home and car repairs or medical bills, or to consolidate other higher-interest debts such as credit card balances into one manageable — and potentially lower — monthly payment with a credit card consolidation loan.
Here are some more ways these loans are often used:
• A personal loan can be a helpful tool for debt consolidation. If you can qualify for a personal loan that has a lower interest rate than your other outstanding debts, you may be able to save money in the long run by consolidating those debts. In order for this financial strategy to work, it’s important to stop using the old sources of credit to avoid going deeper into debt.
• A personal loan also could be a suitable choice for paying for a wedding or home renovation. But it’s important that you feel confident about being able to repay the loan on time and in full. If you don’t responsibly manage a personal loan — or any kind of debt, for that matter — your credit can be adversely affected.
• You can apply for a secured or unsecured personal loan. A secured loan, which is backed by collateral, is typically considered less of a risk by lenders than an unsecured loan. Collateral is an asset the borrower owns — a vehicle, real estate, savings account, or other item of value. If the borrower fails to repay a secured loan, the lender has the right to take possession of the asset that was put up as collateral. An unsecured personal loan is guaranteed only by the borrower’s signature, which is why it’s sometimes called a signature loan.
Here are a few more points about how the process of getting a personal loan can work:
• An applicant’s overall creditworthiness will be considered during the approval process. Generally, an applicant with a higher credit score will qualify for a lower interest rate, and vice versa. Other personal loan requirements may include steady income and a healthy balance of debt vs. income. Applicants who struggle with a limited credit history or erratic income can consider applying for a personal loan with a co-borrower.
• Some lenders charge personal loan fees such as origination fees or prepayment penalty fees. Before signing a loan agreement, it’s important to be aware of any fees you may be charged.
Pros and Cons of Personal Loans
When you need a set amount of money for an expense, a personal loan can be a good choice. Along with the benefits of using this financial tool also come a few drawbacks to consider.
Pros of Personal Loans
• May be a good choice for large, upfront expenses.
• Unsecured personal loans may have higher interest rates than other forms of secured credit.
• May need a higher credit score to qualify for lower interest rates.
• If not used responsibly, it can add to a person’s debt load instead of alleviating it.
• May have fees.
Major Differences Between Personal Lines of Credit and Personal Loans
When you’re looking for the right source of funding for your financial needs, it can help to compare different types. Here are some specifics to consider when looking at a personal line of credit vs. personal loan:
Personal Line of Credit
Personal Loan
Typically has a fixed interest rate
More likely to have a variable interest rate
Fixed interest rate may make it easier to budget payments
Variable interest rate may present a budgeting challenge
Fixed, lump sum
Open-ended credit, up to approved limit
Interest is charged during entire loan term
Interest is charged only on withdrawn amounts
Revolving debt
Installment debt
Considering the Type of Debt
When you’re thinking about applying for a personal loan vs. line of credit, it’s important to consider the effect borrowing money can have on your credit score. If you borrow money without a repayment plan in place, you could run into trouble no matter which borrowing option you go for. But each is looked at differently by the credit bureaus.
A personal line of credit is revolving debt, which means it will factor into your credit utilization ratio — how much you owe compared to the amount of credit that’s available to you. This can count as the second most weighty factor (at 30%) toward your score.
For a FICO® Score, keeping your total credit utilization rate below 30% is recommended. That means if your credit limit is $15,000, you would use no more than $4,500.
• Using a large percentage of your available credit can have a negative effect on your credit score. And lenders may see you as a high-risk applicant because they may assume you’re close to maxing out your credit cards.
• Using a small percentage of your available credit can work in your favor. If your credit utilization ratio is low (under 10%), it signifies to potential lenders that other lenders have determined you to be a good risk, but you don’t need to use the credit that’s been extended to you.
• Having a low credit utilization rate by using just a little of your available credit could actually have a more positive effect on your credit score than not using any of it at all. Lenders generally look for signifiers of a healthy relationship with credit.
A personal loan is installment debt and isn’t considered in your credit utilization ratio. In fact, if you pay off your revolving debt with a personal loan, it potentially can lower your credit utilization ratio and have a positive effect on your credit score. A personal loan also can add some positive variety to your credit mix — something else that’s calculated into your credit score.
Before you decide to obtain a personal loan vs line of credit, it’s wise to compare lenders. Look at the annual percentage rate and whether it’s fixed or variable. You can also take into account any fees you might have to pay, including origination fees, annual fees, access fees, prepayment penalties, and late payment fees.
Estimating the total cost of the loan until it’s paid in full, including the principal loan amount, interest owed, and any fees or penalties you could potentially be charged, will help you figure out how much the loan will actually cost you.
Alternatives to Personal Loans and Lines of Credit
If you examine the difference between personal loan and line of credit and decide that neither feels like the right fit, you could consider these alternatives:
• Credit card A credit card offers flexible access to funds to pay for bills as they come. Unfortunately, credit card interest rates tend to be higher than those for personal loans. If you can find a credit card that has a low (or 0%) initial APR offer and you can be sure you’ll pay your balance off before the initial offer ends, that could be a cost-efficient alternative to a PLOC or personal loan.
• Home equity loan or home equity line of credit (HELOC) If you own your home and have some equity built up, you might be able to borrow against that equity with a home equity loan or HELOC. These options tend to have lower interest rates than either personal loans or personal lines of credit. The tradeoff is that they are secured by your home equity, so if you can’t repay what you borrow, with interest, you risk foreclosure.
• Borrow from a friend or family member This type of loan does have some advantages: It likely won’t require a credit check, and you might have a low interest rate and very flexible repayment terms. But if you don’t repay the loan as promised, a personal relationship is at stake.
• Retirement plan loan If you’ve stowed away money in a 401k, 403(b), or 457(b) retirement plan, you may be able to borrow up to $50,000 or 50% of your balance, whichever is less. You have five years to repay your loan and will need to make quarterly payments (rules are different if you use the money to buy a home). IRS guidelines govern this type of loan, so consult your tax advisor to ensure you follow the rules.
The Takeaway
Deciding when and how to borrow money can be a tough decision. Personal loans and personal lines of credit each have their pros and cons. Personal lines of credit allow you to borrow up to a credit limit, while personal loans disburse a lump sum. Interest rates, fees, and other features may vary. It’s wise to consider your needs and options carefully, reading the fine print on possible offers.
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 it better to get a loan or use a line of credit?
Loans can be better suited for fixed expenses or one-time needs, while lines of credit can offer flexibility for repeated borrowing. That is the key difference between personal loan and line of credit to be aware of when making your decision, but it’s not the only one: Loans often carry lower interest rates but may involve higher upfront fees; lines of credit, on the other hand, may cost more over time due to variable rates and fees.
What are the downsides of a line of credit?
The interest rates for a personal line of credit may be higher than those charged on other sources of funding, and if the rate is variable, that can make budgeting more difficult. Also, there can be fees, such as an annual or monthly maintenance fee and transaction fees.
Does a line of credit hurt your credit score?
A line of credit can involve a hard credit pull when you apply, which can temporarily lower your credit score by several points. After that, how you manage your line of credit can determine how your credit score is impacted. Keeping your usage low and always paying on time can help build your score. Taking on too much debt and missing your payment due dates can lower your score.
What is the typical borrowing limit for a personal line of credit vs personal loan?
Generally speaking, a personal line of credit will have a lower borrowing limit than a personal loan. Some personal loan lenders allow loans of up to $50,000 or even $100,000. A PLOC might top out at $20,000. However, remember that if you borrow with a personal line of credit and then repay what you have borrowed, you can borrow again up to the limit so long as you are still in the borrowing phase of the agreement.
Can you have a personal loan and a personal line of credit at the same time?
It is sometimes possible to have a personal loan and a personal line of credit at the same time. When qualifying applicants for either of these borrowing methods, lenders consider the credit score but also the debt-to-income ratio — the level of debt relative to income. If overall debt remains healthy, a loan and line of credit can coexist. For example, if an applicant with a healthy income is making on-time payments on a modest personal loan and then wishes to add on a personal line of credit, the math could work out in their favor.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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 and how to draw up a personal loan agreement should you decide to do it yourself.
Key Points
• A personal loan agreement outlines terms and conditions, providing legal protection for both the lender and the borrower.
• Key elements include parties, loan amount, interest rate, repayment terms, default provisions, governing law, and signatures.
• Steps to write a personal loan agreement include choosing to DIY or work with a lawyer, gathering details, agreeing on terms, listing payment and legal details, and signing.
• Additional documents for loan approval typically include proof of identity, income verification, and proof of address.
• A personal loan agreement is legally binding and enforceable in court if obligations are not met.
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: These include the lender and borrower, including their legal names and addresses.
• Loan amount: This is 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. If you don’t understand APR vs interest rate differences, this is a good time to learn.
• Repayment terms: These include how and when the loan will be repaid, including the payment schedule, payment frequency, and loan term.
• Default provisions: These are 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: This specifies 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.
Secured vs Unsecured Personal Loans
Most personal loans are unsecured, meaning no collateral is required from the borrower. But at times, a personal loan can be secured by property, such as a car. Collateral can also be an asset such as a savings account or certificate of deposit. Collateral might be required if a borrower has a less-then-stellar credit score.
When a loan is secured with collateral, the lender can take possession of the collateral if the borrower fails to make their loan payments.
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
If you’ve been wondering how to draw up a personal loan agreement, here are the usual steps:
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. Both are often at no cost or sometimes 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. You can use a personal loan calculator to see what the monthly amount should be.
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. What is a high interest rate vs. a low one will depend on the market so keep an eye on published rates.
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.
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.
• The contract should have a severability 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.
• The contract should list any penalties associated with the personal loan, such as late fees that may be assessed, at what point the loan will go into arrears or default, or other scenarios.
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.
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.
SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.
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. Depending on the specifics of your situation, this document can be written by hand, drafted on a computer, or created using a downloaded template.
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. It establishes legally enforceable terms for the lender while safeguarding the borrower by ensuring the lender cannot demand payments beyond the agreed-upon principal, interest, and fees.
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 on 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.
This article is not intended to be legal advice. Please consult an attorney for advice.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Three ways to consolidate and pay off debt are a balance transfer credit card, a personal loan, or a combination of the two. Which option is best depends on the type and amount of debt you have and your ability to pay off that debt over time.
For instance, a balance transfer credit card might be a smart choice if you have good credit and debt across a few credit cards and are prepared to pay the debt off within the next 12 to 18 months. On the other hand, a personal loan might be better if you have multiple high-interest debts and need more time to pay them off.
Read on to learn more about the choice between a balance transfer or personal loan, how a personal loan works, the pros and cons of each option, and how to leverage the benefits of both.
Key Points
• Balance transfer cards and personal loans are both ways to pay down debt, and you can use both simultaneously.
• Balance transfer cards can allow you to pay down debt with no or low interest for a period of 12 to 18 months.
• Personal loans can allow you to consolidate debt into a single, more convenient loan, often at more favorable rates.
• Each option has its advantages and disadvantages, so research is recommended.
• For some people, a combination of a balance transfer card and a personal loan will be the best way to deal with their debt.
What Is a Personal Loan?
A personal loan is a lump sum borrowed from traditional banks, credit unions, or online lenders that you agree to pay back over time, with interest. The borrower will make regular payments, usually on a monthly basis, to the lender over a fixed period of time until the loan is repaid.
Unlike many other types of loans, personal loans can be used for just about anything. Often, these loans are used to resolve short-term cash flow problems, cover unexpected expenses during an emergency, or pay for large expenses.
Personal loans for debt consolidation involve a borrower taking out a personal loan and using it to pay off balances on high-interest credit cards and other debts. Because personal loans typically have lower interest rates than credit cards, the borrower can potentially save money while paying off their debt.
Though there are different types of personal loans, they’re most often unsecured loans. This means they’re not backed by collateral as, say, a mortgage is backed by the borrower’s house. As such, the lender will usually assess your creditworthiness and financial situation when determining whether to approve you for the loan.
A balance transfer credit card is a credit card that allows you to transfer balances from other accounts. Let’s say an individual has outstanding balances on three or four high-interest credit cards. They could transfer that debt to a balance transfer credit card that charges a lower or even 0% annual percentage rate (APR).
If a lower rate is offered, it will usually last for a limited period of time — 12 to 18 months is the norm. Should that person pay off their debt within that window, they could save money on interest and have all of their payments go directly toward paying down the principal. After the promotional period ends, however, the interest rate could be quite high, usually higher than the interest rate on a personal loan.
Balance Transfer vs Personal Loan for Debt Consolidation
When deciding on either a balance transfer credit card or personal loan for debt consolidation, consider the level of debt you have and your capacity for monthly payments.
A balance transfer credit card might be the right choice if you’re confident you can pay off your debt within the low-APR introductory period. However, a personal loan might be the better choice if you find it difficult to resist spending on a credit card, or if you have debt that needs to be paid off over a longer period of time. Personal loans are also preferable if you want a fixed interest rate and would like to know ahead of time how much your monthly payment will be, as it’s going to be the same each month.
Either way, debt consolidation is often a good idea, as it can reduce the overall amount of interest that consumers pay and help clear debt more expediently.
Balance Transfer Credit Card vs Personal Loan
Balance Transfer Credit Card
Personal Loan
Types of Debt You Can Consolidate
• Generally best for credit card debt
• Good for multiple types of debt
Interest Rates
• Can offer a lower intro APR, after which the rate will likely be higher than a personal loan
• Generally a variable rate
• Tends to have lower rates compared to credit cards
• Typically a fixed rate
Fees
• One-time balance transfer fee that’s usually 3% to 5% of the amount transferred
• One-time origination fee ranging from 0% to 8% of the loan amount
Repayment Terms
• Promo APR offers generally limited to 18-21 months
• Can have terms up to 84 months or longer
Payments
• Make only the minimum required payment
• Fixed payments over a set period of time, with a predetermined payoff date
Credit Score Requirements
• Generally need at least good credit (670+) to qualify
• Better rates and terms reserved for those with good credit
Credit Score Impacts
• Might increase credit utilization, which can negatively affect credit
• Might lower your credit utilization, which can help credit
How to Decide Between a Balance Transfer and a Personal Loan
As you explore a balance transfer vs. personal loan, there are some important considerations. As noted above, if you don’t feel you can pay off your debt within the 12- to 18-month low-interest window that most balance transfer cards permit, you may want to pursue a personal loan. Consider the size of your debt and the amount you would be allowed to transfer to a balance transfer card. If you owe more than you can comfortably pay in a year, a personal loan could be the better option.
Do the Math to Compare Your Options
Restructuring debt with personal loans is quite common, and if you are thinking about taking this approach, you can use a personal loan calculator to compute the amount you would pay each month and your total interest paid over the life of the loan. For example, if you took out a $20,000 personal loan to settle your credit card debt and repaid that loan over 36 months at a rate of 8.00%, you would make a monthly payment of $627 and have a total interest payment of $2,562.
It can be more difficult to estimate the cost of paying off debt with a credit card, as rates change periodically. But if you are being offered a 0% APR balance transfer card, then you would need to look at any fees associated with the balance transfer (5% would not be unusual). If you transferred $20,000 onto a 0% APR card and paid a 5% fee, you would pay $1,000. At first, it might seem that the balance transfer option is more affordable. But this is only the case if you can pay off the entire balance before the 0% APR ends, because when it ends, you could face an interest rate of 18.00% or higher.
Pros and Cons of Personal Loans
Both balance transfer credit cards and personal loans can be good options depending on the amount and type of debt you have. If you need more than 12- to 18 months to pay off your debt, personal loans generally offer lower APRs. Personal loan terms vary, but it’s possible to borrow up to $100,000 and pay off the balance over several years.
However, your interest rate will also depend on your credit score — a low score can mean a high interest rate. It’s smart to compare a few personal loan rates to find the best offers.
Pros and Cons of Personal Loans for Debt Consolidation
Pros
Cons
Those with good credit can secure lower APRs.
The interest rate may be high if you have bad credit.
Loans can be large enough to consolidate many types of debt.
It could be a few years before your debt is fully paid off.
Budgeting is easier with fixed interest rates and monthly payments.
There’s less flexibility in your monthly payments, as they’re fixed.
You can choose from different repayment terms.
An origination fee may apply, which could be up to 8% of the loan amount.
Pros and Cons of Balance Transfer Credit Cards
If you have debt on only a few credit cards, a balance transfer credit card might allow you to save on interest while you pay it down. These cards can offer lower or even 0% APRs for a certain period of time, usually for 12 to 18 months. This gives you time to pay off the total balance transferred from other cards.
However, suppose you do not pay off the balance within that window. In that case, the interest rate could rise above the rate you were initially paying before you consolidated the amounts to your balance transfer credit card.
Pros and Cons of a Balance Transfer Credit Card for Debt Consolidation
Pros
Cons
You can get a low or 0% APR for an initial period, thus saving on interest.
You need a good to excellent credit score to qualify.
Once your debt is paid off, you have an additional open credit line, which may boost your credit score.
You may not be able to transfer the full amount of your debt to the card.
Some balance transfer credit cards offer rewards, points, or other perks.
There may be a balance transfer fee, which generally is 3%-5% of the balance transferred.
You’ll have the flexibility to pay off as much as you’d like each month with no fixed payment schedule.
If you don’t pay off your debt during the promo period, the interest rate may become higher than that of your initial debt.
Using A Balance Transfer Credit Card and a Personal Loan
It’s not always necessary to decide between a personal loan vs. balance transfer credit card. A third option for debt consolidation is to use both a personal loan and a balance transfer credit card. You could use a balance transfer credit card to pay off as much high-interest credit card debt as you can at a low APR. Then, you’d take out a personal loan to pay off the rest of your debt at a lower interest rate than what you’re currently paying.
To figure out how much of a personal loan to take out in this scenario, add up your total debt. Next, calculate how much you would have to pay each month in order to pay off your debt in full by the end of the promotional APR.
For example, if you had $4,000 in credit card debt and a 0% APR that lasted for 18 months, you’d have to pay about $222 each month. If you weren’t able to pay that much, you could consider applying for a personal loan to pay off the remaining amount.
The Takeaway
Three ways to proactively consolidate and pay off debt are to use a balance transfer credit card, a personal loan, or a combination of the two. In general, a balance transfer credit card is best for those with good credit and primarily credit card debt. Those with various types of debts and who need a structured debt payment plan may prefer a personal loan. A combination of both can suit a variety of situations.
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 is a balance transfer loan?
A balance transfer is a credit card transaction whereby debt is moved from one account to another. These cards often offer a 0% introductory APR for 12 to 18 months, which means any balances moved to the card could potentially be paid off interest-free. The downsides are that there is often a balance transfer fee, and there may be a limit to the total amount you can transfer to the new card. Explore a balance transfer credit card vs. personal loan to determine which is the most affordable way to manage your debt.
Does a balance transfer hurt your credit?
It depends. Opening a new credit card and transferring all your other credit card balances to it could push your credit utilization ratio to its limit, which would hurt your credit score. Your score is also negatively affected from the hard inquiry that results from applying for a new card. However, if you use a balance transfer credit card wisely and pay off all of your higher-interest cards, that will lower your credit utilization ratio and build your score.
Is there a difference between a loan and a balance transfer?
Either a balance transfer or personal loan can be a way to consolidate debt, but they are not the same thing. A debt consolidation loan is where you take out a loan to pay off your existing debt, while a balance transfer allows you to move your existing debt onto one credit card. Each option has unique pros and cons and exploring a personal loan vs balance transfer is a key step in managing debt.
What credit score do you need for a balance transfer or personal loan?
A good to excellent credit score of 670 or higher is generally required for a balance transfer credit card that offers an attractive low interest rate. It may be possible to obtain a personal loan with a credit score of 580 or better.
How long does a balance transfer take to complete?
It’s not unusual for a balance transfer to a new credit account to take two to three weeks to be completed, though some transfers are accomplished in just a few days. How long a balance transfer takes will depend on several factors, including how many different banks or credit card companies you are transferring from and whether or not you are setting up a new credit account or using an existing one. During the transfer process, it’s important to keep tabs on your old and new accounts and to continue making any payments that are due.
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If you are getting a secured personal loan, you’ll need to use collateral, which often can be in the form of money in a bank account, investments, real estate, or a vehicle. When you put up this kind of asset, the lender can feel more confident about offering the loan. If you, the borrower, were to default on the loan, the lender knows it can claim the collateral. For the more common unsecured type of personal loan, the amount doled out is only secured by a borrower’s promise to repay the funds, rather than collateral.
Learn more here about how secured personal loans work and what can you use as collateral for a loan.
Key Points
• Secured personal loans require collateral, such as real estate, vehicles, bank accounts, investments, or valuable items, providing lenders with an asset to claim if the borrower defaults.
• Potential advantages of secured loans include access to larger loan amounts, lower interest rates, and more favorable terms, especially for borrowers with lower credit scores.
• Risks of secured loans involve potential loss of assets if payments are missed, as well as a longer and more complex application process due to asset valuation requirements.
• Unsecured personal loans do not require collateral, making them less risky for borrowers, but generally offer smaller loan amounts and higher interest rates due to increased risk for lenders.
• Building credit before applying for a loan can help borrowers qualify for unsecured loans, avoiding the need to put valuable assets at risk while still accessing competitive rates and terms.
Common Types of Collateral for Secured Loans
Wondering what can I use as collateral for a personal loan? If you do opt for a secured type of loan, here’s what can usually be used as collateral:
• Real estate you own. You can use a house as collateral for loan or you can use other real estate such as land or a commercial property.
• Vehicles (typically cars and trucks, but boats are possible, too)
• Bank accounts and investments
• Jewelry, art, antiques, or collectibles
What Can’t Be Used as Collateral
There are some assets that a lender typically won’t accept as collateral for a personal loan. These include:
• Real estate that is heavily mortgaged
• Retirement accounts, such as a 401(k)
• Future wages
• Hard-to-value or hard-to-sell art or antiques
Lenders typically like to see as collateral items that can be liquidated quickly, for immediate cash in the event that a borrower defaults on a loan. As you’re thinking about what can be used as collateral for a personal loan, you’ll want to avoid any asset that you plan to sell before the personal loan will be paid off, as entangling that asset in your loan will restrict your ability to dispose of it.
Secured Loans: Personal Loans With Collateral
Requiring collateral for most types of personal loan is uncommon, but not unheard of, depending on the kind of personal loan you get. Generally, secured loans offer more competitive interest rates, larger loan amounts, and more favorable terms.
But if a borrower fails to repay their secured loan, they’ll receive a notice letting them know they’re in default and giving them an opportunity to become current on payments. If the borrower doesn’t pay up, that can lead to loss of the collateral.
There’s a wide range of possibilities when it comes to types of collateral that can be used to secure a personal loan. What can you use as collateral for a loan? Some common examples of loan collateral include:
• Real estate: One option for personal loan collateral is to use a house as collateral for a loan or use other real estate you own, such as an investment property. Even if you don’t fully own your home, you may be able to use the equity you do have as collateral. Just make sure you understand the risk involved because you could lose your home if you’re unable to make payments.
• A vehicle: When you use an auto loan to purchase a car, the vehicle is the collateral. But some lenders allow you to use the equity you have built up in a vehicle to get funds. This may be a better choice than, say, a payday loan. However, you risk losing that vehicle if you can’t make the payments.
• Bank or investment accounts: You might be able to use a certificate of deposit (CD) or other investment account as collateral. Just know that using these accounts as collateral might prevent you from accessing the funds in the accounts, which is a downside to consider.
Beyond these more standard items, other things that could be used as collateral for a secured personal loan include savings accounts, fine art, jewelry, collectibles, and more.
If you’re struggling to come up with an asset that might be used as collateral and you don’t think you can qualify for an unsecured personal loan, one option might be to apply for a personal loan with a co-borrower.
Using Your Home as Collateral
There are several scenarios in which your home can be collateral for a loan. When you purchase a home using a mortgage, the property effectively serves as collateral. And if you obtain a home equity loan, you are borrowing against the equity you have built up in your house. A home might also be collateral for a large personal loan.
In any situation in which your home serves as collateral, it’s essential to have a plan in place to make payments on your loan, and to understand the risk to your home if you fail to repay what you have borrowed. In the event of default, using your home as collateral means you could lose your place.
Potential Advantages of Secured Loans
If you need to borrow a larger sum of cash, then you might find more success if you put up collateral. A borrower whose credit score isn’t as high as might be required for a riskier unsecured personal loan may find it easier to get approved for a personal loan that’s secured.
Plus, you might receive more favorable rates and/or terms because the lender has the security of knowing it can possess the collateral if the loan is not paid back. As a personal loan calculator can demonstrate, a lower interest rate can add up to savings quickly.
Downsides of Secured Personal Loans
The biggest downside of secured personal loans is that if you fail to make your payments, you could lose the asset that’s securing the loan. Given that houses, investment accounts, and vehicles are common examples of personal loan collateral, that could be a big blow.
Another downside of secured vs. unsecured personal loans is that the application process is generally longer and more involved. This is because the lender needs to assess the asset being put up as loan collateral to verify its value.
Unsecured Personal Loans
As mentioned, unsecured personal loans aren’t backed by collateral. Instead, lenders just need a borrower’s signature promising they’ll pay back funds (as well as a review of the applicant’s credit history and other financial fitness indicators, of course). Because of this, you may hear unsecured personal loans referred to as signature loans, good faith loans, or character loans.
Student loans are a type of unsecured loan, though they have their own unique terms and repayment options. So are many credit cards, although they tend to have higher rates than what’s typical on an unsecured personal loan. There are also personal loans for major life events, such as weddings or medical bills.
You can typically obtain unsecured personal loans on short notice. If the borrower has sufficient income for a loan and a good credit score and history (among other factors), rates can be competitive compared to those of secured loans.
And, of course, with an unsecured personal loan, you wouldn’t be tying up any assets or putting them at risk if you struggle with repayment.
As with secured personal loans, unsecured loans of this type can offer tremendous flexibility, such as using the funds as a vacation loan or for almost any other purpose.
Downsides of Unsecured Loans
Because unsecured loans are riskier for the lender, rates are typically higher than those of secured loans. Additionally, amounts available to borrow are usually smaller.
While it’s true that there isn’t an asset a lender can repossess for nonpayment, lenders can still take action on unpaid unsecured personal loans. Lenders can report the account as in default to the credit bureaus, send the account to collections, and take a borrower to court for nonpayment. This can significantly affect a person’s credit for years to come.
Building or Repairing Credit to Avoid Loan Collateral
If your credit score or credit history is preventing you from getting an unsecured loan, it might make sense to take time to work on your credit score. Strengthening a weak credit score doesn’t happen instantly, so cultivating good credit habits won’t be the magic solution if you need a loan now. But if you’d prefer not to put up an asset as collateral, it might be a worthwhile step prior to taking out a personal loan.
• Pay all existing loans on time, and make sure not to miss any payments.
• Get your monthly bills, such as your rent payments or utility bills, added to your credit report by a third-party service.
• Keep your credit utilization (meaning the total percentage of your available credit you’re using) below 30%.
• Get caught up on any outstanding balances or past-due debts.
• Limit applications for new accounts.
• Maintain older credit accounts, even if you only use them occasionally. They can help build the length of your credit history, which may help build your score.
• If possible, responsibly manage a mix of credit accounts, such as both lines of credit and installment loans.
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Making a Choice: Secured or Unsecured
Whether a secured or unsecured personal loan is right for you depends on your specific need, financial situation, and credit history, among other factors, though the common uses for personal loans apply to both.
Factors to Consider When Choosing a Loan Type
If you’re looking for higher borrowing limits and potentially lower rates, or if you know you may not feel your application is particularly strong, a secured personal loan could make more sense. Just think carefully about what asset you decide to put down as collateral, as you do need collateral for a loan of this type.
But if you have strong credit and don’t need to borrow as much money, an unsecured personal loan might make sense. That way, you won’t have to worry about loan collateral. Just remember that doesn’t mean you’re off the hook if you don’t repay the loan. Lenders can report the defaulted loan, put it in collections, and even take you to court.
While less common than unsecured personal loans, secured personal loans can be a useful option for some borrowers. They involve putting up collateral (such as bank accounts, investments, real estate, and vehicles), which can qualify you for lower interest rates and higher borrowing limits. Which kind of loan is right for you will depend on your particular needs and credit history.
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
Can you get a personal loan without collateral?
You can get a personal loan without collateral. These are called unsecured personal loans, and though they may have higher interest rates and lower borrowing limits than secured loans, they are the most common kind of personal loan.
Does the loan amount impact how much collateral is needed?
The loan amount a borrower requests often impacts how much collateral is needed. That is because the lender needs to know that it can recoup the amount of funds loaned if the buyer were to default. So for this reason, a $50,000 secured personal loan would require more valuable collateral than a $5,000 loan.
Do secured loans have lower interest rates than unsecured loans?
Typically, secured loans will have lower interest rates than unsecured loans. The reason: The presence of collateral means the loan is less risky for the lender than an unsecured loan.
How can I qualify for an unsecured personal loan?
To qualify for an unsecured personal loan, you usually need to prove you are creditworthy to lenders. That means having a solid credit history and score. While personal loans may be available to people with credit scores of 580 and up, the more favorable rates are typically reserved for those with scores of 700 and higher.
What happens if I default on a secured loan?
If you default on a secured loan, the lender can claim the collateral and sell it to cover the debt.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
