How a Personal Loan Can Boost Your Credit Score

Will a Personal Loan Build Credit?

One of the factors lenders look at during loan processing is the applicant’s credit score. It’s a good idea to review your own credit reports before applying for a loan to see if there are any errors that can be corrected and possibly increase your credit score, if needed.

If your credit score is not as high as you’d like it to be, it may seem counterintuitive to consider taking on debt to increase it, but it’s a method that has some merit. Making timely payments on a personal loan may have a positive effect on a person’s credit score. Let’s take a look at what factors go into calculating a credit score and how taking out a personal loan can affect it.

Does a Personal Loan Help to Build Credit?

If a borrower makes on-time, regular payments on a personal loan — or any loan, for that matter — that information will typically be reflected on their credit history and can be one way to build credit. It’s a good idea to ask the lender if they report payment history to the three major credit bureaus, Experian®, Equifax®, and TransUnion®. If the lender doesn’t report the information, it won’t affect the borrower’s credit positively or negatively.

Recommended: How to Build Credit Over Time

When Does a Personal Loan Help You Build Credit?

Someone who doesn’t have much of credit history or wants to improve their credit score because they understand the importance of good credit might wonder “Will a personal loan build credit?” It certainly can be one method to do so, but only if handled responsibly. A personal loan to build credit can be an effective tool if the payments are made regularly and on time.

The terms “credit” and “credit score,” while closely related, are not the same. Generally, when the term “credit” is used, it’s referring to a credit report, which is a summary of a person’s financial history. The information contained in a credit report is what affects your credit score. So, while the two are different, they’re used together in lending and other credit matters.

To see where improvement can be made in how you handle your finances, you can review your credit report for individual elements that figure into the calculation of your credit score. Credit score updates can happen every 30 to 45 days, depending on when lenders report payment information to the credit bureaus, and small fluctuations are normal.

Your Payment History

The way you handle debt is the most important factor in determining your credit score. It accounts for 35% of a person’s FICO® Score. How you’ve repaid — or not repaid — debt in the past is considered a good indicator of how likely you are to repay future debt and is something lenders look at closely.

Missing payments or making late payments on a personal loan might hurt your credit score.

Your Credit Utilization Ratio

Second only to payment history, having a large debt-to-credit ratio, also called your credit utilization ratio, can be a damaging factor to your credit score. It accounts for 30% of the total FICO Score and takes into account both revolving (e.g., credit cards) and installment debt (e.g., personal loans).

This ratio is calculated by dividing how much do you currently owe by the total credit available to you. Credit cards offer a good example: if you have a monthly limit of $10,000, and typically carry a balance of $9,000 on your card each billing period, your utilization ratio would be 90%.

The Age of Your Credit History

Since the age of your credit history is a factor in your credit score, the ideal situation is to start building credit early. That’s not always feasible, though. If you don’t have much of a credit history yet, a personal loan to build credit can be useful.

As long as the loan’s payment history is positive, the longer a loan is listed on your credit report, the more likely it is to have a positive effect on your credit score.

Adding Different Types of Credit

An additional factor that can impact your credit score is the mix of different types of credit you might have, such as credit cards, student loans, and mortgage loans. In general, your credit score will benefit from a healthy mix of different kinds of debt on your credit report.

Having both revolving debt, like credit cards or lines of credit, as well as installment debt, such as a personal loan, can have a positive effect on your credit score if you’re making regular, on-time payments on the debts.

If you currently only have credit cards, adding a personal loan to your credit mix can go a long way in establishing multiple types of credit and potentially boosting your credit score.

Recommended: Personal Lines of Credit vs Credit Cards

When Doesn’t a Personal Loan Help You Build Credit?

We’ve covered some of the ways a personal loan can help build credit, but there are situations in which a personal loan might have a negative effect on your credit.

Late Payments

Making late payments on any type of debt, including a personal loan intended to build credit, will likely have the opposite effect. Lenders place a great deal of importance on a person’s payment history. If a lender sees a lot of late payments or missed payments on your credit report, they are probably more likely to see you as a credit risk.

Short Term Loan

Short-term loans can be predatory loans. They are meant to help someone make ends meet until their next paycheck, but it can be next to impossible to actually pay off because of the extraordinarily high-interest rates typically charged on them.

Lenders of these types of loans may not report payments to the credit bureaus, essentially negating any effect your responsible repayment might have. If you’re thinking of taking on debt to boost your credit score, a short-term loan is probably not the best option.

The Takeaway

Personal loans have many direct benefits – access to cash, predictable payments, consolidating high-interest debts – but their secondary impact on your credit score can be meaningful for your borrowing future. Making your personal loan payments on time may help you improve your credit score and your future borrowing options.

SoFi Personal Loans are unsecured loans that offer competitive, fixed rates and no-fee options. With a variety of terms to fit different budgets, there may be an option that works for your unique financial situation.

Check your rate on a personal loan from SoFi

FAQ

Do personal loans raise credit scores?

If repaid on time with regular payments, a personal loan is one financial tool that might have a positive effect on a person’s credit score. There are a variety of factors that go into the calculation of a credit score, though, and it’s wise to pay attention to all of them.

How long does it take to build credit with a personal loan?

Building credit means building a history, which doesn’t happen overnight. It might take about six months to see results from diligently making on-time personal loan payments.

Is taking out a personal loan bad for credit?

Taking on new debt can have a temporary negative effect on your credit score. But over time, while making regular, on-time payments, a personal loan has the potential to help your overall creditworthiness.


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.


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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

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

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Does Loan Purpose Matter?

What a person does with their money is their business, right? Not always. Lenders are indeed interested in how borrowers plan to use the funds they’re loaned — in fact, the reason for a loan is one of the application questions.

But does loan purpose really matter? Keep reading to find out.

What Is the Purpose of a Loan?

At its most basic, the purpose of a loan is the reason the applicant wants to borrow money. Even though there are many acceptable uses of personal loan funds, the loan application will likely include a section asking why the applicant is requesting the loan.

Why Does the Purpose of a Loan Matter?

Banks consider a number of factors in addition to the reason for the loan, such as the amount asked for and the applicant’s credit and employment history, among others. The purpose of including such information on a loan application is so that a bank can assess the potential risk of lending money to an individual.

But the borrower’s reason for needing a loan can be a factor, too, because how much money is needed and how the debt can be repaid — both of which might be influenced by the underlying need — might make some types of loans a better fit than others.

Recommended: What Are the Common Uses for Personal Loans?

Are There Different Guidelines Based on the Purpose of a Loan?

Lenders may request certain pieces of information based on the type of loan being applied for.

For instance, a home loan application may include a section asking if the purpose of the loan is for a purchase, refinance, initial construction, or home improvement. Additional questions may be required based on what the answer to that question was. If the home loan is for the purpose of refinancing, the lender may want to know the original purchase date and cost of the home, if there are any other loans using the home as collateral, any other improvements made to the home and their costs, and what the purpose of the refinance is.

Does the Purpose of a Loan Influence Interest Rates?

The interest rate a lender charges for a loan can be dependent on the purpose of the loan, depending on the lender. Some lenders may set interest rates determined solely by the loan amount, the loan term, and the creditworthiness of the applicant. Other lenders might use those factors, plus have interest rate ranges for different loan purposes. For instance, a lender might charge as much as 18% for a debt consolidation loan, but only 6.5% for a used auto loan, on loans for the same amount and term.

Each lender sets its own rates for loans. They may use the rates set by the Federal Reserve as a base to work from, but also take into account their competitors’ interest rates. Lenders are in the business of making a profit, so they will price their loans to maximize that while still being able to attract customers.

Common Reasons for Getting a Loan

Most people have something particular in mind when they decide to borrow money.

But although every person sees themselves and their individual needs as unique, it turns out the reasons for taking out a personal loan tend to fall into some fairly common buckets:

Debt Consolidation:

Total household debt in the U.S. surged to $15.58 trillion by the end of 2021 — $1.4 trillion higher than two years previous, according to data from the Federal Reserve Bank of New York. But that number consists of a variety of types of debt, including credit card balances, student loans, mortgages, and other lending products. For 37% of Americans, the reason for a personal loan is to consolidate multiple debts, Finder.com found.

Medical Bills:

It may not be surprising in this pandemic era that medical expenses are one of the more common uses of personal loan funds. About 26% of personal loans are taken out to pay for medical expenses not covered by health insurance.

Recommended: How To Pay for Medical Bills You Can’t Afford

Home Improvements:

The pandemic saw an uptick in personal loan funds used for home improvement expenses, according to a 2021 Ipsos survey , with 25% of survey respondents saying they used their personal loan funds this way. With people staying home to avoid contracting Covid-19, they may have begun to notice all the home maintenance tasks they had been putting off, and had the time to tackle them.

Something Else:

The Finder.com survey found that other reasons for taking out a personal loan might be helping a family member, funding a move, or paying for a wedding or funeral.

Planned vs Unexpected Expenses:

Whether it’s a wedding, education, or a home renovation, there are some expenses that can be expected and planned for accordingly. Others, such as an emergency medical bill or unexpected car repairs, require a sudden inflow of cash — sometimes quickly.

What to Consider:

Having longer lead time before borrowing money can give an individual more time to compare loan offerings and typical requirements for getting approved, helping them to find more favorable rates and terms.

For example, secured loans may have lower interest rates than unsecured loans because the loan is secured with collateral, potentially lowering the risk to the lender.

But the process of obtaining such a secured loan can also be slower due to the time it takes to make sure the collateral being used is of sufficient value. As such, an unsecured personal loan may be the quickest way to obtain funds to cover unexpected expenses, although it may cost more overall.

Smaller vs Larger Expenses:

In 2020, the average personal loan balance in the U.S. was $16,458, according to Experian. But that number only tells part of the story. About 40% of Americans don’t have sufficient cash on hand to cover an unexpected $400 expense, a study by the Federal Reserve found — a finding that highlights that depending on the reason for a loan, a person may need to only borrow a little or a lot.

What to Consider:

Calculating the amount needed before applying for a loan and seeking out a loan that’s the right fit is a good idea.

An alternative way to access the funds — such as charging it to a credit card or dipping into savings — may be a more favorable option than a personal loan, after factoring in potential costs such as origination fees charged by some lenders.

One-time vs Ongoing Expenses:

Will the loan funds be used to cover a defined, one-time fee, or will the expenses be ongoing? Depending on the loan purpose, a personal loan might not be the right fit.

What to Consider:

Funds from a personal loan are disbursed in one lump sum, and interest is paid on that sum according to a fixed repayment schedule.

If the loan purpose is an expense that is ongoing or variable, such as wedding or home improvement costs, a line of credit might make sense financially, since interest is only charged on the amount drawn at any one time, and money borrowed can be repaid on a more flexible basis.

Lines of credit tend to come with variable instead of fixed interest rates, however, so the overall amount due may be hard to predict.

Loans To Pay Off Other Loans:

Using one debt to pay off another can sometimes be a sound financial strategy. But when debt consolidation or refinancing is the loan purpose, not just any personal loan will do.

What to Consider:

Debt consolidation and loan refinancing requires some number crunching to ensure the new loan is more favorable than the debt it’s replacing, factoring in any fees or penalties attached to the original loan(s).

Personal Loan Approval

The length of time from application to personal loan approval can vary by lender. On average, approval can take up to three business days for an online lender and up to seven business days for a bank or credit union. Some online lenders, though, offer same-day approval.

Some things that can make this a quicker process are making sure your credit report is free of errors and having required documents ready when the lender requests them. Loan applications that don’t have unusual circumstances, e.g., self-employment income verification or a high debt-to-income ratio, are more likely to be approved faster than those that do.

Once a personal loan application has been approved by the lender, the funds may be made available to the borrower in just a few days or up to a week, depending on the type of lender. Some online lenders may disburse funds the same day as approval.

Recommended: How to Get Approved for a Personal Loan

The Takeaway

There are, indeed, different types of loans for different purposes. Applicants may have their own reasons for wanting a loan, but lenders will want to know what the funds will be used for. There may be certain loans better suited to certain funding needs than others, and a lender will likely want to make sure the loan suits the purpose.

With no fees required and competitive interest rates, SoFi offers unsecured personal loans for a variety of purposes, such as consolidating high-interest credit card balances or springing for a big purchase.

Get started with a SoFi Personal Loan by finding your rate in just 1 minute

FAQ

Why is it important to know the purpose of a loan?

Lenders may want to know the purpose of a loan so they can assess the risk of lending. Borrowers will want to apply for the right type of loan for the purpose.

What are examples of the purpose of a loan?

There are many reasons people may want to use a personal loan, including debt consolidation, medical expenses, home improvements, or others.

What happens if I use my loan for a different purpose?

Some loans are meant to be used for a certain purpose, such as auto loans or mortgages. Personal loans, however, can be used for many purposes, and a lender may not check to see if the funds are being used as intended on the loan application. But it’s a good idea to review the loan application to understand any restrictions on the use of the funds.


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.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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What Are the Differences Between a Loan Officer and a Loan Processor?

What Are the Differences Between a Loan Officer and a Loan Processor?

When someone applies for a personal loan, there are a lot of moving parts and key players involved. While each lending institution will have their own unique process in place, loan applicants can expect to come across a loan officer, loan processor, or an underwriter.

There’s a decent amount of overlap in these roles, so to get some more clarity on who does what, let’s take a look at a loan officer vs. loan processor vs. underwriter.

What Is a Personal Loan Officer?

A loan officer evaluates loan applications and determines whether or not to recommend them for approval. A personal loan officer is a specific type of loan officer that focuses on personal loans. Personal loan officers are generally employed by credit unions, banks, and financial institutions.

Generally, a personal loan officer takes on the following job responsibilities:

•   Contact potential borrowers to see if they need a loan.

•   Work with loan applicants to gather information required for the application.

•   Walk applicants through the different loan types available to them and their unique terms.

•   Collect, verify, and review an applicant’s financial information (e.g., credit score, income, and other factors).

•   Review any loan agreements to confirm they are in compliance with all state and federal regulations.

•   Approve loan applications or pass them onto management for a final decision.

A major part of a personal loan officer’s responsibilities happen during the underwriting process. This process is used to determine if an applicant qualifies for the loan they are applying for. Once a loan officer collects and verifies all of the necessary personal and financial information about an applicant and any corresponding documents, the loan officer will assess the applicant’s need for a loan and their ability to repay it on time.

A loan applicant working with a loan officer can turn to them about any questions they have about what a personal loan is or about the application process. A personal loan is a type of consumer loan and consumer loan officers may use a fully automated underwriting process using software or they may complete it themselves (which is more often the case with smaller banks and credit unions).

What Is a Personal Loan Processor?

A personal loan processor, also known as a loan interviewer or loan clerk, is responsible for interviewing applicants and other necessary parties to obtain and verify the financial and personal information required to finish the personal loan application. Once the applicant is approved for the loan, the personal loan officer will prepare any documents required for the appraisal and the closing of the personal loan.

What Does a Personal Loan Processor Do?

The personal loan processor serves as a liaison between the financial institution issuing the loan and the applicant to make sure that qualified applicants can secure a loan in a timely manner. The loan processor will also help applicants decide which loan product is the best fit for their financial needs and goals. For example, if an applicant is experiencing financial hardship, the loan processor can help them set up debt payment plans.

Review Your Application

A loan processor receives, collects, distributes, and evaluates applicant information required to complete the loan application. They can approve or deny an applicant.

Verify Your Information

Personal loan officers are tasked with interviewing applicants and other necessary parties in order to verify any financial and personal information that must be evaluated during the application process.

Request Documents

As a part of the verification process, they will also request and collect any necessary documents from the applicant. They are also responsible for preparing any documents required for the appraisal and closing process.

Third Party Reports

In addition to collecting documentation from the applicant, the personal loan processor will work with third parties to obtain any necessary documents and reports, such as the applicant’s credit report.

Is a Personal Loan Processor the Same as an Underwriter?

While there is some overlap between what a personal loan processor and an underwriter do, these are two different roles. A loan underwriter focuses on evaluating how creditworthy an applicant is by collecting and evaluating an applicant’s financial information. Typically, they then use loan underwriting software to make an approval or denial recommendation.

A loan processor also reviews how eligible an applicant is for a loan by collecting and verifying important information and documents, but they don’t use underwriting software to make a decision. The loan processor has the ability to approve or deny an applicant.

Loan Processor

Underwriter

Collects and verifies applicant information Collects and verifies applicant information
Makes approval decision Uses underwriting software to determine eligibility
Prepares documents for appraisal and closing

Is a Loan Officer or Loan Processor Responsible for Your Personal Loan Approval?

When it comes to loan processor vs. loan officer, both loan officers and loan processors have the ability to reject or deny a loan application or at the very least make a recommendation for whether or not an applicant should receive a loan.

When Does a Personal Loan Processor or Officer Get Involved?

When someone applies for a personal loan, they’ll connect with a personal loan processor or officer when they submit their initial application. Either one can start the process of collecting personal and financial information and supporting documentation from the applicant.

What Happens During Personal Loan Processing?

During the personal loan processing stage, the applicant will work with the personal loan processor to provide them with any personal information, financial information, or documentation that the personal loan processor needs to finish their application.

Getting Approved for a Personal Loan

Getting approved for a personal loan requires going through the underwriting process which assesses how qualified a loan applicant is. Some firms use underwriting software to make a decision whereas others make the decision without the aid of software.

The Takeaway

When comparing a loan officer vs. loan processor, it’s clear that both loan processors and loan officers play an important role in the personal loan application process. Their roles often overlap and where they work determines the exact role they take on.

Personal loan applicants who might not want to go through a long underwriting process can view their SoFi personal loan rate in just one minute. Once approved, they can receive their personal loan funds that very same day.

Learn more about SoFi personal loans today!

FAQ

Is a personal loan processor the same as an underwriter?

No, a personal loan processor is not the same as an underwriter, although they share similar responsibilities. A loan underwriter determines whether or not an applicant is creditworthy. A loan processor collects and verifies any personal and financial information required to complete loan applications.

What does a personal loan processor do?

A personal loan processor works with personal loan applicants to gather the information and documents needed to complete their applications. A personal loan processor also prepares appraisal and closing documents.

When does a personal loan processor or officer get involved?

A personal loan processor or officer gets involved once a consumer starts the application process. They can help guide the applicant through that process.


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.

Photo credit: iStock/Delmaine Donson
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Using a Co-borrower on a Joint Personal Loan

If your credit is not quite up to a lender’s preferred level to get favorable interest rates and terms on your own, you may be considering a joint personal loan. Using a co-borrower may be one option to help you qualify for a personal loan.

A co-borrower is an additional borrower on a loan who is obligated to repay the loan alongside the primary borrower and shares the responsibility of paying it back. And a co-borrower — if they have great credit and income, among other factors — may have the added benefit of helping to make the original borrower seem less of a risk to a lender.

What Are Joint Personal Loans?

Joint personal loans are loans that take into account multiple borrowers’ creditworthiness in the approval process. There are typically two borrowers on this type of loan — a primary and a secondary borrower — to establish joint personal loan eligibility.

Being a co-borrower on a loan comes with different rights and responsibilities than being a cosigner on a loan.

•   Co-borrowers, along with the primary borrower, have equal ownership of loan funds or what is purchased with the loan funds and are equally responsible for repayment of the loan over the life of the loan.

•   Cosigners have no ownership of the loan funds or what they’re used to purchase, and they are responsible for repayment only if the primary borrower fails to make payments.

How To Use Joint Personal Loans

Loan applicants who don’t feel confident about qualifying for a loan or have concerns about a potentially higher interest rate due to their overall creditworthiness or other reasons, finding a reliable co-borrower might help improve the chances of approval, along with the interest rates and terms offered.

Joint personal loans might be used by homeowners to fund a remodeling project. Couples who want to pay down high-interest debt might use a joint debt consolidation loan.

Why Do People Use Joint Personal Loans?

Reasons someone may be considering a joint personal loan may be that they cannot qualify for a loan on their own, or they would like to qualify for a lower interest rate or more favorable loan terms than they could on their own.

Some reasons people may seek a co-borrower are:

•   They don’t have a long credit history.

•   They’ve just entered the workforce.

•   They’re in the process of rebuilding their credit.

•   They would like to qualify for a larger loan than they could on their own.

How Much Can You Save With Joint Personal Loans?

Having two borrowers on one personal loan may help to qualify for a more favorable interest rate than if just one person’s income and credit are considered. Different lenders will have different qualification requirements, though, so it’s a good idea to compare lenders.

Using a joint personal loan for debt consolidation can be one way to lower the amount of interest paid on outstanding debt. Again, how much savings is accomplished depends on multiple factors, such as the borrower’s creditworthiness, how long it takes to pay down the debt, and others.

What Credit Score Is Required for a Joint Personal Loan?

There is no definite answer to this question, but, in general, applicants with higher credit scores qualify for loans with lower average personal loan interest rates. And, vice versa, applicants with lower credit scores generally qualify for loans with higher interest rates.

Lenders tend to be risk averse and prefer to lend money to people who they believe will repay it in full and on time. An applicant’s credit report — a summary of how responsible they are with credit that has been extended to them in the past — and credit score are tools lenders use to assess risk.

Before applying for a joint personal loan, it’s a good idea to review your credit report. If there are errors or discrepancies, you can file a dispute with the credit reporting agency. If you have poor credit or a limited credit history, you might consider taking some time to improve your credit before applying for a loan. Lenders will look at both applicants’ credit reports during the joint personal loan approval process, so it’s worth it for your credit to be in good shape.

Recommended: What Credit Score Do You Need for a Personal Loan?

Individual vs Joint Loan Applications

The basic process of applying for a loan is the same no matter the number of applicants. Lenders will typically request the same information on either an individual or a joint loan application: proof of identity and address and verification of employment and income, in addition to any lender-specific information. For an individual loan application, there is just one person’s information to verify. Joint loan applications require information for each applicant.

Individual

Joint

Only one applicant’s creditworthiness is considered in the approval process. Creditworthiness of both applicants is considered in the approval process.
One income is considered in the approval process. Combined incomes of all applicants are considered in the approval process.
Only one applicant signs the loan application. The loan application is specifically for more than one applicant, and both must sign it.
One borrower is responsible for repaying the loan. All borrowers are responsible for repaying the loan.

Cosigned Loan vs Joint Personal Loan: The Differences

Both cosigned and joint loans include an additional borrower. However, a co-borrower taking out a joint loan has different rights and responsibilities than a cosigner.

The Disadvantages of Choosing a Cosigned Loan

The disadvantages of a cosigned loan lie mostly with the cosigner, not the primary borrower. The cosigner does not have any ownership rights to the loan funds or anything purchased with the loan funds. They are, however, responsible for repayment of the loan if the primary borrower fails to make payments.

The cosigner’s credit can be negatively affected if the primary borrower defaults on the loan, and their future borrowing power could be affected if a lender decides extending more credit would be too risky.

The Disadvantages of Choosing a Joint Personal Loan

Since joint personal loans take into account both applicants’ credit, and ownership and repayment responsibility is equal for both borrowers, the disadvantages of this type of arrangement are less lopsided than for a cosigned loan. People who already share financial responsibilities — married couples or parents and children, for example — may consider joint personal loans, so there is typically some familiarity present.

Even so, it’s important to have confidence in a co-borrower’s ability to repay the loan because each borrower is equally responsible for repayment over the entire life of the loan. Co-borrowers also have equal ownership rights to the loan funds or what the loan funds purchased, so trust is a big factor in choosing a co-borrower.

Cosigned Loan vs Joint Personal Loan: The Advantages

Arguably, the primary borrower on either a cosigned loan or a joint personal loan has a bigger advantage than the cosigner or co-borrower. Depending on one’s perspective, however, all parties involved can reap benefits from these partnerships.

The Advantages of Choosing a Cosigned Loan

The advantage lies almost exclusively with the primary borrower on a cosigned loan. If they default, the cosigner is responsible for repaying the loan, although the primary borrower’s credit will likely be negatively affected. Ownership of the loan funds or what they purchased is solely the primary borrower’s.

A personal loan cosigner’s main advantage may be in the form of a benevolent feeling. This is not to discount a cosigner’s contribution, since compassion is important to humanity.

The Advantages of Choosing a Joint Personal Loan

The main advantage of a joint loan is that there is equal ownership of the loan funds or the property purchased with those funds. Choosing a joint loan means you are able to present a higher total income than you could alone, signaling to lenders that it’s more likely someone will be able to make the monthly loan payments.

Because joint loans give both co-borrowers equal rights, they are well-suited for people who already have joint finances or own assets together.

What’s the Better Loan Option?

If you’re seeking a loan with a spouse or relative, and one of you has the strong credit history needed to get a low interest rate and terms you’d prefer, then a joint loan as co-borrowers may be right for you.

However, if you’d rather have a loan in your name with a little added security, then having a cosigner may make more sense.

No matter which situation you find yourself in, it’s important to weigh all of the options and do the necessary research that will allow you to arrive at the best joint personal loan option for you. After all, taking out a loan and repaying it responsibly has the power to put someone on a path to a more secure financial future, but it can also come with risks if each party hasn’t thoroughly vetted the other.

Where Do You Find a Joint Personal Loan?

It’s not uncommon for lenders to offer joint personal loans, but some research is necessary to find a lender who will work with your unique financial situation.

Looking at lenders of joint personal loans online is a good first step. Prequalifying to check joint personal loan eligibility is a fairly quick and easy process.

If you’re already an established customer at a local bank or credit union, you may want to look at loan options there, also.

The Takeaway

Though co-borrowers may bring with them peace of mind, they also require a great deal of forethought — especially regarding who to ask. And, regardless of whether or not someone opts for a co-borrower, it’s still important for the primary borrower to get their own credit in the best shape possible.

SoFi Personal Loans accept co-borrowers, so may be a potential option when looking for a joint personal loan. The co-borrower will be equally liable for the loan and must live at the same address as the primary applicant.

Check your rate on a SoFi Personal Loan in just one minute.

FAQ

Can you apply for joint personal loans?

As long as the lender allows co-borrowers, you can apply for a joint personal loan.

What is the maximum amount of people for a joint personal loan?

Typically, a joint personal loan has two co-borrowers, but the maximum number of co-borrowers is up to the individual lender.

Do joint personal loans get approved faster?

It’s likely to take more time for a joint personal loan to be approved than an individual loan because the lender will check the credit of each applicant.


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.


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Family Loans: A Complete Guide to Borrowing and Lending Money to Family

Borrowing money from family members — or lending it to them — can be a risky business. And although all debt is risky, family loans carry different kinds of dangers.

Although family lenders don’t have to worry about pulling (or affecting) anyone’s credit score, private loans may put a strain on otherwise strong relationships. Depending on the size of the loan, there may also be tax implications to consider.

That said, there are ways to thoughtfully issue and receive family loans. Here are our best tips for stacking the odds in your favor.

What Are Family Loans?

Family loans are those that are given and received within a family group, instead of a typical lending situation like a bank or credit union, or even a payday lender.

Someone who may not be able to qualify for a traditional loan might be inclined to ask a family member for a loan.

Sometimes a family loan might work in the interest of both parties. For instance, the borrower might receive a more favorable interest rate than they might have from a bank, and the lender might receive a higher interest rate than they would find in a savings account.

Reasons someone might ask a family member for a loan are similar to reasons they might consider a personal loan: They might need cash for emergency medical expenses, unexpected home repairs, or expenses for adoption or fertility treatments.

How Do Family Loans Work?

At their most basic, family loans work similarly to traditional loans: One person asks for a loan, and another person approves the request. While that is an oversimplification, the concept is the same. There is generally less paperwork involved in a family loan, with no application or credit check necessary, although a formal contract detailing each party’s rights and responsibilities is recommended.

Terms for the Lender to Include in a Family Loan

•   Amount loaned.

•   Interest rate, if interest is charged.

•   Payment amount (often, monthly).

•   Penalties for non-payment.

Terms for the Borrower to Include in a Family Loan

•   Amortization schedule, with principal and interest amounts clearly stated.

•   Ability to pay the loan off early without penalty.

•   Periods of payment suspension in cases of hardship.

Risks and Benefits of Family Loans

No matter which end of the dynamic you might find yourself on, there are both risks and benefits to family loans. But while both the borrower and lender risk putting a strain on the family relationship involved, the lender is likely to carry the greater financial risk — after all, it can be pretty hard to recoup your losses when you have no official financial authority.

Risks of Family Loans

One of the biggest risks of loans between family members is the potential for conflict within the relationship. People tend to have strong emotions tied to money. Some risks lie with the borrower or lender alone, though.

Risks for the Borrower:

•   There is risk to the relationship if the loan repayment plan falls through.

•   Although avoiding a credit check — and possible negative credit consequences — is a plus, family loans also fail to help borrowers build their credit history since they’re not reported to credit bureaus.

Risks for the Lender:

•   There is risk to the relationship if the loan repayment plan falls through — which puts the lender into a particularly tricky situation if they really need the cashback for their own financial situation.

•   It’s easy for family lenders to lose their money outright if the borrower constantly defers to an IOU.

•   Since family lenders don’t have any financial authority or backing, it can be difficult to recoup losses or enforce any substantial consequences for borrowers who go into default.

•   If the loan is interest-free and for an amount in excess of the IRS gift tax exclusion , it may trigger the need to file a gift tax return (and potentially pay taxes on the gift).

Recommended: Should You Borrow Money from Friends and Family?

Benefits of Family Loans

Despite their risks, family loans do have some attractive qualities.

Benefits for the Borrower:

•   Family loans present a potentially low-cost alternative to traditional credit options. Family lenders usually don’t assess fees and may not charge interest.

•   Family loans can carry much easier approval standards than their official counterparts. At a financial institution, borrowers are subject to a credit check, employment history, income verification, and more. A family member is not likely to run those checks.

•   Family loans often carry more flexible repayment standards than traditional loans do, and family lenders may be more lenient if the borrower faces extenuating circumstances that make it difficult to make payments.

•   Failure to pay private family loans in a timely manner — or at all — won’t impact the borrower’s credit score the way such behavior would with a traditional loan.

Benefits for the Lender:

•   It can feel rewarding to help out a family member in need, particularly if they’re putting the money toward a major life goal like homeownership.

•   If the lender chooses to charge interest on the loan, they can earn interest as the loan is repaid.

Tax Implications of Family Loans

It can be surprising to learn that loaning money to a family member could be a big enough deal to land on the IRS’s radar.

Fortunately, most family loans fall outside of the purview of the IRS. It’s only when they’re above IRS-defined amounts and interest-free that lenders have to report them on their tax return.

If a family lender offers an interest-free loan to a family borrower, the IRS still sees the transaction as a loan — and assumes that the interest that should have been charged counts as a gift to the recipient. (The government publishes minimum interest rates on a monthly basis.)

That’s no big deal if the loan is for, say, $300. But if the unpaid interest — or unpaid loan balance — tops the annual gift-giving exclusion, which is $15,000 for 2021, the lender might be responsible for filing a gift tax return and potentially paying taxes on the gift.

The IRS might also count the should-be interest toward the lender’s gross income, even if no interest is charged or received. Again, this isn’t a big deal with rates under 1% on loans of just a few hundred dollars, but with a big enough loan, it could impact the lender’s finances.

Making a Family Loan Legitimate for Tax Purposes

The main thing that makes a family loan legitimate to the IRS is a family loan agreement that specifies repayment terms. If an agreement is not in place, the agency may consider it a gift instead of a loan.

The federal government sets minimum interest rates — Applicable Federal Rates — that lenders can charge on a private loan, which a family loan is. If less than the minimum interest rate is charged, the IRS may assess taxes on any unpaid interest that is deemed payable.

Keeping records of payments made will also show the IRS that the lender was keeping track of the debt and that there is an expectation of repayment.

Recommended: How to Gift a Stock

Tips to Successfully Borrowing From or Lend Money to Family

If you’re considering lending money to or borrowing money from a family member, adding some structure to your loan can help minimize the risks while still allowing everyone involved to reap the benefits.

Planning Your Family Loan Out

All too often, a family loan takes place in a single, impromptu transaction: The borrower asks for some money, and the lender gives it.

Instead, making a concrete plan together specifying all the loan’s terms, such as repayment installments and timing, is recommended. Lenders might want to consider charging interest, especially on large loans, due to the tax implications outlined above. Even a low family loan interest rate can motivate a borrower to get serious about repayment.

Making a Family Loan Official

Clear communication and boundary-setting skills make pulling off a family loan a positive experience for all involved — and oftentimes, the best way to achieve those goals is to write things down.

Plus, drafting a formal money-lending contract makes your loan official in the eyes of the IRS, which can help keep loans from being classified as gifts for tax purposes.

Terms to include in your family loan agreement include:

•   The amount loaned.

•   The loan’s repayment terms, such as frequency and amount, as well as a due date for when the loan must be repaid in full.

•   The loan’s interest rate and fees, if any (for instance, the lender may decide to charge late fees if the loan repayment terms are not honored).

•   Clauses concerning what happens if the loan is repaid early (is there a prepayment penalty?) and what happens if the borrower goes into default for any reason.

Recommended: Can I Pay off a Personal Loan Early?

Family Loans vs Gifts

If a family lender has the financial ability and willingness to make a monetary gift instead of a loan, they can do so without tax implications for amounts up to $15,000 (for gifts made in 2022, this amount will increase to $16,000).

There are various reasons why someone might choose to give a gift instead of making a loan, or vice versa.

Family Loan

Gift

Interest rates can be advantageous to both parties. There is no expectation of repayment for a gift.
Written agreement legitimizes the loan for tax purposes. No paperwork necessary.
Family loans have potential to cause conflict. Giving a gift is generally construed as a positive thing.
The IRS determines minimum acceptable interest rates and loan amounts subject to those rates. Gifts under a certain value are excluded from the IRS gift tax in most cases.

Alternatives to Family Loans

If all of these caveats and warnings are making family loans sound like a less-than-prudent idea, there are alternatives to consider before asking family members for a loan. (And yes, if a family member asks you to borrow money, you’re allowed to say no and steer them in a different direction.)

Obviously, the most ideal financial strategy for making a big purchase is to save your money so you don’t have to go into debt at all. Although this isn’t always possible or realistic, it might be worth taking a second look at your budget, working on a promotion, or starting up a side hustle to generate cash.

Unsecured personal loans are available from certain banks and financial institutions and make it possible to fund a wide variety of expenses upfront. Of course, these may come with higher interest rates and more stringent qualification requirements than family loans do.

You might also consider asking a family member to cosign on a loan with you instead of loaning you the money. They would be responsible for making the loan payments if you, the primary borrower, don’t, but they wouldn’t be immediately taking money out of their own bank account to help you.

If you need to borrow money for business purposes, a small-business loan may be an option to think about. The Small Business Administration is an excellent resource for business loans. The agency works with lenders to help small business owners find funding for a wide range of amounts and terms, with competitive interest rates.

The Takeaway

While borrowing money from or lending money to a family member can be tempting, it can have long-lasting impacts on interpersonal relationships as well as the lender’s finances. While drafting a structured family loan agreement can help, personal loans can be an alternative worth considering.

SoFi offers a range of low-fixed-interest-rate unsecured personal loans that can be used to fund medical expenses, home renovations, moving costs, and more.

Curious to know how a SoFi personal loan could help you? Check your rate today — it won’t affect your credit score.1

FAQ

What is a loan from a family member called?

A loan from a family member is often referred to as a family loan, an intra-family loan, or a friends and family loan.

Can family loans help your credit?

Since a family member is not likely to formally check your credit report or provide payment information to the credit bureaus, a family loan probably won’t help your credit.

Are family loans considered debt?

Yes, a loan from a family member is considered debt, but will likely not be reflected on your credit report. For tax purposes, a family loan is considered debt if it meets certain guidelines.


1Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.


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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Photo credit: iStock/Ridofranz
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