SoFi

You can get a personal loan from many banks, online lenders, and credit unions. A type of unsecured loan, personal loans can be used to pay for just about any large expense.

You might use it to pay off credit card debt, an unexpected medical bill, or the cost of home renovations. Some people use these loans to fund a wedding or big vacation. Given the many ways these versatile loans can be spent, it’s no surprise that personal loans are a popular choice. Currently, 23.5 million Americans have unsecured personal loans, totaling about $245 billion.

If you’re thinking of getting a personal loan, read on to learn more about where you can get one and the pros and cons of each option.

Where Can You Get a Personal Loan?

In terms of where to get a personal loan, these loans are generally available through three main markets: banks, credit unions, and online lenders. (There are other types of personal loans available through physical storefronts and online, such as payday loans and pawnshop loans, but it’s wise to avoid these options. You’ll learn why in a minute.)

Banks

National and regional banks often offer personal loans, which you can typically apply for online or in person. A bank may be the first choice for consumers who are already account holders at that institution, especially since the loan amount can usually be deposited quickly and directly into their checking account.

Credit Unions

Credit unions are another popular option for where to source a personal loan — though generally, these loans are only available to those who are already credit union members.

Each credit union has its own eligibility requirements to open an account or otherwise do business with it, which may be based on where you live or what industry you work in. However, if you do have access to a credit union, you may find lower interest rates and more favorable terms there than at other financial institutions.

Recommended: Is It Hard to Get a Personal Loan?

Online Lenders

Online lenders have proliferated over the years. These days, a personal loan can be easy to find from one of these sources with just a few clicks.

Online lenders may offer instant or near-instant loan decisions. They also don’t require you to be a member of or an account-holder at any specific financial institution. That said, it may take longer to receive your check or transfer than it would if you were borrowing from a bank or credit union where you already hold an account.

Of course, you will want to carefully review the personal loan interest rates and fees you are offered.


💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.

Where Can You Get a Personal Loan With Bad Credit?

You can get a personal loan with bad credit from a few lenders, such as online ones and payday lenders, but it’s important to proceed with caution.

First, a little important background intel:

•   A personal loan with no collateral, also known as an unsecured personal loan, can be tough to qualify for if your credit history is less than perfect.

•   Since there’s no collateral, like a house or a car, for the lender to take if you fail to repay the loan, unsecured personal loans often come with steeper qualification requirements than other types of loans.

•   They may also have higher interest rates, especially for those whose credit could use some improvement. There are some lenders out there who specifically market their products to folks with lower credit scores — but beware. Sometimes these loans come with predatorily high interest rates and other drawbacks.

Online Private Lenders

The convenience and ubiquity of the online personal loan market is a mixed blessing. Sure, it’s easy to find a loan when you need one, but it’s also easy to fall into a bad deal.

Some online lenders specialize in offering loans for poor or no credit, but be sure to read all the fine print before you hit “submit” on your application. The loans may come with soaring interest rates, high origination fees, or hidden costs. Do your homework and vet the business you are borrowing from to make sure it’s legitimate. You may want to check with the Better Business Bureau to search for any complaints on file and for reliable, verified reviews.

Payday Lenders

Payday loans have been around for a long time, but that doesn’t mean they’re a good option.

Designed to be repaid quickly (i.e., at the borrower’s next payday), these short-term cash loans may be for small amounts, but often come with astronomical interest rates. According to the Consumer Financial Protection Bureau, it’s not uncommon for these quick-turnaround loans to have APRs as high as 400%!

In almost every instance, when comparing payday loans vs. personal loans, payday loans are worth avoiding. Other forms of unsecured loans will likely come with lower interest rates and more favorable repayment terms. Fortunately, it is possible to find loans from reliable lenders — even with imperfect credit.

Banks and Credit Unions

You can get a personal loan with bad credit from a few lenders, such as online ones and payday lenders, but it’s important to proceed with caution.

First, a little important background intel:

•   A personal loan with no collateral, also known as an unsecured personal loan, can be tough to qualify for if your credit history is less than perfect.

•   Since there’s no collateral like a house or a car, for the lender to take if you fail to repay the loan, unsecured personal loans often come with steeper qualification requirements than other types of loans.

•   They may also have higher interest rates, especially for those whose credit could use some improvement. There are some lenders out there who specifically market their products to folks with lower credit scores—but beware. Sometimes these loans come with predatorily high interest rates and other drawbacks.

Another place where you can go to get a personal loan of this sort is a bank or credit union. Each financial institution sets their own qualification requirements for their unsecured personal loans, so it’s worth shopping around to find the best fit for your financial needs. Additionally, they may have other products that could work for you, like secured credit cards or share-secured loans.


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

What Are Some Pros and Cons of Different Types of Lenders?

Now that you’ve learned about the main options for personal loan shopping, you can figure out which kind of lender is right for you. Each alternative comes with its own pros and cons. Here are some things to consider while you’re browsing.

Personal Loans From Banks

Personal Loans From Credit Unions

Personal Loans From Online Lenders

Choosing a Personal Loan Lender

No matter where you choose to apply for a personal loan, the best way to determine whether it’s the right loan for you is to look at the fine print. The lender matters less than the loan, and knowing what you’re agreeing to ahead of time is key to avoiding an unpleasant financial surprise.

Here are the most important factors to look for when shopping around for a personal loan:

•   Fees, such as origination fees, early repayment penalties, and late fees, can increase the total amount you’ll spend on your loan in no time. Ideally, you’ll want to look for a lender that charges few fees — or none at all.

•   Interest rates can vary widely with unsecured personal loans, from as low as 4% to as high as 30% or more. While your specific options will vary based on your credit history and other financial information, it’s good to shop around for the lowest possible interest rate.

•   Loan amount caps may be relatively small (e.g., $1,000) or very large ($100,000 or more). Whatever your financial need, you want to ensure your lender will offer enough for you to cover whatever expense you’re paying for.

Recommended: Personal Loan Calculator

The Takeaway

There are many personal loan lenders to choose from, including banks, credit unions, and online lenders. Whether you need money to pay for an unexpected expense, such as a car repair, or you’re planning the ultimate 40th birthday party, it’s wise to shop around and compare interest rates, fees, and speed of funding.

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

FAQ

Where is the best place to get a personal loan?

In terms of where to get a personal loan, there isn’t one “best” place. When comparing banks, credit unions, and online lenders, look at interest rates, fees, customer reviews, and how quickly the loan would fund to determine the option that suits you best.

Where is the best place to get a small personal loan?

Where to go to get a personal loan depends on a variety of factors. Would you be more comfortable working with a large lender or a small, community-based lender for your small loan? Do you already have an account at a financial institution that also makes personal loans? It might also depend on how much you want to borrow because different lenders have different borrowing ranges.

Where is the easiest place to get a personal loan?

If you’re looking for where you can go for a personal loan, it might be best to start at a financial institution where you already have an account. In that case, your financial information will be on record, making the process faster and easier. Although online lenders may promise super-fast funding, be sure to research options carefully and make sure the business is legitimate and interest rates are affordable.

Photo credit: iStock/solidcolours

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

SOPL-Q224-1855664-V1

Personal loan scams are pervasive, often targeting borrowers with bad credit who are in desperate need of cash.

Taking out a personal loan can be helpful in addressing immediate money needs, whether it’s covering emergency expenses, funding a home renovation project, or paying for a large but necessary purchase. But it’s important that you learn how to spot a personal loan scam in the wild.

Let’s take a look at common signs and types of personal loan scams and tips for what to do if a scammer has taken advantage of you.

Signs of a Personal Loan Scam

Wondering how to spot personal loan scams? Check out these common signs of in-person, over-the-phone, and online personal loan scams:

No Credit History Is Required

Bad credit personal loans scams are among the most common. Borrowers who have poor credit scores but need cash to cover an emergency or pay their bills are easy targets for scammers (as well as predatory loans and loan sharks, the latter of which operate illegally).

When a lender advertises that they won’t run a credit check, it’s a likely sign of a scam — or, at least, very predatory loan tactics. Scammers may offer approval to get you to pay upfront fees or share personal information, like your bank account or Social Security number.

Typical personal loan requirements needed for approval include a thorough credit check and several other components.

Even if you have bad credit or no credit history, look for lenders that will:

•   Review your credit score

•   Analyze your debt-to-income ratio

•   Ask for collateral (in the case of secured loans)

•   Ask for proof of address and/or income

Don’t be frightened by the credit check. Some lenders offer personal loans to borrowers with bad credit. Just be prepared for high fees and APRs.

Recommended: Compare Personal Loan Interest Rates

The Lender Isn’t Registered in Your State

The Federal Trade Commission (FTC) requires lenders to register with each state in which they do business. You can check a lender’s registration with your state attorney general’s office.

If the lender isn’t registered, you’ve likely stumbled upon a scam. Steer clear.

A Prepaid Debit Card Is Required

Upfront fees are often a sign of a personal loan scam (more on that below), but that’s especially true if the lender asks you to purchase and send a prepaid debit card or gift card to cover administrative fees before they can fund the loan.

Requesting other untraceable payment methods, like cryptocurrency, is also suspect.

The Lender Requires Immediate Action

Lenders that create a sense of urgency or use language that implies you must act now are potentially scamming you. A legitimate lender understands that you may need time to consider an important financial decision, such as taking on debt.

If a lender is requiring immediate action, it’s wise to walk away from the offer. Better safe than sorry.

The Lender Has No Physical Address

A legitimate lender should always have a physical address, even if it’s an online-only lending institution. Even if the lender does advertise an address but you’re feeling uneasy, verify the address online or on your phone with a maps app.

Not Transparent About Fees

Licensed lenders should disclose all fees upfront. If a lender is shady about their fees, it’s possible they’re trying to sneak in a bunch of high, unfair, and predatory charges.

💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

Upfront Payment

Determining the legitimacy of lenders requiring upfront payments can be challenging — because some reputable lenders often charge application fees and/or origination fees. If the fee comes before approval, however, that’s a red flag.

And if they’re requesting the upfront payment in an unusual way — gift cards, wire transfers, peer-to-peer transfer, etc. — that makes it even more likely it’s a scam.

No Digital Presence

A reputable lender should have an online presence in this day and age. If you can’t find the lender online or if they have a suspicious-looking website, it might be a scam.

You should never enter personal information into an unsecure website platform. Remember to find the padlock icon at the beginning of the URL in your browser’s search bar.

Also verify fishy emails and phone numbers.

Phone Offer

If a lender contacts you directly and you weren’t shopping for a loan, it’s OK to be a little cautious. Be suspicious of phone calls, mailers, and in-person visits when you haven’t requested any information.

Wire Transfers

Remember: Upfront fees before loan approval are often a sign of personal loan scams. If the lender requests that payment via wire transfer, be even more cautious. Wire transfer scams are among the most common types of bank account fraud.

Copycat Name

It’s important to look closely at a lender’s name or URL. It’s possible they’ve chosen a name similar to a legitimate lender (or a website with a similar URL and branding) to trick you into thinking they’re the real deal.

Guarantees Loan Approval

Legitimate lenders don’t guarantee loan approval without reviewing your information. Even lenders aimed at bad credit borrowers, which might not have minimum credit score requirements for a personal loan, do some kind of verification or background check.

If you see a lender that guarantees approval, that’s a major red flag.

Common Types of Personal Loan Scams

Legitimate personal loans, like SoFi’s personal loans and options from other reputable financial institutions, can be a useful tool for building credit and funding necessary purchases outside your monthly budget.

But criminals often take advantage of people’s needs with several common types of loan scams, including the following:

No-Credit-Check Personal Loan Scams

Some lenders do offer personal loans to borrowers with bad credit or no credit history at all. Even then, legitimate lenders typically do some kind of background check (unless it’s a credit builder loan).

If a lender is offering you a personal loan without ever checking your credit or background, it’s likely a scam. They may ask you to send fees in advance or may convince you to share personal information so they can steal your identity.

Live Check Scams

Be cautious if you receive an unsolicited pre-approved loan offer in the mail with a live check. Cashing or depositing that check locks you into the loan terms mailed with the check, which might include high interest rates or fees.

In general, you should not cash or deposit such checks unless you’ve read the loan terms and are ready to accept them. In most cases, you can likely find a better loan offer elsewhere — and shouldn’t accept an unsolicited offer if you weren’t in need of a loan anyway.

In a similar scam, you may receive a fake check from an unknown sender who asks you to deposit it and then wire them money (for a payment). This check could bounce after you’ve wired the money.

Student Loan Forgiveness Scams

In the wake of the Biden administration’s student loan forgiveness announcement last year, scammers began to promise loan forgiveness to borrowers in exchange for fees. The Consumer Finance Protection Bureau has officially declared this to be a scam.

Debt Consolidation Scams

Debt consolidation loans are a legitimate and common type of personal loan. However, if a debt consolidation company approaches you with an offer and is aggressive or advises you to cease communications with your creditors, it’s likely a scam.

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

What to Do If You Are Scammed

Have you been tricked into a personal loan scam? Here’s what to do:

Gather Documents

You’ll need to compile all the physical and digital evidence you can. This includes emails, mailers, paperwork, and even phone screenshots of interactions. The authorities will need this evidence to work your case.

Contact Local Law Enforcement

Even if the scammer is far away from where you live, contacting your local law enforcement is crucial. They’ll be able to file a police report for your case.

Place a Fraud Alert

You’ll want to place a fraud alert with all three major credit bureaus and freeze your credit reports. This will prevent fraudsters from opening credit in your name.

Continue to monitor your credit report and bank statements and report any suspicious entries. Even if your bank account was not compromised, it’s a good idea to inform your financial institution as well.

Contact Agencies Specializing in Oversight

You’ll also want to contact the appropriate agencies, including the Better Business Bureau, FTC, and your state attorney general’s office. You may need to reference the police report in these communications.

Recommended: How to Report Identity Theft

The Takeaway

Personal loan scams can take advantage of borrowers when they are most in need of help. It’s important to stay vigilant when looking for a personal loan by working with reputable lenders that have a thorough application process and transparent fees.

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

FAQ

How can you protect yourself from personal loan scams?

To protect yourself from personal loan scams, familiarize yourself with the common tricks scammers use. Only seek out personal loans from reputable lenders that you can verify online and over the phone, and make sure they do a thorough background and credit check.

What are common personal loan scams?

Common personal loan scams include loans that don’t require credit checks, offer guaranteed approval, require upfront payments, or involve a live check. Educating yourself about common personal loan scams is the best way to prevent falling victim to one.

How can you report a personal loan scam?

If you’re the victim of a personal loan scam, collect all the evidence you have, file a police report, notify your bank and all three major credit bureaus (to place fraud alerts), and file complaints with the FTC, Better Business Bureau, and your state’s attorney general’s office. Continue to monitor bank statements and your credit report.

Photo credit: iStock/fizkes

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.

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

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

What Is a FICO Score?

The FICO Score is a trademark of the Fair Isaac Corporation. It was the first widely used, commercially available score of its type. FICO Scores essentially compress a person’s credit history into one algorithmically determined score.

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

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

What Is the FICO Score Range?

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

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

Recommended: What Is Considered a Bad Credit Score?

How Is a FICO Score Calculated?

There are five main components of your base score, each having a different weight in the calculation:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

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

The base FICO Score range may not be the range used in all credit and lending decisions. There are also industry-specific scores, such as one specifically for auto loans (FICO Auto Scores), others for credit card applications (FICO Bankcard Scores), and multiple FICO scores used by mortgage lenders.

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

What Is a Good FICO Score?

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

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

Recommended: Average Personal Loan Interest Rates & What Affects Them

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

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

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

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

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

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

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

Recommended: What Credit Score Is Needed to Rent an Apartment in 2024?

What Affects Your FICO Score?

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

Payment History (35%)

Do you tend to pay your bills on time or do you have a history of late or missed payments? Your payment history is the most important factor in the calculation of your FICO Score. Perfection isn’t necessary, but a solid track record of regular, on-time payments is important. Lenders like to be assured that a borrower will make their payments, and a past payment history tends to be a good predictor of future payment habits.

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

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

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

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

Amounts Owed (30%)

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

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

Length of Credit History (15%)

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

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

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

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

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

Recommended: 11 Types of Personal Loans & Their Differences

Credit Mix (10%)

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

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

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

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

New Credit (10%)

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

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

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

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

FICO Score vs Credit Score

These two terms — FICO Scores and credit scores — are often used interchangeably. More accurately, though, is that a FICO Score is one type of credit score, the one most often used by lenders when making their decisions. There are multiple types of credit scores, each of them using analytics to create a rating that illustrates a person’s creditworthiness.

The Takeaway

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

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

SoFi 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.

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

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

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

What Is Interest?

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

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


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

Loan APR vs Interest Rate

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

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

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

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

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

How Important Is APR vs Interest Rate?

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

APR vs Interest Rate on Revolving Credit Accounts

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

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

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

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

•   Purchase APR: the standard APR for general purchases.

•   Cash advance APR: the rate charged for cash advances made to the card holder.

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

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

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

What Is a Good Interest Rate for a Personal Loan?

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

The average personal loan rate is currently about 12% APR. However, the rate you receive could be higher or lower, depending on your financial situation and the lender you choose.

Getting a Good APR on a Personal Loan

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

Improving Your Credit

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

Paying Down Your Debts

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

Be Careful When Applying for Credit

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

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

Recommended: Soft vs Hard Credit Inquiry

The Takeaway

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

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

FAQ

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

If the annual percentage rate (APR) on your personal loan is different from the interest rate, it means the lender is charging additional fees, such as origination fees or others.

How important is APR vs interest rate?

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

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

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

Photo credit: iStock/Charday Penn

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

SOPL0124022

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.


💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

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 cash back 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).

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 $17,000 ($34,000 for married couples) for 2023 and $18,000 ($36,000 for married couples) for 2024, 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 on loans of just a few hundred dollars, but with a large 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 (as noted above) 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 Borrow 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.

A better bet is to make a concrete plan together that specifies all the loan’s terms, such as repayment installments and timing. 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.

Recommended: What Happens If You Default on a Personal Loan?

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.

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 $17,000 for 2023 and $18,000 for 2024.

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

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.


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

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. Drafting a structured family loan agreement can help, but you may also want to explore a traditional personal loan from a bank, credit union, or online lender.

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

FAQ

What 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 (or hurt) 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.

Photo credit: iStock/Ridofranz

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.

SOPL0124018