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Starting a new business requires a good idea, customers to whom you can sell your product or service, and money to get you off the ground. A personal loan to start a business can be one option for funding, especially if you don’t yet qualify for a small business loan or you qualify for a personal loan with a low interest rate.

Here’s a look at the pros and cons of using a personal business loan to start your business as well as some alternatives to look into.

What Is a Personal Business Loan?

Personal loans to start a business are offered by some banks, credit unions, and online lenders. The borrowed funds are paid back with interest in regular monthly installments. While most loans will specify what you can spend the money on — a mortgage must be used to buy a house, for example — the sum you receive from a personal business loan can be spent in a variety of ways. It’s important to check with your lender about whether their personal loans can be used for business expenses, as some lenders do not allow it.

Your personal loan interest rate is based on a combination of financial factors, including financial history, income, and credit score. Generally speaking, the higher a person’s credit score, the more likely they are to receive a personal loan with favorable terms and interest rates. Applicants with lower credit scores may find it more difficult to qualify for low-interest rates. That’s because lenders tend to see them as at greater risk of defaulting on their payments and, to offset that risk, they might charge a higher interest rate.


💡 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.

Why Might You Use a Personal Loan to Start a Business?

Taking out personal loans for business may present a number of benefits compared to some other alternatives.

Ease of Qualification

Banks offer personal business loans based on personal income and credit score. When you apply for a business loan, you’ll likely be asked for quite a bit of information during the application process, including your personal and business credit score, annual business revenue and monthly profits, and how long you’ve been in business. The longer your business has existed, the more likely you are to have a record of revenue and profit, and the more likely you are to qualify.

If your business is brand new, it can be tricky to get a business loan right off the bat, and it may be easier to qualify for a personal loan.

Faster Funding

How long it takes to get approved for a personal loan and receive funding will vary by lender. Online lenders are typically faster than banks and credit unions. However, you are likely to receive funding within seven business days.

By contrast, the process for a business loan can be much slower. For example, it can take 60 to 90 days to receive funding from a Small Business Administration (SBA) loan.

Can Have Low Interest Rates

Personal loan applicants with a positive credit history and a healthy credit score may be able to qualify for a low interest rate. In general, interest rates on personal loans can be much more competitive than those on other types of credit.

Credit cards, for instance — although not an inherently bad choice for business credit — can have higher interest rates than other types of lending options. They may also have penalties and fees that personal loans may not have, such as penalty annual percentage rates (APRs) that go into effect if you make a late payment, over-limit fees if you spend more than your credit limit, annual fees, and more.

Flexibility and Versatility

Personal loans have few restrictions on how you’re allowed to use the money you borrow. That means you can spend on anything from buying or renting a building to marketing materials to purchasing inventory, as long as your lender doesn’t restrict the personal loan funds to non-business purposes.

Recommended: 11 Types of Personal Loans & Their Differences

What Are Some Risks of Using a Personal Loan to Start a Business?

Despite the potential advantages of using a personal loan to help you start your business, there are also potential drawbacks to consider.

Some Lenders Don’t Allow Personal Loans for Business

Some lenders do place certain restrictions on how you spend your personal loan. Being upfront about your intentions to use it for business expenses and asking if that is allowed is a good idea. In some cases, it may not be. However, it’s far better to be honest about how you plan to use a loan than risk breaching the loan agreement. If you end up using a loan in a prohibited way, your lender could force you to repay the full amount of the loan with interest.

Can Mean a Smaller Loan

Personal loans generally offer borrowing limits as low as $1,000 and as high as $100,000 for larger personal loans. For small businesses, this might be plenty. But if you’re a larger business that needs more money, you may be better off looking for a loan that can better meet a business’ financial needs.

Can Have Shorter Repayment Terms

Lending periods for personal loans will vary. Typically you can find loans with term lengths of 12 months to five years, sometimes a bit longer. When compared to some small business loans, this is a relatively short period of time. Consider that for SBA loans, maximum terms can be as much as 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory.

Personal Credit Score and Assets Could be Affected

If you take out a personal loan and are unable to make monthly payments, you are putting your personal credit at risk. Missed payments may have a negative effect on your credit score, which can make it more difficult for you to access funding in the future.

Recommended: What Is Considered a Bad Credit Score?

May Qualify for Fewer Tax Deductions

In general, the interest you pay on a personal loan is not tax deductible. However, it may be if you use it for business purposes. This can get a bit tricky. You may only deduct interest on the portion of the loan that is used for business expenses. So if you use any of that money to remodel the bathroom in your home, for example, interest on that portion can’t be deducted.

Businesses are able to deduct interest from bank loans, vehicle loans, credit card debt, and lines of credit.

Personal Business Loans vs Small Business Loans

Borrowing money to pay for business expenses is a decision that takes some consideration. There are different reasons you might want or need a business loan, there are many lenders to choose from, and there are different lending options to compare. Here are some things to think about if choosing between a personal loan for business or a small business loan.

Factor to Consider	Personal Loan for Business	Small Business Loan
Use of funds	Some lenders may not allow personal loan funds to be used for business purposes	Specifically for business purposes — cannot be used for personal use
Qualification	Personal creditworthiness determines approval, interest rate, and loan terms	Lenders will require business financials, proof of time in business, and other details, in addition to possibly taking personal credit into account
Interest rate	Depending on your creditworthiness, interest rate may be lower than other forms of credit, such as credit cards	Depending on the type of loan, interest rates on SBA loans may be lower than some personal loans
Loan amount	Up to $100,000 depending on the lender.	SBA maximum loan amount is $5 million. Some lenders may approve working capital loans for up to several million dollars
Funding time	Depending on the lender, loan funds may be disbursed as soon as the day of approval or in up to seven days	The SBA loan timeline is between 60 and 90 days from application to disbursement. A working capital loan from a traditional lender may be approved quickly and funded shortly after approval
Tax deductibility	Interest is not generally tax deductible	Interest may be tax deductible in some cases

Recommended: Business Loan vs Personal Loan: Which Is Right for You?

Alternatives to Personal Business Loans

Personal loans may not be the best option for everyone and are not the only way you can fund your small business. You may also want to consider small business loans or a business line of credit.

Small Business Loans

Small business loans are offered through online lenders, banks, and credit unions. There are a variety to choose from that may be designed for specific purposes. For example, a working capital loan is designed to help you finance the day-to-day operations of your business. An equipment loan can help you replace aging technology and buy new equipment.

SBA loans are guaranteed by the Small Business Administration, whose aim is to help small businesses get off the ground and grow. That means if you aren’t able to make your payments, the SBA will step in and cover 85% of the default loss. By reducing risk in this way, the organization helps businesses get easier access to capital.

Shopping around for the best small business loan rates is a good way to compare lenders and find the one that works best for your unique financial needs.

Business Lines of Credit

A business line of credit is revolving credit, much like a credit card. You are allowed to borrow up to a certain amount, and you only pay interest on the amount you are currently borrowing — making this option more economical than a term loan for some business owners. As you repay the funds, the amount of credit available to you reverts back to the original limit and you can borrow the money again.

Another advantage to a line of credit over a term loan is the ability to use a check to pay vendors who may not accept credit cards.

Credit Cards

Credit cards, with a current average interest rate of more than 22%, tend to have higher interest rates than other types of funding. For example, the average finance rate for personal loans is about 12.49%, according to the Federal Reserve.

Also, credit cards are revolving credit. If you don’t pay off the balance each month, you can fall deeper into debt. Whereas, installment loans offer fixed monthly payments with a fixed end date.

Business credit cards may be a good choice for some business owners, though, to keep personal and business expenses separate. They may also offer rewards, perks, and bonuses that make them an attractive option.

Recommended: Breaking Down the Different Types of Credit Cards

Merchant Cash Advance

Funding for a merchant cash advance (MCA) is based on a business’ past credit card receipts. Technically not a loan, an MCA is an advance on future revenue. The business repays the MCA lender a percentage of its monthly sales revenue until the debt is paid in full.


💡 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

Can you use a personal loan to start a business? Short answer: Yes. Taking out a personal loan is one way to fund your small business needs, as long as your lender allows the funds to be used for business expenses. There are alternatives, though, including lines of credit and SBA loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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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.

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.

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Student loan consolidation can streamline the federal student loans you’ve accumulated over the years. That can make it easier and possibly more affordable to pay down your debt. But this kind of consolidation can also have downsides, like being in debt longer and possibly paying more interest overall.

Currently, one-third of federal student loan debt is in the Direct Consolidation Loan program, according to EducationData.org. To understand your options, read on to take a closer look at the pros and cons of consolidating student loans and what options you may have. Equipped with this info, you can decide whether debt consolidation is the right next step for you.

What Is Student Loan Consolidation?

A Direct Consolidation Loan is a federal loan under the William D. Ford Direct Loan Program. Consolidation lets you combine one or more existing federal student loans into a new Direct Consolidation Loan. Here are some more details to note:

•   You don’t have to combine all of your federal loans; instead, you can select which eligible loan you’d like to consolidate. The consolidated loan balance is the total remaining principal from the loans you’ve chosen to merge, including any unpaid interest.

•   The loan will have a new interest rate and a longer repayment term. The loan servicer that’s managing your Direct Loan Consolidation repayment might change, too.

•   Most federal Direct Loans and Federal Family Education Loans (FFELs) can be consolidated.

•   Converting private student loans to federal loans through Direct Consolidation isn’t possible. Privately held education loans don’t qualify for this federal program.


💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

Pros of Consolidating Student Loans

Student loan consolidation presents a handful of advantages that help you take control over your repayment journey. Below are the top benefits of a Direct Consolidation Loan of your federal student loans.

Easier to Manage

Over your education, you might’ve opened new loan accounts for various academic years. These loans have different monthly payment amounts and due dates, and they are also likely maintained by different loan servicers.

At its forefront, consolidation simplifies your repayment experience by bundling multiple loans into one neat package. You’ll have one outstanding balance to focus on with just one payment due date to remember so there’s less chance of accidentally missing it (a plus for your credit). And if you have any questions about your loans, you only need to reach out to one servicer.

More Time to Pay Off Your Student Loans

Consolidating your student loans resets your repayment clock. Direct Consolidation Loan terms can be as long as 30 years if you choose a Standard or Graduated Repayment Plan. (Do note, however, that extending your loan term can mean paying more interest over the life of your loan.)

Your maximum timeline to pay back the consolidated loan also depends on your loan’s principal balance:

•   10-year term for amounts under $7,500

•   12-year term for $7,500 to $9,999

•   15-year term for $10,000 to $19,999

•   20-year term for $20,000 to $39,999

•   25-year term for $40,000 to $59,999

•   30-year term for $60,000 or greater

If you need more runway to pay down your federal student debt, a consolidation loan might be an option.

Can Have a Lower Monthly Payment?

Thanks to the extended repayment term that a Direct Consolidation Loan offers, you’re left with a lower monthly payment. The loan’s repayment is stretched over a longer period so your fixed installments are much smaller than you originally had. (As mentioned above, though, you may pay more in interest over the repayment term if you extend it.)

For example, let’s say you’re combining two loans:

•   Loan 1 is $15,000 at 6%

•   Loan 2 is $30,000 at 6.4%

Your original monthly payment for loans 1 and 2 are $166.53, and $339.12, respectively. That’s $505.65 per month in student loan payments.

If you consolidate both loans your principal balance is $45,000. Over a 25-year term at 6.25%, your monthly payment is $296.85 — that’s more than $200 less each month.

Unlocks Income-Contingent Repayment for Parents

If you have a qualifying federal student loan, enrolling in one of four income-driven repayment (IDR) plans can help you access lucrative federal benefits, like Public Service Loan Forgiveness (PSLF). However, Direct PLUS Loans for parents aren’t eligible for IDR.

A consolidation loan gives borrowers with Direct Parent PLUS Loans a way into one IDR plan, the Income-Contingent Repayment (ICR) Plan. After consolidating Parent PLUS Loans, parents can repay the new loan under ICR over 25 years.

The ICR Plan calculates monthly payments either at 20 percent of your discretionary income, or the equivalent of an (income-adjusted) fixed payment over a 12-year period — whichever is lower.

You Can Choose a Federal Loan Servicer

When you have a federal student loan disbursed to you, the account is automatically assigned to a loan servicer. You don’t get a choice in which entity services your loan. Subsequent loans are also automatically assigned to a servicer and not necessarily the same one.

When applying for a Direct Consolidation Loan, you get to choose which loan servicer you prefer. If you’ve had a bad experience dealing with a servicer in the past, consolidation gives you the power to choose a servicer that might be a better fit. It’s currently the only way to switch your loan servicer within the federal system.

Recommended: Student Loan Refinance Guide

Cons of Consolidating Student Loans

Although student loan consolidation offers notable benefits, it also presents a number of potential downsides. Here are a few disadvantages to consider.

Unpaid Interest From Existing Loans, Capitalizes

An easily overlooked downside of loan consolidation involves unpaid interest. If you have unpaid interest on any of the loans you’re combining, the interest is added to your principal balance. This is called interest capitalization.

This means that your new consolidation loan will have a higher principal balance. And moving forward, you’ll pay interest on this higher balance. This could result in paying more for your student debt overall.

You Might Be in Debt Longer

You might be positioning yourself to stay in debt longer than your original repayment timeline. Although a longer term is helpful for lowering monthly payments, it can take a toll on you in other ways.

•   Being in debt longer can take a toll on your mental health. A 2023 study of 331 college graduates found that having high debt was tied to anxiety, depression, and problematic substance abuse.

•   Additionally, being in debt longer might result in delaying other life and financial goals, like buying a first home, starting a family, or saving money for retirement.

Longer Repayment Means More Interest

Another long-term negative effect of loan consolidation is that it can result in paying more interest over time. Although a longer term results in smaller installment payments, it means you’re delaying paying off your debt.

This delay comes at a cost in the form of interest charges. The more interest you pay toward your loan, the more your total borrowing cost.

Losing Federal Loan Benefits

Consolidating your federal student loans might result in lost borrower benefits. Some benefits at stake are interest rate discounts and principal rebates.

A Direct Consolidation Loan also typically resets any payment credit you’ve earned toward federal loan forgiveness under PSLF or an IDR plan. Past qualifying payments that were made before you consolidated won’t count toward the payment requirement for forgiveness. This can ultimately push back your loan forgiveness eligibility.

A one-time IDR account adjustment is in effect through December 31, 2023. If you consolidate your loans before January 1, 2024, qualifying IDR payments will still count toward loan forgiveness. After the adjustment deadline, however, you’ll lose this valuable payment credit.

(Worth noting: If you consolidate your federal student loans with a private loan, you forfeit federal benefits and protections. You’ll learn more about this option below.)

The Application Process Takes Time

How long it takes to consolidate student loans can also be an issue if you’re in a time crunch. Although filling out the application takes an estimated 30 or less, the process overall takes longer. Depending on your unique student loan situation, it can take anywhere from four to six weeks to complete the consolidation process.

Pros of Consolidation	Cons of Consolidation
Simpler repayment experience	Prior unpaid interest added to principal
Extends your term	Keeps you in student debt longer
Lowers installment payments	Might pay more interest
ICR access for parent PLUS borrowers	Lost access to some federal benefits
Lets you choose your servicer	Process isn’t instant

Weighing the Pros and Cons for Yourself

Now you’ve learned what are the pros and cons of student loan consolidation when it comes to federal funds. There’s a lot to mull over if you’re entertaining the idea of consolidating student loans. Pros and cons (and how you prioritize them) might shift depending on your overall repayment strategy.

•   For example, consolidating your loans might make sense if you simply want to declutter your loan accounts or need a lower monthly payment. It might also make sense if your current loan type doesn’t qualify for loan forgiveness or an IDR plan, and consolidation is your only way forward.

•   However, consolidation might not be for you if you’re not working toward loan forgiveness and want to pay the least amount of money toward your education in the shortest time.

Alternatives to Student Loan Consolidation

Sometimes, consolidating student loans isn’t the best approach depending on your situation. If you’re on the fence about pursuing a Direct Consolidation Loan, here are a few other alternatives.

Income-Driven Repayment Plan

If your student loan payment is too difficult to manage and you won’t be able to afford it for the foreseeable future, ask your servicer about an income-driven repayment plan.

IDR plans calculate your monthly payment using your income and family size information. Payments are restricted to a small percentage of your discretionary income, and all plans have a longer-than-standard repayment period.

Most borrowers have four types of IDR plans to choose from:

•   Saving on a Valuable Education (SAVE). Payments are typically 10% of your discretionary income. Its term is 20 years if all your loans are for undergraduate study or 25 years if you’re repaying any graduate-level loans under the plan. This SAVE Plan replaces the REPAYE program.

•   Pay As You Earn (PAYE). Payments are generally 10% of your discretionary income over a 20-year term.

•   Income-Based Repayment (IBR). Your payment is 10% or 15%, over a 20- or 25-year term, depending on when you got the loan.

•   Income-Contingent Repayment (ICR). Over a 25-year term, you’ll pay the lesser of 20% of your discretionary income or the income-adjusted fixed payment you’d pay across 12 years.

Additionally, if you still have a loan balance after completing the plan term, the remainder is forgiven. However, the forgiven balance might be considered taxable income on your federal return.

Deferment or Forbearance

If you can’t manage your current student loan payment due to a temporary financial situation, consider deferment or forbearance.

These relief options are a short-term solution that lets you pause your required federal loan payments until your finances stabilize.

Typically, interest still accrues while you’re in student loan forbearance, and certain loans still accrue interest in deferment. Additionally, the months you’re in deferment or forbearance might not be credited toward loan forgiveness.

Student Loan Refinance

If you have loans that aren’t eligible for consolidation or you have strong credit and aren’t pursuing other federal benefits, refinancing student loans with a private loan is another alternative.

Student loan refinancing is offered by private lenders. You can refinance federal and existing private student loans during this process. The refinancing lender pays off your existing student loan balances and creates a new refinance loan in their place.

The new loan will have a new loan agreement, interest rate, and term. The repayment plans you can access will depend on your lender. Always check your rate with a handful of lenders to find an offer that fits your needs. A student loan refinancing calculator can help you see whether refinancing can save you money.

Keep in mind that refinancing federal loans results in losing access to federal benefits and programs. Learn more about the differences between private and federal student loans before changing your repayment strategy.

The Takeaway

Consolidation can be a useful strategy for some borrowers, but it’s not necessarily for everyone. Take stock of your short- and long-term repayment goals and how the pros and cons of consolidating federal student loans affect them. For instance, a lower monthly payment could be the right choice for one person, but the fact that you might be paying more interest for an extended term could be a no-go for someone else.

If a Direct Consolidation Loan isn’t right for you, explore other repayment paths, including refinancing student loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can student loan consolidation affect your credit score?

Consolidating student loans can affect your credit in indirect ways. For example, payment history is the biggest factor for your FICO® score. Securing a manageable monthly payment via consolidation might help you avoid being late or missing a loan payment. These consistent payments by your due date can build your credit over time.

Can consolidated student loans be forgiven?

Yes, Direct Consolidation Loans are an eligible loan type for federal student loan forgiveness programs. Consolidated loans can be included if you’re earning forgiveness through programs, like Public Service Loan Forgiveness and through an income-driven repayment plan.

Does consolidating student loans lower interest rates?

No. Your Direct Consolidation interest rate is calculated based on the weighted average of the rates on your consolidated loans. This average is then rounded up to the closest one-eighth of a percent, and there’s no rate cap in place.

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Photo credit: iStock/Jovanmandic

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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.

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 .

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