Credit cards typically expire two to five years after they are issued. The date on the card reflects the final month and year you can make purchases with your card.
Cards have expiration dates for reasons ranging from security to marketing, but issuers are usually very good about sending a new card before the old one is invalidated.
Here’s a closer look at what credit card expiration dates are and why they matter.
Key Points
• Credit card expiration dates range from two to five years, enhancing security and functionality.
• Issuers use expiration dates to replace worn cards, market new products, and update brand images.
• New cards are typically sent 30 to 60 days before the old card expires and usually require activation.
• It’s wise to destroy the old card and update automatic billing to avoid interruptions.
• Card expiration does not affect account payments; minimum monthly payments are still required.
What Is a Credit Card Expiration Date?
An important aspect of how credit cards work, a credit card’s expiration date represents the last day you can use it for purchases. Consider these details:
• Credit card expiration dates are typically printed as a two-digit month followed by a two-digit year. The last day of the month printed is the last day that you can use your credit card to make new purchases. If you try to make a purchase on the first day of the following month, the transaction will be declined.
• For example, if your card has an expiration date of 06/26, then you can use that card until June 30, 2026. If you were to try to use that card to make a purchase somewhere that accepts credit card payments on July 1, 2026 — or any time thereafter — you could expect a situation wherein your credit card was declined, per credit card expiration date rules.
Fortunately, credit card issuers will typically mail you a new card with a new expiration date long before your card expires — you won’t have to worry about applying for a credit card.
Most card issuers will mail out a new card 30 to 60 days before your old card is due to expire, so you’ll never be without a valid card.
Why Do Credit Cards Expire?
There are several reasons that credit cards expire.
• For one, the credit card expiration date serves as an additional security feature.
• Credit cards also expire so that card issuers can keep track of their inventory and provide customers with new cards with updated features and technology.
• Also, the magnetic stripes and computer chips in credit cards also wear out, so having an expiration date allows card issuers to ensure that cards don’t fail as often.
• Beyond reasons of functionality, replacing credit cards also gives card issuers an opportunity to market new products (and credit card rewards) and update their brand image.
How to Find Your Credit Card Expiration Date
Your credit card’s expiration date will always appear on the card. In most cases, the expiration date will appear on the front of the card, on the right side, below the account number, which you’ll be familiar with if you know what a credit card is.
However, if the account number is printed on the back of the card, then that’s where you’ll most likely find the card’s expiration date.
Keep in mind that this number is separate from a CVV number on a credit card, which is usually a three- or four-digit number without a forward slash in it.
Once your card expires, it is no longer valid for new purchases. However, you should have already received a new card.
After you’ve activated your new card, there’s no reason to keep your old card, and you should destroy it; more on that in a moment. That’s because your old card still has your account number on it, which could help someone to make a fraudulent transaction with your account (though rest assured in this case there’s always the option to dispute a credit card charge).
What to Do When the New Card Arrives
Once you’ve received your new credit card with the updated expiration date, there’s no reason to continue to use your old card.
• You can simply activate your new credit card, and replace your old one in your wallet or purse.
• Your new credit card should have the same terms, including the credit card APR and credit limit.
• Then, destroy your old card. You can destroy your plastic cards by cutting them up with scissors (it’s wise to cut the magnetic chip in half) or by using a shredding machine that’s designed for destroying plastic cards.
If you have a metal card, the card issuer will typically mail you a return envelope to send the card back for destruction.
However, if you haven’t received your new card and you notice your credit card expiration date is approaching, you should contact your card issuer before your old card expires. For example, if you’ve changed mailing addresses, your new card may have been sent to your previous residence. Or your old card may have gotten lost in the mail. Either way, you’ll want your old card replaced before it expires so that you can continue making charges to it.
Don’t forget: Once you have your new card, you also may need to update any accounts for which you were using your old card for automatic billing every month or every year. This can include everything from streaming subscriptions to utilities. Doing so will ensure that your services remain uninterrupted when your old card does expire.
With your new card up and running, you’ll continue to make at least the credit card minimum payment as you’d been doing.
Your credit card’s expiration date marks the last date it will still be valid for new purchases. You can find the expiration date on your credit card on either the front or the back of the card, and it will usually appear as a two-digit month followed by a two-digit year. You don’t usually have to worry about taking steps to get a new card when your old one is set to expire — the credit card issuer will usually mail you a card with a new expiration date beforehand. Understanding the expiration date can be an important part of using a credit card properly and easily.
Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.
Enjoy unlimited cash back rewards with fewer restrictions.
FAQ
Can I still use my credit card the month it expires?
Yes, your credit card will remain valid until the last day of the month it expires. It will no longer be valid on the first day of the following month.
Why do credit cards expire?
The credit card expiration date can serve as an additional security feature, as a way to replace worn magnetic stripes and computer chips in cards, and as an opportunity for card issuers to market new products and update their brand image.
Does your credit card automatically renew?
A credit card account isn’t attached to the credit card’s expiration date. The account usually renews every year regardless of whether the card itself expires. Card issuers also will automatically mail customers new cards within two months of their existing card’s expiration date.
Is it safe to give out your credit card number and expiry date?
For a merchant to accept credit card payments with your card not present, such as with a transaction online or over the phone, you’ll need to give your card’s number and expiration date, among other information. Otherwise, you should keep all of your credit card details private to avoid fraud and/or identity theft.
Do I have to pay off my credit card before it expires?
The expiration of your credit card is unrelated to your payments. You need to make at least the credit card minimum payment each month before your account’s due date. This date doesn’t correlate with your credit card’s expiration date.
Photo credit: iStock/mrgao
SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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.
Qualifying for a personal loan when self-employed can present some challenges. Self-employed individuals may find it difficult to produce traditional documentation — such as W-2s or pay stubs — used to verify income. And their income may not be steady, as it is with 9-to-5 workers. But that doesn’t necessarily mean you’re out of luck if you’re seeking a quick infusion of cash. Here’s a look at some ways to get a personal loan when you’re self-employed.
Key Points
• Self-employed individuals can face challenges securing personal loans due to unsteady incomes and difficulty providing traditional income verification.
• Self-employed applicants can provide alternative income documentation, such as tax statements and bank statements, to demonstrate earnings.
• Searching for lenders specializing in self-employed borrowers can streamline the personal loan application and approval process.
• Self-employed individuals often undergo increased scrutiny during underwriting, potentially requiring additional tax returns or banking documents.
• Building credit scores, collaborating with specialized lenders, and considering a cosigner can enhance personal loan approval odds.
How to Get a Personal Loan If You’re Self-Employed
A personal loan is a type of installment loan that can be used for nearly any personal expense, including home improvements, a vacation, or consolidating your credit card debt. If you’re considering making a big purchase, like buying an engagement ring, a personal loan can be an alternative to using a high-interest credit card when you don’t have the means to pay the balance off right away.
Personal loans are typically unsecured, meaning a lender won’t require collateral. However, they can also be secured, usually by the asset purchased with the loan. Unsecured loans are usually approved based on the financial standing and creditworthiness of the borrower.
In addition to looking at an applicant’s credit history, lenders will also typically consider a potential borrower’s income when deciding whether or not to approve a loan and, if so, what the rates and terms will be. Those who are self-employed may find it more difficult to show proof of income, especially if their income fluctuates from month to month and year to year.
Self-Employed Loan Requirements
Loan requirements for self-employed individuals will be similar to the typical loan requirements for any borrower as determined by the lender. In addition to evaluating factors like the applicant’s credit score, many lenders will require proof of income.
Typically, the requirements for personal loan approval include pay stubs and W-2s to verify income, which most self-employed people can’t provide. It is possible for self-employed individuals to show proof of income, but it may require a little more legwork, as you’ll learn below.
One point worth noting: In general, lenders are looking for borrowers who have income stability, and it can help if the borrower has been working in a single industry for at least two years. A shorter employment history as a freelancer could be seen as indicating that you are a borrowing risk.
Showing Proof of Income When Self-Employed
Those who are self-employed have a couple of options for showing a lender they have sufficient and reliable income. Here are a few options that self-employed individuals could provide as income documentation.
Tax statements: Self-employed individuals can use their tax returns from the prior two or three years to offer proof of income. These forms include your income earned and taxes paid for those tax years. Lenders often view tax documents as a reliable source of income proof because they are legal documents.
Bank statements: Bank statements could be used if there is a regular history of deposits that illustrate consistent income.
Profit and loss statement: If you own your own business, this document (called a P & L) provides an overview of your costs, expenses, and revenue.
Court-ordered agreements: These may include things like alimony or child support.
Keep in mind that each lender will likely have their own application requirements. Contact the individual lender if you have specific questions on the types of documentation they’ll accept.
Consider Having a Cosigner
In the event that you are still struggling to gain approval for a personal loan with your self-employed proof of income, one option is to consider adding a cosigner. A cosigner is someone who agrees to pay back the loan should you, the primary borrower, default on making payments.
A cosigner can be a close friend or family member, ideally one who has a strong credit history who will strengthen your loan application. Given that a cosigner’s responsibilities are significant, this is not an undertaking to enter into without considerable thought and trust.
Awarded Best Online Personal Loan by NerdWallet.
Apply Online, Same Day Funding
Build Your Credit Score Before Applying
Before applying for a personal loan (or any loan, for that matter), it can be wise to check your credit score. If it’s not at least in the good range, you may want to wait to apply for your loan until you can positively impact your rating. In general, the higher your score, the lower the interest rate and more favorable the terms you’ll be offered.
Key ways to build your score include always making payments on time, keeping your credit usage low, having a good credit mix and long credit history, and not applying for too much credit in a short period of time.
Compare Lenders Who Work With Self-Employed Borrowers
As you look for a personal loan, you may want to do an online search for lenders who explicitly say they work with self-employed borrowers. These financial institutions are likely to have systems in place that tailor the process to those who don’t, say, have W-2s. This can make application and approval simpler.
Prepare a Strong Loan Application Package
In addition to gathering the necessary documentation for your application (as detailed above), also consider ways to strengthen your package for a loan as a self-employed person. These include making sure you keep your personal and business finances separate, so you can accurately reflect your financial situation. If you are going to have a cosigner on the loan, ask them to prepare their paperwork as well.
Understand and Avoid Predatory Lenders
As you hunt for a personal loan when self-employed, you may come across unscrupulous predatory lenders, which typically offer no-credit-check loans at exorbitant interest rates (into the triple digits) and with steep fees. Often, they state the interest rate in a way that doesn’t reveal just how high it is (say, they cite a weekly payment vs. the monthly payment most people are accustomed to). They may use high-pressure tactics, such as saying the offer is only good for a very limited time.
If you are struggling to get approved due to a low credit score or lack of steady income, these lenders may seem to offer you a solution. Beware: These predatory lenders can keep you trapped in a cycle of growing debt.
Why It’s Difficult for the Self-Employed to Get a Personal Loan
It can be more challenging for self-employed individuals to provide proof of income to lenders, which can make it more challenging for them to get approved for a personal loan. But it’s important to note that each loan application is unique, and employment status is just one consideration.
For example, a self-employed individual who has a stellar credit history and who has been self-employed for a few years may be in a better position to apply for a personal loan than someone who has just transitioned into managing their own business.
The Income Challenge
Proving consistent and stable income can be the biggest challenge when getting a personal loan as a self-employed individual. Because you may not be guaranteed the same payment each pay period, lenders may request specific documentation in order to verify the fact that you have enough cash coming in to make payments on the loan. Some lenders may request tax returns for several years in order to verify your income.
Consistency Matters
Consistency in income is another major hurdle when seeking a loan for the self-employed. It’s not uncommon for self-employed people to experience fluctuation in their income. While some slight fluctuation may be acceptable to a lender, for the most part they are looking for consistent payments getting deposited into your account, even better if there is an increasing trend over time.
Higher Scrutiny During the Underwriting Process
Self-employed borrowers will likely face a higher level of scrutiny during the underwriting process which precedes final loan approval. For instance, if you lack steady, predictable income, you may be asked for additional tax returns or banking documents. Or P&L sheets or letters from your accountant about your business income could be requested. This is because lenders typically view those who are self-employed as less creditworthy and more of a risk to default on a loan.
Personal Loan Alternatives When Self-Employed
Personal loans aren’t the only option for self-employed individuals looking to borrow money to pay for expenses. Personal loan alternatives to consider include a credit card, cash advance, or a home equity loan.
Credit Cards With 0% APR Promotions
Credit cards can have high-interest rates, but ones with a 0% APR promotion (aka a balance transfer card) could be a great tool to pay for an upcoming expense. Just be sure to pay off the credit card before the promotional period ends and interest starts accruing.
A cash advance is a short-term loan generally offered by your credit card which allows you to borrow cash against your existing line of credit. Cash advances can provide an avenue for you to get quick access to cash, but there may be additional fees and a higher interest rate than usual. Be sure to read all the terms and conditions outlined by your credit card company before borrowing a cash advance.
Home Equity Loans or HELOCs
If you are a homeowner, you may be able to tap into the equity you’ve built in your home using a home equity loan or home equity line of credit (HELOC). A home equity loan is an installment loan where the borrower receives a lump sum payment and repays it in regular payments with interest.
A HELOC, on the other hand, is a revolving line of credit that the borrower can draw from and, once it is repaid, continue drawing from during a specified period of time.
Business Loans
Small business loans can be used to pay for business expenses. Self-employed individuals may be able to qualify for loans backed by the U.S. Small Business Administration (SBA), as well as private small business loans offered by banks, credit unions, and online lenders.
It is important to keep your personal and business expenses separate as a self-employed person. If you are using the money for a personal expense, you’ll want to avoid borrowing a business loan. Also keep in mind that many lenders don’t allow you to use personal loans for business expenses.
Peer-to-Peer Lending
Peer-to-peer lending bypasses the usual financial institutions and allows companies and individuals to invest in others via loans. You may have heard of some of the popular platforms, such as Kiva, Upstart, and Lending Club. These may be more accommodating for self-employed borrowers who are finding it challenging to secure a loan.
Secured Personal Loan
While most personal loans are unsecured, meaning they are approved based on the applicant’s creditworthiness, some of them are secured, meaning they are backed by an asset, known as collateral. Since these secured loans involve collateral, they are considered less risky. If the borrower defaults, the lender knows they can seize an asset that can help them recoup what is owed. Typical examples of collateral for personal loans include real estate, vehicles, cash in a bank or investment account, and other items of value.
The Takeaway
The challenge for self-employed individuals applying for a personal loan will generally be providing proof of income. Alternatives to traditional proof of income documents include tax or bank statements. Fortunately, many lenders understand that a full-time job isn’t the only qualifier of financial stability and will also consider factors like your credit score, financial history, and whether you have a cosigner.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Can you get any loans if you’re self-employed with no proof of income?
It is possible to get a loan if you are self-employed. However, with zero proof of income, it may be challenging to gain approval for a loan. To improve your odds of approval, you may consider adding collateral to the loan or applying with a cosigner.
Are there any loans for self-employed people with bad credit?
While a strong credit history can help strengthen a loan application, it’s not impossible to qualify for a loan with bad credit. If you can show a consistent and stable income history, that could help improve your application. You’ll likely pay a higher interest rate and enjoy less favorable terms than if your score were higher, however. Another option to qualify could be to add a cosigner.
Can self-employed freelance workers get personal loans?
Yes, self-employed freelance workers can qualify for a personal loan. Instead of providing W-2 documents to verify their income, they will need to provide alternatives such as tax documents or bank statements. Applicants who have been working in a specific industry as a freelancer for two years or more may be viewed more favorably by lenders.
What documents do self-employed borrowers need to apply for a loan?
To apply for a personal loan, a self-employed person should probably gather tax returns, bank statements, profit and loss statements, and any documentation of other income sources (such as alimony). If you are working with a cosigner, they will also need to gather their documentation.
How can self-employed people improve their chances of getting approved for a loan?
Ways that a self-employed person can improve their chances of personal loan approval include building your credit score, working with lenders who specialize in loans for the self-employed, and considering whether to add a cosigner.
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.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
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 .
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
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.
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 Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a way for self-employed individuals and small business employers to set up a retirement plan.
It’s one of a number of tax-advantaged retirement plans that may be available to those who are self-employed, along with solo 401(k)s, and traditional IRAs. These plans share a number of similarities. Like 401(k)s, SIMPLE IRAs are employer-sponsored (if you’re self-employed, you would be the employer in this case), and like other IRAs they give employees some flexibility in choosing their investments.
SIMPLE IRA contribution limits are one of the main differences between accounts: meaning, how much individuals can contribute themselves, and whether there’s an employer contribution component as well.
Here’s a look at the rules for SIMPLE IRAs.
SIMPLE IRA Basics
SIMPLE IRAs are a type of employer-sponsored retirement account. Employers who want to offer one cannot have another retirement plan in place already, and they must typically have 100 employees or less.
Employers are required to contribute to SIMPLE IRA plans, while employees can elect to do so, as a way to save for retirement.
Employees can usually participate in a SIMPLE IRA if they have made $5,000 in any two calendar years before the current year, or if they expect to receive $5,000 in compensation in the current year.
An employee’s income doesn’t affect SIMPLE IRA contribution limits.
SIMPLE IRA Contribution Limits, 2025 and 2026
Employee contributions to SIMPLE IRAs are made with pre-tax dollars. They are typically taken directly from an employee’s paycheck, and they can reduce taxable income in the year the contributions are made, often reducing the amount of taxes owed.
Once deposited in the SIMPLE IRA account, contributions can be invested, and those investments can grow tax deferred until it comes time to make withdrawals in retirement. Individuals can start making withdrawals penalty free at age 59 ½. But withdrawals made before then may be subject to a 10% or 25% early withdrawal penalty.
Employee contributions are capped. For 2025, contributions cannot exceed $16,500 for most people. For 2026, it’s $17,000. Employees who are aged 50 and over can make additional catch-up contributions of $3,500 in 2025, and $4,000 in 2026, bringing their total contribution limit to $20,000 in 2025, and $21,000 in 2026. In both 2025 and 2026, those aged 60 to 63 can make a catch-up contribution of up to $5,250, instead of $3,500 or 4,000, for a total of $21,750 in 2025, and $22,250 in 2026.
See the chart below for SIMPLE IRA contribution limits for 2025 and 2026.
2025
2026
Annual contribution limit
$16,500
$17,000
Catch-up contribution for age 50 and older
$3,500 (ages 50-59, 64+)
$5,250 (ages 60-63)
$4,000 (ages 50-59, 64+)
$5,250 (ages 60-63)
🛈 While SoFi does not offer SIMPLE IRAs at this time, we do offer a range of other Individual Retirement Accounts (IRAs).
Get a 1% IRA match on rollovers and contributions.
Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1
1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
Employer vs Employee Contribution Limits
Employers are required to contribute to each one of their employees’ SIMPLE plans each year, and each plan must be treated the same, including an employer’s own.
There are two options available for contributions: Employers may either make matching contributions of up to 3% of employee compensation — or they may make a 2% nonelective contribution for each eligible employee.
If an employer chooses the first option, call it option A, they have to make a dollar-for-dollar match of each employee’s contribution, up to 3% of employee compensation. (If the employer chooses option B, the nonelective contribution, this requirement doesn’t apply.) An employer can offer smaller matches, but they must match at least 1% for no more than two out of every five years.
In option A, if an employee doesn’t make a contribution to their SIMPLE account, the employer does not have to contribute either.
In the second option, option B: Employers can choose to make nonelective contributions of 2% of each individual employee’s compensation. If an employer chooses this option, they must make a contribution whether or not an employee makes one as well.
Contributions are limited. Employers may make a 2% contribution up to $350,000 in employee compensation for 2025, and up to $360,000 in employee compensation for 2026.
(The 3% matching contribution rule for option A is not subject to this same annual compensation limit.)
Whatever contributions employers make to their employees’ plans are tax deductible. And if you’re a sole proprietor you can deduct the employer contributions you make for yourself.
See the chart below for employer contribution limits for 2025 and 2026.
2025
2026
Matching contribution
Up to 3% of employee contribution
Up to 3% of employee contribution
Nonelective contribution
2% of employee compensation up to $350,000
2% of employee compensation up to $360,000
SIMPLE IRA vs 401(k) Contribution Limits
There are other options for employer-sponsored retirement plans, including the 401(k), which differs from an IRA in some significant ways.
Like SIMPLE IRAs, 401(k) contributions are made with pre-tax dollars, and money in the account grows tax deferred. Withdrawals are taxed at ordinary income tax rates, and individuals can begin making them penalty-free at age 59 ½.
For employees, contribution limits for 401(k)s are higher than those for SIMPLE IRAs. In 2025, individuals can contribute up to $23,500 to their 401(k) plans. Plan participants age 50 and older can make $7,500 in catch-up contributions for a total of $31,000 per year. In addition, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for a total of $34,750.
In 2026, individuals can contribute $24,500 to their 401(k), and those 50 and older can make $8,000 in catch-up contributions for a total of $32,500. For 2026, those aged 60 to 63 may again contribute an additional $11,250 instead of $8,000, for a total of $35,750.
Employers may also choose to contribute to their employees’ 401(k) plans through matching contributions or non-elective contributions. Employees often use matching contributions to incentivize their employees to save, and individuals should try to save enough each year to meet their employer’s matching requirements.
Employers may also make nonelective contributions regardless of whether an employee has made contributions of their own. Total employee and employer contributions to a 401(k) could equal up to $70,000 in 2025 or 100% of an employee’s compensation, whichever is less. For those aged 50 and older, that figure jumps to $77,500, or $81,250 for those aged 60 to 63. In 2026, total employee and employer contributions are $72,000, or $80,000 for those 50 and up, or $83,250 for those aged 60 to 63.
As a result of these higher contribution limits, 401(k)s can help individuals save quite a bit more than they could with a SIMPLE IRA. See chart below for a side-by-side comparison of 401(k) and SIMPLE IRA contribution limits.
SIMPLE IRA 2025
SIMPLE IRA 2026
401(k) 2025
401(k) 2026
Annual contribution limit
$16,500
$17,000
$23,500
$24,500
Catch-up contribution
$3,500 (ages 50-59, 64+)
$5,250 (ages 60-63)
$4,000 (ages 50-59, 64+)
$5,250 (ages 60-63)
$7,500
$11,250 (ages 60-63)
$8,000 (ages 50-59, 64+)
$11,250 (ages 60-63)
Employer Contribution
Up to 3% of employee contribution, or 2% of employee compensation up to $350,000
Up to 3% of employee contribution, or 2% of employee compensation up to $360,000
Matching and nonelective contributions up to $70,000
($77,500 ages 50-59, 64+)
($81,250 ages 60-63)
Matching and nonelective contributions up to $72,000.
($80,000 ages 50-59, 64+)
($83,250 ages 60-63)
SIMPLE IRA vs Traditional IRA Contribution Limits
Individuals who want to save more in tax-deferred retirement accounts than they’re able to in a SIMPLE IRA alone can consider opening an IRA account. Regular IRAs come in two flavors: traditional and Roth IRA.
Traditional IRAs
When considering SIMPLE vs. traditional IRAs, the two actually work similarly. However, contribution limits for traditional accounts are quite a bit lower. For 2025, individuals could contribute $7,000, or $8,000 for those 50 and older. In 2026, individuals can contribute $7,500, or $8,600 for those 50 and older.
That said, when paired with a SIMPLE IRA, individuals under 50 could make $23,500 in total contributions in 2025, which is the same as a 401(K) for that year. In 2026, they could make $24,500 in total contributions, which is the same as a 401(k) for that year, as well.
💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.
Contributions to Roths are made with after-tax dollars. Money inside the account grows-tax free and individuals pay no income tax when they make withdrawals after age 59 ½. Early withdrawals may be subject to penalty. Because individuals pay no income tax on withdrawals in retirement, Roth IRAs may be a consideration for those who anticipate being in a higher tax bracket when they retire.
Roth contributions limits are the same as traditional IRAs. Individuals are allowed to have both Roth and traditional accounts at the same time. However, total contributions are cumulative across accounts.
See the chart for a look at SIMPLE IRA vs. traditional and Roth IRA contribution limits.
SIMPLE IRA 2025
SIMPLE IRA 2026
Traditional and Roth IRA 2025
Traditional and Roth IRA 2026
Annual contribution limit
$16,500
$17,000
$7,000
$7,500
Catch-up contribution
$3,500 (ages 50-59, 64+)
$5,250 (ages 60-63)
$4,000 (ages 50-59, 64+)
$5,250 (ages 60-63)
$1,000
$1,100
Employer Contribution
Up to 3% of employee contribution, or 2% of employee compensation up to $350,000
Up to 3% of employee contribution, or 2% of employee compensation up to $360,000
None
None
The Takeaway
SIMPLE IRAs are an easy way for employers and employees to save for retirement — especially those who are self-employed (or for companies with under 100 employees). In fact, a SIMPLE IRA gives employers two ways to help employees save for retirement — by a direct matching contribution of up to 3% (assuming the employee is also contributing to their SIMPLE IRA account), or by providing a basic 2% contribution for all employees, regardless of whether the employees themselves are contributing.
While SIMPLE IRAs don’t offer the same high contribution limits that 401(k)s do, individuals who want to save more can compensate by opening a traditional or Roth IRA on their own.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Help build your nest egg with a SoFi IRA.
Photo credit: iStock/FatCamera
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
Filing taxes as a beginner can be intimidating, but once you’ve done it a couple of times, it can get easier. You’ll know the process and just which documents and numbers you’ll need to complete your forms. That applies whether you file on your own or work with a tax preparer.
So, here’s a great starting point for learning how to file taxes when you aren’t so familiar with the procedure.
Key Points
• To file taxes as a beginner, gather essential documents like Social Security number, W-2, 1099 forms, and bank account details.
• Stay organized and informed throughout the year to simplify tax preparation.
• Choose between online and manual tax filing methods; online is faster and reduces errors.
• Meet tax deadlines by filing on time or using IRS Online Payment Agreement for installment plans.
• Check for qualifying tax credits and deductions, such as student loans, work expenses, and college tuition.
What Do You Need to File Your Taxes?
If this is your first time filing, it’s a good idea to gather everything you need before you sit down at a computer or with an accountant. Here’s what you’ll need:
• Social Security number: If you aren’t sure, ask your parents or legal guardians. Once you start filing taxes, it’s a good idea for you to keep your Social Security card and other important documents, like your birth certificate, instead of leaving them at your parents’ house.
• Wage and income information: For most first-time filers, this will simply be a W-2 form from your employer.
◦ If you did any freelance or contacted work, you should receive 1099 forms from each entity that paid you.
◦ If you have a bank account or investments that earned interest, and you will have received forms for those, typically a 1099-INT or 1099-DIV.
• Documentation for tax credits and deductions: When doing your taxes at a young age, it is unlikely that you will qualify for many tax credits and deductions, if any at all. And because the standard deduction has increased significantly over the years, you will likely take the standard deduction (instead of itemized), for which you won’t need any documentation.
◦ If you’re a student, also look for the form 1098-T from your school, which details tuition payments you have made and funds received (such as grants), to help you identify whether you are eligible for any deductions. In addition, be aware that some college scholarships or grants may be considered taxable income.
• Bank account info: If you expect to receive a refund and want the money electronically deposited into your bank account, you need to have your account number and routing number at the ready. If you owe money, you can pay from your bank account, a credit or debit card, or a paper check or money order.
The IRS also advises checking with parents before filing to see if they are claiming you as a dependent.
Where Can You Fill Out Your Taxes?
When learning how to do taxes for the first time, one big question is exactly where to get this done. The IRS allows you to fill out your taxes in several ways, either on paper or electronically.
Filing Online
You can file online directly through the IRS website with a tool called IRS Free File. And if your adjusted gross income (AGI) is $84,000 or less, the IRS currently offers free guided tax preparation software. Even if you brought in more than $84,000, the IRS makes its tax forms available for e-file free of charge. Check the IRS website for updates regarding this program for each calendar year.
However, navigating tax forms can be overwhelming. Purchased tax software comes with educational resources and interactive platforms that prompt you for the correct information. Using tax software could help filers avoid math errors and find deductions and tax credits they may not have otherwise known about.
As a filer, it’s up to you to research popular tax software solutions (such as TurboTax, H&R Block, TaxSlayer, and TaxAct) and find the option that suits you best. Prices can range from about $40 to $125 or more and up.
Filing Manually
The old method of filing by hand with pen and paper is still possible, though these returns may take longer to process.
Because pen and paper can potentially lead to errors, it is a good idea for first-time and veteran filers to utilize free or purchased online software or even a tax professional.
Tax professionals can file manually and online, but the IRS encourages all accountants to utilize the online option. For a speedy return and fewer errors, most tax professionals will likely file electronically for you.
As a first-time filer, your tax situation will not likely be complex enough to warrant a tax professional. But as your finances become more complicated — with investments, real estate, small business ownership, and more — a tax accountant may make sense.
Another benefit of working with an accountant can be their training and knowledge. A professional may be able to help you find (legal) ways to pay less taxes.
Increase your savings with a limited-time APY boost.*
*Earn up to 4.30% Annual Percentage Yield (APY) on SoFi Savings with a 0.70% APY Boost (added to the 3.60% APY as of 11/12/25) for up to 6 months. Open a new SoFi Checking & Savings account and enroll in SoFi Plus by 1/31/26. Rates variable, subject to change. Terms apply here. SoFi Bank, N.A. Member FDIC.
How Do You Pay Your Taxes?
When filing taxes for the first time, there’s a good chance you will not owe anything. In the event that you do owe the government money, however, you have multiple options for paying your taxes:
• IRS Direct Pay: The amount owed will be debited from a checking or savings account.
• Credit or debit card: You can pay your outstanding tax balance with a debit or credit card online. This is a nice option if you have cash back rewards, but you will typically be paying a high interest rate if you carry a balance.
• Check or money order: The IRS still accepts checks in the mail, as well as money orders.
• Installment agreement: If you cannot afford your tax bill all at once, you can use the IRS Online Payment Agreement tool to apply for an installment plan.
Filing Tips for First-Timers
Feeling nervous about doing taxes for the first time? Here are some tips for making the experience easier; consider them steps for how beginners can file taxes.
1. Watch Your Income
To determine if you need to file, you can watch your income throughout the year. Once you pass a certain threshold, you will be required to file. This filing threshold can vary depending on your situation, so you’ll need to check out the IRS filing requirements .
If you know that you will make enough money to pay taxes, it’s a good idea to ensure your employer is withholding the proper amount of money from each paycheck for federal, state, city, and even school district taxes. If you believe your employer is not withholding enough (or is withholding too much), the IRS recommends filling out a Form W-4 to change your withholding.
Tax documents will start arriving in the mail or digitally early in the new year, typically near the end of January or in early February. As these documents come in, it’s wise to store them in a safe place, like a manila folder in a fire safe or an encrypted folder on your computer. When it’s time to file, you’ll be able to access all your tax forms quickly and easily, rather than hunting all over for them. Being organized this way can also help you be aware of any missing tax documents.
If your tax situation is more complex — for instance, if you are self-employed, receive student loans, or make charitable donations — it’s a good idea to hold on to relevant forms throughout the year. Self-employed individuals, for example, may want to save receipts for business expenses incurred throughout the year. These can help you claim tax deductions for freelancers.
3. Learn About Potential Credits
When filing taxes for the first time, you may not be eligible for many tax credits. Tax preparation software, a tax professional, or even the IRS’s guided filing tool may be able to help you find out which credits you qualify for.
Before filing on your own, it could be wise to review the IRS list of tax credits for individuals to see if any apply to you.
4. Understand Potential Deductions
Similarly, most first-time filers will want to take the standard deduction instead of itemizing because it may offer the larger discount. However, the IRS does offer itemized deductions for student loan interest and for work expenses, if you are self-employed.
You can familiarize yourself with IRS deductions, including tax deductions for college students (if that applies) before filing to determine if itemizing deductions is right for you.
5. Hit Your Deadlines
Tax Day in the United States is traditionally April 15, but if that date falls on a Saturday, Sunday, or legal holiday, the tax deadline moves out to the next business day.
If you owe estimated taxes each quarter (say, if you are self-employed), you will need to pay taxes four times a year. Working with a tax accountant may be in your best interest. Members of the Armed Forces may have special rules governing the due date of their taxes.
Individuals can also apply for a tax extension; this extends the due date of filing, but not the due date of payment. That means you might get a six-month extension to file the paperwork, but if you have not paid what you owe by April 15, you could be subject to late penalties.
Do You Need to File Taxes Every Year?
Not everyone is required to file tax returns every year. It all comes down to your unique tax situation and how much you earned. However, if you earn income throughout the year, there is a good chance you will need to file. It’s a good idea to review the IRS filing requirements or speak with an accountant if you are not sure.
Tax Filing Mistakes to Avoid
Working with tax preparation software or an accountant can help avoid some common mistakes when filing taxes, but familiarizing yourself with some of the most common errors can be helpful, no matter how you’re filing:
• Forgetting about state and city. We often think about federal income taxes, but your city and state (and maybe even school district) could also have their own taxes that you are required to pay.
• Not filing. Income thresholds can change each year. It’s always a good idea to check whether you are required to file taxes for a given year even if you didn’t have to for the previous year.
• Not checking with parents. If you are filing taxes for the first time, your parents are likely used to claiming you as a dependent. Talking with them about dependent status before filing could be a smart move.
• Filing without all your forms. Getting taxes over with early can relieve a lot of stress (and means you can get your tax refund early), but if you have any tax form stragglers, like a 1099, that appear in the mail after you’ve completed your taxes, you might land in trouble with the IRS.
• Entering in the wrong info. Tax preparation is not something to speed through. Even though e-filing helps avoid simple pen-and-paper mistakes, it’s still possible to incorrectly enter things like your birth date or Social Security number. Slow and steady — with lots of double- and triple-checking — wins the race.
The Takeaway
Filing taxes as a beginner can be intimidating, but if you put some time and organizational effort into the process, it can go smoothly. You’ll also be better prepared for next year’s Tax Day once you’ve filed. Whether you do your own taxes or work with a tax professional, it’s wise to gather the necessary paperwork, understand your potential credits and deductions, and file on time and precisely.
The fastest way to get a tax refund, if you’re due one, is a direct deposit into your bank account. If you’re a first-time filer, it’s wise to have an account ready to receive any funds heading your way.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.60% APY on SoFi Checking and Savings.
FAQ
What happens if you make an error on your taxes?
As soon as you realize you have made a mistake on your taxes, you can amend it with Form 1040-X or by calling the IRS at 800-829-1040. In general, the IRS does not consider mistakes to be tax fraud, though you may end up paying late penalties. If you have intentionally made errors and the IRS catches you, you could be charged with a tax crime.
How much income do I need to make in order to pay taxes?
The amount of income that you need to make to pay taxes can fluctuate each year and depends on your filing status (single; head of household; married, filing jointly; married, filing separately; qualifying widow/widower). For the 2025 tax year, a single filer under 65 needed to make $15,750 or more to file.
What is the deadline for filing taxes?
In general, the tax deadline in the U.S. is April 15. If this date falls on a weekend or legal holiday, the deadline shifts to the next business day. Members of the military may have special rules affecting their deadline, and self-employed individuals typically must pay quarterly estimated taxes throughout the year.
How can I avoid tax scams?
The best way to avoid tax scams is to educate yourself on what they look like. The most common tax scams are email phishing scams and phone scams. Remember that the IRS will never email you requesting personal or financial information nor will the IRS call you and threaten legal action or leave pre-recorded, urgent messages.
Photo credit: iStock/PeopleImages
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet
Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.
See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.
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.
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.
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.
A personal loan can be a useful option when you need to borrow money to cover a medical bill, fund a home repair, or consolidate debt. This kind of loan can offer a considerable lump sum of cash at a relatively low interest rate, but the lender may charge fees. You’ll need a good credit score to qualify.
Before you decide that a personal loan is right for you, it’s important to understand the pros and cons that come along with them. Here, the information that can help you make a wise choice.
Key Points
• Personal loans offer flexibility in use, often featuring lower interest rates compared to some other financing options.
• Potential drawbacks include fees, penalties, and the possibility of securing better rates with alternative loan types.
• Consolidating high-interest debt with a personal loan can simplify payments and potentially reduce overall interest costs.
• Timely repayment of a personal loan can positively influence an individual’s credit score.
• Applying for a loan can temporarily lower credit scores, and missed payments or increased debt load may also cause harm.
What Are Personal Loans?
What is known as a personal loan is money that you borrow from a bank, credit union, or online lender. Typically, it’s a lump sum amount you receive and, since it’s an installment loan, agree to repay the loan principal and interest at regular intervals — usually monthly.
The interest rate for a personal loan is likely to be fixed-rate, and the loan’s term is usually between two and seven years.
When you apply for a personal loan, your lender will run a hard credit check, which will help determine your interest rate. Generally speaking, borrowers with higher credit scores have a better chance of being offered lower interest rates and more favorable terms. The higher your interest rate, the more money it will cost you to borrow.
With many lenders, you will need at least a good FICO® credit score to qualify, and a higher score will probably allow you to get more favorable rates.
Before delving into the pros and cons of personal loans, it’s worthwhile to familiarize yourself with the basics of this kind of loan and how they typically function.
Loan Terms and Repayment
Personal loans are made up of the principal (the amount you are borrowing), the interest rate you will be charged, and any fees you will pay, such as origination fees. The annual percentage rate (APR) helps you evaluate the amount the loan will cost you in terms of both interest and fees. You’ll repay the loan in monthly installments over the loan’s term, which is usually between two and seven years.
Fixed vs Variable Rate
A personal loan can have either a fixed or variable interest rate. Most have a fixed rate, meaning you’ll lock in a rate when the loan begins, and that rate (and your monthly payment) will stay constant over the life of the loan.
However, you may be able to find variable rate loans, if you prefer. In this case, the interest rate will fluctuate with the market, meaning your payments may rise and fall over the loan’s term.
The Benefits of Personal Loans
Personal loans are a flexible option for borrowers looking to accomplish a variety of goals, from consolidating other debts to remodeling their home. Here’s a look at some of the advantages.
Comparatively Low Interest Rate
Personal loans offer relatively low interest rates when compared to other methods of short-term borrowing. The average personal loan interest rate is 12.25% as of October 2025.
Credit cards by comparison had average interest rates of over 20% at the same moment. A personal line of credit, which allows the borrower to withdraw funds up to a limit during the draw period, may have interest rates that vary between11% and 21%, depending on credit score and other variables.
Some forms of predatory short-term lending, such as payday loans, can charge the equivalent of many times these rates to borrow. Some even have annual percentage rates (APRs) of 400%, so it can be wise to proceed with caution and see what lower-cost sources of funding may be available.
Average Interest Rates
Personal Loans
12.25%
Credit Card
20% and higher
Personal Line of Credit
11% – 21%
Comparatively High Borrowing Limits
Small personal loans are usually for amounts of a couple of thousand dollars or less. (Smaller loans often come with lower interest rates.) However, $10,000 personal loans are offered by many lenders, and some will offer large personal loans of up to $100,000 to cover major expenses and life events, which may be quite a bit more than other credit options.
The average credit limit for credit cards, by comparison, is $31,165, according to credit reporting bureau Experian.
Personal lines of credit often have a range of limits from $1,000 to $50,000, which can be more than a credit card but less than a personal loan.
Borrowing Limits
Personal Loans
Up to $100,000
Credit Card
Average limit of $31,165
Personal Line of Credit
Up to $50,000
Personal Loans Can Be Used for Many Things
Some types of loans must be used for designated purposes. Auto loans must be used to buy a car, and a mortgage must be used to finance a home. Personal loans, on the other hand, have few restrictions on how you must use the money, and you can generally use it for any legal purpose, except business expenses and tuition.
Unsecured personal loans are the most common type of personal loans. They are not backed by collateral, such as your car or home.
Some personal loans are secured, however, and require you to borrow against the equity in your personal assets, like a home or your savings. With a secured vs. unsecured personal loan, the lender can seize your collateral if you default, selling it to recoup their loss. As a result, secured loans present less risk for the lender and often come with lower interest rates than unsecured loans.
Simple to Manage
You can use personal loans to consolidate other higher-interest debt, for example, by paying off the balance on several high-interest credit cards. A single personal loan can offer less expensive interest, lowering the cost of your debt over time. And it may be easier to manage, since you only have one bill to pay each month. A debt consolidation calculator can help you do the math and evaluate your options.
Can Be Quick to Obtain
Policies will vary, but some lenders may offer same-day approval and funding within just a few days.
Can Help Building Credit
Your lender will likely report your personal loan and payment history to the three credit reporting bureaus — Experian®, TransUnion®, and Equifax®. In fact, 35% of your FICO® score — the most commonly used credit score — is determined by your payment history.
These loans do have some downsides, which can potentially make personal loans a bad idea for some borrowers. Here’s a closer look.
Higher Interest Rates Than Some Alternatives
Personal loans may carry higher interest rates than some alternatives. For example, if you’re looking to remodel your home, you might consider taking out a home equity loan or a home equity line of credit (HELOC). Keeping in mind the current average interest rate of 12.25% for personal loans, consider the following:
• A home equity loan uses your home as collateral to offer you a lump sum of money to use. In October 2025, the average interest rate on a 10-year fixed home equity loan ranged from 7.24% to 8.20%.
• A HELOC, on the other hand, is a form of revolving credit line that uses your home as collateral. You draw against your limit as needed during the draw period and, after a set number of years, enter the repayment period. As of October 2025, the average interest rate on a HELOC was 7.75 to 7.81%.
Also, your rate will likely vary depending on your credit score: The higher your score, the lower your interest rate may be.
Fees and Penalties
Some lenders may charge fees and penalties in association with personal loans. For instance, an origination fee helps pay for the processing of your loan application and is usually equal to a percentage of the loan amount. Fortunately, it’s possible to avoid origination fees.
Lenders may also charge prepayment penalties if you pay off your loan ahead of schedule, to make up for profit they are losing on interest payments.
Can Increase Debt
Take out a personal loan only if you are sure you can pay it off and if it makes financial sense. For example, a home remodel could increase the value of your home, and consolidating credit card debt could save you money in interest payments. But taking out a personal loan to fund a lavish wedding could wind up interfering with your ability to save for the down payment on a house.
Avoid taking out a loan that is for more money than you need to avoid the risk of taking on more debt than necessary.
Potential Impact on Credit Score
Taking out a personal loan and paying your debt on time can build your credit score, as mentioned above. However, a personal loan can also negatively impact your credit score in a few ways. When a hard credit inquiry is done during the application process, your credit score is typically lowered by several points for at least a few months. The personal loan will also increase your debt load, which could hurt your credit score. And if you are late when making a payment on a personal loan or miss it altogether, that can lower your score.
Alternatives to Personal Loans
You may want to explore personal loan alternatives, described below, as you search for the best source of funding.
• Credit cards allow users to make purchases using credit. Borrowers must make minimum payments and owe interest on any balance they carry from month to month. As noted above, the interest rates are typically high.
• A personal line of credit (PLOC) is similar to a credit card. It allows you to tap your credit line as needed. Credit is replenished when you pay back your loan.
• A home equity loan uses a borrower’s home as collateral. The value of the property contributes to determining the loan amount that is transferred to the borrower as a lump sum.
• A home equity line of credit is a revolving source of credit, like credit cards and PLOCs. As with home equity loans, HELOCs use the borrower’s home as collateral.
The Takeaway
A personal loan is a type of installment loan, usually unsecured, that allows you to obtain a lump sum of money, typically at a fixed interest rate and to be repaid in up to seven years. The pros of these loans can include their flexibility (you can use the money as you like), lower interest rates than some other sources of funding, and the speed, high limits, and convenience they offer. Among the cons: the possibility of having to pay fees and penalties, and the fact that you might be able to get a lower rate with a secured loan elsewhere.
If you’ve explored your options and decide that a personal loan is right for you, it’s wise to shop around to find the right 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.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
What is a personal loan?
A personal loan is a loan you receive from a bank, credit union, or online lender, and it can be used for a variety of purposes. Borrowers pay back the principal and interest in regular installments. These loans are typically unsecured (meaning collateral is not needed) and offer a lump sum payment, usually at a fixed rate of interest, with a term of up to seven years.
What can you use a personal loan for?
Personal loans have few usage restrictions. Basically, you can use them for any legal purposes, though in most cases, lenders restrict business and tuition usage. They can provide funding for everything from unexpected medical bills to home improvement projects to vacations to credit card debt consolidation.
How much money can you get from a personal loan?
Personal loan amounts typically range from $1,000 to $100,000, depending on the lender and the applicant’s qualifications.
What credit score do you need to qualify for a personal loan?
Many lenders require a credit score in the good range or higher to be approved for a personal loan. However, there are lenders who offer loans to those with fair or poor credit. The interest rates tend to be higher, though, and the terms less favorable than what those with higher scores are offered.
How long does it take to get approved for a personal loan?
Policies vary, but some personal loans can be approved on a same-day basis.
Photo credit: iStock/Anchiy
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.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
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 .
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 Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
