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Personal loans can be either secured or unsecured. A secured personal loan has collateral that backs the borrower’s promise to repay the loan. An unsecured personal loan does not require collateral, and the only thing backing the borrower’s promise to repay is their creditworthiness.

The collateral requirement is the main difference between secured and unsecured personal loans, but it can impact interest rates and create other differences that may inform your decision about which type of loan is best for you.

What Is a Secured Personal Loan?

A secured personal loan is a loan for which the borrower pledges collateral that the lender can take possession of if the borrower fails to repay the loan. Put in simpler terms: If you default on your car loan, for example, the bank can repossess your car. For the lender, collateral equals a certain level of security.

Collateralized loans are common for mortgage and auto loans. A home is collateral for a mortgage, and a vehicle is collateral for an auto loan. They are somewhat less common for personal loans, though.

A personal loan isn’t tied to a particular asset in most cases, so there’s not an obvious item to pledge as collateral. The asset pledged must be owned by the applicant, and the lender will evaluate its value to be sure it’s equal to the amount of money being loaned. In some cases, a physical asset such as a vehicle is put up as collateral, but the collateral could also be an asset like a savings account or certificate of deposit.

Pros of Secured Personal Loans

While it may seem like the lender benefits more with a secured personal loan, there may also be advantages for the borrower.

•   Lenders typically see secured personal loans as less risky than their unsecured counterparts because there is an asset to back the loan if the borrower defaults.

•   Borrowers may get a lower interest rate on a secured personal loan than they might on an unsecured personal loan.

•   Secured personal loans can be a good way for borrowers to build credit, as long as they make regular, on-time payments.

Cons of Secured Personal Loans

Things that a borrower might see as a drawback to a secured personal loan might be a benefit to the lender. But each party to the loan agreement takes risks.

•   The lender is able to recoup its losses by seizing the collateral if the borrower defaults on their secured personal loan. However, it may take a while to liquidate that asset. If the collateral is a physical asset, such as a vehicle, it may take some time to find a buyer willing to pay the price the lender has set.

•   For the borrower, the main drawback to a secured personal loan is the possible loss of the asset pledged as collateral if they default on their loan.

•   The application and approval process may include more steps for a secured personal loan than an unsecured one because the asset’s worth will need to be valued.

What Is an Unsecured Personal Loan?

A personal loan that is backed mainly by the creditworthiness of the borrower is an unsecured personal loan. Sometimes called a signature loan, an unsecured loan does not require any collateral to guarantee the loan.

Defaulting on an unsecured personal loan can certainly have a negative effect on the borrower’s credit, but there wouldn’t be an asset to lose in addition. In terms of a guide to unsecured personal loans, see what the pluses and minuses are below.

Pros of Unsecured Personal Loans

Like their secured counterparts, unsecured personal loans can have benefits for both lender and borrower.

•   Lenders may be able to charge a higher interest rate on an unsecured personal loan because there isn’t any collateral to secure the loan. (This is a drawback for the borrower — see below.)

•   The borrower won’t lose an asset if they default on an unsecured personal loan.

•   The application process for an unsecured personal loan is generally much quicker than for one that’s secured because there is no asset to be valued.

•   Funds may be disbursed the same day or within a week, depending on the lender.

Cons of Unsecured Personal Loans

It may be relatively easy to find lenders who offer unsecured personal loans, but there are aspects that may be considered drawbacks.

•   Interest rates on unsecured personal loans may be higher than for secured personal loans because there is no asset backing the loan.

•   Some lenders may have minimum credit score requirements for approval of an unsecured loan, so applicants with poor credit may not qualify.

•   If the borrower defaults, their credit score may be negatively affected.

•   Applicants with lower credit scores may not qualify for loan amounts as high as those with higher credit scores.

Recommended: Personal Loan Calculator

How to Choose Between Secured and Unsecured Personal Loans

There are lots of reasons for considering a personal loan in general, but choosing between a secured and an unsecured personal loan means taking some specifics into account.

Do You Have Collateral?

One of the main things to consider when thinking about applying for a secured personal loan vs. an unsecured personal loan is whether you have an asset of value that you’d be willing to risk.

If you do have such an asset, you may want to compare lenders who offer secured personal loans. Some online lenders offer secured loans, but they’re more commonly available through banks or credit unions.

Lenders may offer higher loan amounts for a loan backed by collateral than for one that isn’t, so if you need to borrow a large amount, it might be worth looking into a secured personal loan.

What Are You Planning to Use the Funds For?

Personal loan funds can generally be used for a wide variety of things, like debt repayment, unexpected medical expenses, home improvement costs, and more.

If you need funds to pay multiple vendors or contractors — common in the case of wedding or home improvement costs — or you plan to consolidate credit card debt, an unsecured personal loan might be the right choice for you.

If you plan to purchase a specific item that might be considered an asset, however, the lender may want to attach that asset as collateral on the loan, thus making it a secured loan. Examples of this might be a secured personal loan to purchase land or to buy a boat.

What Type of Lender Is Right for the Loan You Need?

Another factor to consider when choosing between a secured or unsecured personal loan is the type of lender you’d rather work with.

•   Unsecured loans may be available through banks, credit unions, or online lenders. Not every financial institution offers unsecured loans, however.

•   Secured loans are more commonly offered by banks and credit unions and occasionally online lenders.

If you have a savings account or certificate of deposit at your bank that you’d be willing to put up as collateral, it might be worth looking into a secured loan with your current bank.

How Does Your Credit Score Factor In?

Accessing a loan typically involves a hard inquiry on your credit, as lenders want to know your score and see whether you have handled debt responsibly in the past. If you have, it’s a good indicator that you will do so again in the future.

Typically, you need a credit score of at least 580 to qualify for a loan, but those with scores of 700 and higher will likely be able to access more favorable rates and terms. So, if you have excellent credit, with a score of 800 to 850, you will usually be offered the best rates.

Qualifying For a Personal Loan

There are different factors that go into qualification for a personal loan, which is a key step before getting approved for a personal loan.

Each lender may have its own credit score, income, or debt-to-income ratio requirements, in addition to other factors. If you’re applying for a secured personal loan, each lender may have its own requirements for valuation of collateral.

It’s a good idea to compare lenders so you’ll have an idea of what they commonly require for an applicant to qualify for a personal loan. With that knowledge, you can better evaluate your own credit for the likelihood of being approved — or not.

Reviewing Your Credit Report

You can get a free copy of your credit report from each of the three major credit bureaus: Equifax®, Experian®, and TransUnion®. (Currently, these are available weekly.)

It’s a good idea to check all three because not all lenders report payment history to all three bureaus. The credit bureaus don’t share information with each other, so getting a complete picture of your credit may mean looking at all three reports.

Your credit report contains personal information about you and information about past and current credit accounts in your name.

Personal information includes:

•   Name, current as well as any other names you may have gone by in the past

•   Addresses, current and previous

•   Birthdate

•   Social Security number

•   Employer

Lenders typically report:

•   The total amount of the installment loan or line of credit

•   Your record of on-time payments

•   Any missed payments

If you’ve had any bankruptcies, foreclosures, or repossessions, they will likely be included on your credit report as well. They usually stay on your report for seven to 10 years.

If there is missing, incomplete, or incorrect information on your credit report, you can file a dispute with the credit bureau. It’s a good idea to clear up any errors before you start applying for a loan so you don’t have any unexpected roadblocks on the way to qualification.

If, in the process of reviewing your credit report, you find that you don’t have much of a credit history or your credit isn’t up to qualification standards, you may decide to take some time to work on improving your credit situation. That could mean increasing your income, lowering your expenses, paying down or consolidating existing debt, or just learning how to better manage your overall finances.

Meeting Income Requirements

Income requirements are likely to vary with the type and size of the loan you get. A $2,000 loan to pay off a medical bill may demand a less lofty salary than, say, taking out a $30,000 wedding loan to finance a major celebration of your big day.

Debt-to-Income Ratio Considerations

Another way that lenders evaluate if you are a good risk for a personal loan is looking at your debt to income ratio. This calculates how much of your money coming in goes toward debt. Typically, lenders want to see no more than 30% or 36% going toward debt, though in some cases, those with figures from 40% to 50% may be able to get approved. This is especially true if they have strong income and/or other positive factors.

Common Types of Collateral for Secured Loans

For secured loans, here are some typical sources of collateral:

•   Money in bank accounts

•   Real estate

•   Investments

•   Vehicles

•   Antiques, art, jewelry, or other collectibles

Interest Rate Comparison: Secured vs Unsecured

As mentioned above, secured loans may have lower interest rates than unsecured loans since there’s less risk to the lender.

In terms of specifics, in April 2025, rates looked like:

•   12.43% average rate for unsecured loans

•   A range of 6.49 to 12.99%, depending on such factors as the lender’s guidelines, the borrower’s credit score, and the loan amount.

Recommended: How to Get Approved for a Personal Loan


The Takeaway

The main difference between unsecured and secured personal loans is that one requires collateral — a secured personal loan — and the other doesn’t — an unsecured personal loan. Deciding between the two depends on the borrower’s willingness to risk the loss of collateral, as well as their overall creditworthiness and the rates they qualify for.

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

Which is better: a secured or unsecured personal loan?

There is no one answer to whether a secured or unsecured personal loan is better. For some, an unsecured loan is the faster, simpler option without risk of losing one’s collateral. For others, a secured loan can be a path to a lower interest rate and more affordable loan.

Can I get a secured personal loan with bad credit?

Yes, you can often get a secured personal loan with bad credit, though the interest rate may not be favorable. However, the presence of collateral can reassure lenders and give you options that you might not otherwise have if you were shopping for an unsecured personal loan.

What happens if I default on a secured personal loan?

If you default on a secured loan, you risk losing your collateral. The lender could claim it and sell it to cover the loss of repayment money from you.

Do secured loans have lower interest rates than unsecured loans?

Often, secured loans have lower interest rates than unsecured loans. The reason: Because collateral is involved, the loan is less risky for the lender. The lender could claim the collateral if you default and use its value to cover the loan. This could motivate the lender to charge less in interest.

What can I use as collateral for a secured personal loan?

Some common examples of collateral for a secured personal loan include money in the bank, real estate, vehicles, investments, and collectibles (art, antiques, and jewelry, for instance).

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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 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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Identity theft happens when someone steals your personal information and uses it to take money out of your bank account, open credit accounts in your name, or receive benefits (such as employment, insurance or housing benefits). Identity theft can have a negative impact on your finances, as well as your credit. And it can happen to anyone, regardless of age or income.

Fortunately, there are many things you can do to protect yourself from identity theft and minimize the fallout if your personal or account information ever does get compromised. Read on to learn what steps you can take if you think your identity has been stolen or notice any fraudulent activity on any of your financial accounts.

Contacting Your Creditors

You’ll want to report any potentially fraudulent credit card activity to the creditor involved as quickly as possible. This can help stop any further fraudulent use of your card and also limit your liability for any unauthorized charges. There may be a phone number printed on the back of the card for this purpose.

You may also want to review the last few months of card statements carefully, identify any transactions you believe to be fraudulent, and write a follow-up letter to the credit card issuer with these details and copies of your statements.

There are federal protections provided to consumers in the case of credit card fraud. A consumer’s liability is limited to the lesser of $50 or the amount of the theft if the actual credit card was used fraudulently. If only the credit card number was used fraudulently, there is no consumer liability.

For debit card or ATM card fraud, the quicker you report the card loss, the less they are potentially liable for. If you report a missing debit or ATM card before any unauthorized charges are made, you’ll have zero liability. The amounts increase the longer the missing card goes unreported.

•  Maximum loss is $50 if the card is reported within two business days of the loss or theft.

•  Maximum loss is $500 if the loss or theft is reported more than two business days, but less than 60 calendar days after the account statement is sent to the account holder.

•  If the loss is reported more than 60 calendar days after the statement is sent, you can be responsible for all the money taken from your account. If money from linked accounts was also stolen, the maximum loss can be more than the account balance.

•  If the ATM or debit card number, but not the physical card, was used to make unauthorized charges, the account holder is not liable for those charges if the fraud is reported within 60 days of the account statement being sent.

Recommended: Different Types of Bank Account Fraud

Reporting Identity Fraud to the FTC

If you think your social security number or other important personal information has been stolen and used fraudulently, you’ll want to report it to the Federal Trade Commission (FTC) online at IdentityTheft.gov.

Once you create an account and file an identity theft report, you’ll receive a personalized recovery plan with tools like form letters to send to credit bureaus. The site also allows you to update your identity theft account and track your progress. If you were affected by a company-specific data breach, you can get advice from the FTC on how to protect yourself.

When you file an identity theft report, you’ll also get an FTC identity theft affidavit that you can print out and retain it for your records. You may need this affidavit if you file a police report. Banks and credit card companies may also request a copy of this FTC report.

Consider Filing a Police Report

If you believe you know who was responsible for the fraudulent activity, or can provide evidence for an investigation, you may want to file a police report. Filing a police report might also be necessary if a creditor requires the report as part of its investigation. Having a police report can also be helpful when requesting an extended fraud alert on your credit reports (more on that below).

Recommended: How Credit Card Frauds Are Investigated and Caught

Notifying Credit Bureaus

You may also want to contact one of the three credit major consumer bureaus — Experian®, TransUnion®, and Equifax® — and ask them to place a fraud alert on your credit report. This notifies lenders that you’ve been a victim of identity theft so they can take extra measures to verify your identity when they get an application for credit in your name. Contacting just one of the credit bureaus is fine. That bureau will contact the other two automatically.

Fraud alerts are free. If you have a police report or a FTC Identity Theft Report, you may be able to get a free extended fraud alert, which lasts seven years.

You can also request a freeze or lock on your credit report by contacting each credit bureau individually. Putting a freeze on a credit report blocks all access to the report, making it more difficult for a bad actor to use information fraudulently. Credit freezes are regulated by state laws, and credit bureaus are required to offer credit freezes at no charge. A credit lock also acts to protect your financial information from potential identity thieves, but is a program offered by an individual company, which may charge a monthly fee for the service. Credit locks are typically not regulated by state laws.

Disputing Errors Caused by Identity Theft

Whether you’ve been a victim of identity theft or not, it’s a good idea to periodically request copies of your credit report and read them carefully, checking for any errors or evidence of fraud.

Having misinformation on your reports can have a negative impact on your credit, making it harder for you to qualify for credit cards, mortgages, and personal loans with favorable terms.

Federal law allows consumers to request a credit report at no charge from each of the three credit bureaus once a week via AnnualCreditReport.com. If you notice an error on a credit report, you can contact that credit bureau to file a dispute. All three major credit bureaus provide information on their websites for filing a dispute. It can take up to 30 days for the results of any investigation to be made available.

The Takeaway

Identity theft can happen to anyone, and it can wreak havoc on your finances. However, if any of your personal or financial account information is stolen and used fraudulently, don’t panic. If you report the fraudulent transaction to the appropriate financial institution quickly, you likely won’t be responsible for the charge or loss. You can also help stop any further fraud by locking or freezing your credit, filing an identity theft report with the FTC, and filing a police report.

If you’re thinking about applying for an online personal loan but are hesitant to share your information, know that SoFi takes the privacy and security of its members’ financial and personal information very seriously. We maintain industry-standard technical and physical safeguards designed to protect your information’s confidentiality and integrity. Also keep in mind that checking your personal rate won’t affect your credit.

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

FAQ

How do I check if my identity has been stolen?

If you suspect your identity has been stolen, check your credit reports, bank statements, and mail for unfamiliar charges, accounts, or debt collection notices. You may also want to consider requesting a fraud alert or credit freeze with the three main credit bureaus.

What can I do if someone filed a tax return using my Social Security number?

A good first step is to report identity theft to the IRS. This typically involves filling out the identity theft affidavit (Form 14039) and submitting it to the IRS online, by mail, or by fax. You can also call the IRS at 800-908-4490 with questions for help resolving tax account issues that resulted from identity theft.

How common is identity theft in the U.S.?

Unfortunately, identity theft is common. According to Federal Trade Commission data released in 2025, the agency received fraud reports from 2.6 million consumers in 2024. More than $12.5 billion were lost to fraud in 2024, which is a 25% increase over the prior year.

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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.


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.

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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Unsecured personal loans are loans provided by banks, credit unions, and online lenders that do not require any type of collateral. They provide an opportunity to borrow funds without putting any of your assets (like your home or car) at risk. The funds can be used for virtually any purpose, including debt consolidation, home improvements, and large purchases.

How do you know if an unsecured personal loan is the right choice for you? Learn the full story here.

What Is an Unsecured Loan?

An unsecured loan is a loan that is not backed by collateral, such as your home, bank account balances, or vehicle. To have a loan backed by an asset (aka a secured loan) means that a bank or lender has the right to take that asset in the event of default on the loan.

Loans backed by collateral (such as mortgages, home equity loans, and auto loans) generally pose less risk to lenders — if the borrower defaults, they can recoup the balance due by seizing the collateralized property. Because unsecured loans pose a higher risk, they tend to have higher interest rates and come in lower loan amounts compared to secured loans.

Some borrowers, however, prefer unsecured loans, since they don’t require you to put your home, car, or other personal assets at risk. You qualify for an unsecured personal loan strictly on your ability to repay the borrowed amount. Lenders assess this by looking at your income, credit scores, and borrowing history.

Top Common Uses for Unsecured Personal Loans

Unsecured personal loans can be used for a wide array of purposes. Here are some of the most common reasons why people take out unsecured personal loans.

Credit Card Payoff

Credit cards tend to have high annual percentage rates (APRs). Currently, in the first half of 2025, the average credit card interest rate is about 24.20%. Personal loan interest rates, on the other hand, can charge half that figure (if you have a high credit score, you may be able to get an even lower APR).

Using a personal loan to pay off credit card debt can potentially help you save money on interest. You can get an estimate of the potential savings of using an unsecured personal loan to pay off a credit card balance by using a personal loan calculator.

Debt Consolidation

If you make many different credit card (or other debt) payments every month, it can be difficult to keep track of all the due dates and minimum amounts owed. If you miss a payment or don’t pay at least the amount due, you can get hit with late fees and your credit could be negatively affected.

Debt consolidation is the process of taking out an unsecured personal loan and using it to pay off multiple debts, leaving you with just one monthly payment. This simplifies repayment and, if you get a loan with a lower interest rate, could also help you save money.

Medical Expenses

Unsecured personal loans can be used to pay for a range of medical treatments, including elective procedures, fertility treatments, prescriptions, surgeries, dental procedures, and more.

A number of lenders, including certain banks, credit unions and online lenders, offer personal loans that can be used for medical expenses. Though interest expenses will add to the total cost of treatment, this can be a less expensive option than putting the medical expense on your credit card.

Home Projects

Whether you’re thinking about updating your kitchen or renovating a bathroom, you may be able to use an unsecured personal loan, also called a home improvement loan, to obtain funding for the project.

An unsecured personal loan can be especially useful if you need cash quickly for critical repairs or emergencies. It also provides an alternative to taking out a home equity loan or line of credit for remodeling or repairs, both of which are secured loans and require equity in your home.

Major Purchases

Other large purchases could be funded by a personal loan. This could mean that you are buying tangible items, such as new furniture for a family room or a new water heater. Or you might want to finance a wedding or a big vacation.

Emergency Expenses

A personal loan could be a way to finance a major car repair bill, replace e home heating system that conks out during a cold spell, or other urgent emergency expense. It could also keep you a float if, say, one spouse has lost a job but you still qualify for a loan.

What Are Some Different Types of Unsecured Loans?

The most common types of unsecured loans include:

•   Personal loans Personal loans are typically unsecured vs. secured personal loans, though some lenders offer secured options. Loan amounts range from $1,000 to $50,000 or $100,000 (and occasionally more), with repayment terms of two to eight years. (Some lenders may offer longer terms for large loans.) Interest rates are typically fixed.

•   Personal lines of credit A personal line of credit is a revolving loan, which means the loan can be spent, repaid, and spent again, similar to a credit card. While some credit lines are secured, many lenders offer unsecured options. Personal credit lines typically have a variable interest rate.

•   Student loans Education loans are used to cover the cost of college tuition and expenses. Both federal and private student loans are unsecured. However, student loans usually carry more restrictions and payback instructions than other types of unsecured loans.

•   Credit cards Like a personal credit line, credit cards are a type of revolving loan that lets you access money up to a certain limit as you need it and only pay interest on the amount you borrow. While secured credit cards are available, most consumer cards do not require collateral to access a line of credit in this way.

Why Choose an Unsecured Personal Loan?

Here’s a look at some of the benefits of unsecured personal loans.

•   Fast processing time It often doesn’t take long to get the lump sum of money in your hands — often just a few days or so.

•   Consistent payments Personal loans are a type of installment loan, which means payments will be fixed and follow a set schedule.

•   Less costly than credit cards With good credit, interest rates on unsecured personal loans are typically lower than interest rates on credit cards.

•   Flexibility An unsecured personal loan can be used for almost any purpose, including credit card consolidation, a large purchase (like a kitchen appliance), a wedding, travel, medical expenses, home repairs, and more.

•   No collateral You don’t need to put anything of value at risk of repossession in order to secure the loan.

How to Apply for an Unsecured Personal Loan

Before you apply for an unsecured personal loan it’s a good idea to check your credit score, since it will play a role in your loan eligibility and interest rate.

Next, you’ll want to research and compare lenders, including banks, credit unions, and online lenders. It can be a good idea to compare loan amounts, interest rates, terms, and fees. Also check loan requirements, if they are available. Some lenders have a minimum credit score or income requirements.

In some cases, you may be able to pre-qualify for a personal loan, which lets you see the loan terms you may qualify for. This involves a soft credit check, which won’t impact your credit.

Once you find a loan you like, it’s time to officially apply. Often, you can do this online, though some lenders may require you to apply in person. Either way, you’ll need to provide personal and financial information (such as your name, home address, and employment information). In addition, you may need to provide the following documents:

•   State-issued photo ID

•   Proof of residence

•   Proof of income (like a bank statement or pay stub)

•   Tax return

Once you submit your application, you may receive a decision within a few minutes or a few days, depending on the lender. In some cases, the process may take a week or more.

What Lenders Look for in Unsecured Loan Applications

If you’re applying for an unsecured loan, lenders tend to look for the following, among other factors:

•   A strong credit score. While some people with a score of 580 or higher can qualify for a loan, most lenders look for a score of 700 or above to start to offer their most favorable interest rates and terms to lenders.

•   A favorable credit history. In other words, prospective lenders want to know that you’ve handled debt responsibly in the past. If you have events like bankruptcy in the past, a lender may hesitate or charge you higher interest rates.

•   Financial factors. Lenders will want to see that your earning power and debt-to-income ratio, or DTI, are in the right balance to allow for repayment of the loan.

Unsecured vs Secured Personal Loans: Key Differences

The key difference between unsecured and secured personal loans is that, with a secured loan, you provide a form of collateral to secure the loan. This could be money in the bank, a vehicle, investments, or art and collectibles. The idea is that the lender knows they could claim that item if you were to default on the loan.

This makes lending less risky for them. For this reason, it could help a loan seeker who has a less than ideal credit history qualify, even if they can’t access an unsecured loan. With an unsecured loan, you don’t put up any collateral. Instead, factors like your credit history, income, and assets typically reassure the lender that you are not a risky borrower.

The Takeaway

For some of life’s many curveballs — or opportunities — the occasional need for an unsecured personal loan might come up. Unlike a secured loan (like an auto loan or mortgage), an unsecured personal loan doesn’t require you to provide anything of value to guarantee it. You qualify based only on your ability to repay the borrowed amount to the lender.

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

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

FAQ

What credit score do I need for an unsecured personal loan?

According to the credit bureau Experian®, you need at least a credit score of 580 to qualify for an unsecured personal loan, and a score of 700 or higher to get the most favorable rates and terms.

How much can I borrow with an unsecured personal loan?

Unsecured personal loans can offer a lump sum of anywhere from $1,000 to $100,000 or even more, depending on the lender’s guidelines and the borrower’s creditworthiness.

What are the disadvantages of unsecured loans?

Disadvantages of unsecured loans for borrowers can be that they may be harder to qualify for or charge higher interest rates than secured loans. The reason: They may be riskier for lenders, since if the borrower defaults, the lender doesn’t have a form of collateral to claim and use to offset their loss.

How long does it take to get approved for an unsecured loan?

The timing of getting approval for an unsecured loan can vary depending on the borrower and the lender. At its fastest, it could happen within a day. At the other end of the spectrum, it might take a week or two.

Can I pay off an unsecured loan early?

Yes, you can usually pay off an unsecured loan early. This can help you save on interest fees, but check your lender’s policies. You might owe what’s known as a prepayment penalty, a fee which goes to the lender. This feel helps compensate the lender for the loss of the previously projected interest they would have collected over the life of the loan.

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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.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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 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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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A personal loan is a flexible type of loan issued by a bank, credit union, or online lender that you pay back in regular installments, typically at a fixed rate and over a set term.

Personal loans work a little differently than other types of loans. Consumer loans typically specify what the money should be spent on: Mortgages are used to purchase or refinance homes, and student loans are used to pay for an education. But with a personal loan, you can usually use it however you see fit, whether that means consolidating debt, paying off a major medical bill, or financing a wedding.

Read on to learn more about how personal loans work, including how to apply and the different types of personal loans.

Personal Loans at a Glance

As noted above, a personal loan is an installment loan paid off over time. Specifically, some points to note:

•   The terms is typically between a couple or up to 10 years.

•   While a personal loan may be as small as $1,000 or as large as $100,000 or even more.

•   It’s usually an unsecured, fixed-rate loan.

•   As with most loans, the best (or lowest) interest rates tend to go to those with the best credit scores and history.

What Is a Personal Loan?

As mentioned before, a personal loan is a one-time lump sum you borrow from a bank or other financial institution and repay over time, usually with interest.

The beauty of personal loans is that once you receive the lump sum payment, you can usually use it however you see fit, whether that means putting in a swimming pool, having major dental work done, or paying for family planning, like fertility costs.

How Do Personal Loans Work?

Personal loans are typically unsecured loans (meaning you don’t have to pledge an asset to secure the loan) that provide you with money you then pay back in regular installments over the term of the loan.

How Personal Loan Funds Are Disbursed

After loan approval, the lender typically deposits the loan proceeds directly into the borrower’s bank account. The process could be completed in anywhere from a day or two to a couple of weeks.

Repaying a Personal Loan

You repay a personal loan in monthly installments that go toward both principal and interest.

Typically, personal loans are amortized. This means the total amount you owe is divided into equal monthly payments over the term of the loan. Even though the total monthly payment remains the same with fixed-rate loans, the amounts being directed to principal and interest will change each month. An amortization schedule can show you exactly how much of your payment is going towards paying down the principal and how much is being paid in interest.

Personal loans with longer terms may offer lower monthly payments, but can cost more in interest over the life of the loan. A shorter-term personal loan can have higher monthly payments, but cost less overall in interest.

How Personal Loan Interest Rates Work

The interest rate on a personal loan is determined by the lender and is based on a number of factors, including the applicant’s financial history, income, debt, and credit score. Generally speaking, the better an applicant’s credit score, the better the chance they have to receive a lower interest rate on the loan. The higher the interest rate, the more money the loan will cost over its term.

You’ll also want to keep an eye on the APR, or annual percentage rate, vs. simply the interest rate. This figure includes fees (like origination fees) and other factors. It gives you a truer picture of the cost of the loan.

Top Common Personal Loan Uses

Personal loans can be used for just about anything. That said, there are some common reasons people take out different types of personal loans, including:

•   Debt management and consolidation

•   Home improvement expenses

•   Wedding costs

•   Unexpected medical expenses

•   Moving expenses

•   Funeral expenses

•   Family planning

•   Car repairs

•   Vacation

The Personal Loan Application Process: Step by Step

While it’s not as simple as walking into a bank, asking for a loan, and walking out with a check, the application process for personal loans is relatively easy.

Before you apply for a personal loan, you’ll want to consider how much money you want to borrow, how much you can afford to pay each month, how long you want to make payments, and whether or not you want to put up collateral (though less common, some lenders offer secured personal loans). There may be other considerations for specific financial circumstances, which can vary from person to person.

Checking Your Own Credit

Because lenders will be looking closely at your creditworthiness, it’s a good idea to give your financial health a check-up before you begin the application process. You can get a free copy of your credit reports from the three main consumer credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com.

Once you get your reports, it’s a good idea to review them carefully and report for any errors. Correcting anything that isn’t accurate means your credit report will look as good as possible to lenders.

Comparing Loans

Just like shopping around for the best prices before making a large purchase, comparing lenders’ rates and terms is a smart move before the application process actually begins.

Here are some things to look for when researching lenders:

•   How much do they lend on personal loans? If the amount you need to borrow doesn’t fall within the range offered by the lender, you may need to look elsewhere.

•   Do they charge any fees or penalties? Some lenders charge an origination fee equal to a percentage of the loan amount to process your application. Some personal loans also have a prepayment penalty if you pay off your loan ahead of schedule.

•   How are fees and penalties charged? Some lenders may roll any fees into the loan amount, which increases the total amount you’ll owe. Other lenders may deduct the fee amounts from the loan proceeds, so the amount you receive will be lower than the actual amount of the loan.

•   Can I get prequalified so I’ll know what interest rate they might offer me? Prequalification involves the lender doing a soft pull on your credit report, which will not affect your credit score. This step will give the lender a sneak peek at your financial history so they can give you an estimated interest rate. Going through this process with multiple lenders is one way to compare rates and terms you may qualify for. Keep in might, the rate quoted is an estimate and may not be what you actually are offered if you move ahead with the process.

•   What if I can’t make my loan payments due to financial hardship? Missed or late payments could result in late fees, negative impacts on your credit score, or lead to your account being sent to collections. Some lenders may offer protections for borrowers who have lost their job or are having difficulty making their payments for other reasons.

Applying for a Loan

When you’ve selected a lender, it’s time to submit the actual application. For an unsecured personal loan, lenders typically require:

•   A photo ID

•   Proof of address

•   Proof of income or employment

Each lender has different requirements, though, so it’s important to carefully read and follow the lender’s application instructions. At this stage, the lender will usually do a hard credit check, which can have a small and temporary negative affect on your credit score.

Waiting for Approval

Once you’ve submitted the application and all required documents, it’s time to play the waiting game. Rest easy, though, because some personal loan approvals happen quickly — sometimes in just a day. More complicated applications could take a week or more.

Personal loans usually range anywhere from $1,000 to $100,000, depending on the lender. Once you apply and are approved for the loan, you’ll receive the amount of money you were approved for in a lump sum, minus any origination fees that some lenders may charge. You then start paying back that money in installments which are set by the specific terms of your loan.

Types of Personal Loans

There are a variety of different types of personal loans. Factors like how much money you plan to borrow, your credit and financial history, and how much debt you already have will influence which type of personal loan is right for you. Here’s a look at some common personal loan options.

Unsecured vs Secured Personal Loans

An unsecured personal loan is the most common type of personal loan. Unsecured means the loan is not backed by collateral, like a house or car. The approval and interest rate you receive on an unsecured personal loan is mostly based on your creditworthiness.

Secured personal loans require an asset to be pledged to “secure” the loan. Think of a house when it comes to a mortgage loan, or a car when it comes to a car loan. If you fail to repay your loan, the lender can then seize the collateral.

Some banks offer secured personal loans that allow you to borrow against the equity of your car, personal savings, or other assets. Since secured loans are backed by an asset that the lender can seize if you default on the loan, they generally have a lower interest rate than an unsecured personal loan.

Here’s a look at some pros and cons of unsecured and secured personal loans:

	Unsecured Personal Loans	Secured Personal Loans
Advantages	•   Funds may be disbursed the same day or within a week •   Interest rates are typically lower compared to credit cards •   No collateral required	•   Interest rates are typically lower compared to unsecured personal loans •   Can be a good way to improve credit if payments are regular and on time •   Tend to have a longer repayment period
Disadvantages	•   May need to meet minimum credit score requirements for approval •   Interest rates may be higher compared to secured personal loans •   Credit score may be negatively affected if borrower defaults	•   Collateral is required •   Lender can seize the collateral if borrower defaults •   Application and approval process may involves more steps

Fixed-Rate vs Variable-Rate Personal Loans

Most personal loans are typically fixed-rate loans, meaning your rate and monthly payment stay the same (or are fixed) for the life of the loan. Fixed-rate loans can make sense if you’re looking for something with consistent payments each month. A fixed-rate loan is also worth considering if you are concerned about rising interest rates on longer-term personal loans.

As the name suggests, the interest rate on a variable-rate loan can fluctuate over the life of the loan. Interest rates on this type of loan are tied to benchmark rates or indexes. Based on how the benchmark rate or index changes, the interest rate on a variable-rate loan will also change, directly affecting your monthly payment.

Generally, variable-rate loans carry lower annual percentage rates (APRs) and some have limits on how much the interest rate can rise or lower over a specific period or even over the life of the loan. A variable-rate loan could be a good choice if you are taking out a small amount of money with a short repayment term. The reason: There won’t be too many opportunities for the loan’s rate to climb.

Here are some pros and cons of variable-rate personal loans and fixed-rate personal loans. Choosing between variable vs. fixed rates will come down to personal preference and what you are approved for.

	Variable-Rate Personal Loans	Fixed-Rate Personal Loans
Advantages	•   Loans often start out with a lower interest rate compared to fixed-rate loans •   If benchmark rate goes down, interest rate on the loan also goes down •   Flexible	•   Monthly payments are consistent •   Can avoid rising interest rates •   Easy to understand
Disadvantages	•   If benchmark rises, the cost of the loan also rises •   Borrowers have a greater risk of defaulting on loan if the interest rate increases significantly •   As interest rates change, so will the monthly payment	•   Won’t be able to take advantage of changes in interest rates •   Interest rates tend to be higher compared to variable-rate loans •   May pay more over time if you took out your loan when interest rates were high

Small vs Large Personal Loans

Just as personal loans are taken out for a variety of reasons, the dollar amount borrowed can vary, too.

A small personal loan, which is generally for $3,000 or less, typically has a lower APR than other types of short-term debt, such as payday loans. Many banks and other financial institutions have limits on the minimum amount they’ll lend. Some credit unions may offer alternatives to payday loans in an effort to help their members save money and avoid being stuck in a cycle of debt.

A large personal loan might be used to pay for major expenses such as home repair or remodeling, medical expenses, or an expensive life event, such as a wedding. Some lenders offer personal loans up to $100,000 or more.

It’s important to keep in mind your ability to repay the loan when deciding how much to borrow. Here’s how small and large loans compare:

	Small Personal Loan	Large Personal Loans
Advantages	•   Can use the money for a wide variety of purposes •   Interest rates are typically lower compared to credit cards •   Usually has better terms than payday loans	•   Can use the money for a wide variety of purposes •   Greater ability to combine multiple credit card balances into one balance •   Can be a good way to improve credit if payments are regular and on time
Disadvantages	•   Can often get a better interest rate with a larger loan •   No grace period •   Lenders may limit how much you can borrow	•   The larger the loan, the more debt you’re taking on •   Increases your debt-to-income ratio •   Lenders may limit how much you can borrow

What Personal Loan Lenders Look at in Your Application

When you apply for a loan, the lender typically considers your credit score, debt-to-income (DTI) ratio, and other factors.

Credit Score

A person’s credit score shows lenders what the theoretical likelihood of that person paying back a loan would be. Generally, the lower a person’s credit score, the more of a risk they are assumed to be. Conversely, the higher a person’s credit score, the lower a risk they are assumed to be — and the more likely they are to be approved for lower interest rates and higher loan amounts.

If your credit score isn’t ideal, you might still qualify for a personal loan for bad credit, though you may face higher interest rates and stricter repayment terms. Some lenders specialize in offering options for borrowers with lower credit scores, providing a pathway to access the funds you need.

Debt-to-Income Ratio

Your DTI is a percentage that tells lenders how much money you spend on monthly debt payments versus how much money you have coming into your household. You can calculate your DTI by adding up your monthly minimum debt payments and dividing it by your monthly pretax income.

Lenders generally want to see a DTI of 35% to 40% or less but may make exceptions if you have good credit.

Income and Employment History

Having a steady work history and a rising salary can help you appear less risky to a lender than someone who has been in and out of the job market and has seen ups and downs in their earnings.

Credit History

Lenders will review your credit report for anything that might stand out as a risk for them. If there are a high number of inquiries and/or late payments on your credit report or if there were multiple debt accounts opened in a short time period, that might indicate high risk to a lender. Borrowers who are considered high-risk may find it more difficult to get a loan and could pay higher interest rates.

Is a Personal Loan Right for You?

Not sure whether a personal loan makes sense for your situation? Here are some questions to ask yourself:

•   Do I need the money quickly? If you do, then a personal loan might be a smart move.

•   Can I afford the monthly payments? Before you take on any debt, it’s important to set a realistic plan on how you’ll repay what you owe.

•   Do I already have a high amount of debt? Taking out a personal loan when you have significant debt can put a serious dent in your budget and savings goals. It can also increase your DTI, which lenders look at when reviewing your loan application.

•   Do I have a bad credit score? If your credit score isn’t so great — FICO® defines bad as 579 or below — then you may want to wait on taking out a loan and instead work on your credit.

•   Does a personal loan offer the lowest interest cost of all the options available? It’s a good idea to shop around for the rate and terms that best fit your needs before you apply with a lender.

Recommended: Personal Loan Calculator

Alternatives to Personal Loans

There may be times when you need help covering a big expense, but taking out a personal loan isn’t the best choice. Fortunately, there are alternative funding options. Here are a few you may want to explore:

Credit Cards

Like personal loans, credit cards offer a line of credit that can be used for a wide range of purposes. You may want to consider using a credit card if you have a smaller expense that you can pay off quickly. Just be cautious as interest rates can be significant, especially if you don’t pay it off soon.

Home Equity Line of Credit

If you own your home and have at least 20% equity, you may be able to get a home equity line of credit (HELOC). This option could be a smart move if you need to borrow a large amount of money or plan on having ongoing expenses, like those with a remodeling project.

401(k) Loan

If you have a financial emergency or want to pay off high-interest debt — and no other option is available — then you may want to consider borrowing from your 401(k). Keep in mind that you may face taxes and penalties when you withdraw the money, so be sure you understand how your plan works, what is allowed, and how soon you’d have to pay back the loan and with how much interest.


💡 Quick Tip: While HELOCs may require an appraisal before you get approved, a SoFi home improvement loan does not. That means you can get approved and funded the same day.^*

The Takeaway

Personal loans can offer flexibility when you’re looking for funds for a variety of uses, and they typically have lower interest rates than credit cards. Depending on your financial needs and financial circumstances, there may be a personal loan that fits. Comparing multiple lenders is a good way to make sure you’re getting a personal loan that works for you.

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

How do personal loan payments work?

When you take out a personal loan, you agree to repay the borrowed amount plus interest over a set period, usually through equal monthly payments. Each payment consists of a portion that goes towards reducing the principal balance and another portion that covers the interest charges. The loan agreement will specify the amount of each payment, the duration of the loan, and the interest rate.

What are the risks of a personal loan?

Personal loans come with certain risks that borrowers should be aware of. One risk is defaulting on the loan, which can lead to late fees, damage to your credit score, and even legal action from the lender. Another risk is needing to take on additional debt if you borrow more than you can afford to repay. In addition, personal loans may have higher interest rates compared to secured loans like mortgages or auto loans. It’s important to carefully consider your financial situation and ability to repay before taking on a personal loan.

Is a personal loan bad for your credit score?

A personal loan itself is not inherently bad for your credit score. In fact, when managed responsibly, a personal loan can have a positive impact on your credit. Making timely payments and paying off the loan as agreed can demonstrate your ability to handle debt responsibly, which can build your credit profile. However, if you miss payments or default on the loan, it can have a negative impact on your credit. It’s important to borrow within your means, make payments on time, and consider the impact on your credit score before taking on a personal loan.

Does personal loan money go to your bank account?

Yes, when you are approved for a personal loan, the funds are typically deposited directly into your bank account. This allows you to have speedy access to the loan amount. The specific timeline for receiving the money may vary depending on the lender and the loan application process.

Do you get money right away from a personal loan?

The timing of receiving money from a personal loan can vary depending on the lender and their processes. Typically, you receive the money within five to seven business days of approval, and some lenders even offer same-day funding. Others can take a couple of weeks. Check with the lenders you are considering.

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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.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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 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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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The average American carries about $6,455 in credit card debt as of early 2025, and that figure is up by $200 year over year, according to TransUnion®, one of the major credit bureaus.

If you’re struggling with credit debt, whether it’s higher or lower than that average figure, one method to consider is taking out a personal loan (ideally with a lower rate than you’re paying on your credit cards) and using the funds to pay off your credit card debt. If you’re currently paying off multiple cards, this approach also simplifies repayment by giving you just one bill to keep track of and pay each month.

Still, there are pros and cons to consider if you’re thinking about getting a personal loan to pay off credit cards. Read on to learn more.

How Using a Personal Loan to Pay Off Credit Card Debt Works

Personal loans are a type of unsecured loan. There are a number of uses of personal loans, including paying off credit card debt. Loan amounts can vary by lender and will be paid to the borrower in one lump sum after the loan is approved. The borrower then pays back the loan — with interest — in monthly installments that are set by the loan terms. Some details to consider:

•   Many unsecured personal loans come with a fixed interest rate (which means it won’t change over the life of the loan), though there are different types of personal loans.

•   An applicant’s interest rate is determined by a set of factors, including their financial history, credit score, income, and other debt.

•   Typically, the higher an applicant’s credit score, the better their interest rate will be, as the lender may view them as a less risky borrower. Lenders may offer individuals with low credit scores a higher interest rate, presuming they are more likely to default on their loans.

•   When using a personal loan to pay off credit card debt, the loan proceeds are used to pay off the cards’ outstanding balances, consolidating the debts into one loan. This is why it’s also sometimes referred to as a debt consolidation loan. Ideally, the new loan will have a lower interest rate than the credit cards. By consolidating credit card debt into a personal loan, a borrower’s monthly payments can be more manageable and cost less in interest.

•   Using an unsecured personal loan to pay off credit cards also has the benefit of ending the cycle of credit card debt without resorting to a balance transfer card. Balance transfer credit cards can offer an attractive introductory rate that’s lower or sometimes even 0%. But if the balance isn’t paid off before the promotional offer is up, the cardholder could end up paying an even higher interest rate than they started with. Plus, balance transfer cards often charge a balance transfer fee, which could ultimately increase the total debt someone owes.

Recommended: Balance Transfer Credit Cards vs Personal Loans

Understanding Credit Card Debt vs. Personal Loan Debt

At the end of the day, both credit card debt and personal loan debt are both simply money owed. However, personal loan debt is generally less costly than credit card debt. This is due to the interest rates typically charged by credit cards compared to those of personal loans. Also, some people can get trapped by paying the minimum amount on their credit card, which leads to escalating debt as the high interest rate kicks in.

The average credit card interest rate was 24.20% in early 2024. Meanwhile, the average personal loan interest rate was about half that. Given this difference in average interest rates, it can cost you much more over time to carry credit card debt, which is why taking out a personal loan to pay off credit cards can be an option worth exploring.

Keep in mind, however, that the rate you pay on both credit cards and personal loans is dependent on your credit history and other financial factors.

Pros and Cons of Using Loans for Credit Card Debt

While on the surface it may seem like taking out a personal loan to pay off credit card debt could be the best solution, there are some potential drawbacks to consider as well. Here’s a look at the pros and cons:

Pros	Cons
Potential to secure a lower interest rate: Personal loans may charge a lower interest rate than high-interest credit cards. Consider the average interest rate for personal loans was recently 12.30%, while credit cards charged 24.20% on average.	Lower rates aren’t guaranteed: If you have poor credit, you may not qualify for a personal loan with a lower rate than you’re already paying. In fact, it’s possible lenders would offer you a loan with a higher rate than what you’re paying now.
Streamlining payments: When you consolidate credit card debt under a personal loan, there is only one loan payment to keep track of each month, making it less likely a payment will be missed because a bill slips through the cracks.	Loan fees: Lenders may charge any number of fees, such as loan origination fees, when a person takes out a loan. Be mindful of the impact these fees can have. It’s possible they will be costly enough that it doesn’t make sense to take out a new loan.
Pay off debt sooner: A lower interest rate means there could be more money to direct to paying down existing debt, potentially allowing the debtor to get out from under it much sooner.	More debt: Taking out a personal loan to pay off existing debt is more likely to be successful when the borrower is careful not to run up a new balance on their credit cards. If they do, they’ll potentially be saddled with more debt than they had to begin with.
Could positively impact credit: It’s possible that taking out a personal loan could build a borrower’s credit profile by increasing their credit mix and lowering their credit utilization by helping them pay down debt.	Credit score dip: If a borrower closes their now-paid-off credit cards after taking out a personal loan, it could negatively impact their credit by shortening their length of credit history.

How Frequently Can You Use Personal Loans to Pay Off Credit Card Debt?

Taking out a personal loan to pay off credit cards generally isn’t a habit you want to get into. Ideally, it will serve as a one-time solution to dig you out of your credit card debt.

Applying for a personal loan will result in a hard inquiry, which can temporarily lower your credit score by a few or several points. If you apply for new loans too often, this could not only drag down your credit score but also raise a red flag for lenders.

Additionally, if you find yourself repeatedly re-amassing credit card debt, this is a signal that it’s time to assess your financial habits and rein in your spending. Although a personal loan to pay off credit cards can certainly serve as a lifeline to get your financial life back in order, it’s not a habit to get into as it still involves taking out new debt.

5 Steps to Successfully Pay Off Credit Cards with a Personal Loan

The steps for paying off a credit card with an unsecured personal loan aren’t particularly complicated, but having a plan in place is important. Here’s what you can expect.

Getting the Whole Picture

It can be scary, but getting the hard numbers — how much debt is owed overall, how much is owed on each specific card, and what the respective interest rates are — can give you a sense of what personal loan amount might be helpful to pay off credit cards. You can also use an online personal loan calculator to see how things stack up in detail.

Choosing a Personal Loan to Pay off Credit Card Debt

These days, you can do most — or all — personal loan research online. A personal loan with an interest rate lower than the credit card’s current rate is an important thing to look for. Just be sure you are looking at the loan’s annual percentage rate, which tallies the interest rate and other charges (such as origination fees) to give you a truer picture of the cost of the loan.

Paying Off the Debt

Once an applicant has chosen, applied for, and qualified for a personal loan, they’ll likely want to immediately take that money and pay off their credit card debt in full.

Be aware that the process of receiving a personal loan may differ. Some lenders will pay off the borrower’s credit card companies directly, while others will send the borrower a lump sum that they’ll then use to pay off the credit cards themself.

Hiding Those Credit Cards

One potential risk of using a personal loan to pay off credit cards is that it can make it easier to accumulate more debt. The purpose of using a personal loan to pay off credit card debt is to keep from repeating the cycle. Consider taking steps like hiding credit cards in a drawer and trying to use them as little as possible.

Paying Off Your Personal Loan

A benefit of using a personal loan for debt consolidation is that there is only one monthly payment to worry about instead of several. Not missing any of those loan payments is important — setting up autopay or a monthly reminder/alert can be helpful.

Creating a Budget for Successful Debt Payoff

Before embarking on paying off credit card debt, a good first step is making a budget, which can help you better manage their spending. You might even find ways to free up more money to put toward that outstanding debt.

If you have more than one type of debt — for instance, a personal loan, student loan, and maybe a car loan — you may want to think strategically about how to tackle them. Some finance experts recommend taking on the debt with the highest interest rate first, a strategy known as the avalanche method. As those high interest rate debts are paid off, there is typically more money in the budget to pay down other debts.

Another approach, known as the snowball method, is to pay off the debts with the smallest balances first. This method offers a psychological boost through small wins early on, and over time can allow room in the budget to make larger payments on other outstanding debts.

Of course, for either of these strategies, keeping current on payments for all debts is essential.

Where Can You Get a Personal Loan to Pay off Credit Cards?

If you’ve decided to get a personal loan to pay off credit cards, you’ll next need to decide where you can get one. There are a few different options for personal loans: online lenders, credit unions, and banks.

Online Lenders

There are a number of online lenders that offer personal loans. Many offer fast decisions on loans, and you can often get funding quickly as well.

While securing the lowest rates often necessitates a high credit score, there are online lenders that offer personal loans for those with lower credit scores. Rates can vary widely from lender to lender, so it’s important to shop around to find the most competitive offer available to you. Be aware that lenders also may charge origination fees.

Credit Unions

Another option for getting a personal loan to pay off credit cards is through a credit union. You’ll need to be a member in order to get a loan from a credit union, which means meeting membership criteria. This could include working in a certain industry, living in a specific area, or having a family member who is already a member. Others may simply require a one-time donation to a particular organization.

Because credit unions are member-owned nonprofits, they tend to return their profits to members through lower rates and fees. Additionally, credit unions may be more likely to lend to those with less-than-stellar credit because of their community focus and potential consideration of additional aspects of your finances beyond just your credit score.

Banks

Especially if you already have an account at a bank that offers personal loans, this could be an option to explore. Banks may even offer discounts to those with existing accounts. However, you’ll generally need to have solid credit to get approved for a personal loan through a bank, and some may require you to be an existing customer.

You may be able to secure a larger loan through a bank than you would with other lenders.

Recommended: How to Lower Your Credit Card Debt Without Ruining Your Credit Score

Avoiding the Debt Cycle After Consolidation

Once you’ve paid off your credit card debt, you don’t want to fall back into the same habits that got you in trouble in the first place. Some guidelines:

•   Budget carefully. Try a few different types of budgets until you settle on one that really works for you. Plenty of banks also offer tech tools to help you track the money that’s coming in and going out.

•   Speaking of money going out: Watch your spending carefully. Check in with your money regularly, review your spending habits at least monthly, and scale back as needed.

•   Build an emergency fund (even funneling $25 per paycheck is a smart start) so you can cover unexpected expenses like a big medical bill vs. using your credit card.

•   Avoid credit card spending as much as possible. Use your debit card whenever possible to keep spending in check and avoid interest charges.

The Takeaway

High-interest credit card debt can be a huge financial burden. If you’re only able to make minimum payments on your credit cards, your debt will continue to increase, and you can find yourself in a vicious debt cycle. Personal loans are one potential way to end that cycle, allowing you to pay off debt in one fell swoop and hopefully replace it with a single, more manageable 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

Can you use a personal loan to pay off credit cards?

Yes, it is possible to use a personal loan to pay off credit cards. The process involves applying for a personal loan (ideally one with a lower interest rate than you are paying on your credit cards) then using the loan proceeds to pay off your existing credit card debt. Then, you will begin making payments to repay the personal loan.

How is your credit score impacted if you use a personal loan to pay off credit cards?

When you apply for a personal loan, the lender will conduct what’s known as a hard inquiry. This can temporarily lower your credit score. However, taking out a personal loan to pay off credit cards could ultimately have a positive impact on your credit if you make on-time payments, if the loan improves your credit mix, and if the loan helps you pay off your outstanding debt faster.

What options are available to pay off your credit card?

Options for paying off credit card debt include: Taking out a personal loan (ideally with a lower interest rate than you’re paying on your credit cards) and using it to pay off your balances; using a 0% balance transfer credit card; and exploring a debt payoff strategy like the snowball or avalanche method. Other ideas: Consult with a credit counselor, or enroll in a debt management plan.

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*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.


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