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Budgeting is key to financial success, but with so many strategies available, it can feel overwhelming. One of the most powerful and simplest approaches is the pay-yourself-first method. This system turns traditional budgeting upside down by prioritizing saving and financial goals before addressing everyday expenses. Instead of saving what’s left over at the end of the month, you save first — and spend what’s left after.

If you tend to live paycheck to paycheck, adopting a pay-yourself-first mindset could help you break free from that cycle and start getting ahead. Whether you’re working toward building an emergency fund, saving for a house, or investing for retirement, this strategy can help you get there faster. Here’s a closer look at why this method works so well and how to put it into practice.

3 Reasons to Pay Yourself First

Before we get into what it means to pay yourself first, let’s explore why you might want to adopt the so-called “reverse budgeting” method.

1. To Save Consistently

One of the biggest advantages of the pay-yourself-first budget is that it creates a consistent saving habit. Many people intend to save whatever money remains at the end of the month, only to find that there isn’t much — or anything — left.

By paying yourself first, you’re removing the temptation to spend that money. It becomes a non-negotiable — just like your rent or electric bill. You commit to putting aside a set amount each month into a savings account or investment account, treating your future self as a priority. Over time, these small contributions can accumulate into a sizable savings or investment fund, providing financial stability and peace of mind.

2. To Prepare for the Future

Financial emergencies are almost inevitable. Whether it’s a car repair, medical bill, or trip to the vet, unplanned expenses can derail even the most careful budgets. Paying yourself first ensures you’re building a safety net before life throws a curveball.

Beyond emergencies, the pay-yourself-first strategy also helps you prepare for long-term goals. Whether you’re hoping to buy a home, travel, or fund a child’s education, prioritizing savings makes it easier to achieve big-picture plans without relying on debt. And while retirement may seem a long way off, the sooner you start saving, the more time your money has to grow through compound returns (when your returns start earning returns of their own).

3. To Stay Motivated

Budgeting can feel restrictive and discouraging, particularly when the main focus is on cutting expenses and limiting spending. Paying yourself first changes that mindset. Instead of seeing what you’re giving up, you see what you’re gaining — a growing savings account, a bigger retirement fund, and real progress toward your goals.

Each month that you pay yourself first is another step forward. That sense of progress can inspire you to stay on track, stick with your budget, and look for even more ways to improve your financial well-being.

How to Start Paying Yourself First

If the idea of paying yourself first sounds appealing, here’s a simple step-by-step guide to getting started.

1. Assess Your Income and Spending

Before you can determine how much to pay yourself, you’ll need to get a sense of your overall financial picture. You can do this by gathering up the last several months of financial statements and using them to calculate your average monthly income and average monthly spending. Next, you’ll want to categorize your monthly expenses and divide the list into essential spending (like housing, utilities, groceries, debt payments) and nonessential spending (dining out, entertainment, clothing).

Once you have a clear picture of your income and expenses, you can start identifying how much room there is to pay yourself first. Keep in mind that the goal here is to prioritize saving as if it were an essential bill.

2. Determine How Much to Pay Yourself

How much you should siphon into savings each month depends on your income, expenses, and goals. A good starting point is 10% to 20% of your take-home pay, but don’t be discouraged if that feels out of reach at first. Even saving 5% is better than nothing, and you can gradually increase the percentage as your financial situation improves.

To hone in the right amount to pay yourself, you’ll want to consider your short- and long-term financial goals, how soon you want to reach them, and how much you’ll need to save monthly to meet those goals.

If saving for multiple goals feels too overwhelming, it’s okay to prioritize. For example, If you don’t have a solid emergency fund, you might start there. Once that’s in place, you might bump up your 401(k) contributions and/or start saving for another goal like a downpayment on a home or car or your next vacation. The key is to start somewhere and commit to regular contributions.

3. Trim Unnecessary Expenses

If your current spending habits don’t leave much room for saving, you’ll need to find some places to cut back. The easiest way to find extra money is to look closely at your nonessential spending and consider what you can live without.
Some areas where people tend to overspend include:

•   Eating out or ordering takeout frequently

•   Subscriptions and streaming services

•   Unused gym memberships

•   Impulse purchases or retail therapy

•   Expensive cable or phone plans

Redirecting even $50 or $100 per month from nonessential spending into savings can make a big difference over time. Trimming the fat in your spending not only eliminates waste, but also helps you start spending with more intention, rather than making decisions impulsively or passively. Like other budgeting methods, the pay-yourself-first strategy helps ensure that your spending aligns with your values and goals.

4. Review Your Bank Accounts

To successfully pay yourself first, you need the right banking set-up. It’s a good idea to have multiple accounts to separate your savings from your everyday spending. This prevents the temptation to dip into savings for nonessential expenses.

At a minimum, you’ll want to have one checking account that doesn’t charge any monthly fees (bonus if it also earns some interest), along with at least one savings account that pays a competitive annual percentage yield (APY). To help grow your savings faster, you may want to open a high-yield savings account. These accounts offer significantly higher APYs compared to traditional savings accounts. You can often find the best rates at credit unions and online banks.

5. Automate Your Savings

Once you’ve decided how much to pay yourself each month and where to put those payments, automating your finances is key. By setting up automatic transfers from your checking account to your savings accounts, you eliminate the need to make a decision each month. It happens behind the scenes — just like a bill payment.

Consider setting your transfer to occur on the same day you receive your paycheck. This ensures the money is moved before you have a chance to spend it elsewhere. Alternatively, you might see if your employer will do a split direct deposit, where most of your paycheck goes into checking and a certain percentage goes directly into savings.

6. Review and Adjust Based on Your Goals

Life is constantly changing, and your personal budget should reflect that. It’s a good idea to periodically review your financial goals, income, and spending habits to make sure your savings strategy still aligns with your priorities. You might set a reminder in your calendar to review your budget every three to six months. You’ll also want to go over your budget whenever you experience a major life change (like a new job, move, or marriage).

Some questions to consider when doing a budget review:

•   Am I meeting my savings goals?

•   Can I afford to increase how much I pay myself?

•   Are there any expenses I can reduce or eliminate?

•   Have my financial goals changed?

Adjustments are normal and necessary. The key is to remain proactive and intentional with your money. As your income increases and/or debt decreases, look for opportunities to boost your savings rate and pay yourself even more.

The Takeaway

The pay-yourself-first strategy isn’t simply a budgeting method — it’s a shift in mindset that puts your financial well-being front and center. By prioritizing savings before spending, you can build a habit of consistency, prepare for the future, and stay motivated as you work toward your goals.

This approach to budgeting is also easy to implement. To get started, you simply need to assess your income and expenses, decide how much to pay yourself based on your financial goals, cut unnecessary expenses to free up savings, and automate your savings to stay consistent.

Remember that it’s fine to start small. The key is that you start — and stick with it. Over time, you’ll likely gain momentum and confidence, and those early efforts will pay off in the form of more financial flexibility and greater peace of mind.

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.

FAQ

Are there any disadvantages to paying yourself first?

While paying yourself first is a powerful savings strategy, it can present challenges if your income is irregular or your monthly expenses are high. Automatically transferring money into savings before covering essentials could cause cash flow issues, especially during emergencies or months with unexpected costs. Prioritizing savings without a flexible plan could also lead to relying on credit cards or loans to make ends meet. It’s important to balance saving with realistic budgeting to avoid financial strain.

What types of accounts are best for paying yourself first?

High-yield savings accounts, retirement accounts, and investment accounts are ideal for paying yourself first. High-yield savings accounts offer easy access and better interest rates than traditional accounts, making them ideal for short-term goals. Retirement accounts often provide tax advantages for long-term saving. For building wealth, automated investments in diversified portfolios can be beneficial. You’ll want to choose your accounts based on your goals, time horizon, and tolerance for risk.

How does paying yourself first help with financial stability?

Paying yourself first builds financial stability by prioritizing savings before spending. This habit ensures you’re consistently setting aside money for emergencies, future goals, and retirement, rather than relying on leftover funds. Over time, it can help you create a financial cushion that reduces stress, prepares you for unexpected expenses, and lessens the need for high-interest debt. This proactive approach also helps you build long-term financial security.

Can I still pay myself first if I have debt?

Yes, you can — and often should — pay yourself first even if you have debt. Building savings, even a small emergency fund, can prevent further debt when unexpected expenses arise. It’s about balance: You might prioritize high-interest debt repayment while also saving a small portion of your income. Over time, having savings can improve your financial flexibility, reduces reliance on credit, and can help you make faster progress toward becoming debt-free.

What are the biggest challenges of paying yourself first?

One of the biggest challenges of paying yourself first is sticking to the habit, especially when money feels tight or unexpected expenses arise. It can be tempting to skip saving in favor of immediate needs or wants. People with irregular incomes may also find it challenging to divert a set amount of money to savings each month. To overcome these hurdles, it’s a good idea to start small, automate your savings, and track your progress to stay committed and motivated.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

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Before the age of digital payments, traveler’s checks were considered one of the safest and most convenient ways to carry money while traveling, especially abroad. Though their popularity has waned with the rise of credit cards and mobile wallets, traveler’s checks do still exist and are issued by a limited number of banks and credit unions.

Whether you’re curious about their modern use or holding onto a few from a past trip, understanding traveler’s checks can help you make informed financial decisions on your next journey.

Traveler’s Checks Defined

Traveler’s checks are paper checks you can purchase at a bank or credit union then carry when you travel abroad in a place of cash. Unlike cash, however, travelers checks are secured by the issuing financial institution, which means that the issuer will replace the funds if the checks are lost or stolen at any point at home or abroad.

Issuers print checks in varying denominations, such as $10, $20, or $50, and they are available in a range of currencies. Depending on where you buy traveler’s checks, you may be charged a fee in the range of 1% to 3% of the total purchase amount.^[1]

You can use travelers checks just like cash to pay merchants for goods and services, as long as they accept traveler’s checks. Typically, any change due back to you will be given in local currency. You may also be able to get the checks converted into cash in the local currency at some banks, hotels, and currency exchange offices, though you may need to pay a fee.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

How Do Traveler’s Checks Work?

Traveler’s checks operate somewhat like regular checks but are pre-paid and come with built-in fraud protection. Here’s a step-by-step explanation of how they work:

Where Can I Get a Traveler’s Check?

While traveler’s checks still exist and people still use them, they are getting increasingly hard to come by. American Express — which issued traveler’s checks for over a century — no longer offers new checks (though they will honor previously issued checks). However, some financial services companies — including Visa —- still issue traveler’s checks, which are sold through various partner banks.

If you’re interested in buying traveler’s checks, you will likely need to contact several banks and credit unions to find one that still offers them.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Pros and Cons of Traveler’s Checks

Traveler’s checks offer a mix of benefits and drawbacks. For some, they are a nostalgic or extra-safe backup option. For others, they may seem outdated compared to more modern financial tools.

Pros of Traveler’s Checks

Cons of Traveler’s Checks

Do I Need Traveler’s Checks When Going Abroad?

Generally, no. Modern travelers often find credit cards, debit cards, and mobile wallets to be more convenient, widely accepted, and cost-effective. However, there are exceptions. You might consider traveler’s checks if:

Still, for the majority of travelers, modern financial tools usually make traveler’s checks unnecessary.

4 Alternatives to Traveler’s Checks

Traveler’s checks are no longer the only secure option for carrying money while abroad. Here are four modern, practical alternatives:

1. Prepaid Debit Card

A prepaid travel card is the modern-day version of a traveler’s check. You can load the card with a set amount of money from your bank account before you travel, then use it to get local currency, shop, dine, and more while you’re abroad.

Like traveler’s checks, prepaid cards are not linked to your bank account, which prevents anybody from draining your checking account if the card gets lost or stolen — and you can’t go into debt. On the downside, these cards limit you to a pre-set spending amount. And if you lose your card, there’s no way to get your money back.

2. Credit Card

Using a credit card is a convenient and secure way to pay for goods and services while you travel. These cards come with robust fraud protections that safeguard your money if your card gets stolen or lost while overseas. And many cards also offer spending rewards, such as points, miles, or cash back. However, there may be fees involved with using your card overseas, called foreign transaction fees.

And unless it’s an emergency, you’ll likely want to avoid using your credit card for getting cash at an ATM. When you request a cash advance from a credit card, you can get hit with a fee (often 3% to 5% of the advance amount), as well as interest, which can run as high as 29%. You may also pay an ATM fee of several dollars.

3. Debit Card

Another alternative to traveler’s checks is your debit card, which you can use to get local currency at ATMs and also to make purchases while traveling. Unlike a credit card, you’re spending your own money when you pay by debit card, so you can’t run up debt.

Like a credit card, however, you may get hit with a foreign transaction fee when you pay something overseas using your debit card. You may also have to pay out-of-network ATM fees every time you withdraw cash. However, some banks have partnerships with banks in other countries that allow travelers to make fee-free withdrawals. Before you travel, it’s a good idea to check to see if your bank has this kind of arrangement.

4. Mobile Wallet

Mobile wallets like Apple Pay, Google Pay, and Samsung Wallet are becoming more accepted around the world. You can link your credit and debit cards and pay directly from your phone without needing a physical wallet. This method of payment is not only convenient, it’s also highly secure, since digital wallets use encryption and tokenization to protect your data.

Just keep in mind that not all merchants accept mobile wallets, especially in rural areas, so you may not want to rely on this as your only payment option when you travel.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

How to Keep Your Money Safe While Traveling

Regardless of your preferred payment method, keeping your money safe while traveling is essential. Here are a few tips:

Recommended: How to Keep Your Bank Account Safe Online

What Can I Do With Old Traveler’s Checks?

If you still have old traveler’s checks from past trips, don’t throw them away — they may still be redeemable. Here’s what you can do:

Keep in mind that in order to redeem old traveler’s checks, you’ll need to provide identification and possibly documentation proving you were the original purchaser.

The Takeaway

Traveler’s checks were once the gold standard of secure travel funds, but the rise of digital banking has made them largely obsolete. Still, they retain some usefulness as a secure backup for international travelers, especially in less developed regions or for those who prefer not to rely on digital methods.

For most modern travelers, credit cards, debit cards, prepaid cards, and mobile wallets offer more convenience, better exchange rates, and broad acceptance. However, understanding traveler’s checks — and knowing how to use or redeem them — can still come in handy.

Ultimately, the best approach is a balanced one: carry multiple forms of payment, stay aware of local customs and banking norms, and prioritize security. Whether you’re heading off the beaten path or to a major city, having a thoughtful plan for managing your money can make your travels smoother, safer, and more enjoyable.

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.

FAQ

How does a traveler’s check work?

A traveler’s check is a prepaid, fixed-amount paper check used as a secure alternative to cash while traveling. You purchase it from a financial institution, sign it when issued, and sign it again when spending it or cashing it, allowing merchants or banks to verify your identity. If lost or stolen, traveler’s checks can usually be replaced quickly. However, traveler’s checks are not as widely issued and accepted as they once were. They have largely been replaced by prepaid debit cards and credit cards.

Why are traveler’s checks not used anymore?

Traveler’s checks have largely fallen out of favor due to the convenience and widespread use of credit cards, debit cards, and digital wallets, which are accepted almost everywhere and offer strong fraud protection. ATMs are now globally accessible, making it easy to withdraw local currency as needed. Additionally, it’s hard to find banks that still issue traveler’s checks, and many merchants no longer accept them as payment.

Can you cash traveler’s checks?

Yes, you can still cash traveler’s checks, though it might take some effort. Some major banks will cash them for account holders, especially if they issued the checks. Some currency exchange offices and hotels may also accept them. You’ll need valid identification, and you’ll usually sign the check in front of the cashier. However, because these checks are less common now, it’s best to call ahead and confirm if a location will accept or cash them.

Do financial institutions still carry traveler’s checks?

Some financial institutions still offer traveler’s checks, but their availability is limited. American Express no longer issues travelers checks. However, Visa still offers them through participating banks. You may need to call around to find a bank in your area that offers these checks. Those that do may also require advance notice or only provide them to account holders. As the travel industry shifts toward digital and card-based payment methods, traveler’s checks are now less commonly sold or promoted.

What can I do with old traveler’s checks?

If you have old traveler’s checks, you can generally still cash or deposit them, as they typically don’t expire. Visit a bank — preferably one that issued the checks or one with international banking services — and present valid identification. You can also contact the issuing company (e.g., American Express) for assistance or to process a refund. You may be able to deposit them into your bank account (though check with your bank first). They retain their original value if unused.

Photo credit: iStock/AndreyPopov

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.

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.

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

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Online lenders can make applying for and securing a personal loan easier than working with traditional lenders. The process of getting a lump sum of cash to use however you wish can be fast, affordable, and convenient. However, there may be some times that a traditional lender is a better option. Learn the full story here.

Convenience

The convenience factor is one of the biggest advantages of getting an online personal loan. Younger generations of consumers might be drawn to a process that incorporates the technology they’ve grown up with and are comfortable using. But online lenders often have a streamlined application process that might appeal to people of any generation who are comfortable with technology.

Online loan applications can be completed from anywhere a prospective borrower has an internet connection, preferably secure. In addition, online lending websites often have thorough lists of Frequently Asked Questions (FAQs) to give consumers as much information as possible without the need to travel to a brick-and-mortar bank branch.

Competitive Rates

The lack of brick-and-mortar locations is one key reason why online lenders can often offer competitive rates on personal loans. Without physical bank branches to maintain, their overhead is likely to be less than a traditional bank’s.

Some online lenders, however, may try to generate profits by charging fees, such as those for paying off a loan early. When shopping around for personal loan rates, you’ll want to be sure to compare annual percentage rates (APRs), which includes any fees. This allows you to compare loans apples to apples.

Recommended: APY vs Interest Rate

Quick Turnaround

Some online lenders are able to offer preapproval to prospective borrowers with just a soft inquiry on their credit report that won’t affect their credit score. One benefit of knowing quickly what rate might be offered is being able to compare rates among multiple lenders to find the one that will be the best fit.

After the application and loan approval, some online lenders distribute loan funds in as quickly as one to a few days. You may even see some lenders advertising same-day approval and disbursement. For people who need access to funds quickly, this could be the determining factor in choosing a lender.

Recommended: What to Know Before You Borrow Money Online

Differing Criteria

Someone who has not built a credit history might have difficulty being approved for a personal loan. Some online lenders, however, are willing to look at factors other than credit score in determining approval for a personal loan and may have more flexible qualification criteria than a traditional bank.

There are also some online lenders that cater specifically to underserved populations.

Recommended: Typical Personal Loan Requirements Needed for Approval

What About Traditional Banks?

Even though online lenders are well established in the financial world, traditional banks still make sense for some people or some financial needs.

For people who prefer working with a lender in person, a traditional bank or a credit union can be a good choice. If there is already a relationship in place with a particular financial institution, it may be advantageous to build on that and get a personal loan rate quote from that lender.

In some situations, a personal line of credit (LOC) might be a better option than a personal loan. Though online lenders are beginning to offer LOCs, they are more likely to be offered by banks or credit unions.


💡 Quick Tip: Choosing a personal loan with a fixed interest rate makes payments easy to track and gives you a target payoff date to work toward.

From Disrupting to Redefining

Online lenders and traditional financial institutions are realizing that they can meet the needs of more consumers if they work together. Today’s modes of banking may be less about disrupting the status quo of lending and more about finding a new definition of banking as a whole.

Recommended: Guide to Unsecured Personal Loans

The Takeaway

If you’re thinking about taking out a personal loan, the great news is that you have plenty of lenders to choose from, including traditional banks, credit unions, and online lenders. Some people may prefer the in-person experience of working with a traditional bank or credit union. Others may find that online personal loans can make it easy to rate-shop and typically offer a quick and convenient application process. Online lenders also tend to be faster to fund than traditional institutions.

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

FAQ

Is it better to apply for a personal loan online or in person?

It’s a matter of personal choice whether to apply for a personal loan in person or online. Some people may prefer the face-to-face interaction and support of applying in person. Others may like the speed and convenience of applying online.

What are the cons of online lenders?

Some people may feel the cons of online lenders include having to share sensitive financial information online and not having in-person support.

How long does it take to get an online personal loan?

Online personal loans can often be obtained in just a day or two. Some lenders even advertise same-day approval and disbursement.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

You may have seen personal loans advertised as starting at a certain interest rate or annual percentage rate (APR). But when you check your personal loan interest rate, you may find that what is offered to you is significantly higher. Why is that?

The average personal loan interest rate is dependent on several factors, including the amount borrowed, credit history, and income, among others. Average interest rates for personal loans may also differ depending on the type of the loan. Here are some factors that may affect the personal loan interest rate you’re approved for.

Average Personal Loan Interest Rates By Credit Score

The APR for a personal loan is calculated by looking at several factors, including the requested amount, the applicant’s income history, and the reasons for borrowing. One of the biggest factors, however, is an applicant’s credit score. In general, the higher a borrower’s credit score, the lower the loan interest rate they will be offered.

Here’s a look at average personal loan interest rates for different credit scores as of May 2025.

Factors That Can Lower Personal Loan Interest Rates

One thing to know about how personal loans work is that your unique credit profile will likely affect the interest rate offered to you. Here’s a look at some ways you may be able to qualify for a lower personal loan interest rate.

Building Your Credit Score

Building your credit score can potentially be a way to qualify for a personal loan with better rates and terms. Some strategies that can help you positively impact your credit profile include:

•  Checking your credit report It’s a good idea to get copies of your credit reports (you have three; one each from Equifax®, TransUnion®, and Experian®) and make sure that your personal information — e.g., name, address, phone number, Social Security number — is correct in each one. Also look for any erroneous public record information, such as lawsuits or bankruptcies filed that you were not a part of and any errors or inaccuracies in the credit accounts section. You can dispute any errors with the credit reporting agency.

•  Lowering your credit utilization ratio Your credit utilization ratio — the amount of debt you have compared to the amount of credit available to you — plays a large part in credit score calculation. Paying down your debt will lower this ratio. Financial experts suggest keeping the ratio at 30% or lower (10% or lower is ideal).

•  Avoiding late payments Late payments can have a large and lasting impact on your credit score. If there are any late payments in your history, you may be able to minimize their impact by creating a record of on-time payments moving forward. Setting up autopay for debt payments is one way to make sure those payments are made regularly and on time.

Secured vs Unsecured Personal Loans

How a personal loan works depends on the type of personal loan you choose. As you research loan options, you may come across options for secured and unsecured personal loans.

What’s the difference between a secured and unsecured personal loan?

•  A secured personal loan requires the borrower to pledge collateral to guarantee the loan. This collateral is something of value that the borrower owns, such as a car, investments, or a savings account. If the borrower cannot or does not make the loan payments, then the lender can seize that collateral to recoup its losses.

•  An unsecured personal loan, also called a signature loan, is backed by the borrower’s estimated creditworthiness. If the borrower can’t pay back the loan, the lender can’t take any of their property or valuables to recoup its loss. The lender can, however, take other steps to recoup its loss, such as suing the borrower, which may affect the borrower’s credit score and future financial options.

Personal loans are commonly unsecured loans. However, some lenders offer secured personal loans, which can allow borrowers with fair credit to qualify for a loan or get a better rate than they otherwise would with an unsecured loan.

Income and Employment Status

Your income and employment status may affect the rate you’re offered on a personal loan. Lenders generally see borrowers with solid, steady income as lower risk and, therefore, offer them lower rates. If you’re a freelancer, independent contractor, or business owner, you might need additional paperwork to prove your income than you would if you work a W-2 job.

If your income is irregular, having a creditworthy co-applicant may help you get approved for more favorable interest rates. Asking someone to be a co-applicant is a big commitment, though, and having a conversation about all that it entails can help alleviate any concerns of both parties.

Factors That May Increase Personal Loan Interest Rates

Lenders must assess how risky an unsecured loan might be and the likelihood of the loan being paid back. To do that, they look at the applicant’s credit history, employment status, and loan amount requested, among other factors. Here are some things that may lead a lender to think a loan is more risky — and potentially offer a higher rate to the borrower.

Credit Score

An applicant’s credit score is one factor that affects the personal loan interest rate they might be approved for. In general, the lower the applicant’s credit score (which indicates poor management of credit in the past), the higher the rate of interest they will be offered. Improving your credit over time may make it possible to qualify for a loan with a lower interest rate.

Debt-to-Income Ratio

Debt-to-income (DTI) ratio refers to how much debt someone has in relation to how much income they have. To calculate your DTI, you add up your monthly debts (including mortgage payments, car payments, and credit card payments) then divide that number by your gross monthly income and multiply by 100. DTI ratio is expressed as a percentage. In general, the higher your DTI ratio, the riskier you may seem to lenders. Each lender sets its own DTI ratio requirement.

Unemployment

A personal loan application will ask for proof of income, usually in the form of W2s or tax returns from prior years. The lender wants to know that a borrower has a steady source of income. If a loan applicant is unemployed, it may be harder — but not impossible — to have a loan approved.

Recent Bankruptcy

Bankruptcy will appear on an applicant’s credit report and stay there for seven to 10 years, typically making it challenging to be approved for a personal loan. Applying with a cosigner can make it easier to be approved for a personal loan after recent bankruptcy. But keep in mind that if you are unable to repay the loan, your cosigner would be responsible for the debt.

Is a Personal Loan the Right Choice for You?

Individual circumstances really determine whether a personal loan is the right choice for any one person.

•  A personal loan can be a good option for people who want to consolidate high-interest debt, like that of credit cards, to save money. For a debt consolidation loan to be successful, it’s important to discontinue using the credit cards to accumulate more debt.

•  Having a fixed interest rate and steady payment amount can be helpful when using a personal loan to cover a big purchase. A personal loan is installment debt with a payment end date, in contrast to the revolving debt of a credit card.

•  A personal loan is still debt and increases a person’s overall debt load, so it can be a good idea to have a sense of how you’ll repay it. Making late payments or failing to repay the loan can negatively affect your credit score.

A personal loan rate calculator can be a helpful tool to estimate your personal loan rate and will not affect your credit score. Your offered rate may vary slightly when you officially apply for a loan, but an estimate can give you a good benchmark for comparison.

Recommended: How to Apply for a Personal Loan

The Takeaway

Personal loan interest rates vary depending on an applicant’s financial circumstances but can also vary by lender, so it can make sense to shop around for rates. If your credit profile is not as strong as it could be, you may want to work on building your credit before applying for a personal loan. This can help increase your chances of loan approval, as well as your odds of getting approved for a loan with a favorable interest rate.

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

FAQ

What is a good interest rate on a personal loan?

A good interest rate on a personal loan could be under the almost 14.00% average for those with superior credit as of May 2025. At that time, some of the lowest rates for personal loans began at around 7.99%.

Is 10.00% a good personal loan rate?

Yes. If you have good to very strong credit (720-plus), you could qualify for a 10.00% APR, which is considered a good personal loan interest rate. It is lower than the average personal loan rate for borrowers with excellent credit, which is 13.88% as of May 2025.

Is 12.00% a good personal loan rate?

Yes, a 12.00% APR is considered a good personal loan rate as of May 2025. You would probably need a very strong credit score (possibly 720 or higher) to qualify for this rate. It beats the average personal loan interest rate for excellent credit, which is 13.88%.

Which bank has the lowest interest rate on personal loans?

According to Forbes Advisor, the best low-interest personal loans are currently available from SoFi, Upgrade, LendingClub, PenFed, Happy Money, and U.S. Bank.

What is a personal loan interest rate?

A personal loan’s interest rate is the cost you pay each year to borrow money expressed as a percentage. The interest rate does not include fees charged for the loan. The annual percentage rate (APR) of a personal loan is the cost you pay each year to borrow money, including fees, expressed as a percentage. The higher the APR, the more you’ll pay over the life of the loan.

What is the interest rate on a $40,000 loan?

The interest rate on a $40,000 personal loan will depend on the lender, the loan’s term, and the creditworthiness of the borrower. The APR can range anywhere from the single digits to 35.99% or possibly higher.

What is a good interest rate for an unsecured personal loan?

A good interest rate for an unsecured personal loan can range anywhere from 7.99% to 13.88% as of May 2025. However, you will likely need to have excellent credit to qualify.

Photo credit: iStock/alexsl

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Remodeling a closet can be a great way to get organized while getting rid of clutter. But creating an inviting, functional space involves more than just buying a few new sweater boxes.

When planning a closet model, you’ll want to keep a few things in mind, including what you intend on storing there, how much space you have, and your budget. Ready to roll up your sleeves? Use this guide to help you get started.

Clear Out the Closet

If you can, start a remodeling project with a blank slate. In this case, that means clearing out whatever is in your closet now. You’ll appreciate the extra breathing room when it comes time to measure the space (more on that in a minute). Plus, you’ll have a chance to see exactly what will be stored in the closet after the remodel, which will help you determine what clothing rods, drawers, storage bins, and containers might be needed.

Recommended: How Much Does It Cost to Remodel or Renovate a House?

Size Up Your Space

Accurately measure the size of the closet and, if desired, see what potential extra space exists. The following tools can help you get the job done:

•   Measuring tool: This can be a 25-foot flat tape measure or, if preferred and needed, an electronic measuring tool. The latter can measure longer walls.

•   Acrylic square finders (two): With these, verify whether closet corners are actually square.

•   Angle finders for closets with slanted ceilings: This allows the angle of the roofline to be properly measured.

•   Paper: Record all numbers; graph paper can be especially helpful when sketching out measurements and closet remodel ideas.

New to measuring? Here are some tips to help you get the right figures the first time.

•   When doing a hard measurement, round down by the nearest quarter of an inch.

•   When doing soft measurements, round down to the nearest whole number.

•   Measure walls in three places and use the smallest of these measurements: near the top, in the middle, near the bottom.

•   Measure from top to bottom.

•   Check inside corners.

•   Check the angle of pitch for any sloped ceilings.

•   Note and measure any obstacles, which can include light fixtures and switches, trim, and vents.

Consider Closet Features You’d Like

Not sure what to include in your closet remodel? Here are some ideas to get your creative juices flowing.

Bright Lighting

From LED lights that shine on specific areas of the closet (like the furthest corners) to illuminated rods and shelves to lights that focus on cabinets, lights are popular closet features.

A Dressing Room

Because not every house has bedrooms with enough square footage for dressing room space, some homeowners are choosing to transform an extra bedroom — or even an underused dining or living room — into a walk-in closet/dressing room.

These rooms typically have some kind of seating and mirrors, and even pieces of art. They can range from reasonably simple rooms containing a makeup table and comfy seat to luxurious spaces.

Walls That Wow

People who have a more straightforward paint color or wallpaper pattern in their rooms are sometimes willing to experiment with bolder hues or eye-catching patterns on the walls in their closets.

Stylish Extras

If your budget and lifestyle allow, here are some features that are in demand today and may be worth considering. Some are DIY, while others may require the help of a contractor.

•   Ventilation systems to remove smells and dehumidifiers to remove moisture

•   Entire walls devoted to shoes or handbags

•   Crown molding

•   A sliding ladder

•   Built-in drawers, called cellarets, to keep socks, ties, and more well organized

•   Laundry cabinet storage with a removable liner to carry the load to the washer

•   Jewelry organizer with multiple compartments, some with locks

Closet Remodel No-Nos

The best remodel is one that allows you to make the most of your closet. As you’re making your plans, be mindful to avoid the following:

Dead Space

People often waste space above the top shelf in their closets. It’s true that you can fold and store clothes on that shelf or use the space for storing boxes. But keep in mind that the higher an item is, the more difficult it is to access. It may be best used for out-of-season items vs. clothes you want to wear regularly.

Wasted Space Behind Swing-in Doors

If possible, try to avoid closet doors that swing in, because shelves can’t be built there and clothes hung there will continually be banged into. But if this is your setup, fear not. The space can still be salvaged by the addition of a hook board where scarves, ties, and other thin objects can be placed.

Shallow Shelving

When shelves are too shallow, clothes hang over top of them and the closet can look sloppy or fall from their designated spot. Lots of closet systems have 12-inch shelves; make sure this is deep enough for your needs or choose other shelving with more depth.

What Will a Closet Remodel Cost?

On average, a closet renovation costs around $2,300 to $6,700, with an average of $4,100, according to the home improvement website Angi. Other sources, like Thumbtack, put the price closer to an average of $771, so there’s obviously a range of costs possible.

A good rule of thumb is that the cost per linear foot is $125. Add-ons will affect the cost. Here are some amounts that someone might expect to spend:

•   Professional organization services: $40 to $60 an hour

•   New lights and outlets: $55 to $65 an hour

•   New door: $180

•   Paint job: $200

Designing a custom closet costs between $1,500 and $2,500 on average, according to HomeAdvisor.com. The materials used, organization elements included, permits, and whether a wardrobe is added affect the pricing. Of course, if you’re looking to sell a home, a custom closet design may be of more value to a buyer than an off-the-shelf closet organizing product.

Another factor is whether the closet is a reach-in or walk-in type. Reach-in closets are typically smaller, but when organized well can be functional. Remodeling these closets, which are often found in smaller bedrooms and hallways, may cost less than redoing a walk-in closet.

How to Afford a Closet Remodel

When it comes to paying for a closet remodel, homeowners have several options. Examples include using your personal savings, using a credit card and then paying the balance in full to avoid high interest charges, or taking out an unsecured personal loan.

When used for home renovation projects, these are typically called home improvement loans. They provide a lump sum of cash, which is then paid back (typically over a couple or several years) with interest in installments. The rates are usually considerably lower than those of credit cards.

Recommended: A Guide to Unsecured Personal Loans

The Takeaway

A closet remodel can cost hundreds or thousands of dollars, depending on how extensive it is, how luxurious the materials you choose are, and how much customized work is done. Plan exactly what you want — first deciding whether to expand the space or enhance what you have — and then carve out a budget for that vision. A home improvement loan, a kind of personal loan, can help you finance this type of project.

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

FAQ

How much does a closet remodel cost?

A closet remodel typically costs a few thousand dollars, but for smaller spaces or less extensive renovations (primarily cosmetic), you may be able to get the job done for less than $1,000.

What is the rule of 3 for cleaning closets?

The rule of three says that if you can’t imagine wearing an item three different ways or to three different occasions, you should probably find it a new home, either giving it to a friend or relative, donating it, or selling it.

Is it worth it to remodel a closet?

Whether a closet remodel is worth it is a personal decision. Some people feel it’s definitely an improvement, making it easier and more enjoyable to get dressed and store their clothes. Others think it isn’t worthwhile to spend money on a small space, especially if it’s working fairly well as-is.

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.

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