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If you’re looking to start or grow a side hustle or small business, you might think a business loan is the right next step. A personal loan, however, is another popular financial product that you also might be able to use. For instance, by using it to free up some cash elsewhere in your budget, you could put more of your income toward funding your business.

Because there are potential benefits and disadvantages to both types of financing, it’s important to understand the differences. You’ll find that information here and be better equipped to decide whether a business loan vs. personal loan might work best for you.

What Is a Personal Loan?

A personal loan is a source of financing that a borrower typically can use for just about any legal personal purpose. That said, you typically cannot use the money from a personal loan directly for your business. You might instead use the lump sum to consolidate credit card debt, which could free up funds in your overall budget to put back into your business.

Typically, you’ll find unsecured personal loans, with the borrower agreeing to pay back the full amount, plus interest, in fixed monthly payments within a predetermined time frame.

Some lenders also offer secured personal loans, however,which means some form of collateral is involved. Also, some offer personal loans with variable interest rates.

How Personal Loans Work

When you apply for a personal loan, you can expect the lender to review your personal financial information — including your credit score, credit reports, and income — to determine your eligibility. In general, the better your credit, the better your chances of receiving a lower interest rate.

Personal loan amounts vary, but some lenders offer personal loans for as much as $100,000.

Although most personal loans have shorter repayment terms, the length of a loan can vary from a few months to several years. Typically, they last from 12 to 84 months.

What is a Business Loan?

A business loan is a type of financing used specifically to pay for business expenses. It could be used to purchase equipment or inventory, for example, or to fund a new project.

There are many kinds of small business loans available — with different rates and repayment terms — including Small Business Administration (SBA) loans, equipment loans, micro loans, and more. Rates, terms, and loan requirements also can vary significantly depending on the lender.

How Business Loans Work

Applying for a business loan tends to be more complicated than getting a personal loan. For one thing, you’ll likely have to submit more paperwork to back up your application, including your business’s financial statements and an up-to-date business plan. The lender also usually will want to review your personal and business credit scores. And you may have to be more specific about what the loan will be used for than you would with a personal loan.

If your business is brand new, lenders may be reluctant to give you a business loan. Some lenders might ask you to put up some type of collateral to qualify.

Differences Between Business and Personal Loans

There are several factors you’ll want to understand when considering the difference between a personal loan vs. a business loan, including the loan costs, how you plan to use the money, and how much you hope to borrow. Here’s a look at a few basic differences.

Cost Differences Between Business and Personal Loans

Whether you’re considering applying for a business loan or a personal loan, it’s important to be clear about how much it could cost you upfront and over the life of the loan.

Interest Rates

Interest rates for business loans can be lower than for the interest rates for personal loans, but the rates for both can vary depending on the type of loan, the lender you choose, and your qualifications as a borrower.

Fees

Fees also can affect the upfront and overall cost of both personal and business loans, so it’s a good idea to be clear on what you’re paying. Some of the more common fees for business loans and personal loans that you might see include origination, application, packaging, and underwriting fees, and late payment and prepayment penalties.

Some fees may be subtracted from the loan amount before the borrower receives the money. But fees also may be folded into a loan’s annual percentage rate (APR) instead, which can increase the monthly payment.

Down Payment

Business loans may be available for larger amounts than a personal loan. For a larger business loan — a substantial SBA loan or commercial real estate loan, for example — you could be required to come up with a down payment. This amount can add to your upfront cost. However, just as with a mortgage or car loan, a larger down payment can help you save money over the long term, because you’ll pay less in interest.

Whether you’ll need a down payment, and the amount required, may depend on your individual and business creditworthiness.

Different Uses for Business and Personal Loans

One of the biggest differences between business vs. personal loans is the way borrowers can use them.

•   A business loan can be used to finance direct business costs, such as paying for supplies, marketing, a new piece of equipment, business debt consolidation, or a business property. But it typically can’t be used for indirect business costs, which means a borrower can’t pay off personal debts with the money or buy personal property with it.

•   Some business loans have a very specific purpose, and the borrowed money must be used for that purpose. For example, if you get an equipment loan, you must buy equipment with it. Or, if you get a business car loan, you must buy a business car with the money.

•   With a personal loan, you have tremendous flexibility in how you use the loan, although that usually does not include business purposes. Rather, you can use a loan to pay off credit card debt, fund a home improvement, or pay an unexpected medical or car repair bill. Personal loans are typically smaller than business loans, and they generally come with a shorter repayment term. It can be helpful to have a clear intent for how the money will be spent and to keep separate records for business and personal expenses.

Differences When Applying for Business and Personal Loans

The criteria lenders look at can be very different when approving a small business loan vs. a personal loan. Here’s what you can expect during the application process.

Applying for a Personal Loan

When you apply for a personal loan, your personal creditworthiness usually plays a large role in the application and approval process.

•   Lenders typically will review a borrower’s credit scores, credit reports, and income when determining the interest rate, loan amount, and repayment term of a personal loan.

•   Generally, you can expect to be asked for a government-issued photo ID, your Social Security number, and/or some other proof of identity.

•   You also may be asked for proof of your current address. And the lender will want to verify your income.

Applying for a Business Loan

When you apply for a business loan, your personal finances still will be a factor, though other aspects of your application will be reviewed carefully.

•   The loan underwriters also will evaluate your business’s cash flow, how long you’ve been in business, your profitability, the exact purpose of the loan, trends in your industry, your business credit score, and more.

•   The lender may ask for a current profit-and-loss statement, a cash-flow statement, recent bank statements and tax returns for the business, your business license and a business plan, and any other current loan documents or lease agreements you might have.

•   You also will have to provide information about your collateral if you are applying for a secured loan.

Recommended: Understanding Credit Score Ranges

Structural Differences in Business and Personal Loans

Knowing the differences in how personal loans vs. business loans are structured could help you decide which is right for you and your business. A few factors that might affect your choice include:

Loan Amount

A business loan may be more difficult to apply for and get than a personal loan, especially if your business is a startup or only a few years old. But if you can qualify, you may be able to borrow more money with a business loan. While personal loan amounts typically top out at $50,000 to $100,000, some SBA loans can go as high as $5.5 million.

Loan Length

You’ll likely find personal and business loans with both short and long repayment terms. But generally, personal loans have shorter terms (typically one to seven years), while some business loan repayment periods can be up to 25 years.

Tax Advantages

If you have a business loan, deducting the interest you pay on the loan may be possible when filing income taxes if you meet specific criteria.

With a personal loan, it might get a little more complicated. If you use the borrowed money only for business costs, you may be able to deduct the interest you paid. But if you use the loan for both business and personal expenses, you would only be able to deduct the percentage of the interest that was used for qualifying business costs.

And you should be prepared to itemize deductions, documenting exactly how you spent the money. Your financial advisor or tax preparer can help you determine what’s appropriate.

Support

Along with the traditional banking services you might expect to get with any type of loan, a business loan also may come with operational support and online tools that can be useful for owners and entrepreneurs.

Risk

When you’re deciding between a personal vs. business loan, it’s also a good idea to think about what could happen if, at some point, the loan can’t be repaid.

•   If your business defaults and it’s a business loan, the impact to your personal credit would depend on how the loan is set up.

◦   If you’re listed as a sole proprietor or signed a personal guarantee, it’s possible you could be sued, your personal and/or business credit scores could take a hit, and your personal and business assets could be at risk.

◦   If your business is set up as a distinct legal entity, on the other hand, your personal credit score might not be affected — but your business credit score could suffer. And it could be more difficult for you to take out a business loan in the future.

Pros and Cons of Business Loans

There are advantages and disadvantages to keep in mind when deciding whether to apply for a business loan vs. personal loan.

•   A business loan can be more difficult to get than a personal loan, especially if the business is new or still struggling to become profitable.

•   If you qualify for a business loan, you may be able to borrow a larger amount of money and get a longer repayment term.

•   A business loan also can make it easier to separate your business and personal finances. {Personal loans typically can only be used for personal expenses, as the name indicates.)

•   There could be fewer personal consequences if the business defaults on the loan.

Recommended: Can You Refinance a Personal Loan?

Pros and Cons of Personal Loans

A personal loan vs. business loan can have advantages and disadvantages to consider.

•   Personal loans can offer borrowers more flexibility than business loans in terms of usage, though those uses must typically be for personal expenses, such as paying for a home renovation or a vacation.

•   They’re generally easier to qualify for and may have lower interest rates.

•   One major hurdle may be that you cannot use them for any business expense in most situations. You could use them to free up cash in your budget which you might then apply to a business purpose.

Is a Business or Personal Loan Right for You?

Considering the differences between a personal loan and a business loan can help you decide which is right for your needs. You may want to do some online research, compare rates and terms, and/or ask a financial professional or business mentor for advice before moving forward with this important decision. Here are some things to think about as you look for a loan that’s a good fit for your personal and professional goals.

A business loan may make sense if:

•   You’re seeking a lower interest rate and/or repayment term.

•   You want to keep personal and business expenditures separate.

•   You’ve been successfully running your business for a while.

•   You need more money than you can get with a personal loan.

•   You hope to build your business credit.

•   You want to limit your liability.

A personal loan may make sense if:

•   Your goal is to use the money for personal purposes, which might free up funds in your budget for business expenses.

•   You plan to use the money for both business and personal expenses.

•   You can find a personal loan with a lower interest rate than a comparable business loan, and the lender approves the loan for business expenses.

•   You want to get the money as quickly as possible.

•   You are seeking a shorter repayment term.

•   You don’t want to secure the loan with collateral.

•   You feel confident about your personal ability to repay the loan.

Recommended: Can I Pay Off a Personal Loan Early?

The Takeaway

If you’re seeking funding to start or grow your business, you may decide to apply for a business loan. Another approach: You might apply for a personal loan, which could be used for personal purposes, freeing up money in your budget that could go toward your business. Personal loans are typically easier to apply for and offer quicker access to funds, but often at a somewhat higher interest rate and shorter term vs. business loans. Also, business loans usually offer significantly higher loan amounts and the interest can be tax-deductible. It’s worthwhile to consider the tax and credit implications of each type of loan too, among other factors.

FAQ

Are business loans more expensive than personal loans?

Business loans typically have lower interest rates than personal loans. However, these two loans aren’t interchangeable: one is for business uses, the other for personal expenses.

Can I use a personal loan for business?

Most (but not necessarily all) personal loans can be used for just about any personal use. Check the fine print, and follow the lender’s guidelines.

Are startup loans personal loans?

There are a few different options for funding a startup, including SBA loans, family loans, or crowdfunding platforms. But if you have good credit and are confident you can make the monthly payments, taking out a personal loan could be an effective strategy for funding a startup, if the loan permits that usage.

Photo credit: iStock/MicroStockHub

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOPL-Q425-040

Both a loan modification and a loan refinance can lower your monthly payments and help you save money. Depending on your circumstances, one strategy will make more sense than the other. A modification alters the terms of your current loan and can help you avoid default or foreclosure. Refinancing, on the other hand, involves taking out a new loan (ideally with better rates and terms) and using it to pay off your existing loan.

Here’s a closer look at loan modification vs. refinance, how each lending option works, and when to choose one or the other.

What Is a Loan Modification?

A loan modification changes the terms of a loan to make the monthly payments more affordable. It’s a strategy that most commonly comes into play with mortgages. A home loan modification is a change in the way the home mortgage loan is structured, primarily to provide some financial relief for struggling homeowners.

Unlike refinancing a mortgage, which pays off the current home loan and replaces it with a new one, a loan modification changes the terms and conditions of the current home loan. These changes might include:

•   A new repayment timetable. A loan modification may extend the term of the loan, allowing the borrower to have more time to pay off the loan.

•   A lower interest rate. Loan modifications may allow borrowers to lower the interest rates on an existing loan. A lower interest rate can reduce a borrower’s monthly payment.

•   Switching from an adjustable rate to a fixed rate. If you currently have an adjustable-rate loan, a loan modification might allow you to change it to a fixed-rate loan. A fixed-rate loan may be easier to manage, since it offers consistent monthly payments over the life of the loan.

A loan modification can be hard to qualify for, as lenders are under no obligation to change the terms and conditions of a loan, even if the borrower is behind on payments. A lender will typically request documents to show financial hardship, such as hardship letters, bank statements, tax returns, and proof of income.

While loan modifications are most common for secured loans, like home mortgages, it may also be possible to get modifications for unsecured loans as well, such as student loans and even personal loans.

What Is Refinancing a Loan?

A loan refinance doesn’t just restructure the terms of an existing loan — it replaces the current loan with a new loan that typically has a different interest rate, a longer or shorter term, or both. You’ll need to apply for a new loan, typically with a new lender. Once approved, you use the new loan to pay off the old loan. Moving forward, you only make payments on the new loan.

Refinancing a loan can make sense if you can:

•   Qualify for a lower interest rate. The classic reason to refi any type of loan is to lower your interest rate. With home loans, however, you’ll want to consider fees and closing costs involved in a mortgage refinance, since they can eat into any savings you might get with the lower rate.

•   Extend the repayment terms. Having a longer period of time to pay off a loan generally lowers the monthly payment and can relieve a borrower’s financial stress. Just keep in mind that extending the term of a loan generally increases the amount of interest you pay, increasing the total cost of the loan.

•   Shorten the loan repayment time. While refinancing a loan to a shorter repayment term may increase the monthly loan payments, it can reduce the overall cost of the loan by allowing you to pay off the debt faster. This can result in significant cost savings.

Recommended: How Does a Personal Loan Work?

Refinance vs Loan Modification: Pros and Cons

Loan refinance is typically something a borrower chooses to do, whereas loan modification is generally something a borrower needs to do, often as a last resort.

Here’s a look at the pros and cons of each option.

Benefits of Loan Modification

While a loan modification is rarely a borrower’s first choice, it comes with some advantages. Here are a few to consider.

•   Avoid default and foreclosure. Getting a loan modification can help you avoid defaulting on your mortgage and potentially losing your home as a result of missing mortgage payments.

•   Change the loan’s terms. It may be possible to increase the length of your loan, which would lower your monthly payment. Or, if the original interest rate was variable, you might be able to switch to a fixed rate, which could result in savings over the life of the loan.

•   Avoid closing costs. Unlike a loan refinance, a loan modification allows you to keep the same loan. This helps you avoid having to pay closing costs (or other fees) that come with getting a new loan.

Drawbacks of Loan Modification

Since loan modification is generally an effort to prevent foreclosure on the borrower’s home, there are some drawbacks to be aware of.

•   It could have a negative effect on your credit. A loan modification on a credit report is typically a negative entry and could lower your credit score. However, having a foreclosure — or even missed payments — can be more detrimental to a person’s overall creditworthiness.

•   Tapping home equity for cash is not an option. Unlike refinancing, a loan modification cannot be used to tap home equity for an extra lump sum of cash (called a cash-out refi). If your monthly payments are lower after modification, though, you may have more funds to pay other expenses each month.

•   There is a hardship requirement. It’s typically necessary to prove financial hardship to qualify for loan modification. Lenders may want to see that your extenuating financial circumstances are involuntary and that you’ve made an effort to address them, or have a plan to do so, before considering loan modification.

Recommended: Guide to Mortgage Relief Programs

Benefits of Refinancing a Loan

For borrowers with a strong financial foundation, refinancing a mortgage or other type of loan comes with a number of benefits. Here are some to consider.

•   You may be able to get a lower interest rate. If your credit and income are strong, you may be able to qualify for an interest rate that is lower than your current loan, which could mean a savings over the life of the loan.

•   You may be able to shorten or extend the term of the loan. A shorter loan term can mean higher monthly payments but is likely to result in an overall savings. A longer loan term generally means lower monthly payments, but may increase your costs.

•   You may be able to pull cash out of your home. If you opt for a cash-out refinance, you can turn some of your equity in your home into cash that you can use however you want. With this type of refinance, the new loan is for a greater amount than what is owed, the old loan is paid off, and the excess cash can be used for things like home renovations or credit card consolidation.

Drawbacks of Refinancing a Loan

Refinancing a loan also comes with some disadvantages. Here are some to keep in mind.

•   You’ll need strong credit and income. Lenders who offer refinancing typically want to see that you are in a solid financial position before they issue you a new loan. If your situation has improved since you originally financed, you could qualify for better rates and terms.

•   Closing costs can be steep. When refinancing a mortgage, you typically need to pay closing costs. Before choosing a mortgage refi, you’ll want to look closely at any closing costs a lender charges, and whether those costs are paid in cash or rolled into the new mortgage loan. Consider how quickly you’ll be able to recoup those costs to determine if the refinance is worth it.

•   You could set yourself back on loan payoff. When you refinance a loan, you can choose a new loan term. If you’re already five years into a 30-year mortgage and you refinance for a new 30-year loan, for example, you’ll be in debt five years longer than you originally planned. And if you don’t get a lower interest rate, extending your term can increase your costs.

Is It Better to Refinance or Get a Loan Modification?

Whether a refinance or loan modification is better depends on your situation. If you have solid credit and are current on your loan payments, you’ll likely want to choose refinancing over loan modification. To qualify for a refinance, you’ll need to have a loan in good standing and prove that you make enough money to absorb the new payments.

If you’re behind on your loan payments and trying to avoid negative consequences (like loan default or foreclosure on your home), your best option is likely going to be loan modification. Provided the lender is willing, you may be able to change the rate or terms of your loan to make repayment more manageable. This may be more agreeable to a lender than having to take expensive legal action against you.

Recommended: Debt Consolidation Calculator

Alternatives to Refinancing and Loan Modification

If you’re having trouble making your mortgage payments or just looking for a way to save money on a debt, here are some other options to consider besides refinancing and loan modification.

Mortgage Forbearance

For borrowers facing short-term financial challenges, a mortgage forbearance may be an option to consider.

Lenders may grant a term of forbearance — typically three to six months, with the possibility of extending the term — during which the borrower doesn’t make loan payments or makes reduced payments. During that time, the lender also agrees not to pursue foreclosure.

As with a loan modification, proof of hardship is typically required. A lender’s definition of hardship may include divorce, job loss, natural disasters, costs associated with medical emergencies, and more.

During a period of forbearance, interest will continue to accrue, and the borrower will still be responsible for expenses such as homeowners insurance and property taxes.

At the end of the forbearance period, the borrower may have to repay any missed payments in addition to accrued interest. Some lenders may work with the borrower to set up a repayment plan rather than requiring one lump repayment.

Mortgage Recasting

With a mortgage recast, you make a lump sum payment toward the principal balance of the loan. The lender will then recast, or re-amortize, your remaining loan repayment schedule. Since the principal amount is smaller after the lump-sum payment is made, each monthly payment for the remaining life of the loan will be smaller, even though your interest rate and term remain the same.

Making Extra Principal Payments

With any type of loan, you may be able to lower your borrowing costs by occasionally (or regularly) making extra payments towards principal. This can help you pay back what you borrowed ahead of schedule and reduce your costs.

Before you prepay any type of loan, however, you’ll want to make sure the lender does not charge a prepayment penalty, since that might wipe out any savings. You’ll also want to make sure that the lender applies any extra payments you make directly towards principal (and not towards future monthly payments).

The Takeaway

If you’re interested in getting a lower interest rate, lowering your monthly debt payment, or cashing out some equity, refinancing likely makes more sense than a loan modification. If, however, you’re dealing with financial challenges and at risk of home foreclosure, you may want to look into a loan modification, which could be easier to qualify for than loan refinancing. When debt grows, you might also look into debt consolidation loans.

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

FAQ

What are the disadvantages of loan modification?

A loan modification typically comes with a hardship requirement. A lender may ask to see proof that your financial circumstances are involuntary and that you’ve made an effort to address them before considering loan modification. A loan modification can also have a negative effect on your credit.

A loan modification can also have a temporary negative effect on your credit.

What is loan refinancing?

Loan refinancing replaces an existing loan with a new one, which pays off the old one. Then, going forward, the borrower makes payments on the new loan with its new interest rate and terms. This can help a borrower snag a lower interest rate, lower monthly payments, or shorten the loan repayment period.

Photo credit: iStock/AlexSecret

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

SOPL-Q425-033

For Americans, the average credit limit sits at $32,025, according to the most recent data from Experian. That’s the typical maximum amount that a cardholder can spend on the card. A credit limit is sort of like a loan maximum — the higher the credit limit, the more money the cardholder can charge on the credit card. But when you hit the limit, you have to pay down the balance before you can spend more.

Read on to learn more about average credit limits and how you may be able to increase yours if you need access to more buying power.

What Is the Average Credit Card Limit?

The average credit card limit for Americans is $32,025, according to the most recent report by Experian. However, individual credit card limits can vary depending on a variety of factors, and can be as low as $300. For instance, there’s variance in the average credit card limit by age, as well as by creditworthiness.

Whatever your credit limit may be, it’s a critical part of understanding what a credit card is. Knowing your credit limit will help you to be aware of how much you can spend at places that accept credit card payments.

How Credit Card Issuers Determine Your Credit Limit

When you apply for a credit card, your initial credit limit depends on a variety of factors, including your credit scores, your income and debt-to-income ratio (DTI), your history with the card issuer, the card issuer’s policies and goals, and the current economic conditions. Every card issuer has its own process for determining an applicant’s credit limit. Here, some more specifics:

Your Credit Score

Your credit score plays a large role in determining your credit limit. Just like your score can affect your APR on a credit card, the higher your credit score, the more likely you are to receive a higher credit limit.

In addition, the average credit limit increases with the age of the credit history. Generally, the longer someone has had credit, the more likely they are to use it responsibly. That’s why credit companies may be more likely to offer a higher credit limit to applicants with an older line of credit and a higher credit score. Obviously, the age of your oldest line of credit is limited to your own age, so be sure to be aware of how old you have to be to get a credit card.

Your Income and Debt-To-Income Ratio (DTI)

Due to how credit cards work, card issuers are taking a risk when they extend credit to cardholders. If they think the applicant is a riskier customer, they may offer them a lower credit limit. A high income can indicate that you are able to repay what you borrow. Therefore, a high income can help you get a higher credit limit.

However, credit issuers will also consider your existing debt obligations when deciding your credit limit. Specifically, they will look at your debt-to-income ratio (DTI), which compares the amount of money you owe each month to the amount of money you earn each month.

Your debt-to-income ratio can also affect factors like whether your interest rate is above or below the average credit card interest rate.

Your History With the Card Issuer

Your history with a card issuer can also influence your credit limit. If you have an existing positive relationship with the card issuer, it may help you to get approved for a higher credit limit. However, if you have too many existing cards with an issuer, the card issuer may not want to extend you additional credit, even if you meet other criteria like having an excellent credit score.

The Card Issuer’s Policies and Goals

The credit card issuer has the authority to determine your credit limit, based on how risky they think you are as a customer. Each card issuer has its own policies and goals that it uses to determine what credit limit is afforded to each customer. In other words, your credit limit will also depend on your credit issuer.

Current Economic Conditions

One factor that’s completely out of your control when it comes to your credit limit are the current economic conditions. Since it relates to risk, the current economic environment does play a role in how credit card issuers determine your credit limit. For example, some credit card issuers lowered card limits at the start of the COVID-19 pandemic due to global economic uncertainty.

How to Increase Your Credit Limit

There are several ways to increase your credit limit. Sometimes, your card issuer will offer you a revised credit limit after you update your income information or build your credit. Other times, you may need to be more proactive by directly requesting an increase or transferring your available credit.

Update Your Income Information

One way to increase your credit limit is to keep your income information up to date with your card issuers. Sometimes your card issuer may periodically ask you if your income has changed. If not, you may need to let them know when your income rises, as a higher income can lead to a higher credit limit.

Build Your Credit

One of the best ways to increase your credit limit is to build your credit score. You can positively impact your credit by paying your bills on time, keeping your balances low by making more than your credit card minimum payment, and maintaining a low credit utilization rate.

Although this method may take the longest, it may have the most benefit because it could help you in many other financial aspects as well. For instance, it may make it possible for you to secure a good APR, or annual percentage rate, for a credit card.

Request an Increase

Most card issuers allow you to request a credit limit increase online. If this option is not available, you also can call your credit issuer to request an increase. However, be aware that a request for an increase sometimes results in a hard credit inquiry, which may hurt your credit score.

Transfer Your Available Credit

If you need a higher credit limit for a specific card (like for a large upcoming purchase), you may be able to transfer available credit from another card from the same card issuer. To check if this is an option for your cards, call your card issuer’s customer service line to request the transfer.

The Takeaway

Your credit limit represents how much you can spend on your card. While the average credit card limit was recently found to be $32,025, credit limits can vary widely depending on age, creditworthiness, your credit card issuer, current economic conditions, and more. Plus, there may be ways to increase your credit limit.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

What is a reasonable credit limit?

A reasonable credit limit may depend on a variety of factors, including your credit score, your income, and the current economic conditions, among others. The current average credit limit is $32,025, but many people will have a significantly higher or lower cap.

Can lenders change credit limits?

Lenders can change credit limits after you have been given an initial credit limit. Sometimes the card issuer will offer you a new credit limit after you update your income information or build your credit. Other times, you may need to directly request an increase. You can also consider transferring your available credit to increase your limit on a specific card.

What is available credit?

Available credit is the amount of money that is available to you to borrow, considering the current balance on your account. Credit limit, on the other hand, is the total amount that you can borrow.

Photo credit: iStock/RgStudio

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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®

SOCC-Q425-011

When it comes to picking a new credit card, there’s one detail you should not overlook: the card’s annual percentage rate, or APR. This represents the rate lenders charge to borrow, including fees and interest. But credit cards don’t have one single rate, and it may be hard to evaluate what’s a good deal and what isn’t.

In general, a good APR is one that’s below the current average interest rate, which is 21.39%, according to the latest data from the Federal Reserve as of August 2025. However, what’s a good APR will also depend on the type of credit card, the various rates that could be assessed, and your own creditworthiness. This guide will take you through the details.

What Is an Annual Percentage Rate (APR)?

The APR on a credit card represents the total cost of the loan expressed in annual terms. A credit card’s APR includes the interest rate as well as any fees, including for late payments, foreign transactions, or returned payments.

Taking these fees into account when applying for a credit card helps to provide a fuller picture of what the loan may actually cost over its lifetime.

Keep in mind that APR is distinct from interest rate, which is simply the additional cost of borrowing money. Like APR, interest rate is typically expressed as a percentage of the principal. However, when looking at the average credit card interest rate vs. the average APR, you’re not comparing apples to apples.

For example, if a consumer takes out a $1,000 loan with a 10% simple interest rate and a one-year term, they will pay $1,100 over the lifetime of the loan — the principal $1,000 plus interest of $100.

While this example is extremely simplified, it’s helpful in demonstrating the difference between a simple interest rate and a not-so-simple APR calculation. If the consumer calculates the cost of the same $1,000 loan, considering the various fees that go into the APR, the number will likely be higher than the stated interest rate.

How Is APR Determined?

Knowing how APR is determined is an important part of understanding how credit cards work. A credit card’s APR is largely determined based on an individual’s financial specifics when they open the account.

•   The lender will look at the person’s credit score and credit history, as well as factors like their payment history and debt-to-income (DTI) ratio, which represents how much of an individual’s gross income is already going toward debt payments. In general, someone with a good payment history and credit score and a lower DTI ratio will qualify for a better APR.

•   However, APR isn’t only based on a borrower’s creditworthiness. Lenders will also take into account the current US prime rate, which is used to set rates on consumer loan products. Typically, a lender will take this rate and then bump it up a bit to minimize risk and increase profits.

•   Lastly, APR will vary based on the type of credit card. If you know what a credit card is, you’ll know all credit cards aren’t created equal. For instance, a credit card that offers lucrative rewards (like travel points or cash back) will generally have a higher APR than a more basic card.

When It Matters to Look at APR

If a consumer is comparing two similar loan or credit card offers, they may want to also look at the offer’s APR.

Say a person has two loan offers. Each is a $1,000 loan with an interest rate of 10%. With just that information to compare the two, they seem equal to each other. A little more digging, though, will uncover that Offer A has a $100 origination fee while Offer B only has a $50 origination fee — both of which could be calculated and accounted for in the offer’s APR.

With credit cards, it could be that two cards have the same interest rate, but Card A has no late payment fees, while Card B carries a 20% late payment fee, making its APR potentially higher.

When it comes to APR, the devil really is in the details. And reading the fine print can reveal that the APR could make a difference to your credit card balance and debt management.

Types of Credit Card APR

To further complicate the answer to the question of what’s a good APR for a credit card, it’s important to understand that, just as there are different types of credit cards, cards can have different types of APR. The main one you’re probably going to want to consider when considering your total cost of borrowing is the purchase APR. However, if you’re planning to take out a cash advance or do a balance transfer, you’ll want to look at those APRs as well.

Introductory APR or Promotional APR

Sometimes, cards will offer a lower (or even 0%) APR to new customers for a limited time after they open the account. This APR can apply to purchases or to balance transfers. Introductory or promotional APRs must last at least six months, but they can be longer, too. Once this period is up, the regular APR kicks in.

Purchase APR

The purchase APR is the rate that applies when you use your credit card to make a purchase and then carry a balance into the next billing cycle, perhaps only making the credit card minimum payment. This is the most commonly discussed type of APR, and the main one you’ll want to look out for when comparing credit cards.

Cash Advance APR

A cash advance APR applies if you withdraw money from an ATM or bank using a credit card. Unlike your purchase APR, this APR doesn’t have a grace period, meaning interest starts accruing immediately. Additionally, cash advance APRs tend to be on the higher side.

Penalty APR

If you fail to make your payments on time, the penalty APR will kick in, driving up your card’s previous APR to one that’s often much higher. This is why it’s always important to make your credit card payments on-time — even if you’re in the midst of disputing a credit card charge, for instance.

Balance Transfer APR

A balance transfer APR will apply when you transfer any balances from other cards onto your credit card account. Often, this APR is comparable to the purchase APR, though this can vary depending on the credit card company.

How to Evaluate and Compare APRs

To get a sense of a credit card’s APR, follow these steps:

•   First take a look at a card’s purchase APR range, and compare that to other credit cards. For a fair comparison, make sure to look at the same type of credit card. (For example, only compare travel rewards cards to other travel rewards cards, or a credit-building card to another credit-building card.)

•   Then, get into the nitty-gritty and look at the APR for different types of transactions. Even one credit card can have varying APRs on different transactions. For example, a card may have a different APR on late payment penalties than it does for balance transfers or cash advances.

•   Evaluate each APR and compare those to any other offer you may have in front of you to ensure you pick the most competitive option. It’s a good idea to attempt to seek out the lowest rate possible for your financial situation. That way, you can feel confident using your credit card for what you need to use it for — which might include paying taxes with a credit card.

Low vs High APR Credit Cards

As you’re evaluating credit card APRs, it’s important to keep in mind that some credit cards tend to have higher APRs than others. For example, rewards credit cards generally have higher APRs, but provide value through perks, discounts, points, or other benefits.

On the other hand, many low-interest cards come with fewer perks. But again, these cards can save someone money in the long run if they need to carry a balance from, say, covering a large purchase at an establishment that accepts credit card payments.

Low-interest cards also tend to be reserved for those with higher than average credit scores, so they may be harder to qualify for with lower credit.

What Is a Good APR for a Credit Card?

According to the Federal Reserve, the national average credit card APR was 21.39% as of August 2025. It’s reasonable to assume that an APR at or below the national average is considered “good.”

That said, qualifying for a “good” APR may hinge on a consumer’s credit score. For instance, someone with a below-average credit score may have a different definition of a good APR for a credit card compared to someone whose score is excellent.

APR and interest rates also change alongside federal interest rates changes. Because of this, it’s important for consumers to find the most recent data available on average credit card APR to ensure they aren’t relying on out-of-date information to inform their decision.

How to Avoid Paying APR

The APR a person qualifies for typically depends on their individual credit score. This means that those with credit scores on the higher end of the scale might qualify for lower APRs. If a consumer has a lower credit score, that doesn’t mean they’re totally out of luck, but they might be offered the same card at a higher APR.

However, there are a few ways a person can improve their chances of qualifying for a lower APR, and that starts by doing the work to build one’s credit score.

Tips for Qualifying for a Better APR

Here are some ways you can positively impact your credit score and potentially qualify for a lower APR.

•   One step is to check your credit report regularly for accuracy. US federal law allows consumers to get one free credit report annually from each of the three credit reporting agencies. Look out for any incorrect or suspicious charges. Even if you’d thought you’d resolved an issue related to a credit card skimmer, for instance, you’ll want to make sure those charges aren’t affecting your credit report in any way.

•   You can build your personal credit scores by making debt payments on time and trying to use only 30% of your available credit limit at any given time. Payment history accounts for 35% of the total credit score, and credit utilization — how much of a person’s total credit is being used at a given time — accounts for 30% of the total credit score. Also, try not to apply for multiple credit products in the space of a few months; that can negatively impact your score.

Rebuilding a poor credit score can take some time, but it’s worth the work.

The Takeaway

Currently, the average credit card APR is 21.39%, and anything below that could be considered a good rate. However, when it comes to what is a good APR for a credit card, the answer is that it depends on a variety of factors. It will also depend on your credit scores and history as well as what type of credit cards and rewards you’re looking for. When you do get a credit card, it’s important to use it wisely so that you don’t wind up getting charged higher penalty rates.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

What is a bad APR rate?

A bad APR for a credit card is generally one that’s well above the current national average credit card rate. APR for a credit card can vary widely, with some offering APRs as high as a whopping 36%:

What APR will I get with a 700 credit score?

A credit score of 700 is considered in the good range. It’s likely you could qualify for an APR around the average, though of course this will also depend on other factors, including the type of card and the current prime rate.

Does the interest rate on my credit card change?

Your credit card company can increase your interest rate. However, they are not permitted to do so within the first year of opening the account. Additionally, they must give you notice at least 45 days in advance.

What other financial products have an APR?

Many different types of lending products have APR. Beyond credit cards, this can include mortgages, car loans, and personal loans.

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

SOCC-Q425-014

It’s entirely possible to sell a house with a mortgage. In fact, it’s common to sell a property that still has a mortgage, because most people don’t stay in a home long enough to pay off the home loan.

With the help of your lender and real estate agent, you can move ahead and sell a house with a mortgage. Yes, there’s a bit of paperwork involved, but settling your mortgage at the closing table shouldn’t prove too challenging. Here’s everything you need to know about selling a home with a mortgage.

What Happens to Your Mortgage When You Sell Your Home?

When you sell your home, the amount you contracted with the buyer is put toward your mortgage and settlement costs before any excess funds are wired to you. Here’s how it works for different transaction types.

A Typical Sale

In a typical sale, homeowners will put their current home on the market before buying another one. Assuming the homeowners have more value in their home than what is owed on their mortgage, they can take the proceeds from the sale of the home and apply that money to the purchase of a new home.

A Short Sale

A short sale is one when you cannot sell the home for what you owe on the mortgage and need to ask the lender to cover the difference (or short).

In a short sale transaction, the mortgage lender and servicer must accept the buyer’s offer before an escrow account can be opened for the sale of the property. This type of mortgage relief transaction can be lengthy (up to 120 days) and involves a lot of paperwork. It’s not common in areas where values are falling or at times when the real estate market is dropping.

When You Buy Another House

There are several roads you can take when you buy another house before selling your own. You may have the option of:

•   Holding two mortgages. If your lender approves you for a new mortgage without selling your current home, you may be able to use this option when shopping for a mortgage. However, you won’t be able to use funds from the sale of your current home for the purchase of your next home.

•   Including a home sale contingency in your real estate contract. The home sale contingency states that the purchase of the new home depends upon the sale of the old home. In other words, the contract is not binding unless you find a buyer to purchase the old home. The two transactions are often tied together. When the sale of the old home closes, it can immediately fund the down payment and closing costs of the new home (depending on how much there is, of course). Keep in mind that a home sale contingency can make your offer less competitive in a hot real estate market where sellers are not willing to wait around for a buyer’s home to sell.

•   Getting a bridge loan. A bridge loan is a short-term loan used to fund the costs of obtaining a new home before selling the old home. The interest rates are usually pretty high, but most homebuyers don’t plan to hold the loan for long.

💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

Selling a House With a Mortgage: Step by Step

Here are the steps to take to sell a home that still has a mortgage.

Get a Payoff Quote

To determine exactly how much of the mortgage you still owe, you’ll need a payoff quote from your mortgage servicer. This is not the same thing as the balance shown on your last mortgage statement. The payoff amount will include any interest still owed until the day your loan is paid off, as well as any fees you may owe.

The payoff quote will have an expiration date. If the outstanding mortgage balance is paid off before that date, the amount on the payoff quote is valid. If it is paid after, sellers will need to obtain a new payoff quote.

Determine Your Home Equity

Equity is the difference between what your property is worth and what you owe on your mortgage (your payoff quote is most accurate). If your home is worth $400,000 and your payoff amount on the existing mortgage is $250,000, your equity is $150,000.

When you sell your home, you gain access to this equity. Your mortgage, any second mortgage like a home equity loan, and closing costs are settled, and then you are wired the excess amount to use how you like. Many homeowners opt to use part or all of the money as a down payment on their next home.

Secure a Real Estate Agent

A real estate agent can walk you through the process of selling a home with a mortgage and clear up questions on other mortgage basics. Your agent will be particularly valuable if you need to buy a new home before selling your current home.

Set a Price

With your agent, you will look at factors that affect property value, such as comparable sales in your area, to help you set a price. There are different price strategies you can review with your agent to bring in more buyers to bid on your home.

Accept a Bid and Open Escrow

After an open house and showings, you may have an offer (or a handful). Consider what you value in accepting an offer. Do you want a fast close? The highest price? A buyer who is flexible with your moving date? A buyer with mortgage preapproval?

You may also choose to continue negotiating with prospective buyers. Once you’ve selected a buyer and have signed the contract, it’s time to go into escrow.

Review Your Settlement Statement

You’ll be in escrow until the day your transaction closes. An escrow or title agent is the intermediary between you and the buyer until the deal is done. While the loan is being processed, title reports are prepared, inspections are held, and other details to close the deal are being worked out.

Three days before, you’ll see a closing disclosure (if you’re buying a house at the same time) and a settlement statement. The settlement statement outlines fees and charges of the real estate transaction and pinpoints how much money you’ll net by selling your home.

💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

Selling a House With a Negative Equity

Negative equity means that the value of an asset (such as a home) is less than the balance due on the loan against it. Say you purchased a property for $400,000 with a $380,000 loan, but then the real estate market took a nosedive. Your property is now worth $350,000, less than the amount of the mortgage.

If you have negative equity in the home and need to sell it, it is possible to sell if you come up with the difference yourself.

In this scenario (an alternative to a short sale), you pay the difference between the amount left on your mortgage note and the purchase offer at closing. So in the example above, if you sold the house for $350,000, at the closing, you would need to pay the loan holder an additional $30,000 to clear the debt.

The Takeaway

Selling a house with a mortgage is common. The buyer pays the sales price, and that money is used to pay off your remaining mortgage, your closing costs, and any second mortgage. The rest is your profit to spend however you like — perhaps on a new house.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Who is responsible for the mortgage on the house during the sale?

The homeowner is responsible for continuing to pay the mortgage until paperwork is signed on closing day.

What happens if you sell a house with a HELOC?

When you sell a home that is used to secure a home equity line of credit with a balance, a home equity loan, or any other kind of lien against the house, that will need to be paid off before the remaining equity is paid out to you.

What happens to escrow money when you sell your house?

Your mortgage escrow account will be closed, and any money left will be refunded to you.

Can I make a profit on a house I still owe on?

Yes. You can make a profit if the amount you sell your house for is greater than the amount you owe on it, less closing and settlement costs.

Can I have two mortgages at once?

Yes, you can have two mortgages at once if the lender approves it.

Photo credit: iStock/Beton studio

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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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