Taking a break from financial obligations can offer some breathing room, but it’s important to understand how deferred payments may affect your credit score.
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When you purchase a home, you must pay closing costs, which are the fees the lender charges to recoup loan processing costs. These can add up to a hefty sum, typically 3% to 6% of your mortgage amount.
Typically, you can take out a personal loan to cover those closing costs and help you across the finish line of a property purchase. You can often tap other funding sources as well. Take a closer look at the pros and cons of using a personal loan for closing costs, plus the alternatives, so you can decide what’s best for your needs.
Key Points
• Closing costs for purchasing a home typically range from 3% to 6% of the total mortgage amount, covering fees such as loan origination, appraisal, title search, and insurance costs.
• A personal loan can be used to cover closing costs, offering quick access to funds and flexible repayment options, but it cannot be used for the down payment on the property.
• The advantages of using a personal loan for closing costs include not needing collateral, fast approval, and flexible repayment terms without prepayment penalties.
• Potential downsides include an increased debt-to-income (DTI) ratio, which could affect mortgage approval or lead to higher mortgage interest rates, and the challenge of managing an additional loan payment alongside mortgage payments.
• Alternatives to a personal loan for closing costs include rolling the costs into your mortgage, requesting a fee waiver, negotiating with the seller to cover costs, exploring state and local assistance programs, or using gift money from family.
Closing costs are processing fees that you pay to your lender, either as the buyer or seller in a real estate transaction:
• Buyers: Buyers typically pay between 3% and 6% of the total loan amount in closing costs. Buyers must pay this amount out of pocket, so it’s important for them to have a plan for how they’ll access the money before they get to the closing table.
• Sellers: If sellers contribute to closing costs (say, to negotiate a home sale), those fees usually get taken out from the sale proceeds.
Here’s an example: If you plan to buy a home with a $300,000 loan, as the buyer, you’ll need to bring between $9,000 and $18,000 to the closing table. If you were the seller, you’d see that amount taken out of the costs you’d pocket from the sale.
Closing cost fees may include:
• Application fee: Lenders sometimes charge a one-time fee for borrowers to submit a loan application.
• Credit report fee: A credit report or credit check fee covers the cost to dig into your credit report, which shows your credit history. Your lender uses the information it uncovers to decide whether to approve your loan and how much they’ll lend you.
• Origination fee: You pay this fee to the lender to process the loan application.
• Appraisal fee: A fee paid to a professional to appraise the home based on an evaluation to determine its fair market value.
• Title search: A title search looks into public records to determine who actually owns the property and who has liens on the property (for example, an unpaid contractor’s lien for work done on the home).
• Title insurance: Title insurance protects you from financial loss and legal expenses in case the home has a bad title.
• Underwriting fee: Underwriting is the process of reviewing your finances to determine the risk of offering you a mortgage, and the fees cover this process.
• Property survey fee: Property survey fees cover the cost of checking the boundaries and easements of a property. This process shows exactly where the property’s perimeter is and what the property includes.
• Attorney fee: You will probably need to hire a lawyer to review the terms in your purchase contract and handle your closing.
• Discount points: Discount points are a way to balance your upfront costs and your monthly payment. If you use points to pay more upfront, you’ll likely have a lower interest rate, meaning that you could pay less monthly and over your loan term.
• Homeowners insurance premiums: Homeowners insurance provides financial protection if your home undergoes a disaster or accident. You must typically show your lender that you have paid homeowners insurance.
• Mortgage insurance: If you have a down payment of less than 20%, you will often have to pay mortgage insurance, a fee per month that protects your lender if you were to default. You’ll also have to pay a version of mortgage insurance on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. You may have to pay these insurance fees with your closing costs in addition to your monthly payments, particularly for the FHA and USDA loans.
• Property tax: Homeowners pay property tax to state, county, and local authorities for schools, roads, and other municipal services. You may have to pay a portion of your property tax at closing.
• Homeowners association (HOA) fees: If you plan to move to a neighborhood that has an HOA, or an organization that makes and enforces rules for a neighborhood, you may owe HOA fees at closing. The seller may pay these on a prorated basis.
• Per-diem interest: Per-diem interest refers to the interest a lender charges for the days between a closing date and the first day of your billing period.
• Transfer tax: State or local governments often charge real estate transfer taxes, meaning that they charge when properties transfer ownership.
• Recording fee: State and local governments charge recording fees to legally record your deed, mortgage, and other home loan documents.
Note that this isn’t an exhaustive list of closing costs — you may be on the hook for other fees as well.
First, it’s important to understand how a personal loan works. It is usually funded by a bank, credit union, or online lender. You can typically use the money however you want — there aren’t as many restrictions on personal loans compared to, say, student loans. After you receive a personal loan, you pay it back with regular, fixed payments (with interest) over a specified term.
As mentioned above, you can use the cash as you see fit. So, yes, you can use a personal loan for closing costs. However, you can’t use it for a down payment, and you must tell your lender that you’ll go this route and borrow to pay the closing costs. The lender will include it in your debt-to-income (DTI) ratio, which is the amount of debt you have relative to your income.
Applying for a personal loan can involve prequalifying with several lenders and comparing them, gathering required documents (ID, proof of address and income, Social Security number, and education history), filling out the loan application, and receiving your funds after approval. You may be able to get a personal loan in one to three days.
As you shop around for funds, you’ll likely want to consider what credit score you need for a personal loan at a given interest rate. Also consider the length of the loan term; this can typically range from one to seven years.
Recommended: Guide to Personal Loans
Here are some of the key benefits of taking out a personal loan for closing costs.
• Collateral not required: Personal loans are often unsecured loans, meaning that you don’t have to put an asset up in order to receive the loan. Therefore, if you fail to repay the loan, your lender will not claim the asset to repay your debts.
• Quick approval: It usually doesn’t take long to get a personal loan once you’ve been approved. After you submit your application and materials, it might take just a day to get the personal loan, though it could take longer.
• Flexible repayment options: You can tap into flexible repayment plans, including no prepayment penalty, meaning that the lender won’t penalize you for paying off the loan early.
Next, consider the downsides of using a personal loan to cover closing costs.
• DTI increase: Lenders will look at your overall debt under a microscope, so taking on a personal loan may factor into your overall debt. It may signal to the lender that you aren’t in a good financial position since an additional loan could raise your DTI ratio. It might keep you from being approved for a mortgage or could result in a higher mortgage interest rate.
• Additional loan payment: You might find it tricky to repay a personal loan in addition to a mortgage payment. Consider whether you can comfortably make both payments every month.
• High interest rates: There is the potential for high interest rates if you have poor credit. This can make it more challenging to afford a personal loan.
Recommended: Personal Loan Requirements
You may have options vs. getting a personal loan for closing costs. Consider how else you might handle those fees.
• Roll them into your mortgage: You may be able to add your closing costs to your mortgage, but this means you’ll increase the principal balance of your loan. This will increase both the principal and the interest you’ll pay over your loan term and also translates to higher monthly payments.
• Ask for a waiver: Your lender may be willing to waive certain fees. For example, they may reduce certain processing fees. There’s no guarantee, but it can be worth asking. That might help you out with your final closing cost amount.
• Ask the seller to pay: As mentioned previously, sellers may pay for some of the closing costs if they’re eager to ensure that the property sale doesn’t fall through.
• Tap into assistance programs: Many state and local governments offer down payment and closing cost assistance programs for moderate- to low-income home buyers. Look into your state’s housing finance agency, your city or county website, the U.S. Department of Housing and Urban Development (HUD), or check with your lender to learn more about your options.
• Use gift money: Do you have a generous grandparent or parent who wants to help you cover your closing costs? Your state may have rules and regulations attached with gift money (especially ensuring that it’s an actual gift). Check with your lender to learn more.
You can typically use a personal loan to pay for closing costs, the fees that can cost 3% to 6% of your home loan amount when you purchase a property. While this can be a convenient source of funding that is typically unsecured (meaning no collateral is required), it can raise your DTI and add to your monthly financial burden. It’s wise to carefully consider all the pros and cons, as well as alternative funding sources, when deciding whether to use a personal loan for closing costs.
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.
Whether it’s smart to finance closing costs depends on your personal situation. For example, for some people who can handle the additional monthly payment, it may be a convenient move. On the other hand, getting a personal loan may increase your DTI, so your mortgage lender might charge you a higher interest rate or deny you the loan altogether.
While you’ll usually use a cashier’s check, certified check, or wire transfer to pay for closing costs, you can put some closing costs on a credit card, such as attorney, appraisal, and survey fees. Check with your lender to learn more about which fees you can put on a credit card. (Also note that using your credit card in this way can raise your credit utilization rate and potentially lower your credit score.)
Closing costs are typically paid by a cashier’s or certified check or by wire transfer. Funds for these could be acquired by such sources as a government program or a personal loan. Less frequently, credit cards, debit cards, and personal checks may be accepted for some closing costs.
About the author
Melissa Brock
Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Read full bio.
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.
SOPL-Q324-010
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A passbook loan is a loan that allows you to borrow against the money you have in your savings account. In other words, your savings serve as collateral for the loan.
While you will likely have to pay interest when borrowing money in this way (which you wouldn’t have to do if you used your savings directly), a passbook loan can help you build credit if your financial institution reports the activity to the credit bureaus and you manage the loan well. Passbook loans may also be a valuable financial tool if you’re having trouble securing a personal loan or find their interest rates to be higher than you can afford.
Keep reading for all the details about how passbook loans work, plus their pros and cons.
Key Points
• A passbook loan allows you to borrow against your savings account, using the account as collateral.
• These loans often offer lower interest rates compared to other loans and can help build credit if reported to credit bureaus.
• You cannot access your savings while the loan is active, and defaulting may result in losing your savings.
• Passbook loans are useful for those with limited credit history or those struggling to qualify for unsecured loans.
• Alternatives to passbook loans include personal loans, credit-builder loans, and secured credit cards.
Here, learn more about the definition and history of passbook loans as well as how they usually work.
Passbook loans (often called share-secured or savings-secured loans) are a way to borrow funds, typically at a lower interest rate, by using your savings as collateral.
Passbooks are physical books that record a bank account holder’s transactions. These passport-sized books originated in the 18th century; bank tellers and postmasters could record account transactions in them. For example, a bank teller could write the date of a transaction, the amount deposited or withdrawn, and the amount of money available to the customer. In the late 20th century, bank statements began to make their appearance and replaced passbooks to a large degree. (For those who want them, however, passbook accounts are still available from some financial institutions and can provide a customer with a classic booklet to track transactions.)
A passbook loan borrows from the name of these old-fashioned books. With passbook loans, you use your savings account, held at the same institution, as collateral for a loan, and you may pay a relatively low interest rate. Putting the money in your account up for collateral, however, means your lender can seize that cash if you default on your loan payments.
Here’s how a passbook loan works:
• First, you’ll have to find a bank or lending institution that offers passbook loans. Most banks don’t offer them, so you might consider checking at a credit union.
• Once you find a potential lender and establish a savings account or a certificate of deposit (CD) there, the financial institution will usually let you borrow up to 90% to 100% of the money in your savings account. For example, if you have $20,000 in your savings account, you may be able to borrow $18,000 to $20,000. Check with the lender to learn the exact amount.
• Once you receive the loan from your financial institution, it’s important to note that you can’t access your savings. The financial institution might put a hold on your account, or you might have to hand over your savings passbook until the loan is repaid.
• As you repay your loan with interest, your lender will usually release the amount you repay from your withheld savings.
• Your payments may be reported to the national credit bureaus, but check with your lender to be sure. Timely payments can help build your credit score, while making late payments on your passbook loan can damage your score.
Next, take a closer look at the usual eligibility and requirements, interest rates, and repayment terms for passbook loans.
You’ll need a funded savings account or certificate of deposit to be eligible for a passbook loan, and it’ll typically have to be held at the institution you plan to borrow from. These types of loans are usually easier to get and less risky to the lender because they use collateral to back them (unlike unsecured loans, which don’t require collateral).
It’s important to understand passbook loan interest rates (the amount you repay in addition to the principal), particularly because you’re basically paying interest on your own money.
These loans can offer some of the lowest interest rates of any type of loan, likely because, since they are secured, they pose less risk to your financial institution. For instance, BankFive charges passbook loan rates of 3.00% to 3.50% APR (annual percentage rate) over the interest rate of the savings account used as collateral.
You repay the loan in regular, monthly installments over a specified period, such as three years.
You’ll have to fill out an application for a passbook loan. Each bank or credit union has its own application. Simply request the application from your financial institution. Depending on the lender’s requirements, you may be able to complete the application online, in person, over the phone, or via mail.
You may find the paperwork simpler and shorter than what is required for other kinds of loans. That can reflect the fact that you are already a customer of the financial institution and that you are borrowing against your own money.
It’s important to consider the pros and cons of passbook loans before you pursue one.
First, the upsides of passbook loans:
• Lower interest rates: Passbook loans typically carry a lower interest rate than other types of loans, which means the amount you pay back (principal plus interest) could total less than what you’d pay for other types of loans.
• Credit building: Passbook loans may help you build credit, provided your lender reports the loan activity to the credit bureaus and you make your payments on time.
• Few approval requirements: You usually don’t have to meet as many approval requirements to get a passbook loan as you would with other types of loans. That’s because your savings account, typically at the same financial institution, serves as collateral.
Now, the downsides of passbook loans:
• Credit may not improve: Though unlikely, your lender may not report your passbook loan payments to the credit bureaus. In that case, a passbook loan might not help you build your credit, even if you are meticulous about paying it back on time. It’s wise to check this point in advance. (Also, you must manage the debt responsibly to build credit if the lender does report your activity.)
• Uses your account as collateral: If you fail to make your payments on your passbook loan, your financial institution can take the money from your savings account.
• Cannot access your money while you borrow: You cannot access your savings account when you borrow money using a passbook loan. This can put you in a tricky situation if you need money immediately.
• Paying the bank for your own funds: At a basic level, a passbook loan means you’re paying the bank to borrow your own money.
• Restricted amount: In a best-case scenario, you can only borrow the amount you have in the bank. So if you have $3,000 in your savings account but are hoping to borrow $10,000 via a passbook loan to buy a car, you won’t be able to do so.
Passbook loans may not be the right fit for your situation, so you might consider these options instead.
• Personal loans: Personal loans, which generally range between $1,000 to $50,000, are unsecured loans that come from a wide variety of financial institutions, including banks and credit unions. You can use them for any purpose, including home improvements, debt consolidation, and more. Personal loans may cost you more in interest compared to passbook loans, and repayment terms usually range from two to seven years.
However, you typically don’t need collateral for a personal loan, unless it’s a secured personal loan.
Use a personal loan calculator to learn more about how much a personal loan might cost you.
• Credit-builder loans: If you have little to no credit, a credit-builder loan may help you improve your credit score. These loans, which usually range between $300 and $1,000, involve depositing money into a certificate of deposit (CD) or savings account, which the lender holds as collateral. You don’t receive a lump-sum disbursement upfront, as you do with many loans. Instead, you make fixed monthly payments toward the loan (principal plus interest). Your lender may release some of the borrowed funds when you make a monthly payment, or they might hold the full amount till you make the final payment. Interest and fees are usually deducted from the amount you receive. This activity is reported to credit bureaus and contribute to an uptick in your score.
• Secured credit cards: You may want to consider a secured credit credit card instead of a passbook loan. A secured credit card is a credit card that requires a security deposit, which becomes your line of credit. If you don’t make your payments on time or default on your loan, your lender can take your deposit. However, using the credit card responsibly can help you build credit because your lender typically reports your payments to the three major credit-reporting agencies — Experian®, Equifax®, and TransUnion®.
Recommended: What Is the Average Interest Rate on a Personal Loan?
There are many uses for funds borrowed via a passbook loan, such as:
• Purchases, such as a new laptop
• Expenses, like homeowners insurance or summer camp for the kids
• Debt consolidation, such as paying off your credit card bill
• Buying a car
• Home improvement projects
• Wedding costs
• Medical or educational expenses
• Vacations
Ultimately, you can use a passbook loan for whatever you want.
Will passbook loans be part of the future financial landscape? Given all the other financial products currently available (such as the personal loans described above), consumers may not want to pay interest to borrow against their own savings.
Passbook loans are not very common, having seen their popularity ebb over the years. Their usefulness is often limited to those who want to build their credit in this particular way or are seeking an especially low interest rate. If you find yourself in that situation, you may want to check with various lenders, especially credit unions, to see what’s available.
On the other hand, market data indicates that personal loans are gaining popularity.
Passbook loans are a way of borrowing money against your savings, which can be useful for some people looking to build their credit. Ultimately, however, you end up paying a financial institution to borrow your own money with a passbook loan.
If you’re looking to access funds for debt consolidation, home improvement projects, a wedding, or other needs, you might want to consider a personal loan instead.
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.
Yes, passbook loans are still available today. Not every lender offers them, so search online for options. You may find that credit unions are more likely to fund these loans.
Typically, you need a savings account or a certificate of deposit (CD) account for a passbook loan, typically with the institution you intend to borrow from.
If you default on a passbook loan, your lender could seize your savings (the loan’s collateral) to repay the delinquent balance. Defaulting on your loan can also hurt your credit score.
About the author
Melissa Brock
Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Read full bio.
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.
SOPL-Q324-006
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Asking for a higher credit limit can be as simple as calling the credit card company or completing an online form. In some cases, a credit card company may grant one automatically based on an account history.
To give this subject a bit of context: Most credit cards come with credit limits that determine how much you can spend at any given time. Requesting a credit line increase is something you might consider if you’d like to have more purchasing power, you want to schedule a balance transfer, or you need a cash advance.
Knowing how to increase a credit limit the right way can minimize credit score impacts. Read on to learn more about this important topic.
Key Points
• Credit limits affect credit utilization, a key factor in credit scores.
• Requesting a higher limit may give you more spending power but also cause a temporary drop in credit scores due to a hard inquiry.
• Maintaining low balances with a higher limit can build credit scores.
• Methods to increase limits include online requests, updating income, and contacting issuers.
• Opening a new card boosts available credit but can also impact scores with a hard inquiry.
Credit scores are a measure of your ability to manage debt responsibly. FICO® Scores, which are used by 90% of top lenders, are calculated using these five factors:
• Payment history (35% of your score)
• Credit utilization (30% of your score)
• Length of credit history (15% of your score)
• Credit mix (10% of your score)
• New credit inquiries (10%)
As a reference point, the current average credit limit in the U.S. is around $13,000.
Credit limits are important because they can affect the credit utilization part of your credit score. Credit utilization refers to the percentage of your available credit you’re using. For example, if you have a credit card with a $5,000 limit and a $1,000 balance, your credit utilization is 20%.
Using a lot of your available credit can be detrimental to your credit scores, while keeping balances low can positively impact your scores.
Generally, it’s recommended that you keep the ratio at 30% or less (below 10% can be ideal) for the most favorable credit score impact. A higher ratio could suggest to lenders that you may be struggling to manage spending and debt.
Whether a credit line increase hurts your credit score, or affects it all, depends on how the credit card company reviews your financial information. Specifically, it hinges on whether the credit card company performs a soft or hard inquiry into your credit history.
Remember, credit inquiries account for 10% of your FICO credit score. An inquiry simply means that you have authorized a creditor or biller to review your credit reports and scores. (Inquiries for credit remain on your credit report for two years, though they only affect FICO credit score calculations for 12 months or less.)
When requesting an increase in credit limit that involves a hard pull, you may lose a few credit score points. While the impact isn’t as significant as a late payment or a maxed-out credit card, it’s still worth noting.
If you were to ask for a credit line increase from several cards at once, multiple hard inquiries could cost you more points.
A soft inquiry, on the other hand, has no credit score impact. Checking your own credit score, prescreened credit offers, and credit screenings that are required as part of an employer’s hiring process are examples of soft pulls.
While you may lose a few points initially if your credit card company performs a hard inquiry, asking to increase your limit could help build your credit score over time.
It all goes back to credit utilization. If raising your credit limit on one or more credit cards improves your credit utilization, then you may see a positive effect on your credit score.
Say you have a card with a $10,000 limit and a $5,000 balance. That puts your credit utilization at 50%. But if you can increase the credit limit to $15,000, you instantly shrink your credit utilization to 33%.
The key to making this strategy work is not adding to your debt balance. Going back to the previous example, say that you have to unexpectedly replace your HVAC system to the tune of $5,000. You decide to take advantage of your new higher credit limit to make the purchase.
Now your balance is $10,000. While you still have a $5,000 available credit cushion, you’ve increased your credit utilization to 66%. That could result in a credit score drop until you’re able to pay some of the balance down. So, while asking for a credit line increase can give you more purchasing power, that can work against you if you use it.
There are several ways to get a credit line increase, depending on what your credit card company offers. There are different types of credit cards, and card issuers don’t always follow the same policies with regard to credit limit increases.
Before asking to increase your credit limit, get familiar with the various ways your credit card company allows you to do it. Then consider how much of a credit limit increase you’d like to ask for.
Keep in mind that whether the credit card company grants your request can depend on things like:
• How long you’ve been a customer
• Your account history, including payment and purchase history
• Your income
• Credit scores, if a hard pull is required
With that in mind, here are four ways to get a higher credit limit:
Your credit card company may make it easy to ask for a higher credit limit online. Log in to your account, navigate to the Request Credit Limit Increase section, and fill out the relevant details. You may need to update your income information.
If your credit card issuer offers this option, it’s possible to be approved for a credit line increase almost instantly. But a decision may be delayed if the credit card company wants to take time to review your account or credit history.
Credit card companies may periodically ask you to update your income information when you log in. You may be tempted to skip over this step, but it’s worth taking a moment to do, as the credit card company may use the information to grant an automatic credit limit increase.
Again, whether you’re eligible for an automatic credit line increase can depend on the type of your card and your account history, income, and overall financial situation.
If your credit card company doesn’t allow for automatic increases or credit limit increase requests online, you can always call and ask for a higher limit. You may need to tell them your income, specify how much of a credit limit increase you’d like, and provide a reason for the request.
Calling the credit card company may also be worthwhile if you’ve been denied for a credit limit increase online. You can ask the card provider to reconsider your request, but be prepared to make a strong case (e.g., significantly higher income, on-time payment history) for why it should do so.
If you’ve tried other avenues for requesting an increase in credit limit and been unsuccessful, you could always consider opening a brand-new credit card account. The upside is that you can expand your available credit if you’re approved, which could improve your credit utilization ratio.
The downside of opening a new credit card is that applying can ding your score, since it typically involves a hard inquiry. But if you’re able to keep your credit utilization low, that could help make up the difference in lost points relatively quickly.
If you have good credit, requesting a higher credit limit may be easy. The key is knowing how to make the most of a credit limit increase to improve your credit score. Keeping your balances as low is a step in the right direction. Paying your balance in full each month is even better, since this can help you avoid paying interest on credit cards. Finally, spacing out credit line increase requests and opening new accounts sparingly can help maintain your credit scores.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
You may get a higher credit limit simply by asking your card issuer to raise it. To qualify, keep your financial information up to date, make on-time debt payments, and keep an eye on your credit reports for any incorrect or fraudulent information.
If you define good as above average, yes, it’s a very good limit. The average limit is currently around $13,000. However, if you spend a lot and your credit utilization rises, that can negatively impact your credit score and financial health.
You can increase your credit limit by contacting your card issuer and requesting an increase. You’ll likely need to show responsible credit usage to qualify and perhaps a higher income than in the past. Or you might apply for a new card.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
SOCC-Q225-019
A high-risk personal loan can be a source of funding for people who have a low credit score or no credit history and need to access cash. It is considered “high-risk” because the borrower is seen as more likely to default on the loan. For this reason, the interest rate is likely to be significantly higher than what a borrower with a more creditworthy profile would be offered via a conventional personal loan.
Here, learn the details of high-risk personal loans, their pros and cons, and alternatives if you need a quick infusion of cash.
High-risk personal loans make cash available to those with a poor credit score or without a credit history. Some points to consider:
• Most personal loans require a credit score of 580 or higher, but if you have a low credit score (typically between 300 and 579) or lack a robust credit history, you may be able to tap into a high-risk personal loan.
• These loans can give you access to cash, but they often come with higher interest rates, higher fees, strict repayment terms, and limits on the amount of money you can borrow.
• While some of these are unsecured personal loans, others may be secured. This means you may be required to put up collateral, or an asset, to be approved for the loan. In this situation, if you default on the loan, the lender can seize your asset.
• Personal loans typically come with fixed interest rates, and you must repay them in fixed monthly installments over a specified period, usually up to seven years. High-risk personal loans may have much shorter terms, however.
It’s worth noting that personal loans don’t usually have any restrictions on their usage. You could use them to pay for a car repair, travel, credit card debt, a new kitchen appliance, and almost any other legal purchase or service.
Recommended: Personal Loan Glossary
Here are some options you might consider for high-risk personal loans.
With this loan, you will not need to put up collateral to obtain funding. Typically, the lender will offer you a lump sum of cash; perhaps up to $10,000. While this may supply a quick cash infusion, keep in mind that the “high risk” cuts both ways. The lender is taking a gamble on you, as the odds of you defaulting may be high. But you are also probably securing a loan at a high interest rate and with significant fees and limitations.
In the case of a high-risk secured loan, you will be required to put up a form of collateral (such as real estate or a savings account) to gain access to funding. If a lender offers you this kind of loan, keep in mind that if you default, you could lose your collateral.
Payday loans are short-term, high-cost loans, usually due on your next payday. Typically they provide a small amount of money, such as $500, that needs to be repaid within two to four weeks, and are offered online or at retail locations of payday lenders.
Here’s how they often work: You write a post-dated check for the amount borrowed plus fees, and the lender debits the funds from your account on the day the loan is due. Or you might grant the lender permission to pull the funds from your bank account electronically. If you can’t pay off the loan on time, it could roll over with more interest and fees accruing.
Note that these loans can involve an annual percentage rate (APR) of up to an eye-watering 400%. For this reason, they are considered a last resort.
Not all states offer them, but a car title loan lender lets you borrow between 25% to 50% of your car’s value, typically starting at $100 with 15- to 30-day repayment periods. In exchange, you put your car up for collateral. This means the lender can take possession of your car if you don’t repay the loan. (In one review, the Consumer Financial Protection Bureau found that one in five borrowers of this kind of funding winds up losing their vehicle.)
Lenders who offer car title loans typically have very low or no credit requirements, and you can get funding fairly quickly, even in a day. They also likely come with extremely steep interest rates, up to 300% APR.
With a pawn shop loan, you hand over an item as collateral (such as jewelry, a musical instrument, or a computer), and the pawn shop offers a loan based on the item’s appraised value.
The shop may lend 25% to 60% of the resale value of the item, but note that if you fail to repay the loan, the pawn shop can keep and then sell the item. The pawn shop may give you 30 to 60 days to repay the loan.
Here’s the risky part: The APRs are high, around 200%, and vary based on your state.
Recommended: Using a Personal Loan to Pay Off Credit Card Debt
Here are signs that you would be considered a high-risk borrower by lenders:
• You have a non-existent or thin credit history, meaning you don’t have a proven record of handling debt responsibly
• You have a low credit score (generally, below 580)
• You have made repeated late payments on loans or credit cards
• You have defaulted on a loan in the past
• You have a high debt-to-income ratio (DTI); typically, this means your debts add up to more than 35% of your income
• You are unemployed
• You have declared bankruptcy in the past seven to 10 years
Each lender will have its own guidelines regarding to whom they lend, how much, and at what rate and fees. It’s therefore important to check with your lender about the requirements for their personal loans and their terms.
If you have poor credit or no credit and want to borrow money, a high-risk loan may offer you the best (or only) option to access a loan, particularly if you have an urgent need for cash. You can often access high-risk loans with a lower credit score or minimal credit history than you would need to qualify for traditional loans.
You might seek this kind of loan vs. dipping into an emergency fund you just started or into a college or retirement fund. It could help you preserve those assets if, say, you need quick cash for a move.
It’s important to consider both the pros and the cons of these personal loans so you make the right choice about whether to pursue this type of funding.
High-risk loans come with several downsides, including the following:
• Higher interest rates and fees: High-risk loans typically have higher APRs and fees, meaning that you’ll pay more over the loan term. An example: Some have a 400% APR vs. the average APR of 12.38% for conventional personal loans as of August 2024. Some people can get caught in a debt cycle of taking out high-risk loans continually (particularly in the case of payday loans).
• Risking collateral: You may have to put up an asset as collateral for your loan. If you fall behind on payments, you may lose the asset because your lender will seize it.
• Lower amounts: You may not get to borrow as much as you prefer, because many lenders will only pay out small amounts to high-risk borrowers. For instance, some payday loans max out at $500.
Here’s how you might qualify for a personal loan as a high-risk borrower. Personal loan lenders will want you to see that you’ll likely be able to cover a new loan payment. Among other factors, lenders may use your credit score, your income, and your DTI to assess your ability to repay a loan. In terms of a target DTI, lenders like to see you keep it below 35% for a standard personal loan. With a high-risk loan, you may qualify with a significantly higher figure.
Next, you’ll gather the documents, including:
• Your ID
• Social Security number
• Pay stubs
• W-2 forms
• Federal income tax forms
• Bank account statements
You can apply online for a high-risk personal loan in just a few minutes once you have your materials ready. Your lender will let you know if you need to submit more documentation. In most cases, you’ll have a loan decision fairly quickly (some lenders advertise approval in minutes). If approved, you’ll likely have funds within one to three business days.
You can also consider alternatives to high-risk loans, including:
• Payday alternative loans: Credit unions may offer their members short-term loans as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. PALs 1 offer between $200 and $1,000 with a maximum APR of 28%, and one- to six-month repayment terms. PALs II offer up to $2,000, a maximum 28% APR, and one- to 12-month repayment terms.
• Family or friend loan: Family members or friends may be willing to lend you money. However, ensure that you can repay the loan in a timely manner so you don’t risk damaging the relationship.
• Get a cosigner: You can approach someone you know who has good credit to become a cosigner on your application to help you qualify for a standard personal loan. Make sure, however, that both parties involved understand that the cosigner is responsible for taking over your monthly payments if you default on repaying the loan. That’s a major commitment on your cosigner’s behalf.
• Look for “buy now, pay later” offers: These allow you to purchase an item and then pay it off on an installment plan, which may or may not charge interest.
• Build your credit: Perhaps it seems obvious, but building your credit can play a key role in helping you qualify for more favorable loans in the future. You might work on positively impacting the factors that determine your credit score or meet with a qualified credit counselor to learn strategies.
Recommended: Guide to Personal Loans
High-risk personal loans can be a source of quick cash for people with a low credit score or a thin credit history. They can be risky for the lender, because there is a fair chance the borrower might default. They can also be risky for the person seeking the money because the interest rate, fees, and other terms may prove very expensive and/or involve potentially losing any collateral that might be put up.
If you are a high-risk borrower, it’s important to fully understand what these loans involve and the downsides if you cannot repay them on time. It may also be wise to review what options exist before you decide to apply for a high-risk personal loan.
If you’re seeking a standard personal loan, see what SoFi offers.
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.
High-risk loans are funds offered to individuals who may have bad or no credit. In exchange for accepting a higher-risk applicant, lenders typically charge higher APRs and fees and/or may require the borrower to put up collateral.
Banks typically don’t offer loans to high-risk borrowers, though it may be worth checking with them before moving on to another type of lender. Those who do offer high-risk personal loans could be online lenders or a retail payday loan provider, for example.
There are several types of loans you may want to avoid if possible, including car title loans and payday loans. Why? You will pay high interest rates which can trap you in a cycle of debt. Also, with a car title loan, you are using an asset as collateral, which means you risk losing your vehicle if you can’t repay the loan on time.
About the author
Melissa Brock
Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Read full bio.
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