Can You Open a Roth IRA For Your Child?

A Roth IRA for minors, called a Custodial Roth IRA, can be opened by any adult—whether a grandparent, parent, or family friend—for a minor who earns income.

Who Can Contribute to a Custodial Roth IRA for Your Child?

Unlike a 529, which anyone can contribute to, only the custodian of the Roth IRA account can contribute funds into the account. But it’s important to be mindful of how much your child has earned during the year and only contribute up to that limit.

Financial Topics Archives | Page 345 of 801

Jan

2024

Custodial Roth IRA: How to Open a Roth IRA For Kids

By SoFi Editors | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A Roth IRA can be a retirement savings tool for children as well as adults. Funded with after-tax dollars, a Roth IRA grows tax-free, so account holders won’t need to pay taxes when they withdraw money in retirement as long as the account has been open for at least five years. Plus, the money in a Roth IRA will have many decades to grow if you open it when your child is young.

And while a Roth IRA has an early distribution penalty, that penalty is generally waived for certain expenses, such as paying for qualified college expenses, if your child needs to access those funds. That flexibility can make a Roth IRA appealing.

Can you open a Roth IRA for a child? Yes! A Roth IRA for kids, called a Custodial Roth IRA, can be opened by a parent, grandparent, or other adult for a child of any age, as long as the child earns income (more on that later).

Here’s everything you need to know about a Roth IRA for kids.

🛈 Currently, SoFi does not offer custodial banking or investment products.

What Is a Roth IRA for Kids?

A Roth IRA for kids, also known as a custodial Roth IRA, is an IRA opened by an adult (usually a parent), who manages the account until the child gets full control of it, which is at age 18 or 21 in most states.

A custodial Roth IRA for kids generally operates in the same way a Roth IRA for adults does. The account holder contributes after-tax dollars toward their retirement savings and the money grows tax-free in the account.

In order to open and contribute to a Roth IRA, your child must have earned income.

Who’s Eligible for a Roth IRA for Kids?

A child of any age can have a Roth IRA for kids. However, to be eligible, a child must have an earned income. Earned income can include the compensation earned from jobs like babysitting, dog walking, or working for an employer.

Custodial Roth IRA Rules

In addition to the standard rules for a Roth IRA, there are specific rules for custodial Roth IRAs. These rules include:

No Minimum Age Limit

A child of any age can have a custodial Roth IRA as long as he or she has earned income.

A Child Must Have Earned Income

In order to open a custodial Roth IRA, a child must have earned income. The IRS generally defines earned income as taxable income, wages, and tips. This can also include self-employment, such as yard work or babysitting. Cash gifts given to a child do not count as earned income.

There Are Contribution Limits

The contribution limit for a Roth IRA is $7,000 for 2024 ($8,000 for those 50 and older), or the total of the individual’s earned income for the year, whichever is less.

In addition, a child (or an adult on behalf of a child) cannot contribute an amount greater than the child’s earned income. So if a child earned $2,000 as a lifeguard at the local swimming pool, for example, the most that can be contributed to the child’s custodial IRA that year, including contributions from parents, is $2,000.

Certain Early Withdrawals Are Allowed

In general, you can withdraw contributions from a Roth IRA at any time without penalty. Earnings typically can’t be withdrawn before age 59 ½ without penalty except in certain circumstances. Allowable exceptions include withdrawals up to certain limits to pay for qualified college expenses, cover certain medical bills, and to buy a first home.

Eventual Conversion to a Regular Roth IRA

When the child reaches the legal age in their state (typically 18 or 21, depending on the state), the custodial Roth IRA will need to be converted to a regular Roth IRA in the child’s name.

How to Open a Custodial Roth IRA for a Kid

A Roth IRA for kids can be opened by any adult, such as a parent or grandparent, for instance. While the child is a minor, the adult will have sole access to the account; once the child comes of age (the timing of which varies by state), the account will transfer over to the child.

As with any Roth IRA, investment options within the account can include stocks, bonds, and mutual funds.

A Roth IRA can be opened through a financial institution or brokerage firm. You can typically open the account online by providing some basic information about yourself and your child. Choosing the right institution and Roth IRA offering depends on the investor and their preferences, so be sure to do some research.

Benefits of Starting a Roth IRA for a Child

Flexibility in how to use the funds can be one benefit of opening a custodial Roth IRA as part of an investment plan for your child. A Roth IRA can provide flexibility not only for potential expenses in early adulthood — such as college expenses or buying a home — but can be an investment vehicle throughout your child’s lifetime.

Another benefit is that a Roth IRA typically gives you more control over investments than an education-focused 529 college savings plan, and it may allow you to create a diversified portfolio of different asset classes.

A Roth IRA is a gift that can keep growing, since investors can potentially maximize compounding returns to get the most out of their investment. Here’s how a Roth IRA may unlock the power of compounding: As an example, let’s say you open a custodial Roth IRA when the child is 10 years old, and contribute $2,000 annually. At a certain point, your child might take over contributing $2,000 annually.

Assuming a 7% rate of return, the account will be worth $928,000 by the time your child is 60 years old — even though the amount you and your child contributed would be $100,000 in total. In comparison, if that same money was put in a taxable savings account over the same time period, the total of the account would be approximately $515,764.

And unlike a traditional IRA, there is no required minimum distribution (RMD) on a Roth IRA once the account owner reaches retirement age. A Roth IRA also allows people to continue contributing throughout their lifetime, as long as they’re earning income.

Alternatives to a Roth IRA for a Kid

If you’re looking for other possible investments for your child, some options to consider include the following.

• Savings account: A parent can open a savings account for a child, as long as the parent is a joint account holder. Savings accounts typically have low interest rates (as of January 2024, the average interest rate for a savings account was 0.47%), so you might want to look for a high-yield savings account instead. These accounts have average interest rates of more than 4% as of early 2024.

• Savings bonds: If your child doesn’t have earned income, you may want to consider savings bonds. However, savings bonds don’t offer the same potential tax advantages a Roth IRA does since you have to pay federal income tax on the bonds when they mature or you cash them. You won’t pay income taxes on Roth IRA earnings unless you take a non-qualified distribution.

• 529 plans: These plans can help you save for your child’s education. You can typically invest the money you contribute to a 529 plan and choose from a wide range of investment options. While these plans aren’t tax deductible at the federal level, your state may offer tax breaks for contributions made to them. And funds can be withdrawn tax-free for qualified education expenses. As of 2024, money left in a 529 may be rolled over to a Roth IRA for your child, although certain conditions and limits may apply.

• UGMA/UTMA accounts: A Uniform Gifts to Minors Act (UGMA) account and a Uniform Transfers to Minors Act (UTMA) account are custodial accounts in which an adult can invest on behalf of a child. These accounts are typically used to invest in stocks, bonds, mutual funds, and so on. There are no contribution or income limits, and gifts below the annual gift threshold do not need to be reported. However, there are no tax benefits when contributions are made, and earnings are made to these accounts, and earnings are subject to taxes. When the child reaches legal age, they take over control of the account.

The Takeaway

For a child with earned income, a custodial Roth IRA may be a good way to help them prepare for their future and get started on the path to investing. A child does need to have an earned income to open a custodial Roth IRA, and contributions cannot exceed their income. If your child qualifies, a Roth IRA for kids could potentially give them years of tax-free growth on their money.

FAQ

Can you open a Roth IRA for a child if they don’t earn income?

No. A child must have earned income — which the IRS defines as wages, salaries, tips and other taxable employee compensation, as well as net earnings from self-employment — in order to open a custodial Roth IRA.

Can you open a Roth IRA for a baby?

It’s possible to open an IRA for a baby. As long as a baby earns an income — modeling baby clothes, for instance — you can open a custodial Roth IRA for them. There is no minimum age to open a custodial Roth IRA, but the child must have earned income.

Is it a good idea to open a Roth IRA for a child?

It may be a good idea to open a Roth IRA for a child for several reasons. A Roth IRA can help a child save up for and cover certain expenses in early adulthood, such as qualified college expenses. Also, a Roth IRA typically has higher returns than a savings account. And because kids have a low tax rate now, when contributions are made, it makes sense to open a Roth IRA, which is taxed upfront. At retirement, as long as they are at least age 59 ½, they can withdraw the money tax-free.

Can I give my child money for a Roth IRA?

Yes, you can contribute to your child’s IRA. However, annual contributions to the account cannot exceed the child’s annual earned income. Also, per IRS rules, the overall amount you can contribute to a Roth IRA is to $7,000 in 2024 for individuals under age 50, or the total annual earned income, whichever is less.

What is the disadvantage of a Roth IRA for kids?

One potential disadvantage of an IRA for kids is that your child must earn an income in order to open and contribute to an account. In addition, you can only contribute the amount the child earns. So if the child makes $500 for the year babysitting, that is the most you can contribute to their custodial Roth IRA.

Can I open a Roth IRA for my 2 year old?

As long as your 2-year-old earns an income, you can open a custodial Roth IRA for them. There is no minimum age requirement for a Roth IRA for kids.

How do I prove my child’s income for a Roth IRA?

If your child receives a W-2 or 1099 form for work they did for an employer, you can use those documents to prove your child’s income. However, if they are self-employed and do work like babysitting, dog walking or yard work to earn money, you should keep receipts or records of the type of work they did, the amount they earned, when the work was done, and who it was for, as proof of their income.

What happens to a custodial Roth IRA when the child turns 18?

Once a child is of legal age, which is typically 18 or 21, depending on your state, the IRA must be converted to a regular Roth IRA in the child’s name that they then own and manage.

Do children need to file a tax return to fund their Roth IRA?

As long as their income is below the threshold that requires them to file a tax return, children are typically not required to file a tax return just because they have a custodial IRA. However, you may want to consult with a tax professional about your specific situation.

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Jan

2024

Roth IRA Conversion: Rules and Examples

By SoFi Editors | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A Roth IRA is a retirement savings account that offers tax-free withdrawals during retirement. You can convert a traditional IRA or a qualified distribution from a previous employer-sponsored plan, such as a 401(k), into a Roth IRA. This is known as a Roth IRA conversion.

A Roth IRA conversion may be worth considering for the potential tax benefits. Along with tax-free qualified withdrawals in retirement, the money in a Roth IRA has the potential to grow tax-free. Read on to learn how a conversion works, the Roth IRA conversion rules, and whether a Roth IRA conversion may make sense for you.

What Is a Roth IRA Conversion?

With a Roth IRA conversion, an individual moves the funds from another retirement plan into a Roth IRA. You pay taxes on the money in your existing account in order to move it to a Roth IRA.

Many retirement plans, such as 401(k)s and traditional IRAs are tax-deferred. The money is contributed to your account with pre-tax dollars. In retirement, you would pay taxes on your withdrawals. But by doing a Roth conversion, you pay taxes on the money you convert to a Roth IRA, and the money can then potentially grow tax-free. In retirement, you can make qualified withdrawals from the Roth IRA tax-free.

You can convert all or part of your money to a Roth IRA.

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How Does a Roth IRA Conversion Work?

As mentioned, when converting to a Roth IRA, an individual must pay taxes on the contributions and gains in their current retirement plan because only after-tax contributions are allowed to a Roth IRA. They can typically convert their funds to a Roth IRA in one of three ways:

• An indirect rollover: With this method, the owner of the account receives a distribution from a traditional IRA and can then contribute it to a Roth IRA within 60 days.

• A trustee-to-trustee, or direct IRA rollover: The account owner tells the financial institution currently holding the traditional IRA assets to transfer an amount directly to the trustee of a new Roth IRA account at a different financial institution.

• A same-trustee transfer: This is used when a traditional IRA is housed in the same financial institution as the new Roth IRA. The owner of the account alerts the institution to transfer an amount from the traditional IRA to the Roth IRA.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Roth IRA Conversion Rules

There are a number of rules that govern a Roth IRA conversion. Before you proceed with a conversion, it’s important to understand what;’s involved. Roth IRA conversion rules include:

Taxes

You’ll pay taxes on a traditional IRA or 401(k) before you convert it to a Roth IRA. This includes the tax-deductible contributions you’ve made to the account as well as the tax-deferred earnings. They will be taxed as ordinary income in the year that you make the conversion. Because they’re considered additional income, they could put you into a higher marginal tax bracket. You’ll also need to make sure you have the money on hand to pay the taxes.

Limits

There are two types of limits to be aware of with a Roth IRA conversion. First, there is no limit to the number or size of Roth IRA conversions you can make. You might want to convert smaller amounts of money into a Roth IRA over a period of several years to help manage the amount of taxes you’ll need to pay in one year.

Second, Roth IRAs have contribution limits. For instance, in 2024, you can typically contribute up to $7,000, or up to $8,000 if you’re 50 or older.

Withdrawals

The withdrawals you make from a Roth IRA are tax-free. However, with a Roth IRA conversion, if you are under age 59 ½, you will need to wait at least five years before withdrawing the money or you’ll be subject to a 10% early withdrawal penalty (more on that below).

Backdoor Roth IRAs

A Roth IRA conversion may be an option to consider if you earn too much money to otherwise be eligible for a Roth IRA. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all. For 2024, the income limits begin to phase out at $230,000 for those who are married and filing jointly, and $146,000 for those who are single.

However, if you have a traditional IRA and convert it to a Roth IRA — a process known as a backdoor Roth IRA — those income phase-out rules don’t apply. You can use a backdoor IRA as long as you pay taxes on any contributions to the traditional IRA that you deducted from your taxes, as well as any profits you earned.

5-Year Rule

According to the 5-year rule, if you are under age 59 ½, the funds that you convert to a Roth IRA must remain in your account for at least five years or you could be subject to a 10% early withdrawal penalty.

The five years starts at the beginning of the calendar year in which you do the conversion. So even if you don’t do the conversion until, say, December 2024, the five years still begins in January 2024. That means you could withdraw your funds in January 2029.

Also, if you complete separate Roth IRA conversions in different years, the 5-year rule would apply to each of them, so keep this in mind.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Is Converting to a Roth IRA Right for You?

Doing a Roth IRA conversion means paying taxes now on the funds you are converting in order to withdraw money tax-free in retirement. Here’s how to decide if converting a Roth IRA may be right for you

Reasons For

If you anticipate being in a higher tax bracket in retirement than you’re in now, a Roth IRA conversion may make sense for you. That’s because you’ll pay taxes on the money now at a lower rate, rather than paying them when you retire, when you expect your tax rate will be higher.

In addition, with a Roth IRA, you won’t have to take required minimum distributions (RMDs) every year after the age of 73 as you would with a traditional IRA. Instead, the money can stay right in the account — where it may continue to grow — until it’s actually needed.

If your income is too high for you to be eligible for a Roth IRA, a Roth IRA conversion might be beneficial through a backdoor IRA. You will just need to put your funds into a traditional IRA first and pay the taxes on them.

Finally, if you won’t need the funds in your Roth IRA for at least five years, a conversion may also be worth considering.

Reasons Against

A Roth IRA conversion may not be the best fit for those who are nearing retirement and need their retirement savings to live on. In this case, you might not be able to recoup the taxes you’d need to pay for doing the conversion.

Additionally, if you receive Social Security or Medicare benefits, a Roth IRA conversion would increase your taxable income, which could increase the taxes you pay on Social Security. The cost of your Medicare benefits might also increase.

Those who don’t have the money readily available to pay the taxes required by the conversion should also think twice about an IRA conversion.

And if you expect to be in a lower tax bracket in retirement, a conversion also likely doesn’t make sense for you.

Finally, if you think you might need to withdraw funds from your account within five years, and you’re under age 59 ½, you could be subject to an early withdrawal penalty if you convert to a Roth IRA.

The Takeaway

A Roth IRA conversion may help individuals save on taxes because they can make qualified withdrawals tax-free withdrawals in retirement. For those who expect to be in a higher tax bracket in retirement, a Roth IRA may be worth considering.

It’s important to be aware of the tradeoffs involved, especially the amount of taxes you might have to pay in order to do the conversion. Making the right decisions now can help you reach your financial goals as you plan and save for retirement.

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FAQ

How much tax do you pay on a Roth IRA conversion?

You pay tax on the money you convert, but the specific amount of tax you’ll pay depends on the marginal tax rate you’re in. Before doing a Roth IRA conversion, you may want to calculate to see if the funds you’re converting will put you into a higher tax bracket.

How many Roth iRA conversions are allowed per year?

There is no limit to the number of Roth conversions you can do in one year.

When is the deadline for Roth IRA conversions?

The deadline for a Roth IRA conversion is December 31 of the year you’re doing the conversion.

Is there a loophole for Roth IRA conversions?

A backdoor IRA might be considered a loophole for a Roth IRA conversion. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all. However, a backdoor IRA may be a way to get around the income limits. To do it, you will need to have a traditional IRA that you convert to a Roth IRA.

How do I avoid taxes on Roth conversion?

You cannot avoid paying taxes on a Roth conversion. You must pay taxes on the money you convert.

How do you not lose money in a Roth IRA conversion?

To reduce the tax impact of a Roth IRA conversion, you may want to split the conversion into multiple conversions of smaller amounts over several years. If possible, try to do the conversions in years when your taxable income is lower.

Do you have to pay taxes immediately on Roth conversion?

Taxes on a Roth conversion are not due until the tax deadline of the following year.

Should a 65 year old do a Roth conversion?

It depends on an individual’s specific situation, but a Roth conversion may not make sense for a 65 year old if they need to live off their retirement savings or if they are receiving Social Security or Medicare benefits. A Roth IRA conversion could increase the taxes they pay on Social Security, and the cost of their Medicare benefits might rise.

Does a Roth conversion affect my Social Security?

It might. A Roth IRA conversion increases your taxable income, which could potentially increase the taxes you pay on Social Security.

Does a Roth conversion affect Medicare premiums?

A Roth IRA conversion may affect your Medicare premiums. Because it increases your taxable income, the cost of your Medicare benefits might increase as well.

What is the best Roth conversion strategy?

The best Roth conversion strategy depends on your particular situation, but in general, to help reduce your tax bill, you can aim to make the conversion in a year in which you expect your taxable income to be lower. You may also want to do multiple smaller conversions over several years, rather than one big conversion in one year, to help manage the taxes you owe.

Can you do Roth conversions after age 72?

Yes, you can do Roth conversions at any age. Some individuals may want to consider a Roth IRA conversion at 72 if they prefer to avoid paying the required minimum distributions (RMDs) for traditional IRAs that begin at age 73. If you convert before you turn 73, you will not be required to take RMDs.

How do I calculate my Roth conversion basis?

The concept of basis, or money that you’ve paid taxes on already, might be applicable if you’ve made non-deductible contributions to a tax-deferred retirement account. When you convert the money in that account, in order to calculate the percentage that’s tax-free, you need to divide your total nondeductible contributions by the end-of-year value of your IRA account plus the amount you’ve converting.

Do you have to wait 5 years for each Roth conversion?

No. There is no time limit for doing Roth conversions, and in fact, you can do as many as you like in one year. However, if you’re under age 59 ½, you do have to wait five years after each conversion to be able to withdraw money from the account without being subject to an early withdrawal penalty.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Jan

2024

Comparing Personal Loans vs Business Loans

By Kim Franke-Folstad | Budgeting & Goals, Financial Independence, Life & Career, personal_loan, SMB | Comments Off

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. Or it could free up some cash by covering expenses elsewhere in your budget, so you can 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 anything. (That said, you may need to get approval from your lender if you plan to use the money directly for your business. This is not always possible.)

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.

💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.

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 may want to evaluate if you’re trying to decide 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 to use for your business, 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.

• Because you may be able to use the influx of cash for both business and personal expenses, the uses of a personal loan can be very flexible. But 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.

• It’s also important to note that some lenders put restrictions on how personal loans can be used, so you should read the fine print before applying and share your plans with the lender if asked.

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 has financial problems and you have a personal loan, you (and your cosigner, if you have one) could be held responsible for the debt. You could lose your collateral (if it’s a secured loan) or damage your personal credit.

• 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.

Structural Differences in Business and Personal Loans
	Business Loans	Personal Loans
Loan Amount	Typically come in larger amounts (up to $5 million)	Generally are limited to smaller amounts (up to $100,000)
Loan Length	Usually have longer repayment periods (up to 25 years)	Generally have shorter terms (a few months to a few years)
Tax Advantages	Interest paid on a business loan is often tax-deductible	Interest paid on a personal loan used for business expenses may be tax-deductible
Support	Lenders may offer operational support and online business tools to borrowers with business loans	Lenders may offer more personal types of support to borrowers with personal loans
Risk	Defaulting on a business loan could affect the borrower’s business credit score or business and personal credit scores (based on how the loan is structured)	Defaulting on a personal loan could affect the borrower’s personal credit score

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 could make it easier to separate your business and personal finances.

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

Pros of Business Loans	Cons of Business Loans
Borrowers may qualify for larger amounts than personal loans offer	Applying can require more time and effort
Longer loan terms available	Qualifying can be difficult
Interest rates may be lower	Collateral and/or a down payment may be required
Interest is usually tax deductible	Loan must be used for business purposes only
Lenders may offer more business-oriented support	New businesses may pay higher interest rates
Debt may be the responsibility of the business, not the individual (depending on loan structure)	Responsibility for the debt could still land on individual borrowers

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 if you are wondering if you can use one to fund a business.

• Personal loans can offer borrowers more flexibility than business loans in terms of usage.

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

• One major hurdle may be tracking whether the funds were used for business or personal expenses, which can be crucial, especially for income taxes.

Pros of Personal Loans	Cons of Personal Loans
Application process is usually quick and easy	Lending limits may be lower than business loans
Qualifying can be less challenging than with a business loan because it’s based on personal creditworthiness	Borrower doesn’t build business credit with on-time payments
Can use funds for both personal and business expenses (unless there are lender restrictions)	Defaulting can affect personal credit score/finances
Most personal loans are unsecured	Interest rates are generally higher than for a business loan
Interest may be tax deductible (when funds are used for business)	Shorter loan terms than business loans typically offer

💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

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 grow your startup or new business and the loan allows this usage.

• 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 have to decide between personal and business loans. 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.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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

FAQ

Are business loans more expensive than personal loans?

Business loans typically have lower interest rates than personal loans. Still, it’s probably worth comparing both types of loans and the rates lenders are willing to offer you and/or your business before making a final decision between the two.

Is it illegal to use personal loans for business?

Most (but not necessarily all) personal loans can be used for just about anything. Your lender may not even ask how you intend to spend the money. But it’s a good idea to check the lending agreement in case there are any restrictions. And if the lender wants to know the purpose of the loan, you should be honest about your intentions.

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

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.

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 .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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Jan

2024

$10,000 Personal Loan: Everything You Need to Know

By Jason Steele | Budgeting & Goals, Financial Independence, personal_loan | Comments Off

A personal loan can be a relatively low-interest way to access a lump sum of cash, which is usually paid back in monthly payments. This kind of unsecured installment loan can be used for a variety of purposes, from paying off high-interest credit card debt to funding a home renovation.

Here, you’ll learn the full story on one popular option, a $10,000 personal loan.

Key Points

• A personal loan can provide a low-interest lump sum, which borrowers can use for various purposes, including debt consolidation and home renovations.

• Monthly payments for personal loans depend on factors like the loan amount, interest rate, and repayment term, with fixed or variable rates available.

• Typical requirements for qualifying include a credit score of at least 640, a steady income, and an active checking account, although options exist for those with lower scores.

• Fees, such as origination fees, can increase the overall cost of a personal loan, and borrowers should calculate the annual percentage rate (APR) for clarity on expenses.

• Fast processing times for personal loans are common, with many lenders offering same-day or next-day funding after approval, provided applicants have the necessary documentation.

Reasons to Get a $10,000 Personal Loan

Many prospective borrowers are attracted to personal loans because of the freedom and flexibility that they offer compared to some alternatives. Reasons to get a $10,000 loan might include the following:

• To pay off an unforeseen expense, such as costly car repairs or a major medical bill. (A borrower might use a lesser sum, like a $5,000 personal loan, in some situations.)

• To consolidate other debts. For example, assume you have a $10,000 balance between two credit cards, each having an interest rate of over 20%. You might be able to secure a $10,000 personal loan with a significantly lower interest rate to pay off that debt.

• To pay for a home renovation.

• To start a side hustle.

• Any other need for a cash infusion.

💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

$10,000 Personal Loan Terms

Depending on the lender, the repayment periods typically range from 12 months to 84 months.

You can shop around for a personal loan with terms that allow for affordable monthly payments. Keep in mind that a longer term likely means you will pay more interest over the life of the loan.

When calculating the overall costs of a personal loan, consider such factors as the principal amount borrowed, interest rate, fees, and the loan term. You might use an online personal loan calculator to help you tally up costs.

$10,000 Personal Loan Monthly Payments

Personal loans are typically repaid over a multi-year term through monthly payments. The cost of the monthly payments is influenced by the interest rate that applies to the specific loan. Interest rates are essentially the fees charged by the lender for providing the loan.

The lowest interest rates are typically offered to consumers with a good to excellent credit history and may also be influenced based on other factors including their current income. Generally speaking, lenders may increase their interest rates if they think an applicant presents higher risk for timely repayment.

The following chart shows the impact that interest rates have on the monthly payment and also how choosing a longer-term loan can increase the overall cost of the loan.

Principal	Interest Rate	Loan Term	Monthly Payment	Total Interest Paid
$ 10,000	6.0%	24 months	$ 443.21	$ 636.95
$ 10,000	10.0%	24 months	$ 461.45	$ 1,074.78
$ 10,000	6.0%	48 months	$ 234.85	$ 1,272.81
$ 10,000	10.0%	48 months	$ 253.63	$ 2,174.04

Personal loan interest rates are generally fixed, which means the monthly payment will remain the same. Variable-rate personal loans are offered by some lenders, and payments will be influenced by market conditions.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

$10,000 Personal Loan Fees

In addition to interest, some lenders charge origination fees that will also increase the overall cost of the loan.
The combination of the interest rate and any applicable fees is the annual percentage rate (APR) of the loan. Calculating the APR is necessary for determining the true cost of the loan. Recent Federal Reserve data shows the average APR of a 24-month personal loan to be 12.17%.

It’s important for applicants to closely review the terms of any potential loan agreement. For example, a lender may charge a late fee when payments are not received on time, and some may have prepayment penalties that apply if a borrower pays off the loan ahead of schedule.

What Credit Score Do You Need To Get a $10,000 Personal Loan?

Your credit score is a three-digit number that a lender checks to assess your creditworthiness. The most popular credit scoring systems (like FICO® Score) usually range from 300 to 850. Your credit score is calculated largely based on your credit history because past consumer behavior tends to predict the future.

Here are the usual credit score ranges according to FICO:

• 300 to 579: Very Poor

• 580 to 669: Poor

• 670 to 739: Fair

• 740 to 799: Good

• 800 to 850: Excellent

There’s no single credit score needed for getting a personal loan. Keep in mind that $10k loan represents an average personal loan amount (the current average is $11,548). Rates may vary depending on the size of your loan.

Can You Get a $10,000 Personal Loan With Bad Credit?

In general, you need a credit score of 640 to qualify for a personal loan. If you have bad credit (say, in the lower “poor” or “very poor” range), you might still be able to secure a loan, but potentially at a higher interest rate.

How Long Does It Take to Get a $10,000 Personal Loan?

Personal loans are known for offering fast processing — or funding — times, particularly among online lenders. Many lenders today offer same-day or next-day funding of personal loans after approval. Applicants should be properly prepared with the documentation necessary to confirm their identity, address, and income, as well as current bank statements.

Requirements for a $10,000 Personal Loan

Requirements will vary across lenders. However, qualifying for a $10,000 personal loan typically requires a credit score that exceeds 640, an active checking account, and a steady, verifiable income, among other factors.

Top $10,000 Personal Loan Lenders

Lender	Minimum Credit Score	APR Range	Loan Amounts
SoFi	None	8.99% to 25.81%	$5,000 to $100,000
LightStream	660	8.49% to 25.49%	$5,000 to $100,000
Upstart	None	6.40% to 35.99%	$1,000 to $50,000
Discover	660	7.99% to 24.99%	$2,500 to $40,000
Upgrade	560	8.49% to 35.99%	$1,000 to $50,000

The Takeaway

If you’re considering a personal loan, it’s a good idea to take the time to compare the various options available and make sure you understand the terms and costs of a loan. A $10,000 personal loan is close to the average amount borrowed currently, which indicates that these loans are typically accessible. Those with less-than-perfect credit are likely to encounter significantly fewer choices and higher interest rates and fees.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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

FAQ

What is the monthly payment on a $10,000 personal loan?

The monthly payment on a $10,000 personal loan will fluctuate based on your credit score, the loan’s interest rate and fees, and the term of the loan, among other factors.

Do I need at least a 620 credit score to get a $10,000 loan?

There is no formal minimum credit score needed for getting a personal loan. Different minimums may apply across the various institutions that offer personal loans in the $10,000 range. Those with a 640 or higher credit score are likely to find a number of options for a $10,000 personal loan; those with higher scores may have more options as well as more favorable terms.

How long will it take to get a $10,000 loan?

Fast-funding options including same-day and next-day loans are common for 10,000 dollar loans. As long as you are prepared with some basic documentation that verifies your identity, address, and income, rapid approval and funding may be available.

Photo credit: iStock/Edwin Tan

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.

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 .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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Jan

2024

Differences and Similarities Between Personal Lines of Credit and Credit Cards

By Jason Steele | Credit, Financial Independence, personal_loan | Comments Off

Credit cards and personal lines of credit both allow you to borrow money over time until you hit a credit limit. You typically pay back what you owe on a monthly basis, paying interest on your balance.

Each method has its pros and cons (for example, while a line of credit may have a lower interest rate, it likely won’t offer rewards and may be tougher to qualify for). Here, you’ll learn the ins and outs of a personal line of credit vs. a credit card so you can decide which is right for you.

What Is a Personal Line of Credit?

A personal line of credit operates under the same concept as a credit card, with slight differences. It’s a type of revolving credit that allows you to borrow a set amount, which is typically based on your income. Here are details to know:

• The majority of personal lines of credit are unsecured, meaning there’s no collateral at risk if you default on payments. However, you can obtain a secured personal line of credit at some institutions if you put down a deposit. This deposit will be used to pay your balance due if you default on payments, but it can also help you achieve a lower interest rate. Personal loans secured by a deposit are typically used as a method for building credit.

• A home equity line of credit (or HELOC) is similar to a secured personal line of credit in that your house acts as the collateral in the loan. You’re borrowing against the equity in your home. If you default on payments, your house could be foreclosed on to make up the difference.

💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

How Does a Personal Line of Credit Work?

Get acquainted with how a personal line of credit works:

• As with any other credit transaction, personal lines of credit are reported to the three major credit bureaus. You will have to provide details about your financial standings in order to qualify for a personal line of credit. Typically, this comes in the form of demonstrating your income, in addition to other requirements.

• The interest rate for a personal line of credit usually fluctuates with the market conditions, such as the prime rate. You may also have to pay a fee each time you use your personal line of credit.

• Some banking institutions may require you to have a checking account established with them before offering you a personal line of credit. This is critical for using your personal line of credit, since the money can be transferred to a linked checking account. (In some cases, you might receive funds via a payment card (similar to a debit card) or use special checks to move the funds.

• Personal lines of credit contain what’s called a “draw period.” During this predetermined amount of time, you can use your available credit as you please, as long as you don’t go over the limit.

• Once the draw period reaches its end, you may be required to either pay your remaining balance in full or pay it off by a certain date after that.

What Is a Credit Card?

Is a credit card a line of credit? Not exactly. A credit card is a type of unsecured revolving credit that includes a credit limit. This limit is determined by your financial situation, which requires a hard credit check. There are credit cards for practically all types of credit scores, from poor all the way up to excellent.

Many credit cards offer rewards in the form of cash back or travel rewards. You may also receive a bonus for signing up for a new account, either as rewards or as an interest-free, introductory financing period. Also, a credit card can offer cardholder benefits such as purchase protection or travel insurance.

How Does a Credit Card Work?

Your personal bank or other financial institutions may offer their own credit cards, but you don’t have to belong to a particular bank or lender in order to qualify for a credit card. After you’ve applied for a credit card and been approved, the lender will likely set a credit limit.

• When you make a purchase with a credit card, it constitutes a loan. At the end of each billing cycle you’ll receive a statement. You can usually avoid interest charges by paying your statement balance in full.

• If you choose to pay a lesser amount, you’ll incur interest charges. Credit cards typically charge high interest, so it’s important to stay on top of the amount you owe, which can increase quickly.

• If you don’t make a payment by the statement due date, you will likely also incur a late payment fee. Interest charges and fees are added to the account balance, and interest will accrue on this new total.

• If you miss payments by 60 days typically, you could be assessed a higher penalty APR.

Recommended: Average Personal Loan Rates

Personal Lines of Credit Vs Credit Cards Compared

Now that you know a bit more about each of these options, you know that the answer to “Is a line of credit the same as a credit card?” is no. Now, take a closer look at the difference between a line of credit and a credit card.

Similarities

Both personal lines of credit and credit cards are types of revolving credit. This means you can borrow up to a certain amount as it suits you, as long as you pay the balance back down in order to make room for future purchases.

Both personal lines of credit and credit cards also report your balance and payment history to the three major consumer credit bureaus.

Differences

Here’s a quick summary of the main differences between personal lines of credit and credit cards.

Features	Personal Line of Credit	Credit Card
Interest rate	Typically lower than credit cards	Typically higher than personal lines of credit
Borrowing limit	Often up to $50,000 or more	Typically, $28,000 but varies
Rewards	None	Many cards offer cash back or travel rewards
Fees	Annual fee, late payment fees, fees for drawing on account	Annual fees, balance transfer fees, late payment fees and penalty APRs, overdraft fees
Application process	Can be lengthy	Usually very simple
Grace period	No	Yes
Other benefits	Good for emergency and/or unexpected expenses	Many cards offer travel insurance, purchase protection, and other benefits.

💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why credit card consolidation loans are so popular.

Pros and Cons of Personal Lines of Credit

There are times when a personal line of credit can make life much simpler. However, you may have to accept certain tradeoffs.

Pros	Cons
Lower fees for a cash advance	Potential fees for usage
High borrowing limits	Preset credit lifespan
Lowwe interest rates	No spending rewards or perks
Funds can be used at your discretion	No interest-free grace period
You only pay interest on what you borrow	Annual fee

Pros and Cons of Credit Cards

Credit cards are a powerful financial tool you can use to wisely manage your spending. Knowing the terms of the game, however, is just as important as learning how to be responsible with credit cards.

Pros	Cons
Many cards offer rewards for spending	Some cards have annual fees
Can be used for retail purchases	Typically high interest rates
One for practically every credit score	Hefty fees for cash advances
Useful tool in establishing and/or rebuilding credit	Balance transfer fees

Recommended: Credit Score vs. FICO® Score

Alternatives to Revolving Credit

Besides personal lines of credit and credit cards, there are a few other types of financial products you can use to access credit.

Personal Loans

It may be easy to get personal loans vs. lines of credit confused, but it’s crucial to know the difference. For example, a personal line of credit is a potential amount that can be borrowed. Personal loans, however, are a lump sum of money that you receive shortly after your approval. Here’s how this kind of loan typically:

• Obtaining either a secured or unsecured personal loan requires a credit check. The potential amount you may be able to borrow ranges from $1,000 all the way up to $40,000 or more.

• Some personal loans are taken out for a specific purpose, such as a home renovation, a personal line of credit can often be used for whatever reason crops up. For example, you may want to go with a personal loan instead of a line of credit if you need to make home renovations.

• A personal loan rate calculator can be used to see what terms you may be able to expect. While these calculators may not give you the exact terms you’ll receive if you do obtain a personal loan, they can be a great starting place.

Auto Loan

Many people don’t have thousands of dollars sitting around to help pay towards a new car, so they use auto loans. An auto loan is a kind of personal loan that’s secured by the title of the vehicle.

If the borrower fails to pay the loan, the vehicle can be repossessed. And the name of the lender typically appears on the title of the car, so the loan must be paid off before the car can be sold.

Mortgage

A mortgage, or home loan, is a loan that’s secured by a real estate property. Because of the inherent value of real estate, a home mortgage can often have a lower interest rate than other types of secured loans. Most home mortgages are installment loans that have a fixed repayment period, such as 30 years or 15 years.

A home equity loan or a home equity line of credit is a second mortgage taken out against the existing equity in a property. Because of their low interest rates these are sometimes used instead of unsecured personal loans.

Student Loans

Student loans can allow students to fund their education; you may not need to start paying those loans off until you’ve graduated.

Federal student aid can help pay for college-related costs as well. The Free Application for Federal Student Aid (FAFSA®) is one way to determine how much and what type of federal student aid students and parents might qualify for. Some individual colleges also use the FAFSA in determining eligibility for their own financial aid programs.

Private student loans are another option, both for loans and to refinance federal loans. In terms of the latter, however, there are two important considerations:

• If you refinance federal student loans with private loans, you forfeit the federal benefits and protections, such as forgiveness.

• If you refinance for an extended term, you may pay more interest over the life of the loan.

• For these reasons, think carefully about whether private student loans suit your situation.

The Takeaway

Personal lines of credit are similar to credit cards in that they are both generally unsecured loans issued based on your personal creditworthiness. By understanding how a credit card differs from a personal line of credit, you can choose the loan that best fits your needs or decide to access cash through an alternative method.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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

FAQ

Here’s a list of the most common questions associated with personal lines of credit and credit cards.

Is a personal line of credit the same as a credit card?

Personal lines of credit and credit cards are similar but not the same. A credit card is a form of payment accepted by merchants and a kind of revolving loan. A personal line of credit is a revolving loan, and the funds are typically transferred to the borrower’s personal bank account before they are used for purchases. Credit cards can also have numerous benefits not offered by a personal line of credit but the interest rate may be higher.

Are there additional risks to lines of credit vs credit cards?

Both personal lines of credit and credit cards require you to pay back what you owe, whether it’s on a monthly basis or at the end of the draw period, in the case of a line of credit. Making late payments or missing payments can negatively affect your credit score and incur fees.

Do personal lines of credit affect your credit score?

Yes, personal lines of credit, just like credit cards, are subject to reporting to the major credit bureaus. If you make late payments or miss payments, your credit score can be negatively affected. However, personal lines of credit can also be used to build your credit if you make your payments on time and use your credit responsibly.

Photo credit: iStock/Deepak Sethi

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.

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SOPL0124046

Custodial Roth IRA: How to Open a Roth IRA For Kids

What Is a Roth IRA for Kids?

Who’s Eligible for a Roth IRA for Kids?

Custodial Roth IRA Rules

No Minimum Age Limit

A Child Must Have Earned Income

There Are Contribution Limits

Certain Early Withdrawals Are Allowed

Eventual Conversion to a Regular Roth IRA

How to Open a Custodial Roth IRA for a Kid

Benefits of Starting a Roth IRA for a Child

Alternatives to a Roth IRA for a Kid

The Takeaway

FAQ

Can you open a Roth IRA for a child if they don’t earn income?

Can you open a Roth IRA for a baby?

Is it a good idea to open a Roth IRA for a child?

Can I give my child money for a Roth IRA?

What is the disadvantage of a Roth IRA for kids?

Can I open a Roth IRA for my 2 year old?

How do I prove my child’s income for a Roth IRA?

What happens to a custodial Roth IRA when the child turns 18?

Do children need to file a tax return to fund their Roth IRA?

Roth IRA Conversion: Rules and Examples

What Is a Roth IRA Conversion?

How Does a Roth IRA Conversion Work?

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Roth IRA Conversion Rules

Taxes

Limits

Withdrawals

Backdoor Roth IRAs

5-Year Rule

Is Converting to a Roth IRA Right for You?

Reasons For

Reasons Against

The Takeaway

FAQ

How much tax do you pay on a Roth IRA conversion?

How many Roth iRA conversions are allowed per year?

When is the deadline for Roth IRA conversions?

Is there a loophole for Roth IRA conversions?

How do I avoid taxes on Roth conversion?

How do you not lose money in a Roth IRA conversion?

Do you have to pay taxes immediately on Roth conversion?

Should a 65 year old do a Roth conversion?

Does a Roth conversion affect my Social Security?

Does a Roth conversion affect Medicare premiums?

What is the best Roth conversion strategy?

Can you do Roth conversions after age 72?

How do I calculate my Roth conversion basis?

Do you have to wait 5 years for each Roth conversion?

Comparing Personal Loans vs Business Loans

What Is a Personal Loan?

How Personal Loans Work

What is a Business Loan?

How Business Loans Work

Differences Between Business and Personal Loans

Cost Differences Between Business and Personal Loans

Interest Rates

Fees

Down Payment

Different Uses for Business and Personal Loans

Differences When Applying for Business and Personal Loans

Applying for a Personal Loan

Applying for a Business Loan

Structural Differences in Business and Personal Loans

Loan Amount

Loan Length

Tax Advantages

Support

Risk

Pros and Cons of Business Loans

Pros and Cons of Personal Loans

Is a Business or Personal Loan Right for You?

The Takeaway

FAQ

Are business loans more expensive than personal loans?

Is it illegal to use personal loans for business?

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