How a Personal Loan Can Boost Your Credit Score

Will a Personal Loan Build Credit?

One factor lenders look at during loan processing is the applicant’s credit score. It’s a good idea to review your own credit reports before applying for a loan to see if there are any errors that can be corrected and possibly increase your credit score, if needed.

If your credit score is not as high as you’d like it to be, it may seem counterintuitive to consider taking on debt to increase it. But it’s a method that has some merit. Making timely payments on a personal loan may have a positive effect on a person’s credit score. Let’s take a look at what factors go into calculating a credit score and how taking out a personal loan can affect it.

Do Personal Loans Help Build Credit?

If a borrower makes on-time, regular payments on a personal loan — or any loan, for that matter — that information will typically be reflected in their credit history and can be one way to build credit. It’s a good idea to ask the lender if they report payment history to the three major credit bureaus: Experian, Equifax, and TransUnion. If the lender doesn’t report the information, it won’t affect the borrower’s credit positively or negatively.


💡 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.

When Does a Personal Loan Help You Build Credit?

Someone who doesn’t have much of a credit history or wants to improve their credit score because they understand the importance of good credit might wonder if a personal loan will build credit. It certainly can be one method to do so, but only if handled responsibly. A personal loan to build credit can be an effective tool if the payments are made regularly and on time.

The terms “credit” and “credit score,” while closely related, are not the same. Generally, when the term “credit” is used, it’s referring to a credit report, which is a summary of a person’s financial history. The information contained in a credit report is what affects your credit score. So, while the two are different, they’re used together in lending and other credit matters.

To find financial areas needing improvement, you can review your credit report for individual elements that figure into the calculation of your credit score. Credit score updates can happen every 30 to 45 days, depending on when lenders report payment information to the credit bureaus, and small fluctuations are normal.

Recommended: 11 Types of Personal Loans

Your Payment History

The way you handle debt is the most important factor in determining your credit score. It accounts for 35% of a person’s FICO® Score. How you’ve repaid — or not repaid — debt in the past is considered a good indicator of how likely you are to repay future debt and is something lenders look at closely.

Missing payments or late payments on a personal loan might hurt your credit score.

Your Credit Utilization Ratio

Second only to payment history, having a large debt-to-credit ratio, also called your credit utilization ratio, can damage your credit score. It accounts for 30% of the total FICO Score and takes into account both revolving debt (e.g., credit cards) and installment debt (e.g., personal loans).

This ratio is calculated by dividing how much you currently owe by the total credit available to you. Credit cards offer a good example: If you have a monthly limit of $10,000, and typically carry a balance of $9,000 on your card each billing period, your utilization ratio would be 90%.

The Age of Your Credit History

Since the age of your credit history is a factor in your credit score, the ideal situation is to start building credit early. That’s not always feasible, though. If you don’t have much of a credit history yet, a personal loan to build credit can be useful.

As long as the loan’s payment history is positive, the longer a loan is listed on your credit report, the more likely it is to have a positive effect on your credit score.

Adding Different Types of Credit

An additional factor that can impact your credit score is the mix of different types of credit you might have, such as credit cards, student loans, and mortgage loans. In general, your credit score will benefit from a healthy mix of different kinds of debt on your credit report.

Having both revolving debt, like credit cards or lines of credit, as well as installment debt, such as a personal loan, can have a positive effect on your credit score if you’re making regular, on-time payments on the debts.

If you currently have only credit cards, adding a personal loan to your credit mix can go a long way in establishing multiple types of credit and potentially boosting your credit score.

Recommended: Personal Lines of Credit vs Credit Cards

When Doesn’t a Personal Loan Help You Build Credit?

We’ve covered some of the ways a personal loan can help build credit, but there are situations in which a personal loan might have a negative effect on your credit.

Late Payments

Making late payments on any type of debt, including a personal loan intended to build credit, will likely have the opposite effect. Lenders place a great deal of importance on a person’s payment history. If a lender sees a lot of late or missed payments on your credit report, they are probably more likely to see you as a credit risk.

Short-Term Loan

Short-term loans can be predatory loans. They are meant to help someone make ends meet until their next paycheck, but they can be next to impossible to actually pay off because of the extraordinarily high interest rates typically charged.

Lenders of these types of loans may not report payments to the credit bureaus, essentially negating any effect your responsible repayment might have. If you’re thinking of taking out a personal loan to improve your credit score, a short-term loan is probably not the best option.


💡 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.

The Takeaway

Personal loans have many direct benefits, such as access to cash, predictable payments, and consolidating high-interest debts. But can a personal loan help you build credit? Possibly. A loan’s secondary impact on your credit score can be meaningful for your borrowing future. Making your personal loan payments on time may help you improve your credit score and your future borrowing options.

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


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

FAQ

Do personal loans raise credit scores?

If repaid on time with regular payments, a personal loan is one financial tool that might have a positive effect on a person’s credit score. There are a variety of factors that go into the calculation of a credit score, though, and it’s wise to pay attention to all of them.

How long does it take to build credit with a personal loan?

Building credit means building a history, which doesn’t happen overnight. It might take about six months to see results from diligently making on-time personal loan payments.

Is taking out a personal loan bad for credit?

Taking on new debt can have a temporary negative effect on your credit score. But over time, as long as you make regular, on-time payments, a personal loan has the potential to help your overall creditworthiness.

Which types of personal loans typically help build credit?

There are many different types of personal loans you can use to build up your credit. If you have no credit history, you may want to explore a credit builder loan or secured credit card. Both can help you establish a positive credit profile. But keep in mind, the type of loan you take out is not as important as how you manage the debt.


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


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


Third-Party 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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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

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What Is Impact Investing?

Impact investing is a strategy that seeks to create both financial return and positive social or environmental impact. Impact investments can be made in both publicly traded companies and private companies or funds, and can take the form of equity, debt, or other assets.

In recent years, many investors have become increasingly aware of potential adverse societal effects to which their investments may contribute. These can include effects on health, the environment, and human rights. As such, large firms and foundations have increasingly decided to put capital to work to minimize these negative effects. For investors, it helps to be aware of the growing trend of impact investing to determine whether it is a suitable wealth-building strategy for a portfolio.

How Does Impact Investing Work?

Impact investing is typically, but not always done by large institutional investors and private foundations, though individual investors can do it as well. These organizations invest in various areas, including affordable housing, clean water, and renewable energy. Impact investments in these areas can benefit both developed and emerging markets.

The term “impact investing” is relatively new, but the concept of investing for both financial return and social good is not. Impact investing began in the early 1900s, as numerous philanthropists created private foundations to support their causes.

The concept of impact investing has expanded to include a broader range of investors and investment vehicles. Impact investing may be practiced by individuals, foundations, endowments, pension funds, and other institutional investors.

The growth of impact investing has been fueled by several factors, including the rise of social media and the increasing availability of data and analytics. Impact investing is also being driven by the growing awareness of businesses and investors’ role in solving social and environmental problems. Individual investors can take this new knowledge and consider index funds that focus on various causes.

Characteristics of Impact Investments

As outlined by Global Impact Investing Network (GIIN), the following are considered characteristics of credible impact investments:

•   Investor intentionality: An investor must intend to make a measurable positive impact with their investment. This requires a certain level of transparency about both financial and impact goals. The investor’s intent is one of the main differentiators between traditional investments and impact investments.

•   Utilize data: Impact investments must use data and evidence to make informed decisions to achieve measurable benefits.

•   Manage impact performance: Specific financial returns and impact goals must be established and managed.

•   Contribute to the growth of the industry: The goal of impact investments is to further social, economic, or environmental causes. Impact investing toward these goals must be intentional and measured, not just guesswork.

Impact Investing vs Socially Responsible Investing

Impact investing is often associated with “socially responsible investing” (SRI). Both SRI and impact investing seek to generate positive social or environmental impact, but they differ in some ways.

SRI typically focuses on actively avoiding investments in companies involved in activities that are considered harmful to society, such as the manufacture of tobacco products or the production of weapons. SRI also typically focuses on promoting corporate policies considered socially responsible, such as environmental sustainability or gender diversity.

In contrast, impact investing focuses on making investments in companies or projects that are specifically designed to generate positive social or environmental impact.

Impact Investing vs ESG

The main difference between impact investing and ESG (environmental, social, and governance) is that impact investing is focused on investments that are expected to generate a positive social or environmental impact. In contrast, ESG considers a range of environmental, social, and governance factors in investing decisions.

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Why Is Impact Investing Important?

While some investors may not think impact investing is important at all, others may think the exact opposite. For those investors, impact investing may be considered important for a few key reasons.

First, it allows investors to put their money into companies or projects that they believe will positively impact society or the environment. Second, impact investing can help attract more capital to social and environmental causes.

When more people invest in companies or projects that aim to make a difference, it can help to increase the amount of money and resources available to make positive change happen. Those investments, however, may not offer the best opportunities to generate returns. While there’s no way to know for sure how an investment will shake out over time, investors should familiarize themselves with the concept of opportunity costs.

Finally, impact investing can help create jobs and support businesses working to improve society or the environment. This can have a ripple effect, as these businesses often provide goods or services that benefit the community.

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Examples of Impact Investing

Impact investing is usually done by institutional investors, large asset managers, and private foundations. Some of the largest foundations and funds focused on impact investing include, but are not limited to:

•   The Bill & Melinda Gates Foundation: This foundation has a $2.5 billion Strategic Investment Fund. This fund makes direct equity investments, provides low-interest loans, and utilizes other impact investing tools in promoting global health and U.S. education.

•   The Ford Foundation: The foundation has committed to invest a portion of its endowment to address social problems while seeking a risk-adjusted market rate of financial return. Its mission-related investments are focused on affordable housing, financial inclusion, and other areas in the U.S. and across the Global South.

•   The Reinvestment Fund: The Philadelphia-based nonprofit finances housing projects, access to health care, educational programs, and job initiatives. It operates primarily by assisting distressed towns and communities in the U.S.

Types of Impact Investments

There are various impact investment areas, including but not limited to microfinance, renewable energy, sustainable agriculture, and affordable housing.

Impact investments don’t have to be equity investments either; they come in many different investment vehicles, like bonds and alternative investments.

Evaluation Methods for Impact Investors

There are many ways to measure impact investments. The United Nations Sustainable Development Goals (SDGs) are a popular framework for measuring impact. The SDGs are a set of 17 goals that the United Nations adopted in 2015.

The SDGs include goals such as “no poverty,” “zero hunger,” and “good health and well-being.” Each SDG has a specific target to be achieved by the year 2030.

Impact investors often seek to invest in companies or projects that will help achieve one or more of the SDGs. For example, an impact investor might invest in a company working on a new technology to improve water quality, contributing to the SDG goal of ensuring access to water and sanitation for all.

Another popular framework for measuring impact is the Impact Management Project (IMP). The IMP is a global initiative that seeks to develop standards for measuring and managing impact.

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How to Start an Impact Investment Portfolio

Though foundations and institutional investors are the heart of the impact investing world, individual investors can also make investments in companies and funds that may positively impact society. Here’s how to do it.

1.    Decide what type of investment you want to make, whether that’s in a stock of a company, an exchange-traded fund (ETF) with an impact investing strategy, or bonds.

2.    Next, research the different companies and funds, and find a diversified selection that fits your desires.

3.    Finally, make your investment with a brokerage and monitor your portfolio to ensure that your investments have a positive impact.

In order to become an impact investor, it’s wise to consider both the financial potential of an investment, as well as its social, environmental, or economic impact.

Some investors have a higher risk tolerance than others, and some might be willing to take a lower profit in order to maximize the potential positive impact of their investments.

The Takeaway

Impact investing involves making investments with aims of improving certain outcomes in the world, which may come at the expense of potential returns. There is no one-size-fits-all answer to how to balance financial return and social or environmental impact. Impact investors must make investment decisions that are aligned with their values and objectives.

Not all impact investments are created equal. Some impact investments may have a higher financial return potential than others, but may also have a lower social or environmental impact. Similarly, some impact investments may have a higher social or ecological impact but may also have a lower financial return potential. Impact investors must consider both financial return and social or environmental impact when making investment decisions.

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Mortgage vs Promissory Note in Real Estate Explained

Though a promissory note and a mortgage work together to create a legally binding loan agreement, each has its own distinct purpose in finalizing a real estate transaction. When you sign a promissory note, you’re agreeing to pay back the loan amount under specific loan terms. When you sign a mortgage, you’re acknowledging that if you default on that loan, the lender can get its money back by foreclosing on the property.

These separate contracts have important roles in your purchase, so before you sign on the dotted line, read on for an explanation of how each one works.

Promissory Note vs Mortgage

If you’re borrowing money to buy real estate, you’ll likely be asked to sign both a promissory note and a mortgage at your closing. And in the blur of paperwork, it may seem as though they’re pretty much the same thing.

They aren’t. Here’s a look at the role each document has in finalizing a home loan agreement.

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What Is a Promissory Note?

You can think of a promissory note as a formal and really specific IOU. It’s the borrower’s promise to repay the loan by a predetermined date, and it typically details the terms of the loan, including the loan amount, the interest rate, the length of the loan, and monthly payments (all the factors you would see in an online mortgage calculator).

If you sign the promissory note, sometimes referred to as a mortgage note, you are obligated to pay back the loan under these terms.

What Is a Mortgage?

A mortgage is the contract you sign with the lender that states that the property you’re purchasing serves as the security, or collateral, for the loan. It contains a legal description of the property and usually notes that you’re responsible for things like maintenance and for carrying homeowners insurance.

The mortgage doesn’t obligate you or anyone who signs it to repay the loan, but it does allow the lender to take the property as collateral if you don’t make your payments or if you otherwise fail to follow through on the terms of the loan. If you default, the lender can proceed with a mortgage foreclosure and then sell the home to recover its money.

Recommended: What Are the Different Types of Home Mortgage?

Key Similarities and Differences Between a Mortgage and Promissory Note

Because the paperwork a borrower completes and signs for a real estate loan is often referred to, in general, as the “mortgage,” it can be easy to lose sight of the different purposes of the mortgage and promissory note. So here’s a quick breakdown of some of their similarities and differences.

Similarities Between Promissory Notes and Mortgages

•   Both documents establish a legally binding contract that ensures the lender is protected if the borrower defaults on the loan.

•   Some of the terms of the promissory note may also be listed in the mortgage, including the length of the loan and the amount due. (The interest rate and monthly payment usually aren’t included on the mortgage, however, and won’t be a part of the public record.)

•   Both are important documents that you should read (and understand) before signing.

Differences Between Promissory Notes and Mortgages

•   Each document has a distinct purpose and legal implication. A signed promissory note serves as the borrower’s promise to repay the home loan. A signed mortgage secures the note to the property and says you agree the lender can foreclose on your property if you default on the terms of the loan.

•   Each document contains different pieces of information. While the promissory note lists more details about the loan terms, including the interest rate and repayment schedule, the mortgage has more details about the borrower’s obligations and the lender’s rights.

•   There’s also a difference in where each document is kept after the closing. The lender holds onto the promissory note until the loan is paid off. (After that it can serve as the borrower’s “receipt,” proving the loan is paid — so it’s important to make sure you keep it in a safe place when you receive it.) The mortgage becomes part of the county land records to provide a traceable chain of ownership.

•   Each document confers a different obligation on those who sign it. Anyone who signs the promissory note can be held personally liable for the borrowed money and could face legal consequences if they fail to make their payments. If, for example, the lender forecloses on the home and sells it, but the sale doesn’t cover the amount you owe, you may be responsible for paying the difference, depending on state laws. However, if you sign only the mortgage document and not the promissory note, the lender can’t hold you legally responsible for paying back the loan; you’re only giving the lender permission to foreclose on the property if the loan isn’t repaid.

How Promissory Notes and Mortgages Compare

Promissory Note Mortgage
Protects the lender if the borrower defaults x x
Outlines terms of the loan agreement x x (with limits)
Establishes borrower’s legal promise to repay loan x
Establishes lender can foreclose upon default x
Is held by the lender until loan is paid x
Is filed in county records x
Should be read and understood before signing x x

Required Documents to Get a Mortgage

You should be prepared to provide and sign several documents during the homebuying process — first on the front end, when you’re applying for a loan, and again later, when it’s time to close on the property.

The person who’s in charge of your closing can give you a complete list of what you’ll need to bring with you and the paperwork you’ll be asked to sign, but here are a few of the documents you can expect to see:

Closing Disclosure

The Closing Disclosure lays out the final terms of the loan, including all closing costs, and provides information about who is paying and who is receiving money at closing. Lenders are required to send buyers a copy of their Closing Disclosure at least three business days before closing so there’s time to review it and clear up any potential discrepancies. You should bring it with you to your closing to be sure your costs remain the same as you expected or that any necessary changes were made.

Promissory Note

The promissory note is the document that states that you legally agree to repay your home loan. It provides important details about the loan, including the amount owed, interest rate, dates when the payments will be due, length of the loan, and where payments should be sent.

Mortgage/Deed of Trust/Security Instrument

This document gives your lender the right to foreclose on your property if you fail to live up to the repayment terms you agreed to. It also will outline your responsibilities and rights as a borrower.

(Your state may use a deed of trust vs. a mortgage as part of the home loan process. A deed of trust states that a neutral third party — usually the title company — may hold legal title to the home until the borrower pays off the loan.)

Initial Escrow Disclosure

This form explains the specific charges you may have to pay into an escrow account each month as part of your mortgage agreement, such as money to cover property taxes and insurance.

Deed

This document transfers ownership of the property from the seller to the buyer.

Right to Cancel Form

You’ll only see this form if you’re refinancing your home loan (it doesn’t apply if you’re purchasing the property). It states your right to cancel the loan within three business days and explains how that process works.

Recommended: What Is Mortgage Underwriting?

The Takeaway

Though people tend to think of the term “mortgage” as describing everything that has to do with their home loan, there are actually two separate documents that form the legal agreement between a buyer and a lender and outline their responsibilities.

It’s important to understand the differences between these two distinct pieces of paperwork — the promissory note and the mortgage — before you see them at your closing. You’ll also want to carefully review them — and all the forms you see — before you sign for your loan.

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


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FAQ

Do you need a promissory note and a mortgage to buy a house?

Usually, yes. But you might have a promissory note without a mortgage if you’re using an unsecured loan from a family member, a friend, or the seller.

Is a promissory note the same as a loan?

A promissory note is part of a formal loan agreement. It contains a promise from the borrower to repay a specific amount of money to the lender under designated terms.

What is the purpose of a promissory note in real estate?

The promissory note helps formalize the terms of a real estate loan, including the length of the loan, the interest rate, how and when payments should be made, and what happens if the borrower defaults.

Does a promissory note create a lien?

No. A promissory note obligates the borrower to repay the loan, but it does not “collateralize,” or secure, the loan to the property.


Photo credit: iStock/nortonrsx

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


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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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


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Guide to Personal Loan Agreements

Guide to Personal Loan Agreements

Getting a personal loan? It’s not as simple as walking into a bank and asking for a check — there’s some paperwork involved.

Your personal loan agreement is the document that contains everything you need to know about the deal you’re making with your lender, including your rights and responsibilities as well as theirs. It’s a fairly long and complex form, but breaking it down can make it easier to understand.

Here, take a closer look at personal loan agreements.

What Is a Private Personal Loan Agreement?

A personal loan agreement, as mentioned above, is a document that details exactly what is being agreed to on both sides of a personal loan — lender and borrower. At the very least, it will state how much money is being loaned and the terms and conditions of the borrower’s repayment responsibilities.

But what about a personal loan that is not with a traditional lender? Private lenders can be individuals or organizations that make loans to individuals, sometimes without the qualification requirements of traditional lending institutions. A private personal loan agreement, specifically, is drafted as part of a private personal loan — one made between a private lender and a borrower.

Any personal loan agreement is a legally binding document, so it’s important to understand it in full before you apply your signature.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Why Is a Loan Agreement Needed?

A personal loan agreement is essentially a protective document. It protects both the lender and the borrower by laying out, in clear terms, exactly what is being agreed to. If either party fails to uphold the agreement, action can be taken — such as the lender seizing any assets offered as collateral or sending the account to collections — both of which, obviously, would be bad for the borrower.

But the document works both ways. Lenders, too, are subject to lender liability and can be taken to court if they fail to uphold their end of the loan agreement. Although these cases are far less common than borrower default, the loan agreement is a document that can be used for the borrower’s protection as well.

How to Write a Personal Loan Agreement

Here are the usual steps to writing a personal loan agreement.

Decide Whether to DIY It or Hire a Lawyer

Depending on the specifics of your loan and situation, you could write up a simple agreement by hand or draft it on your computer and then print it out for signing. Or you might download a template from a reputable site, which can be a popular option. These are often free or are sometimes available for a small fee.

However, if the loan is complicated or you don’t want to handle the agreement yourself, you could look into hiring a lawyer to draw up the paperwork. Either way, a personal loan agreement will be a legally binding arrangement. Hiring a lawyer will likely be a costlier proposition.

Gather the Necessary Personal Details

You will need the legal names and addresses of both parties. This ensures the lender can’t ask you for anything beyond the borrowed principal (plus interest, which will also be listed).

Agree to and Spell Out the Loan Terms

The loan agreement should list the payments that will be expected each month and the expected date of the conclusion of the loan term.

The interest rate for the personal loan should also be on the personal loan agreement, likely expressed as an APR, which shows what percentage of the loan principal you’ll end up paying back in the course of one year including interest and any additional fees that may be packaged into the loan.

The interest rate will vary based on your credit score and other financial factors. If you have decent credit, you’ll likely be able to qualify for a personal loan. But generally speaking, the higher your score, the lower your rate.

Recommended: APR vs. Interest Rate

List Payment and Legal Details

A personal loan agreement should also include the following:

•   The loan agreement may list which types of payment are acceptable, such as check, bank transfer, or credit card.

•   The personal loan contract should also list specific repayment conditions, including when payment is due and whether or not additional principal can be applied without penalty.

•   A complete personal loan agreement should include details on how any disputes will be handled between the parties involved.

•   Some personal loan documents may include the option to change your loan’s term (the period over which the loan is repaid).

•   Personal loan contracts in the United States should stipulate which state’s laws will be used to govern and interpret the agreement if the borrower lives in a different state than the lender is headquartered.

•   Severability is a clause that states that even if one part of a contract is found to be unenforceable or otherwise rendered null and void, the remainder of the agreement will still hold.

•   Penalties associated with the personal loan, such as any late fees that may be assessed, at what point the loan will go into arrears or default, or other scenarios, should be listed in the contract as well.

Sign the Document

Finally, the contract for loaning money must be signed by the borrower and the lender in order to be made legally binding.


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Does a Personal Loan Agreement Need to Be Notarized?

Personal loans are a type of contract, and contracts do not need to be notarized to be legally binding. All it needs is your signature. Be sure to read all the fine print in detail before you uncap that pen.

Recommended: Comparing Personal Loans vs Business Loans

Other Personal Loan Documents

Along with the signed personal loan agreement, other typical personal loan requirements include the following:

Proof of Identity

Your driver’s license or some equivalent form of photo ID will likely be necessary in order to verify your identity.

Income Verification

Lenders will consider your income when qualifying you for a loan — after all, they have good reason to be interested in whether or not you’ll be able to repay the debt. Along with asking you to list your annual income, verifying documents such as tax returns may also be required.

Proof of Address

In order to prove your residence, and therefore eligibility for any type of personal loan, you may need to provide utility statements, bank statements, or other official documents.

Getting a Personal Loan

Taking out a personal loan is a big financial responsibility, but it can also be a smart money move if you need to handle large, unexpected expenses at the last minute, or to consolidate existing debt. For someone who has bad credit, a small personal loan responsibly managed can be one way to bolster their credit score.

Just remember that all loans come at a price — interest charged — and considering the total amount you’ll pay back to the lender over time is important in order to have a full understanding of the cost of the loan.

For example, if you take out a $10,000 personal loan at a 7% interest rate to be repaid over a term of five years, you’ll pay back a total of $11,880.72, or an additional $1,880.72 in interest. That’s not including any origination fees, late fees, or prepayment penalties a lender might charge.

The Takeaway

If you’re considering a personal loan, reading the loan agreement in depth is a good way to understand for sure what you’re agreeing to. That loan agreement will contain many details about funds borrowed and how they will be repaid.

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

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

FAQ

Does a personal loan agreement need to be notarized?

No, a personal loan agreement does not need to be notarized to be legally binding — it simply needs to be signed by each party to the agreement.

What is a private personal loan agreement?

A private personal loan agreement is the binding legal contract between a borrower and a private lender for a personal loan.

Why do you need a loan agreement?

The personal loan agreement serves to outline the specific terms of the loan and protect both parties in case either fails to uphold the agreement.


Photo credit: iStock/Chaay_Tee

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

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

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

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What Is the Motherhood Penalty?

Having children brings many joys. But for women, it can also have a financial dark side. Becoming a mother often results in a loss of pay and opportunities for career advancement, a phenomenon known as the motherhood penalty. In fact, women experience a 60% decrease in income compared to men in the decade after their first child is born, according to PricewaterhouseCoopers’ 2023 Women in Work Index.

Many factors contribute to the motherhood penalty, and not every woman experiences it in the same way. Understanding the motherhood penalty can help women — and their families — sidestep this financial setback.

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How Does the Motherhood Penalty Work?

If you want to avoid the motherhood penalty and keep your budget on track, it pays to know your enemy. According to a 2023 article published in the scientific journal PNAS, women’s diminished earnings after the birth of a child is driven by both a reduction in employment and by lower earnings for those who remain employed. Let’s look at each of these factors.

Despite the fact that women today have achieved historic levels of education and are working at senior levels in the corporate world, they are still more likely than men to cut back on their working hours or stop working altogether after a baby is born. Some women may choose jobs that allow for more flexibility in hours even if those roles pay less.

Discrimination is a more insidious factor: Women make up nearly half of all U.S. workers and do the bulk of consumer spending, yet some hiring managers still believe that women’s earnings are not as critical as men’s for household support. (A quick look at any parent’s money tracker app would reveal just how untrue this stereotype is.) When two women are similarly qualified for a job, the one without children tends to earn more than the one who has kids. And when men and women hold similar positions, fatherhood seems to confer a salary advantage in many occupations.

Recommended: The Highest-Paying Jobs in the US

Why the Motherhood Penalty Matters

Dual-income households have been the norm among married couples for decades, and most households composed of married couples with children have two working parents, according to 2023 data from the Bureau of Labor Statistics. Families with two healthy incomes are most likely to be able to afford a home, and to be able to cover other large expenses, including the cost of kids. (A 2022 report from the Brookings Institution suggests that the average middle-income family today will spend more than $310,000 to raise a child to age 17.)

But the motherhood penalty takes an especially hard toll on families led by women. According to the 2023 Census, 21% of U.S. children are growing up in a household led by a single mother, who often has no other source of income than her own earnings. The motherhood penalty may contribute to the fact that nearly 30% of single-parent families are living below the federal poverty level.

Factors Contributing to the Motherhood Penalty

As noted above, the unspoken ideas that women belong at home caring for their children, or that women are not vital contributors to their family finances, continue to be a driver of the motherhood penalty. This is despite the fact that households where two parents work outside the home is now the norm in the U.S.

But there is another troubling scenario. Women may leave their job because childcare costs more than they earn. The cost of caring for an infant in a childcare center averages $15,417 per year per child. In big cities, the number climbs even higher: Washington, D.C. averages $24,243, for example. And even when women don’t stop working, they may scale back their hours, or take more flexible but less well-paid positions.

The motherhood penalty is unfair, and one additional factor adds to the unfairness: In households with two working parents, where each parent earns roughly the same amount, women still spend more time on caregiving responsibilities than men do — 12.2 hours per week on average, compared with 9 hours for men, according to a 2023 Pew Research Center report. Women also spend 4.6 hours doing housework to men’s 2 hours. Women’s work may be valued less, but as the old saying goes, it’s never done.

Recommended: Pros and Cons of Salary vs Hourly Pay

Tips to Avoid the Motherhood Penalty

So what can women do to safeguard their finances from the motherhood penalty?

Consider your career choice. Women can begin to protect their financial future while they are still contemplating a career path. Some research suggests that the motherhood penalty disappears for mothers who work in business and post-secondary education. And in STEM careers, and fields such as medicine and law, mothers actually appear to earn more than women who don’t have kids.

Stand up for fair earnings. Exercise your right to be fairly compensated with every step you take in the working world. Applying for a job? Do your research to learn what is a good entry-level salary. Offered a position? Learn how to ask for a signing bonus — with unemployment relatively low, employers in industries from retail to engineering may pay you to come on board.

Change jobs. Women may be less likely to change jobs after becoming mothers, as switching jobs can be stressful and time off is often allotted based on seniority. Yet changing jobs is one way to bump up your salary. When you do switch, make sure you understand what is a competitive pay rate. A growing number of states, including California, Colorado, and New York, have passed pay transparency laws that require employers to post salary ranges when they advertise job openings.

Don’t share your status. It’s unlikely that you’ll be asked during a job interview if you have caregiving responsibilities, as doing so may violate federal and state laws. But many women casually disclose that they are parents during the interview process without thinking twice about it. Avoid talking about your personal life when interviewing for a job and consider that many employers examine applicants’ social media feeds during their screening process.

Advocate for fair pay and families. Research suggests that moms in women-dominated and low-paid professions face the greatest motherhood penalty. To help promote equitable pay that can sustain families, you can support raising the minimum wage. Lifting your voice in favor of government support for affordable childcare and for mandatory paid parental/caregiver leave can also help ensure that women who want to stay in the workforce after having a child can afford to do so.

The Takeaway

Despite the fact that women are working outside the home in historic numbers, the motherhood penalty still exacts a perilous price for many women and their families. Acknowledging that women are financially penalized for becoming parents is a first step in fighting back against the stereotyping and discrimination that is often at the root of this problem.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

With SoFi, you can keep tabs on how your money comes and goes.

FAQ

What is meant by the motherhood penalty?

The motherhood penalty refers to the fact that women’s earnings suffer after they have children, sometimes due to discrimination in hiring or the awarding of promotions, and sometimes because women scale back on work or stop working altogether after having a child.

How does the motherhood penalty affect a woman’s career?

The motherhood penalty results in lower earnings, and because future earnings are often based on current salary, the diminishment in income often persists as a woman progresses up the ladder.

How can I avoid the motherhood penalty?

A primary way to avoid the motherhood penalty is to know your worth. Do your research on salary before taking a job, and reevaluate your salary at least yearly by looking at comparable positions.


Photo credit: iStock/Pekic

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

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