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A personal line of credit is a type of revolving credit line that can be used to pay for a variety of personal expenses. It works in a similar way to a credit card: A lender approves you for a specific credit limit, and you draw only what you need and pay interest only on the amount you use. This is different from a personal loan, which is a type of installment loan. With an installment loan, you receive a lump sum of money up front that must be repaid at specified intervals.

While both options allow you to borrow money, each comes with its own benefits and drawbacks. Continue reading for more information on personal lines of credit and when this type of financing may make the most financial sense.

What Is a Personal Line of Credit?

A personal line of credit is what’s known as a revolving credit vehicle. It’s similar to a credit card in that:

•  It has a maximum credit limit.

•  A minimum payment is required every month.

•  When the debt on the credit line is repaid, money can be withdrawn again.

Although a personal line of credit isn’t linked to a physical card, you can generally write checks, withdraw cash at an ATM, and transfer money into another account using the line. Generally speaking, the interest rates on a personal line of credit are lower than those on a credit card.

Personal lines of credit may be secured (requiring collateral) or unsecured (not requiring collateral). Whether secured or unsecured, some lines of credit require minimum payments of interest and principal, while others require only interest payments for a period of time, known as the draw period. That means that for a set period, you can draw money from your line of credit and need to make only interest payments during that time. After the draw period is over, the line of credit is no longer revolving (meaning, you can’t borrow against it anymore), and you’re typically required to make interest and principal payments.

Unlike personal loans, which tend to have fixed interest rates, a personal line of credit may have a variable rate during its draw period, then switch to a fixed rate once that period ends.

Recommended: Line of Credit vs. Revolving Credit

Where to Get a Personal Line of Credit

Personal lines of credit can be found at some banks, credit unions, and other financial institutions. However, not every lender offers them.

How to Get a Personal Line of Credit

The process for applying for a personal line of credit is usually similar to applying for other loans or credit cards. Lenders may accept applications online, in person, or over the phone, and specific application requirements may vary by lender.

Before formally applying, it’s a good idea to review your credit score and shop around at different lenders to compare the rates and terms you may qualify for. Many lenders will allow you to see if you prequalify, which may require a soft credit check, which won’t impact your credit score. Also be sure to evaluate any fees associated with the line of credit and review the draw period and repayment periods.

Once you’ve determined which loan you’d like to apply for, you’ll need to gather the required documentation (such as statements for proof of income). Your chosen lender will generally have a list of required documents. From there, you’ll fill out the application and wait for approval. At this stage, the lender will usually complete a hard credit inquiry which may temporarily impact your credit score.

When to Use a Personal Line of Credit

Personal lines of credit typically offer greater flexibility when it comes to accessing the loan and repaying it than other types of financing, such as a personal loan.

If you’re planning to do a home renovation, for example, you may not need a big chunk of money all at once. A line of credit allows you to access money over time to pay for things in dribs and drabs as you pick out the tile for your kitchen and your contractor finally gets around to installing it. This flexibility can reduce your interest charges because you are only borrowing money you plan to use immediately.

Another benefit of a line of credit is that you can pay it off and then typically borrow from it again. This can make it a good backup to have in case you suddenly experience an expensive emergency that you don’t want to put on your credit cards.

You may also be able to choose a line of credit with a draw period that allows you to only pay interest on the money borrowed for a period of time.

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How a Personal Line of Credit Works

As we mentioned, personal lines of credit have a draw period and a repayment period. It’s important to understand how both work.

The draw period begins once you open a personal line of credit, and the funds are available for you to use as needed. You can borrow up to your credit limit, pay off the balance, and draw from it again. Your financial institution will likely send you a monthly bill, and you’ll need to make a minimum payment based on the amount you borrow, plus interest. (If you pay the balance in full each month, you may be able to avoid interest charges.)

The repayment period starts when the draw period ends. During this time, you won’t be able to borrow new funds. And you’ll likely be responsible for repaying the total amount you owe by the end of the repayment period.

Drawbacks to a Personal Line of Credit

One drawback is that unsecured lines of credit can be more difficult to qualify for than some other types of loans, such as a home equity line of credit (HELOC). This is because unsecured loans are generally more risky for the lender. Without collateral, the lender needs to be sure that the borrower has the ability to pay back their loan. That’s why for some, it may be easier to qualify for a HELOC (which uses your home as collateral) than a personal credit line. However, keep in mind that with a HELOC, you are taking on some additional risk by putting your house on the line.

Also, the flexibility that comes with a line of credit may be a double-edged sword. The ability to keep borrowing for an extended period of time could lead to feeling tempted to take on more debt or take longer to pay off debt… all of which could mean more interest charges over time.

Using a Personal Loan as a Personal Line of Credit Alternative

When comparing a personal line of credit vs. a personal loan, the major difference is that a personal loan is an installment loan. Like a personal line of credit, personal loans can be used to pay for nearly any personal expense. Borrowers receive a lump sum payment and pay back the loan in installments.

A personal loan may make more sense for borrowers who have a firm idea of their budget or a fixed expense, such as for medical bills, buying an engagement ring, or consolidating debt. Additionally, depending on creditworthiness, the average interest rate on a personal loan may be lower than that of a personal line of credit. Interest rates will vary by lender, so evaluate the options available to you.

Also compare any fees or penalties associated with the personal loan. If a personal loan has a prepayment penalty, you may not be able to benefit from paying off the personal loan early.

Recommended: Alternatives to Personal Loans

Other Personal Line of Credit Alternatives

•  HELOC: With a home equity line of credit, borrowers tap into the equity in their home to borrow a line of credit. This is a secured loan where the home functions as the collateral. This can help borrowers qualify for a more competitive interest rate than with an unsecured personal line of credit, but it also means that if the borrower has issues repaying the HELOC, their home is at risk.

•  Credit Card: In certain situations, a credit card may be used to help pay for emergency expenses. Be aware that credit cards generally have high interest rates — the average credit card interest rate was 24.04%, as of November 28, 2025.

•  Secured loans for a specific purpose: For example, if you are buying a car, you may be better off with a car loan over a personal line of credit or personal loan.

Personal Line of Credit vs Credit Card

A personal line of credit and a credit card both offer a pool of money you can borrow from and pay back over time. But there are key differences to keep in mind. Let’s take a closer look.

Flexibility and Usage

A credit card is designed for everyday convenience and can be a good fit for making small purchases like groceries, shopping, or dining out. To use, you just swipe or tap the card at a store or online checkout. Some credit cards may also earn cash back, points, or miles, which can be an added benefit.

A personal line of credit works more like a flexible bank loan. When you’re ready to use the funds, you might have the option to write a check, transfer the money to your bank account, or make a cash withdrawal. And unlike credit cards, PLOCs don’t typically earn rewards.

Interest Rate Differences

Credit cards tend to have higher interest rates than personal lines of credit. As mentioned, the average APR on credit cards is around 24.04% as of November 2025.

By comparison, the average APR on a personal line of credit is around 12.25%. Note that your credit score can impact the rate you receive for a personal line of credit. As a general rule, the stronger your credit score, the lower the rate you may qualify for.

The Takeaway

Personal lines of credit offer flexibility for borrowers because they are a revolving line of credit that functions similarly to a credit card. Borrowers can continue drawing on the line of credit for a set period of time to cover the cost of necessary expenses. For a one-time expense, however, you may be better off with a personal loan vs. a personal line of credit.

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

FAQ

What is the difference between a personal loan and a personal line of credit?

The biggest difference between a personal loan and a personal line of credit is that a personal loan is an installment loan. Borrowers receive a lump sum payment and pay back the loan in fixed monthly payments. A personal line of credit, on the other hand, lets you borrow up to a set limit, and you pay interest only on the funds you use.

Does a personal line of credit affect your credit score?

Yes, a personal line of credit impacts your credit score. Opening a PLOC can cause a temporary dip in your credit score, but if managed responsibly, it can help build your score over time.

Can you pay off and reuse a personal line of credit?

Yes. During the draw period, you repay the money you borrowed, and those funds become available for you to borrow again, up to your approved credit limit.

What are typical interest rates for personal lines of credit?

As of November 2025, the average interest rate for a personal line of credit is around 12.25%. However, the rate you receive will depend largely on your creditworthiness.

Is a personal line of credit secured or unsecured?

A personal line of credit can be either unsecured or secured, though most are unsecured.

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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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If you already have a personal loan but need more funds, you may wonder if you can take out another one. Some lenders will approve you for a second personal loan if you stay under their maximum borrowing cap. You may also be able to get a new personal loan from a different lender, provided you meet their requirements. Already having a personal loan, however, could make it harder to get approved.

Read on to learn more about how many personal loans you can have at once, how stacking personal loans can impact your credit, and alternatives to consider.

Can You Have More Than One Personal Loan at Once?

Technically, there is no limit on how many personal loans you can have. Whether you can get approved for a second or third personal loan will depend on the lender and your qualifications as a borrower.

Some lenders limit the number of concurrent personal loans you can have to one or two. They might also restrict you to a maximum borrowing amount (such as $50,000) across all of the personal loans you hold with them.

If you’re maxed out with your current lender, you may be able to get a new personal loan with a different lender. Generally, lenders don’t reject applicants solely due to having an existing loan. However, they may decline approval if they feel you carry too much debt and might struggle to make an additional payment.

Does It Ever Make Sense to Have Multiple Loans?

There are some situations where it can make sense to have more than one personal loan. If you took out a loan to consolidate credit card debt and then got hit with an unexpected medical or car repair bill, for example, you may be better off getting a second personal loan rather than running up new and expensive credit card debt. Before taking out another personal loan, however, it’s worth checking to see if you might qualify for a lower-cost way to borrow money (more on that below).

If you’re looking to get another personal loan to bridge a gap between your spending and income, on the other hand, taking on additional debt could add to the problem. You may be better off looking at ways to reduce expenses and pay down your existing debt.

Pros and Cons of Taking Out Multiple Personal Loans

If you’re seriously considering taking out a second or third personal loan, it’s wise to familiarize yourself with the benefits and disadvantages of doing so.

Pros of Multiple Personal Loans

On the plus side, pros include:

•   Access to more cash

•   Often a quick approval and disbursement process

•   Ability to use loans for different purposes, such as debt consolidation and a home improvement project

•   Credit building, provided the debts are handled responsibly

Cons of Multiple Personal Loans

Next, consider the downsides of taking out multiple personal loans:

•   Spending more on interest

•   More stress on your budget, perhaps meaning you can’t save as much

•   Increased debt-to-income ratio (DTI)

•   More opportunities to miss a payment, which can negatively impact your credit score

•   Applying for new loans typically lowers your credit score by several points temporarily

Here is this information in chart form:

Ways Multiple Personal Loans Can Affect Your Credit

Having multiple personal loans can have both negative and positive impacts on your credit, as noted above. Any time you apply for new credit, the lender will do a hard pull on your credit, which can cause a small, temporary dip in your scores. Multiple hard credit inquiries in a short period of time, however, can significantly harm your credit. Late or missed payments can also negatively affect your credit score.

On the plus side, taking out a new personal loan and handling it responsibly (by making on-time payments) can positively influence your credit over time.

Other Potential Complications

Here’s a look at some other ways that having multiple personal loans can affect your finances.

•  Multiple payments: A new personal loan means a new monthly payment. Before you add to your debts, it’s a good idea to review your budget to ensure you can manage an additional monthly loan payment.

•  Debt-to-income ratio: Each personal loan impacts your debt-to-income ratio (DTI). This ratio measures how much of your monthly income goes toward current debt. A higher DTI can make it harder to qualify for other types of loans, such as a mortgage, in the future.

•  Higher interest rates: A lender could approve you for an additional personal loan but at a high annual percentage rate (APR), which is the personal loan’s interest rate blended with applicable fees and charges, because of your existing debt.

Getting Multiple Loans From the Same Lender

Before applying for an additional personal loan from your current lender, it’s a good idea to check their policies. Some lenders limit the number of outstanding personal loans you can take out at one time or cap the total amount you can borrow. In addition, some lenders require that you make a certain number of consecutive on-time payments (such as three or six) toward an existing loan before you can apply for another loan.

If you believe you’ll meet the lender’s requirements for a second personal loan — and you feel comfortable making the additional monthly payment — getting an additional loan from the same lender could be a smart strategy.

Recommended: Average Personal Loan Interest Rates

Qualifying for Another Personal Loan

If you apply for a personal loan with another lender, you won’t have to worry about a cap on the number of loans you have or the combined amount you can borrow. However, you will have to go through the whole application process, and the lender will likely perform a hard credit check. They will factor in how much debt you already carry, even though it may be with another lender.

You can get an idea of whether or not you’ll get approved for an additional personal loan by calculating your current DTI. To do this, simply add up all your current debt payments, including any auto loans, mortgage, credit cards, and student loans. If that number comes close to 50% of your monthly gross (pre-tax) income, another personal loan may not be in the cards. The max DTI for a personal loan is typically 50%. However, many lenders like to see a DTI that is less than 36%.

Recommended: Secured vs Unsecured Personal Loans: Comparison

Alternatives to Multiple Personal Loans

When you need to cover unexpected expenses, a personal loan (whether for several hundred dollars or a $15,000 personal loan or more) can be a great resource — but it’s not your only option. Here are some alternatives to personal loans you might consider.

0% Interest Credit Card

If your credit is strong, you may be able to take advantage of a credit card with a 0% introductory APR. The promo rate can last up to 21 months; after that, the card will reset to its regular APR.

If you can use the card to cover your costs and repay the balance before the 0% rate ends, it’s the equivalent to an interest-free loan. If you’ll need a significantly longer period of time, however, this route could end up costing more than a personal loan.

Home Equity Loans or Lines of Credit

A home equity loan or home equity line of credit (HELOC) may be worth exploring if you own a home and have built up significant equity. A home equity loan is a single lump sum you repay (plus interest) over time. A HELOC is a revolving line of credit that you can draw from as needed; you pay interest only on what you use.

Home equity loans and HELOCs are secured by your home, which lowers risk for the lender. As a result, they may come with lower interest rates than personal loans. A major downside of this type of loan is that, if you default on the loan, you can lose your home.

Debt Consolidation Loan

A debt consolidation loan is actually a type of personal loan, but it can be used to replace multiple debts with a single, more convenient loan.

Here’s how debt consolidation works:

•  Say, you already have a $5,000 personal loan.

•  You are also carrying credit card debt totaling a few thousand dollars.

•  Getting a new $10,000 personal loan can allow you to eliminate both of those debts. The funds from the new loan would pay off your existing loan and credit card balances, and you would then make payments on your new single personal loans until it’s paid off.

Having one loan vs. many can help some people avoid paying a bill late or missing a payment altogether.

The Takeaway

You can have as many personal loans as you like, provided you can get approved. Some lenders limit the number of loans they’ll extend to an individual at any one time, or cap the total amount one person can borrow. To get an additional personal loan with a new lender, you’ll need to meet their qualification requirements. Having an existing personal loan could make this harder to do. However, you may get approved if your monthly income is sufficient to cover the new payment. Before you jump in, you’ll want to consider how it will impact your overall debt, credit score, and credit history.

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

FAQ

How long should you wait between loans?

A general rule of thumb is to wait at least six months between applying for new credit. Submitting multiple loan applications in a short time frame can result in several hard inquiries on your credit report, which can lower your credit score. It may also signal to lenders that you are in financial distress, which could make it harder to get approved for a new loan.

Do multiple loans affect credit score?

Multiple loans can positively and negatively impact your credit. Each new loan application can result in a hard inquiry on your credit report, which may temporarily lower your score. Having multiple loans can also increase your debt-to-income ratio, which can make you appear less creditworthy to lenders. If you consistently make on-time payments on all of your loans, however, it can positively impact your credit history over time.

What happens if you pay off a loan too quickly?

Paying off a loan early can have mixed effects. While it can save you interest payments, some lenders may charge prepayment penalties, which could offset the benefits of early repayment. When you’re shopping for loans, it’s a good idea to ask if there is an early payoff fee. Some lenders do not charge them.

Paying off a loan early can also have a slightly negative impact on your credit by bringing down your average credit history length and reducing your credit mix.

Paying off a loan early can also have a slightly negative impact on your credit by bringing down your average credit history length and reducing your credit mix.

Is it legal to have multiple personal loans?

There is no federal law against having multiple personal loans. As long as lenders approve you and you handle the debt responsibly, it should not be a problem. However, note that you typically cannot use personal loans for any illegal uses, business purposes, or tuition payments.

Can you be denied a personal loan if you already have one?

Yes, you can be denied a personal loan if you already have one. The lender may have a cap on how much applicants can borrow that you would exceed with a new loan, or your DTI (debt-to-income) ratio may exceed the amount they are comfortable with.

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Many homeowners are flush with equity, and tapping it can be tempting. Some lenders will let you borrow as much as 100% of your home equity — the home’s current value minus the mortgage balance — for any purpose. Your house, though, will be on the line.

Here are things to know before applying for a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

What’s the Most You Can Borrow With a Home Equity Loan?

To determine how much you can borrow with a home equity loan, lenders will calculate the combined loan-to-value ratio: your mortgage balance plus the amount you’d like to borrow compared with the appraised value of your home.

Most lenders will require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity loan or HELOC (although some will allow you to borrow 100% of your home’s value).

combined loan balance ÷ appraised home value = CLTV

Let’s say you have a mortgage balance of $150,000 and you want to borrow $50,000 of home equity. Your combined loan balance would be $200,000. Your home appraises for $300,000. (An appraiser from the lending institution determines your property value.) The math would look like this:

$200,000 ÷ $300,000 = 0.666

Your CLTV is 67%.

If a lender allowed you to borrow 90% of CLTV in this scenario, you would have a loan of $120,000:

($150,000 + $120,000) ÷ $300,000 = 0.900

But just because you might qualify for a loan or line of credit of this amount doesn’t mean it’s a good idea for your personal situation. Consider what the payments, which include interest, would look like and whether your financial situation is secure enough for you to afford them if you suffer a setback.

Three Ways to Tap Home Equity

You paid off a chunk of your mortgage or all of it, or your home value soared along with the market, but now a wedding, college, remodel, or something else has you wanting to put that home equity to use. Here are three ways to do that.

Remember that converting home equity to cash means you’ll be using your home as collateral.

Home Equity Loan

Home equity loans come in a lump sum. They are often useful for big one-time expenses like a new car or swimming pool and for borrowers who know how much they need and who want fixed payments.

Some lenders waive or reduce closing costs of 2% to 5%, but if you pay off and close the loan within a certain period of time — often three years — you may have to repay some of those costs.

HELOC

A HELOC may be helpful for long-term needs such as home renovations, college tuition, or medical bills.

Borrowers who want flexibility when dealing with, say, a home addition may favor a revolving line of credit over a lump-sum loan.

Again, some lenders waive the closing costs for a HELOC if you keep it open for a predetermined period.

Recommended: How Do Home Equity Lines of Credit Work?

Cash-Out Refinance

A cash-out refinance might be a good choice if you want to borrow more than you’d qualify for with a home equity loan or HELOC. A cash-out refi replaces your existing mortgage with a new mortgage for more than the previous balance. You receive the difference in cash.

Homeowners will often need to have 20% equity left in the home after refinancing. Some lenders will let them dip below that minimum but pay for private mortgage insurance on the new loan.

Some HELOC borrowers refinance before the draw period ends. In that case, the cash can be used to pay off the HELOC.

You can change the mortgage term and aim for a reduced interest rate with a cash-out refi. Closing costs will be required; it’s a new loan.

Recommended: Cash-Out Refinance vs HELOC

What’s the Difference Between a Home Equity Loan and a HELOC?

A home equity loan, also known as a second mortgage, comes in a lump sum with a repayment term of 10 to 30 years. It typically has a fixed interest rate.

A HELOC is a revolving line of credit that lets a homeowner borrow money as needed, up to the approved credit limit. The credit line has two periods:

•   The draw period, when you can use the line of credit. It’s often 10 years. Minimum monthly payments usually will be interest only on the amount withdrawn.

•   The repayment period, often 20 years, when principal and interest payments are due.

Most HELOCs have a variable interest rate but cap how much the rate can rise at one time and over the loan term. (Some lenders, though, offer fixed-rate HELOCs or allow the borrower to fix the rate on a balance partway through the loan.)

Some HELOCs require you to draw a minimum amount upfront. Some have a balloon payment at the end of the draw period, when the loan principal and interest are due. Ensure that you understand your HELOC’s terms, and when the draw period ends and the credit line is closed.

How Is a HELOC Calculated?

Qualified borrowers are often able to access as much as 90% of their equity with a HELOC.

Some HELOC lenders require that the homeowner retain at least 20% equity in the home, but a few are more generous.

Is Taking Out Home Equity Right for You?

If you’re aware of the risk, you’ve read all the fine print, and you forecast no job or income loss, tapping home equity can be extremely useful.

HELOCs usually have lower interest rates than home equity loans, but some people prefer the fixed rate and payments of the latter. HELOC rates tend to be a tad higher than mortgage rates, but you only have to pay interest on what you borrow during the draw period.

Most cash-out refinances result in a new 30-year fixed-rate mortgage.

Approval for a home equity product and the rate you’re offered will depend on your credit score, debt-to-income ratio, home equity, and home value.

Shopping around can yield the best offer.

Recommended: Home Improvement Cost Calculator

The Takeaway

How much equity can you borrow from your home? Homeowners who meet credit and income requirements are often able to tap up to 90% of equity and sometimes more with a home equity loan or HELOC. A cash-out refi is another way to make use of home equity.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

FAQ

How can I increase my home equity?

Paying off your mortgage faster, refinancing to a shorter loan term, and making home improvements are some of the ways to boost home equity. In a competitive market, your home value may just naturally rise.

How quickly can I get cash from my home equity?

It depends on the product, but closing can take place in as little as two to four weeks.

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

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Qualifying for a personal loan when self-employed can present some challenges. Self-employed individuals may find it difficult to produce traditional documentation — such as W-2s or pay stubs — used to verify income. And their income may not be steady, as it is with 9-to-5 workers. But that doesn’t necessarily mean you’re out of luck if you’re seeking a quick infusion of cash. Here’s a look at some ways to get a personal loan when you’re self-employed.

How to Get a Personal Loan If You’re Self-Employed

A personal loan is a type of installment loan that can be used for nearly any personal expense, including home improvements, a vacation, or consolidating your credit card debt. If you’re considering making a big purchase, like buying an engagement ring, a personal loan can be an alternative to using a high-interest credit card when you don’t have the means to pay the balance off right away.

Personal loans are typically unsecured, meaning a lender won’t require collateral. However, they can also be secured, usually by the asset purchased with the loan. Unsecured loans are usually approved based on the financial standing and creditworthiness of the borrower.

In addition to looking at an applicant’s credit history, lenders will also typically consider a potential borrower’s income when deciding whether or not to approve a loan and, if so, what the rates and terms will be. Those who are self-employed may find it more difficult to show proof of income, especially if their income fluctuates from month to month and year to year.

Self-Employed Loan Requirements

Loan requirements for self-employed individuals will be similar to the typical loan requirements for any borrower as determined by the lender. In addition to evaluating factors like the applicant’s credit score, many lenders will require proof of income.

Typically, the requirements for personal loan approval include pay stubs and W-2s to verify income, which most self-employed people can’t provide. It is possible for self-employed individuals to show proof of income, but it may require a little more legwork, as you’ll learn below.

One point worth noting: In general, lenders are looking for borrowers who have income stability, and it can help if the borrower has been working in a single industry for at least two years. A shorter employment history as a freelancer could be seen as indicating that you are a borrowing risk.

Showing Proof of Income When Self-Employed

Those who are self-employed have a couple of options for showing a lender they have sufficient and reliable income. Here are a few options that self-employed individuals could provide as income documentation.

Tax statements: Self-employed individuals can use their tax returns from the prior two or three years to offer proof of income. These forms include your income earned and taxes paid for those tax years. Lenders often view tax documents as a reliable source of income proof because they are legal documents.

Bank statements: Bank statements could be used if there is a regular history of deposits that illustrate consistent income.

Profit and loss statement: If you own your own business, this document (called a P & L) provides an overview of your costs, expenses, and revenue.

Court-ordered agreements: These may include things like alimony or child support.

Keep in mind that each lender will likely have their own application requirements. Contact the individual lender if you have specific questions on the types of documentation they’ll accept.

Consider Having a Cosigner

In the event that you are still struggling to gain approval for a personal loan with your self-employed proof of income, one option is to consider adding a cosigner. A cosigner is someone who agrees to pay back the loan should you, the primary borrower, default on making payments.

A cosigner can be a close friend or family member, ideally one who has a strong credit history who will strengthen your loan application. Given that a cosigner’s responsibilities are significant, this is not an undertaking to enter into without considerable thought and trust.

Build Your Credit Score Before Applying

Before applying for a personal loan (or any loan, for that matter), it can be wise to check your credit score. If it’s not at least in the good range, you may want to wait to apply for your loan until you can positively impact your rating. In general, the higher your score, the lower the interest rate and more favorable the terms you’ll be offered.

Key ways to build your score include always making payments on time, keeping your credit usage low, having a good credit mix and long credit history, and not applying for too much credit in a short period of time.

Compare Lenders Who Work With Self-Employed Borrowers

As you look for a personal loan, you may want to do an online search for lenders who explicitly say they work with self-employed borrowers. These financial institutions are likely to have systems in place that tailor the process to those who don’t, say, have W-2s. This can make application and approval simpler.

Prepare a Strong Loan Application Package

In addition to gathering the necessary documentation for your application (as detailed above), also consider ways to strengthen your package for a loan as a self-employed person. These include making sure you keep your personal and business finances separate, so you can accurately reflect your financial situation. If you are going to have a cosigner on the loan, ask them to prepare their paperwork as well.

Understand and Avoid Predatory Lenders

As you hunt for a personal loan when self-employed, you may come across unscrupulous predatory lenders, which typically offer no-credit-check loans at exorbitant interest rates (into the triple digits) and with steep fees. Often, they state the interest rate in a way that doesn’t reveal just how high it is (say, they cite a weekly payment vs. the monthly payment most people are accustomed to). They may use high-pressure tactics, such as saying the offer is only good for a very limited time.

If you are struggling to get approved due to a low credit score or lack of steady income, these lenders may seem to offer you a solution. Beware: These predatory lenders can keep you trapped in a cycle of growing debt.

Recommended: Guarantor vs. Cosigner: What’s the Difference?

Why It’s Difficult for the Self-Employed to Get a Personal Loan

It can be more challenging for self-employed individuals to provide proof of income to lenders, which can make it more challenging for them to get approved for a personal loan. But it’s important to note that each loan application is unique, and employment status is just one consideration.

For example, a self-employed individual who has a stellar credit history and who has been self-employed for a few years may be in a better position to apply for a personal loan than someone who has just transitioned into managing their own business.

The Income Challenge

Proving consistent and stable income can be the biggest challenge when getting a personal loan as a self-employed individual. Because you may not be guaranteed the same payment each pay period, lenders may request specific documentation in order to verify the fact that you have enough cash coming in to make payments on the loan. Some lenders may request tax returns for several years in order to verify your income.

Consistency Matters

Consistency in income is another major hurdle when seeking a loan for the self-employed. It’s not uncommon for self-employed people to experience fluctuation in their income. While some slight fluctuation may be acceptable to a lender, for the most part they are looking for consistent payments getting deposited into your account, even better if there is an increasing trend over time.

Higher Scrutiny During the Underwriting Process

Self-employed borrowers will likely face a higher level of scrutiny during the underwriting process which precedes final loan approval. For instance, if you lack steady, predictable income, you may be asked for additional tax returns or banking documents. Or P&L sheets or letters from your accountant about your business income could be requested. This is because lenders typically view those who are self-employed as less creditworthy and more of a risk to default on a loan.

Personal Loan Alternatives When Self-Employed

Personal loans aren’t the only option for self-employed individuals looking to borrow money to pay for expenses. Personal loan alternatives to consider include a credit card, cash advance, or a home equity loan.

Credit Cards With 0% APR Promotions

Credit cards can have high-interest rates, but ones with a 0% APR promotion (aka a balance transfer card) could be a great tool to pay for an upcoming expense. Just be sure to pay off the credit card before the promotional period ends and interest starts accruing.

Recommended: Average Credit Card Interest Rates

Cash Advances

A cash advance is a short-term loan generally offered by your credit card which allows you to borrow cash against your existing line of credit. Cash advances can provide an avenue for you to get quick access to cash, but there may be additional fees and a higher interest rate than usual. Be sure to read all the terms and conditions outlined by your credit card company before borrowing a cash advance.

Home Equity Loans or HELOCs

If you are a homeowner, you may be able to tap into the equity you’ve built in your home using a home equity loan or home equity line of credit (HELOC). A home equity loan is an installment loan where the borrower receives a lump sum payment and repays it in regular payments with interest.

A HELOC, on the other hand, is a revolving line of credit that the borrower can draw from and, once it is repaid, continue drawing from during a specified period of time.

Business Loans

Small business loans can be used to pay for business expenses. Self-employed individuals may be able to qualify for loans backed by the U.S. Small Business Administration (SBA), as well as private small business loans offered by banks, credit unions, and online lenders.

It is important to keep your personal and business expenses separate as a self-employed person. If you are using the money for a personal expense, you’ll want to avoid borrowing a business loan. Also keep in mind that many lenders don’t allow you to use personal loans for business expenses.

Peer-to-Peer Lending

Peer-to-peer lending bypasses the usual financial institutions and allows companies and individuals to invest in others via loans. You may have heard of some of the popular platforms, such as Kiva, Upstart, and Lending Club. These may be more accommodating for self-employed borrowers who are finding it challenging to secure a loan.

Secured Personal Loan

While most personal loans are unsecured, meaning they are approved based on the applicant’s creditworthiness, some of them are secured, meaning they are backed by an asset, known as collateral. Since these secured loans involve collateral, they are considered less risky. If the borrower defaults, the lender knows they can seize an asset that can help them recoup what is owed. Typical examples of collateral for personal loans include real estate, vehicles, cash in a bank or investment account, and other items of value.

The Takeaway

The challenge for self-employed individuals applying for a personal loan will generally be providing proof of income. Alternatives to traditional proof of income documents include tax or bank statements. Fortunately, many lenders understand that a full-time job isn’t the only qualifier of financial stability and will also consider factors like your credit score, financial history, and whether you have a cosigner.

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

FAQ

Can you get any loans if you’re self-employed with no proof of income?

It is possible to get a loan if you are self-employed. However, with zero proof of income, it may be challenging to gain approval for a loan. To improve your odds of approval, you may consider adding collateral to the loan or applying with a cosigner.

Are there any loans for self-employed people with bad credit?

While a strong credit history can help strengthen a loan application, it’s not impossible to qualify for a loan with bad credit. If you can show a consistent and stable income history, that could help improve your application. You’ll likely pay a higher interest rate and enjoy less favorable terms than if your score were higher, however. Another option to qualify could be to add a cosigner.

Can self-employed freelance workers get personal loans?

Yes, self-employed freelance workers can qualify for a personal loan. Instead of providing W-2 documents to verify their income, they will need to provide alternatives such as tax documents or bank statements. Applicants who have been working in a specific industry as a freelancer for two years or more may be viewed more favorably by lenders.

What documents do self-employed borrowers need to apply for a loan?

To apply for a personal loan, a self-employed person should probably gather tax returns, bank statements, profit and loss statements, and any documentation of other income sources (such as alimony). If you are working with a cosigner, they will also need to gather their documentation.

How can self-employed people improve their chances of getting approved for a loan?

Ways that a self-employed person can improve their chances of personal loan approval include building your credit score, working with lenders who specialize in loans for the self-employed, and considering whether to add a cosigner.

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

SOPL-Q425-064

For most Americans, having a car is a necessity to get to work, school, the supermarket, the doctor, and everywhere else. However, both new and used cars are expensive — and auto loan rates can be considerable, too.

So when buying a car, does it ever make sense to use a personal loan instead of traditional financing? Here, you’ll learn the difference between personal loans and car loans and when you might want to use each to buy a new set of wheels.

Personal Loan vs Auto Loan: An Overview

You can use a personal loan for almost any legal purpose, including buying a car. (Typically, though, you cannot use personal loans for business purposes or for tuition.) But why would you use a personal loan to purchase a vehicle when there are very specific loans — auto loans — to finance this purchase?

As you’ll see, personal loans can offer some benefits over car loans, including less buyer risk, no down payment needed, better negotiating power, and potential savings on car insurance. But car loans still have their place and may be cheaper in the long run.

Personal Loans

A personal loan allows you to borrow money from a bank, credit union, or lender to fund nearly any kind of purchase. People commonly use personal loans for debt consolidation, home renovations, weddings, vacations, and even new and used car purchases.

Personal loans can be unsecured (no collateral required) or secured (collateral required). For the sake of our personal loan vs. auto loan comparison, we’ll be looking at unsecured personal loans, as they’re more common.

How Interest Rates Work on Personal Loans

Because unsecured personal loans aren’t backed by any collateral, interest rates tend to be higher than what you’d get for a car loan. Average personal loan interest rates vary depending on your credit score and the loan terms. As of November 2025, the average rate was 12.25%, and these loans tend to max out at a rate of about 36%.

Most personal loans come with fixed rates, meaning your interest rate will stay the same over the life of the loan. It is possible, however, to get a variable-rate personal loan. Check out options for a fixed- vs. variable-rate loan to figure out which is right for you.

Terms for Personal Loans

Terms for personal loans vary by lender, but you can typically take out a loan with a repayment term of one to seven years. The faster you pay it off, the less you’ll pay in interest — but your monthly payments will be larger.

When Personal Loans Make Sense

A personal loan can be useful in many scenarios, including:

•   For debt consolidation. If you have several debts (say, balances on a couple of high-interest credit cards), you could pay them off with a single personal loan, simplifying your financial life since you only need to make one monthly payment. What’s more, the personal loan may charge a lower interest rate.

•   Unexpected major bills. If you get hit by a big medical, dental, or car repair bill and can’t cover it with emergency fund savings, a personal loan could be used for financing.

•   Home renovations. If you need to replace your hot water heater or want to renovate a dated bathroom, a personal loan can be an option that doesn’t require tapping your home equity or using your property as collateral.

•   Major purchases. When it’s time to get a new laptop or a used car, a personal loan could be the right option.

•   Pricey life events. Maybe you’re getting married or planning a big vacation for your whole family. A personal loan can help you afford this kind of big-ticket, memorable experience.

Recommended: Types of Personal Loans

Car Loans

When buying a new or used car through a dealership, the dealer’s finance department can help you find a loan through a bank or credit union. Alternatively — or when buying from a private seller — you can shop around for a car loan from various banks and credit unions on your own.

Auto loans are usually secured loans, meaning the car you’re buying serves as collateral. This means that if you fall behind on payments, the lender can repossess your car. (It’s possible, but less common and more expensive, to get a car loan without putting the car up as collateral.)

An important note: For tax years 2025 to 2028, interest paid on a car loan can now be deducted on your federal tax return, up to $10,000 annually, even if you take the standard deduction. The loan must be for new cars assembled in the U.S. and used for personal purposes only. The deduction phases out for taxpayers with a MAGI (modified adjusted gross income) over $100,000 per year.

How Interest Rates Work on Car Loans

The collateral on the car loan reduces the risk to the lender, which usually results in a lower interest rate. As of mid-2025, the average car loan interest rate for a new car was 6.73% and 11.87% for a used car. That said, auto loan interest rates depend on your credit score. You can use an online auto loan calculator to get a better idea of how different rates and terms compare.

Car loan rates for both new and used cars have increased in recent years, but they’re still typically lower than the average personal loan rate. Notably, car loan refinancing rates are lower than regular financing rates.

Terms for Car Loans

Like personal loans, car loans might stretch 84 months (that’s seven years), but some are as short as 24 months (two years). Also like personal loans, it’s common to repay your car loan over three to five years.

When Car Loans Make Sense

There are several scenarios when getting an automobile loan can make good sense:

•   You lack the cash to buy a car. For many people, cars are necessities to get to work, school, and run errands that are necessary for daily life. A car loan can enable the purchase of a car when you don’t have the funds to pay upfront.

•   You want to protect your savings. Perhaps you do have enough money in the bank to buy a car, but you’d rather save it for a goal like buying a house. Getting a loan can be a good option in this case.

•   You have a good, very good, or exceptional credit score. Typically, the higher your credit score, the lower your interest rate on a loan. If you have a solid score, a personal loan may offer a relatively affordable avenue to financing.

•   You want to build your credit history. Securing a loan and making on-time payments every month can positively impact your credit score.

Can You Use a Personal Loan to Buy a Car?

Yes, you can use a personal loan to buy a car. In fact, you can use a personal loan for (almost) any legal purpose (though typically not for business expenses or tuition, as mentioned above). However, it often makes more sense to get traditional vehicle financing when buying a car.

Recommended: Personal Loan Calculator

Is It Better to Get a Personal Loan to Buy a Car?

In some ways, it can be better to buy a car with a personal loan. You don’t have to stress about saving up for a down payment, there’s no risk of your car being repossessed, and you might even have more negotiating power at the dealership.

However, many buyers prefer the structure of an auto loan. These loans tend to be cheaper in the long run because of the lower interest rates. And they’re easier to get — both because of lower credit score requirements for car loans and because dealerships can help you find the best car loan for you.

Key Differences Between Personal Loans and Car Loans

Here’s a summary of the key ways that personal loans and auto loans differ when you’re shopping for a new car.

Secured vs Unsecured Debt

As noted above, a car loan is secured by the vehicle. When you use an auto as collateral in this way, the loan is less risky for the lender and therefore the interest rate is typically lower. However, you do run the risk of losing your car (that is, having it repossessed) if you default on the loan.

A personal loan, on the other hand, is unsecured, meaning it’s not backed by an asset. For this reason, the rate is typically somewhat higher but you don’t face the possibility of losing your property if you don’t pay the loan.

Vehicle Ownership and Title

With an auto loan, the lender typically holds onto the title until the loan is fully paid off. However, with a personal loan, you usually buy the car with the funds provided and take ownership and title right away. This quicker path to holding the title may appeal to some borrowers.

Loan Approval and Credit Score Considerations

Because a car loan is a secured loan, it carries less risk to the lender. That means the lender may approve a loan for a borrower with a lower credit score vs. what’s required for a personal loan.

Pros & Cons: Personal Loan vs Car Loan

Buying a car with a personal loan instead of an auto loan has its share of advantages, but there are also drawbacks to consider. Once you know these, you can decide whether a personal loan is right for you or if you should use an auto loan as an alternative to a personal loan.

Pros

First, the upsides of using a personal loan:

•   Less risk: When you take out a car loan, the car itself serves as collateral for the loan. If you miss enough payments, the lender could repossess your vehicle. With an unsecured personal loan, you don’t face that risk, though there are still consequences if you default on a personal loan.

•   More negotiating power: When you don’t have to go through the hassle of securing financing, the car buying process is much easier and faster for you and the dealer. That means you might be able to negotiate a better deal, like a discount for paying in full.

•   Lower insurance costs: When financing a car, the lender may require you to carry comprehensive, collision, and gap insurance. But when you pay for the vehicle outright with the funds from your personal loan, no one can require you to carry those car insurance coverages, just what is dictated by your state law.

•   No need to save for a down payment: Personal loans don’t require a down payment. Though some have origination fees, you might even be able to roll those into the cost of the loan. That means you could use a personal loan to get a car with no money down.

Cons

Next, review the potential downsides of using a personal loan to buy a car:

•   Higher cost: Interest rates are typically higher for personal loans, which means you’ll end up spending more money on your car in the long run than you would if you got traditional auto financing. Origination fees for personal loans may also be higher than they are for car loans.

•   Higher credit score requirements: Because auto loans are secured by the vehicle being financed, lenders are a little more willing to work with lower credit scores. The credit score you need for a personal loan is typically higher (usually in the good range), though this varies by lender.

•   More insurance risk: There may not be an auto lender requiring you to carry comprehensive, collision, or gap insurance. However, declining those coverages just because your personal loan lender doesn’t mandate them could open you up to considerable risk. If your car is totaled and you don’t have the proper coverage to get reimbursed, you’ll still be on the hook for making your personal loan payments — so think carefully before minimizing your car insurance coverage.

The Takeaway

Both auto loans and personal loans can help you get behind the wheel of a new (or used) car. Determining which type of loan is right for you comes down to your needs, preferences, and financial profile.

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

FAQ

Is it easier to get a personal loan or car loan?

Getting a car loan is usually easier than getting a personal loan. That’s because car loans are secured by the vehicle you’re buying. That means less risk to the lender, who will be willing to accept lower credit scores.

Should I take out a personal loan to buy a car?

It depends. While you can get an auto loan through a bank, credit union, or the dealership, you can also pay for a car with a personal loan. Personal loans reduce your risk — there’s no chance of your car being repossessed — and they may give you more negotiating power. However, personal loans typically cost more in the long run.

Am I allowed to use a personal loan to buy a car?

Yes, you can use a personal loan to buy a new or used car. In fact, you can use personal loans for just about any legal purpose (though usually not for business expenses or tuition). Just read the fine print of any loan agreement to make sure.

Which loan type typically offers better interest rates?

When comparing auto loans and personal loans, an auto loan usually has somewhat lower interest rates since it’s a secured loan vs. an unsecured loan. However, that also means that with a vehicle loan, you risk possible repossession of the auto (the collateral) if you default. With an unsecured personal loan, there’s no asset that the lender could lay claim to if you don’t make payments.

What are the risks of using a personal loan to buy a car?

The risks of using a personal loan to buy a car can include higher costs (interest rates and origination fees may be higher than for auto loans), which means your monthly payment may be steeper. Also, there can be higher credit requirements for approval, and if you fail to make timely payments, your credit score will likely be negatively impacted.

Photo credit: iStock/skynesher

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

SOPL-Q425-063