SoFi

There may be times in your life when your car breaks or you get a surprise medical bill in the mail or you finally move forward with a home remodeling project. If you need help covering those costs, you might decide to take out a personal loan. But is money from the loan considered income and therefore subject to taxes?

The good news is, a personal loan is usually not considered income, though there are some exceptions that could impact borrowers during tax season. Let’s take a closer look.

Does a Personal Loan Count as Income?

If you take out a personal loan, you may treat the funds the same as you would your paycheck. But as far as the IRS is concerned, any kind of formal loan from a bank or lender with terms that require repayment is considered a debt and is therefore typically not considered income. This distinction is important because it means you may not have to pay taxes on money you receive from a personal loan.

However, there may be tax implications on informal loans from friends and family. Before you enter into any agreement with a loved one, it’s a smart move to consult with an accountant.

Recommended: How to Pay Less Taxes: 9 Simple Steps

When Is a Personal Loan Considered Income?

While personal loans are generally not considered income and therefore taxable, there are exceptions that borrowers should know about.

If you take out a personal loan and then some or all of the loan debt is forgiven, the amount forgiven could be considered income. It might seem odd for canceled debt to be considered income, but think about it like this: Let’s say you made an extra $5,000 from work and used it to pay off your personal loan. That $5,000 would be considered income, and your loan would be paid off.

However, if you made no extra money but your $5,000 loan was canceled, then you would be in the same financial position in the end. So the IRS considers that forgiven loan debt taxable income.

Once a formal debt is forgiven or canceled, you should receive a Form 1099-C from the lender. According to the IRS, the amount of the canceled debt is taxable and must be reported on your tax return for the year.

There are some exceptions, such as certain qualifying student loan cancellations or personal loans canceled as part of bankruptcy hearings. And that’s where professional tax guidance might come in handy. Another thing to know is that the interest on personal loans is generally not tax-deductible.

What Exactly Is a Personal Loan?

As you’re exploring your options, it helps to understand what a personal loan is and how it works. A personal loan is one of many types of loans offered by banks, credit unions, and online lenders like SoFi. Personal loans typically range from $1,000 to $100,000, depending on the lender. There are both secured and unsecured personal loans. A secured personal loan means there is some sort of collateral to back the loan.

With an unsecured loan, there is no collateral. Generally, personal loans are unsecured. The terms of the loan—including things like interest rates, origination fees, and repayment schedules—are typically based on an applicant’s financial history, income, debt, and credit score. Because these types of loans aren’t tied to an asset, their interest rates can be higher than secured personal loans but are usually lower than credit cards or payday loans.

Exact eligibility requirements will vary by lender. The loans are then typically paid back with interest in monthly payments over a set schedule; typical repayment terms are extended over anywhere from 12 to 60 months.

Unlike a business loan or a home loan, an unsecured personal loan can be spent on a range of personal expenses, from home renovations to medical bills to consolidating credit card debt.

Applying for a Personal Loan

Over the past 12 months, 68% of Americans applied for a personal loan, according to a 2023 Forbes Advisor survey. And the average personal loan amount is $8,018.

If you’re thinking about a personal loan, consider starting with this checklist:

•   Determine how much money you need.

•   Explore all your financial options.

•   Research various loans and lenders.

•   Choose the type of loan you want.

•   Compare interest rates.

If you decide a personal loan is right for you, the application process is relatively straightforward. You may be asked to submit paperwork, like a photo ID, proof of address, and proof of employment or income. Many lenders offer applicants the option to see if they pre-qualify for a loan, which can give them an idea of the rates and terms available to them.

If you’re planning to use a personal loan to pay off existing debt, you could also use SoFi’s personal loan calculator to compare payments and rates to see if an unsecured personal loan could potentially help you save money.

Recommended: Preapproval vs. Prequalify: What’s the Difference?

The Takeaway

A personal loan can provide borrowers with funds for a variety of purposes. Generally speaking, the money isn’t taxable and considered as income. However, there are some exceptions. For instance, if you take out a personal loan, and some or all of the balance is forgiven, the canceled debt could be considered income. There are both secured and unsecured personal loans; typically, personal loans are unsecured.

If you are thinking about taking out a loan to cover an unexpected or large expense, a SoFi unsecured personal loan could be a good option for your unique financial situation. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.

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.

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.

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

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

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Whether you’ve just moved into a new home or want to breathe new life into your current one, refacing cabinets in your kitchen could really transform the space.

Cabinet refacing involves changing the cabinet exterior surfaces only, and can cost significantly less than a full cabinet replacement. How much will it set you back? The cost to reface kitchen or bathroom cabinets ranges from roughly $4,000 to $10,000, with the national average coming in at around $7,000.

Read on to learn what factors affect refacing costs, how to keep a cabinet makeover project within your budget, and how to get started.

Average Cost of Cabinet Refacing

Cabinet refacing allows you to give your kitchen a refresh at a significantly lower price tag than a full kitchen remodel. The exact cost will depend on the materials you choose, the size of the room, labor costs, and where you live. However, the cost typically runs between $4,273 and $10,056, or an average of $7,158.

If you have a small kitchen, DIY the project, and choose budget-friendly materials, you could spend a lot less than the average cabinet refacing cost. On the other hand, if you have a large kitchen, hire a contractor, and go with top-of-the-line materials, you could spend significantly more.

Recommended: 20 Small Kitchen Remodel Ideas & Designs

Cabinet Makeover Costs by Budget

The good news is that you can give your cabinets a refresh on virtually any budget. Here’s a look at what you can accomplish at different price points.

Budget: Under $1,000
If you’re looking to spend less than $1,000, you can likely reface the cabinets in a small kitchen yourself using laminate veneers. However, you may need to keep the original hardware.

Budget: $1,000 to $5,000
With more wiggle room in your budget, you may be able to hire a contractor to reface your cabinets using laminate or wood veneer, and also replace the hardware. However, you may not be able to add accessories like a built-in wine rack or under-cabinet lighting.

Budget: $5,000 to $10,000
With this budget, you can likely hire a contractor to install high-end wood veneer and hardware, plus add cabinet accessories, even for a large kitchen. With a smaller space, you may be able to reface your cabinets with solid wood.

Budget: $10,000 to $15,000
If you can spend $10,000-plus on the project, you should be able to hire a contractor to install new solid wood doors and drawer fronts, choose luxurious hardware, and add fancy accessories. You might also be able to add a couple of custom cabinets to match your newly upgraded cabinets.

Recommended: 9 Ways to Keep Inflation From Ruining Your Kitchen Reno Budget

Reasons to Reface

Refacing old cabinets can give your kitchen an updated look for 30% to 50% less than a full cabinet replacement. This makes it an appealing option for homeowners looking to do a kitchen renovation on a budget. What’s more, there are a wide range of resurfacing options to choose from, so you can likely find a look that fits your kitchen design vision. The process is also faster and more environmentally friendly than a remodel.

Keep in mind, however, that refacing might not be the best option if the existing cabinets are damaged or you need a better kitchen layout. While refacing can make your kitchen look and feel brand new, it won’t change its layout or functionality.

Standard Options for Refacing

When you reface cabinets, there are four common types of finishes you can choose from. Here’s a look at each option.

Plastic Laminates

You can also reface cabinets with plastic laminate. The laminate is cut to size and applied to the cabinet boxes and doors using a special adhesive. This is one of most budget-friendly refacing options, ringing in between $1,000 and $3,000. However, plastic laminate is not as resistant to chipping and cracking as other refacing materials.

Wood Veneer

Wood veneers give you the look of wood cabinets without the high cost. They come in thin sheets designed to mimic standard species of wood, such as oak, cherry, maple, and ash, and run between $2,500 and $6,000. While wood veneer is stronger than laminate, it’s not as durable as real wood.

Rigid Thermofoil (RTF)

Rigid thermofoil laminate is another budget-friendly refacing choice. It’s made of plastic (Formica or melamine) but looks like wood and requires little care. Just keep in mind that the melamine version of RTF is not recommended for hot or humid environments. Refacing with RTS can run roughly $1,000 to $3,000.

Solid Wood

Solid wood refacing material is the priciest option but also the longest-lasting and easiest to repair. A solid wood refacing project can run anywhere from $5,000 to $10,000. However, the cabinets will look high-end and the doors and drawers will be extremely durable.

Other Factors that Affect the Cost of Refacing

When coming up with your budget for a cabinet makeover, there are some other costs and upgrades you may want to factor in. Here’s a look at add-ons that can level up your kitchen refresh.

•   Hardware replacements Replacing all the hardware on your cabinets can cost anywhere from $100 and $1,000, depending on the material and style.

•   Crown molding Depending on the materials used and the labor involved, installing crown molding can run around $700 to $2,100.

•   Under-cabinet lighting Having strip, built-in, or puck lights installed under your cabinets can run $200 to $300 per light. If your budget is tight, you can get peel-and-stick lights for as little as $20 to $30.

•   Glass If you want to add glass inserts to some, or all, of your kitchen cabinets, plan on spending an extra $100 to $300 per linear foot of glass you add.

•   Handy accessories If you’re interested in adding some extras, such as a built-in spice rack, built-in wine rack, pull-out trash can, or a lazy Susan, you’ll need to add some additional funds to your refacing budget.

Getting Started

If you are ready to move forward with refacing, it can be a good idea to shop around and get estimates from at least three contractors.

As you interview potential installers, be sure to ask about their experience with cabinet refacing and if they’re insured and licensed. You may also want to ask the following questions:

•   What kind of refacing material do you recommend for this area?

•   How long will this project take?

•   Can I use my cabinets as soon as you’re done?

•   How long will the refacing last?

•   Do you make any changes to the interior of the cabinets?

•   Does the estimate include handles and drawer pulls?

•   Will you remove the doors and drawers to work on them at your shop or do all the work at my home?

•   Can you use hardware that I’ve already purchased?

•   Can you add features like crown molding, under-the-cabinet lighting, or glass inserts?

•   Do you offer a warranty, and if so, what does it include?

Recommended: 10 Steps for the Perfect Bathroom Remodel

Financing Your Home Improvement

While a cabinet makeover can give your kitchen a face-lift for an affordable price, you’ll still need to come up with a significant sum of cash to cover the cost of materials and labor. If you’re eager to get going but don’t have enough money on hand, you may be able to finance the project using a home improvement loan.

A home improvement loan is essentially a personal loan designed to be used to pay for home upgrades and renovations. Available through banks, online lenders, and credit unions, these loans are typically unsecured (meaning your home isn’t used as collateral to secure the loan). You also don’t need to have any equity built up in your home to be approved. Instead, the lender decides how much to lend to you and at what rate based on your financial credentials, such as your credit score, income, and how much other debt you have.

Once approved, you receive a lump sum of cash up front you can then use to cover the cost of refacing your cabinets. You repay the loan (plus interest) in regular installments over the term of the loan, which can range from five to seven years.

If you think a personal loan might work well for your cabinet makeover project, SoFi could help. SoFi’s home improvement loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.

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.

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.

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

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Are you a parent who is committed to helping your kids get through college and minimizing higher education costs as much as possible? Have you been asking yourself, is private school tuition tax deductible?

The good news is that it may be possible to lower education costs by using tuition tax breaks. Even if the money comes out of your pocket at first, you might be able to recoup some of those dollars come tax time. There are currently two tuition tax credits for parents to consider: the American Opportunity Tax Credit and the Lifetime Learning Credit.

With each of these programs to make private school tuition tax deductible, the parent would need to claim their student as a dependent on their taxes, as well as meet some pretty specific rules for each program. To get started, it’s smart to understand the rules and requirements of each and know that not every filer is going to qualify for these programs.

This article is for informational purposes only, offering a high-level overview of the available tuition-related tax credits and deductions. For parents wanting to take a deep dive into the particulars of tax programs, talking to a licensed tax professional about tax credits and deductions is critical.

What’s the Difference Between a Tax Deduction and Tax Credit?

For those dealing with student loan debt and wondering, can you write off private school tuition?, it’s important to understand the difference between a tax deduction and a tax credit. A deduction can reduce the amount of your taxable income. For example, if you made $80,000 in gross income in a given year and had $15,000 in deductions, you’d have $65,000 in taxable income.

A tax credit, on the other hand, can help provide a dollar-for-dollar reduction in income taxes you owe. For example, a $2,000 tax credit would reduce your tax bill by $2,000.

When compared dollar for dollar, tax credits can sometimes be more valuable than a similar tax deduction. A nonrefundable tax credit qualifies a taxpayer for a reduction up to the amount that they owe. With a refundable credit, a taxpayer could receive a refund even if they do not owe any tax.

The American Opportunity Tax Credit

So, is private school tuition tax deductible? It could be. Parents with a child or children they claim as dependents who are in the first four years of their undergraduate education may qualify for the American Opportunity Tax Credit (AOTC).

The AOTC is a credit for tuition and other qualified educational expenses paid for during an eligible student’s initial four years of their college education. The AOTC doesn’t apply to students in their fifth year and beyond.

The AOTC is worth up to $2,500 per eligible student. Because it is a tax credit, it should directly reduce the filer’s tax bill—not their taxable income. As of this writing, if the credit happens to bring the filer’s tax bill to zero, they may qualify to have 40% of any remaining amount of the credit (up to $1,000) refunded to them.

To qualify for the AOTC, there are additional requirements for both the parent and the student. According to the IRS, for the student to be eligible for the AOTC, they must be pursuing a degree or other recognized educational credential, be enrolled at least half time for at least one academic period beginning in the tax year, not have claimed the AOTC for more than four tax years, and do not have a felony drug conviction at the end of the tax year. Again, the AOTC only applies to undergrad students in their first four years.

To currently qualify as a parent, your modified adjusted gross income must be $80,000 or less ($160,000 or less if married filing jointly) in order to claim the full credit. If your modified adjusted gross income is between $80,000 and $90,000 ($160,000 and $180,000 if married filing jointly), you would be eligible for a reduced credit.

Recommended: Private Student Loans Guide

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) is another possibility for parents paying for school for a child they claim as a dependent.

Like the AOTC, the LLC is a tax credit. The LLC is more expansive in the coursework it covers, which is helpful because college is not for everyone. The LLC credit can be applied to qualified tuition and education expenses for eligible students enrolled in a qualifying educational institution. This includes undergraduate, graduate, and professional schools—including courses to acquire job skills.

In addition, there is no limit on the number of years where a person can claim the LLC, compared to the AOTC’s four years per student.

Similar to the AOTC, there is an income limitation to who qualifies for the LLC credit. To claim the full credit in 2022, a parent’s modified adjusted gross income must be below $80,000 (or $160,000 if married filing jointly). If your modified adjusted gross income is between $80,000 and $90,000 ($10,000 and $180,000 if married filing jointly), you could be eligible for a reduced credit.

Parents cannot file for both the LLC and the AOTC for the same student in the same tax year, so it is a choice between one or the other. Also, a student can’t file for either of these if their parents have already filed for a credit for the same expenses.

Recommended: Are Student Loans Tax Deductible?

Other Education-Related Deductions

Parents who have taken out loans for their child’s education and put money toward student loans may also qualify to deduct the interest payments on those loans.

One of the basics of student loans is that borrowers pay interest on the loans. The deduction includes both required and voluntary interest payments.

Filers may be able to deduct up to $2,500 in student loan interest expenses. You do not need to itemize your taxes in order to qualify for the deduction.

Aside from deductions, another way to possibly lower your student loan payments is by refinancing student loans. When you refinance, you replace your current student loans with a new loan.

One of the advantages of refinancing is that you may be able to get a lower interest rate or better terms that could lower your monthly payments. However, be aware that if you refinance student loans, they become ineligible for federal protections and programs like income-driven repayment. Also be aware that you may pay more interest over the life of the loan if you refinance with an extended term.

If you decide that refinancing is an option that might help you save on student loan payments, SoFi offers loans with flexible terms, low fixed or variable interest rates, and no fees.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

We take our household appliances for granted. Ovens, refrigerators, dishwashers, washers, and dryers — they’re all essential for everyday life, but we just always expect them to work. When one finally breaks down and we realize it’s time to buy a new, expensive replacement, it can be a bitter pill to swallow.

But what if you don’t have the cash on hand to pay for a new appliance? That’s where appliance financing, also called an appliance loan, comes in.

What Is Appliance Financing?

Appliance financing refers to buying a new appliance on credit. Rather than paying out of pocket for a new appliance, you’ll pay it off over time in monthly increments, like a house or car payment.

While this means you don’t have to spend money from your emergency fund or borrow money from a relative to pay for a replacement fridge or washer, it does mean you might face additional fees, like interest.

You can get appliance financing in a number of ways, including taking out a personal loan, paying for the appliance with your credit card, and exploring in-store financing, such as in-store appliance loans or rent-to-own options.

How Does Appliance Financing Work?

When you can’t afford a new appliance but need one because your old one has broken down and is beyond repair (or not worth the cost of repair), you can take out an appliance loan. How this type of financing works depends on the method of financing you use.

For example, if you pay for the appliance with a credit card, you’ll simply make your credit card payments as you would for any other purchase. But if you take out a personal loan from a bank or credit union, you’ll have a set number of years to pay off the loan, and there may be certain fees on top of the interest charged.

Methods of Appliance Financing

There are a few key ways of paying for an expensive appliance you can’t afford.

Personal Appliance Loans

You can take out a personal loan from a financial institution for almost anything, including home renovations, a wedding or vacation, debt consolidation, and, yes, even a new appliance.

Credit score requirements for a personal loan vary depending on the lender. Often, borrowers with bad credit can still qualify for personal loans, but interest rates and fees may be higher.

Additionally, lenders might have origination and prepayment fees, so it’s a good idea to read a lender’s loan details thoroughly before signing on the dotted line.

Personal loan terms generally range from two to seven years. Monthly payments will be higher on a shorter loan, but interest rates are typically lower — meaning you’ll spend less on interest over the life of the loan.

Recommended: What Is a Signature Loan?

Credit Cards

If you have a credit card with a high enough limit, you can also pay for an appliance with your card. Just keep in mind your credit card’s APR, or annual percentage rate — if you can’t pay off the balance in full by the due date, you may rack up interest charges quickly.

If you have a cash back or travel credit card, you could earn significant rewards by paying for an appliance on credit. For instance, refrigerators cost anywhere from $430 to $10,600. A 3% cash-back rewards card would earn you $318 on the purchase of a $10,600 fridge.

In-Store Financing

Many retailers offer their own financing options for large appliances, often via a store credit card. Unlike other credit cards, these cards are closed-loop, meaning you can only use them at that store.

These stores, like Lowe’s and Home Depot, may offer special perks for financing with them. This could include no interest if you pay in full within a set number of months or a percentage discount off the purchase price.

Some retailers may also offer rent-to-own options. In this scenario, you’d make a weekly or monthly payment until you’ve paid off the appliance. If you miss a payment, the store will take the appliance back. Rent-to-own fees can be high, making it more expensive for consumers by the time the appliance is paid off.

What Can Appliance Financing Be Used For?

You can use appliance financing for any kind of home appliance, but it’s generally not a good idea to take out a loan for luxury appliances like espresso makers and immersion blenders. Instead, experts advise only taking on loans for appliances that are considered more of a necessity, like:

•   Ovens and stovetops

•   Microwaves

•   Dishwashers

•   Refrigerators

•   Kitchen sinks

•   Washing machines

•   Dryers

Pros and Cons of Appliance Financing

Thinking about using appliance financing for your next household purchase? Let’s weigh the pros and cons:

Pros

Appliance financing offers the following upsides:

•   No waiting: When your washer or oven breaks down, you need a replacement. Sure, you can go to the laundromat and rely on microwave dinners temporarily, but ultimately, you’ll need to purchase a new appliance. If you don’t have the money in your bank account or are saving for other goals, you can instead take out an appliance loan or pay with your credit card to ensure you get the appliance you need without having to wait.

•   Home renovation: If you’re doing a larger home renovation, like remodeling your kitchen, you may be purchasing all-new appliances. Those costs can add up quickly. By using a personal loan for appliances — or even a home renovation loan for the entire project — you can get everything you need, rather than replacing appliances one at a time.

•   Rewards: If you finance your appliance with a rewards credit card, you may earn cash back or miles on your purchase. Or, if you use in-house financing from the store, you may qualify for special terms or even a discount.

Cons

Meanwhile, consider these downsides of appliance financing as well:

•   Higher cost: When you take out a loan for home appliances, you’ll likely pay more for the appliance through interest and fees. Even if you put it on a credit card, you could incur fees if you don’t pay off the balance in full by your next statement due date.

•   Credit score requirements: While bad-credit borrowers can typically get a personal loan, some consumers with low credit scores may have trouble qualifying for in-house financing or credit cards without high fees.

•   Temptation to spend beyond means: Making a low monthly payment instead of paying the full price upfront can create the illusion of affordability. That means you might be tempted to buy an expensive appliance that’s actually outside your budget — after all, the monthly payment looks manageable. Just remember that you’ll have to make that monthly payment for several years.

Recommended: How to Pay for Emergency Home Repairs

The Takeaway

Appliance financing makes it possible to purchase a new appliance when your old one breaks down and you don’t have the cash on hand. Whether you need a new refrigerator, washer and dryer, oven, or dishwasher, an appliance personal loan, in-store financing, or credit card might be the way to go.

Thinking about funding your new appliance with a personal loan from SoFi? You’ll enjoy competitive SoFi personal loan interest rates, and same-day funding. Check out your personal loan rate in just 60 seconds.

FAQ

Which appliances can be financed?

You can finance virtually any appliance if you qualify for a personal loan or pay with a credit card. Retailers that offer in-house financing may only offer their programs for specific appliances, however. Before financing, just keep in mind that it’s not a good idea to finance luxury appliances that you don’t need or can’t afford. Instead, most experts advise using appliance financing for necessary appliances priced within your means, such as a refrigerator or washing machine.

What is the credit requirement for an appliance loan?

Credit requirements for appliance loans vary depending on the type of loan. Borrowers with bad credit typically can find personal loans for appliances, though these will come with high interest and fees. Rent-to-own programs don’t have a credit check. But if you want to take advantage of a retailer’s in-house financing, you may need a credit score of 580 or higher, though requirements vary by store.

Photo credit: iStock/Talaj

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.

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.

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.

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Legal fees can get expensive. Whether you need to hire an attorney for a divorce case, to represent you against criminal charges, or to guide you through the adoption process, the cost can be prohibitive — but that doesn’t mean you should move forward without legal counsel.

Instead, there are a few different ways to pay for a lawyer, including personal loans. We’ll review how to get a loan for legal fees, as well as other options available to you.

What Are Loans for Legal Fees?

While you cannot find a loan designed specifically for legal fees, you can take out a personal loan to cover your legal costs. If your lawyer mentions taking out a loan for payment, they’re likely referring to a personal loan.

How Do Loans for Legal Fees Work?

Personal loans for legal fees work much like how a personal loan works typically. Personal loan rates and terms vary by financial institution. In general, the longer the loan term, the higher your annual percentage rate (APR) will be, but because the repayment is spread out over more years, the monthly payments will be lower. Generally, personal loan terms range between one and seven years.

When you get a personal loan for legal fees, you’ll get the lump sum from the lending institution to pay your lawyer. Some banks offer same-day funding. Then, rather than owing the lawyer, you’ll owe the lender until the loan is paid off in full.

Keep in mind that, in addition to interest, some personal loans include origination fees and prepayment penalties.

Typical Legal Loan Requirements

When you go to apply, the lender may have a few personal loan requirements that you’ll have to meet. These may vary by financial institution.

Credit Score

A key factor in getting approved for a legal loan is your credit score. In general, the higher your credit score, the better your chances of approval (and at a lower interest rate, which means lower personal loan rates).

The credit score you need for a personal loan will vary by institution. Some lenders may even grant personal loans to borrowers with bad credit. In those cases, fees and APRs are typically very high.

Speaking of your credit score, most lenders offer soft pulls for personal loans to see if you’re qualified. But once you apply, expect a hard inquiry on your credit report, which will temporarily lower your score.

Debt-to-Income Ratio

Lenders also factor in your debt-to-income (DTI) ratio when considering your loan application. Your DTI ratio is the total amount of your monthly debts (think car payment, student loan payments, credit card bills, mortgage, etc.) divided by your monthly income.

The lower your DTI ratio, the better your chances of getting approved for a personal loan for legal fees with favorable rates and terms.

Proof of Income and Employment

To get a legal fee loan, you’ll need to demonstrate your ability to repay it to the lender. That means that lenders often want to see proof of income and employment, such as a signed letter from your employer, pay stubs, and/or W-2 forms.

Self-employed and need a personal loan? You’re not out of luck. Lenders may just want to see your tax returns and/or bank deposit info.

Origination Fees

Some lenders charge a loan origination fee when you take out a personal loan. This is a one-time fee at the start of the loan that covers the administrative costs of processing the loan. (If you’ve ever bought a house, you likely paid a mortgage origination fee as part of your closing costs.)

Personal loan origination fees might be flat fees or a percentage of the loan amount. Not every lender charges these fees.

Collateral

Loans for legal fees are usually unsecured personal loans, meaning they’re not backed by any collateral. Other examples of unsecured loans are traditional credit cards and student loans, where you can borrow money without putting up assets as collateral. Because there’s no collateral, fees and interest rates tend to be higher.

That being said, personal loans can be secured in some instances, meaning you’d have to put up some kind of collateral, like a car or house. Secured personal loans may have lower fees and interest rates, but costs vary by lender.

If you get a secured personal loan for your legal fees, you’ll need to offer some kind of collateral to the lender.

Pros and Cons of Using a Loan to Cover the Cost of Legal Fees

Thinking about using a personal loan to cover legal fees? Here are the pros and cons to consider:

How Legal Fees Are Billed

Legal fees can run the gamut. Your attorney may charge you several types of fees during the course of their representation. Here’s a quick look at some of the fees you might incur when hiring a lawyer:

•   Hourly fees: A lawyer will likely charge you by the hour for their services — and that’s not just the hours you spend consulting with them. Lawyers do a lot of work on your case behind the scenes, and they’ll bill you for every one. Hourly rates can range from as little as $50 to $100 an hour to as much as several thousand dollars an hour, depending on the lawyer’s experience, the complexity of the case, and geographic location. The average hourly rate for a lawyer in 2022 was $313, according to the Clio 2022 Legal Trends Report.

•   Flat rates: Sometimes, a lawyer might charge you a simple fixed fee for a specific service. This is typically for less involved work (i.e., no court representation). For instance, they may charge a set rate to prepare your will or help you with a real estate transaction, bankruptcy filing, or uncontested divorce.

•   Contingency fees: As the name implies, these fees are contingent. You’ll only pay them if you win your case and are awarded a monetary sum. Often, a lawyer’s contingency fees are a percentage of that sum.

•   Litigation fees: Your lawyer may include this as a line item on your invoice, but really, it’s a catch-all for several fees. These include court filing fees, attorney’s fees, expert witness fees, fees for re-creating an accident or accessing records, copy fees, and others.

Recommended: The Cost of a Divorce

Alternatives to Legal Loans

A legal loan is not your only option for covering legal fees. If you don’t want to take out a personal loan or don’t qualify, consider these other options. Just make sure to steer clear of predatory lending.

Credit Cards

Many lawyers accept credit cards as a payment method for their services. If that’s your preferred payment method, ask a lawyer if they accept credit card payments. If they say no, keep looking for a different option.

Just keep in mind that credit cards may have higher interest rates than a personal loan. Check your credit card’s APR to calculate how much you might owe in interest if you don’t pay off your credit card balance quickly.

Legal Payment Plans

Some law offices may offer payment plans to their clients. In this case, you would pay your lawyer in monthly installments rather than in one lump sum.

While not every lawyer offers this option, it never hurts to ask. This is another question you can ask upfront before hiring a lawyer.

Crowdfunding

Asking friends and family for financial help is never easy, but loved ones may chip in if you’re in a bind.

Alternatively, you can seek a wider net of potential benefactors by crowdfunding on social media or using official crowdfund platforms. Just keep in mind that such platforms often keep a percentage of the funds as payment.

Taking Out a Personal Loan With SoFi

Paying for costly legal fees with a personal loan can ease the process and make legal counsel more accessible, whether you’re adopting a child, getting a divorce, fighting criminal charges, or suing a person or business as a victim. SoFi offers personal loans at competitive rates.

Tackle your legal fees with a personal loan from SoFi.

FAQ

Is it legal to take out a loan for legal fees?

Yes, it is legal to take out a loan for legal fees. Legal funding loans are simply personal loans that you take out with a lender to cover the cost of hiring a lawyer.

Can legal fees be tax deductible?

If you’re a business owner who incurs legal fees for your business, you can deduct the cost on your taxes. This applies to property owners who incur legal fees when renting out their property to tenants. In addition, legal fees related to adopting a child are tax-deductible through the federal adoption tax credit.

Can legal fees be paid in installments?

Many law firms offer payment plans to their clients that allow them to make payments in installments. If your lawyer doesn’t offer this and you can’t pay out of pocket, you can also look for a legal finance loan (a personal loan) to cover the cost. While you’ll pay the lawyer in a lump sum, you’ll pay off the loan in installments.

Photo credit: iStock/Andrii Yalanskyi

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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