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A personal loan can be a useful option when you need to borrow money to cover a medical bill, fund a home repair, or consolidate debt. This kind of loan can offer a considerable lump sum of cash at a relatively low interest rate, but the lender may charge fees. You’ll need a good credit score to qualify.

Before you decide that a personal loan is right for you, it’s important to understand the pros and cons that come along with them. Here, the information that can help you make a wise choice.

What Are Personal Loans?

What is known as a personal loan is money that you borrow from a bank, credit union, or online lender. Typically, it’s a lump sum amount you receive and, since it’s an installment loan, agree to repay the loan principal and interest at regular intervals — usually monthly.

The interest rate for a personal loan is likely to be fixed-rate, and the loan’s term is usually between two and seven years.

When you apply for a personal loan, your lender will run a hard credit check, which will help determine your interest rate. Generally speaking, borrowers with higher credit scores have a better chance of being offered lower interest rates and more favorable terms. The higher your interest rate, the more money it will cost you to borrow.

With many lenders, you will need at least a good FICO® credit score to qualify, and a higher score will probably allow you to get more favorable rates.

Recommended: 11 Types of Personal Loans

How Personal Loans Work

Before delving into the pros and cons of personal loans, it’s worthwhile to familiarize yourself with the basics of this kind of loan and how they typically function.

Loan Terms and Repayment

Personal loans are made up of the principal (the amount you are borrowing), the interest rate you will be charged, and any fees you will pay, such as origination fees. The annual percentage rate (APR) helps you evaluate the amount the loan will cost you in terms of both interest and fees. You’ll repay the loan in monthly installments over the loan’s term, which is usually between two and seven years.

Fixed vs Variable Rate

A personal loan can have either a fixed or variable interest rate. Most have a fixed rate, meaning you’ll lock in a rate when the loan begins, and that rate (and your monthly payment) will stay constant over the life of the loan.

However, you may be able to find variable rate loans, if you prefer. In this case, the interest rate will fluctuate with the market, meaning your payments may rise and fall over the loan’s term.

The Benefits of Personal Loans

Personal loans are a flexible option for borrowers looking to accomplish a variety of goals, from consolidating other debts to remodeling their home. Here’s a look at some of the advantages.

Comparatively Low Interest Rate

Personal loans offer relatively low interest rates when compared to other methods of short-term borrowing. The average personal loan interest rate is 12.25% as of October 2025.

Credit cards by comparison had average interest rates of over 20% at the same moment. A personal line of credit, which allows the borrower to withdraw funds up to a limit during the draw period, may have interest rates that vary between11% and 21%, depending on credit score and other variables.

Some forms of predatory short-term lending, such as payday loans, can charge the equivalent of many times these rates to borrow. Some even have annual percentage rates (APRs) of 400%, so it can be wise to proceed with caution and see what lower-cost sources of funding may be available.

Comparatively High Borrowing Limits

Small personal loans are usually for amounts of a couple of thousand dollars or less. (Smaller loans often come with lower interest rates.) However, $10,000 personal loans are offered by many lenders, and some will offer large personal loans of up to $100,000 to cover major expenses and life events, which may be quite a bit more than other credit options.

The average credit limit for credit cards, by comparison, is $31,165, according to credit reporting bureau Experian.

Personal lines of credit often have a range of limits from $1,000 to $50,000, which can be more than a credit card but less than a personal loan.

Personal Loans Can Be Used for Many Things

Some types of loans must be used for designated purposes. Auto loans must be used to buy a car, and a mortgage must be used to finance a home. Personal loans, on the other hand, have few restrictions on how you must use the money, and you can generally use it for any legal purpose, except business expenses and tuition.

Popular uses for personal loans can include:

•  Medical, dental, or car repair bills

•  Home improvement projects

•  Debt consolidation

•  Travel

•  Weddings or other major celebrations

•  Holiday shopping

•  Summer camp or other expenses for children

No Collateral Necessary

Unsecured personal loans are the most common type of personal loans. They are not backed by collateral, such as your car or home.

Some personal loans are secured, however, and require you to borrow against the equity in your personal assets, like a home or your savings. With a secured vs. unsecured personal loan, the lender can seize your collateral if you default, selling it to recoup their loss. As a result, secured loans present less risk for the lender and often come with lower interest rates than unsecured loans.

Simple to Manage

You can use personal loans to consolidate other higher-interest debt, for example, by paying off the balance on several high-interest credit cards. A single personal loan can offer less expensive interest, lowering the cost of your debt over time. And it may be easier to manage, since you only have one bill to pay each month. A debt consolidation calculator can help you do the math and evaluate your options.

Can Be Quick to Obtain

Policies will vary, but some lenders may offer same-day approval and funding within just a few days.

Can Help Building Credit

Your lender will likely report your personal loan and payment history to the three credit reporting bureaus — Experian®, TransUnion®, and Equifax®. In fact, 35% of your FICO® score — the most commonly used credit score — is determined by your payment history.

You can help build a strong credit history over time by avoiding late or missed payments.

Recommended: Personal Loan Calculator

The Disadvantages of Personal Loans

These loans do have some downsides, which can potentially make personal loans a bad idea for some borrowers. Here’s a closer look.

Higher Interest Rates Than Some Alternatives

Personal loans may carry higher interest rates than some alternatives. For example, if you’re looking to remodel your home, you might consider taking out a home equity loan or a home equity line of credit (HELOC). Keeping in mind the current average interest rate of 12.25% for personal loans, consider the following:

•  A home equity loan uses your home as collateral to offer you a lump sum of money to use. In October 2025, the average interest rate on a 10-year fixed home equity loan ranged from 7.24% to 8.20%.

•  A HELOC, on the other hand, is a form of revolving credit line that uses your home as collateral. You draw against your limit as needed during the draw period and, after a set number of years, enter the repayment period. As of October 2025, the average interest rate on a HELOC was 7.75 to 7.81%.

Also, your rate will likely vary depending on your credit score: The higher your score, the lower your interest rate may be.

Fees and Penalties

Some lenders may charge fees and penalties in association with personal loans. For instance, an origination fee helps pay for the processing of your loan application and is usually equal to a percentage of the loan amount. Fortunately, it’s possible to avoid origination fees.

Lenders may also charge prepayment penalties if you pay off your loan ahead of schedule, to make up for profit they are losing on interest payments.

Can Increase Debt

Take out a personal loan only if you are sure you can pay it off and if it makes financial sense. For example, a home remodel could increase the value of your home, and consolidating credit card debt could save you money in interest payments. But taking out a personal loan to fund a lavish wedding could wind up interfering with your ability to save for the down payment on a house.

Avoid taking out a loan that is for more money than you need to avoid the risk of taking on more debt than necessary.

Potential Impact on Credit Score

Taking out a personal loan and paying your debt on time can build your credit score, as mentioned above. However, a personal loan can also negatively impact your credit score in a few ways. When a hard credit inquiry is done during the application process, your credit score is typically lowered by several points for at least a few months. The personal loan will also increase your debt load, which could hurt your credit score. And if you are late when making a payment on a personal loan or miss it altogether, that can lower your score.

Alternatives to Personal Loans

You may want to explore personal loan alternatives, described below, as you search for the best source of funding.

•  Credit cards allow users to make purchases using credit. Borrowers must make minimum payments and owe interest on any balance they carry from month to month. As noted above, the interest rates are typically high.

•  A personal line of credit (PLOC) is similar to a credit card. It allows you to tap your credit line as needed. Credit is replenished when you pay back your loan.

•  A home equity loan uses a borrower’s home as collateral. The value of the property contributes to determining the loan amount that is transferred to the borrower as a lump sum.

•  A home equity line of credit is a revolving source of credit, like credit cards and PLOCs. As with home equity loans, HELOCs use the borrower’s home as collateral.

The Takeaway

A personal loan is a type of installment loan, usually unsecured, that allows you to obtain a lump sum of money, typically at a fixed interest rate and to be repaid in up to seven years. The pros of these loans can include their flexibility (you can use the money as you like), lower interest rates than some other sources of funding, and the speed, high limits, and convenience they offer. Among the cons: the possibility of having to pay fees and penalties, and the fact that you might be able to get a lower rate with a secured loan elsewhere.

If you’ve explored your options and decide that a personal loan is right for you, it’s wise to shop around to find the right loan.

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 a personal loan?

A personal loan is a loan you receive from a bank, credit union, or online lender, and it can be used for a variety of purposes. Borrowers pay back the principal and interest in regular installments. These loans are typically unsecured (meaning collateral is not needed) and offer a lump sum payment, usually at a fixed rate of interest, with a term of up to seven years.
 

What can you use a personal loan for?

Personal loans have few usage restrictions. Basically, you can use them for any legal purposes, though in most cases, lenders restrict business and tuition usage. They can provide funding for everything from unexpected medical bills to home improvement projects to vacations to credit card debt consolidation.

How much money can you get from a personal loan?

Personal loan amounts typically range from $1,000 to $100,000, depending on the lender and the applicant’s qualifications.

What credit score do you need to qualify for a personal loan?

Many lenders require a credit score in the good range or higher to be approved for a personal loan. However, there are lenders who offer loans to those with fair or poor credit. The interest rates tend to be higher, though, and the terms less favorable than what those with higher scores are offered.

How long does it take to get approved for a personal loan?

Policies vary, but some personal loans can be approved on a same-day basis.

Photo credit: iStock/Anchiy

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-Q425-059

You may feel proud of yourself for paying off a debt early, but doing so could trigger prepayment fees (ouch). The best way to avoid those charges is to read the fine print before you take out a loan that involves this kind of fee.

If you neglected to do that, however, it doesn’t necessarily mean you’re stuck with a prepayment penalty. Read on to learn ways to avoid paying loan prepayment penalties.

What Is a Prepayment Penalty?

A prepayment penalty is when a lender charges you a fee for paying off your loan before the end of the loan term. It can be frustrating that a lender would charge you for paying off a loan too early. After all, many people may think a lender would appreciate being repaid as quickly as possible.

While that’s true in theory, in reality, it’s not that simple. Lenders make most of their profit from interest, so if you pay off your loan early, the lender is possibly losing out on the interest payments that they were anticipating. Charging a prepayment penalty is one way a lender may recoup their financial loss if you pay off your loan early.

Lenders might calculate the prepayment fee based on the loan’s principal or how much interest remains when you pay off the loan. The penalty could also be a fixed amount as stated in the loan agreement.

Can You Pay Off a Loan Early?

Say you took out a $5,000 personal loan three years ago. You’ve been paying it off for three years, and you have two more years before the loan term ends. Recently you received a financial windfall and you want to use that money to pay off your personal loan early.

Can you pay off a personal loan early without paying a prepayment penalty? It depends on your lender. Some lenders offer personal loans without prepayment penalties, but some don’t. A mortgage prepayment penalty is more common than a personal loan prepayment penalty.

Recommended: When to Consider Paying off Your Mortgage Early

Differences in Prepayment Penalties

The best way to figure out how much a prepayment penalty would be is to check a loan’s terms before you accept them. Lenders have to be upfront about how much the prepayment penalty will be, and they’re required by law to disclose that information before you take on the loan.

Personal Loan Prepayment Penalty

If you take out a $6,000 personal loan to turn your guest room into a pet portrait studio and agree to pay your lender back $125 per month for five years, the term of that loan is five years. Although your loan term says it can’t take you more than five years to pay it off, some lenders also require that you don’t pay it off in less than five years.

The lender makes money off the monthly interest you pay on your loan, and if you pay off your loan early, the lender doesn’t make as much money. Loan prepayment penalties allow the lender to recoup the money they lose when you pay your loan off early.

Mortgage Prepayment Penalty

When it comes to different types of mortgages, things get a little trickier. For loans that originated after 2014, there are restrictions on when a lender can impose prepayment penalties. If you took out a mortgage before 2014, however, you may be subject to a mortgage prepayment penalty. If you’re not sure if your mortgage has a prepayment penalty, check your origination paperwork or call your lender.

Checking for a Prepayment Clause

Lenders disclose whether or not they charge a prepayment penalty in the loan documents. It might be in the fine print, but the prepayment clause is there. If you’re considering paying off any type of loan early, check your loan’s terms and conditions to determine whether or not you’ll have to pay a prepayment penalty.

How Are Prepayment Penalties Calculated?

The cost of a prepayment penalty can vary widely depending on the amount of the loan and how your lender calculates the penalty. Lenders have different ways to determine how much of a prepayment penalty to charge.

If your loan has a prepayment penalty, figuring out exactly what the fee will be can help you determine whether paying the penalty will outweigh the benefits of paying your loan off early. Here are three different ways the prepayment penalty fee might be calculated:

1. Interest costs. If your loan charges a prepayment penalty based on interest, the lender is basing the fee on the interest you would have paid over the full term of the loan. Using the previous example, if you have a $6,000 loan with a five-year term and want to pay the remaining balance of the loan after only four years, the lender may charge you 12 months’ worth of interest as a penalty.

2. Percentage of balance. Some lenders use a percentage of the amount left on the loan to determine the penalty fee. This is a common way to calculate a mortgage prepayment penalty fee. For example, if you bought a house for $500,000 and have already paid down half the mortgage, you might want to pay off the remaining balance in a lump sum before the full term of your loan is up. In this case, your lender might require that you pay a percentage of the remaining $250,000 as a penalty.

3. Flat fee. Some lenders simply have a flat fee as a prepayment penalty. This means that no matter how early you pay back your loan, the amount you’ll have to pay will always be the prepayment penalty amount that’s disclosed in the loan agreement.

Recommended: Debt Payoff Guide

Avoiding a Prepayment Penalty

Trying to avoid prepayment penalties can seem like an exercise in futility, but it is possible. The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If that’s not possible, you may still have options.

•   If you already have a personal loan that has a prepayment penalty, and you want to pay your loan off early, talk to your lender. You may be offered an opportunity to pay off your loan closer to the final due date and sidestep the penalty. Or you might find that even if you pay off the loan early and incur a penalty, it might be less than the interest you would have paid over the remaining term of the loan.

•   You can also take a look at your loan origination paperwork to see if it allows for a partial payoff without penalty. If it does, you might be able to prepay a portion of your loan each year, which allows you to get out of debt sooner without requiring you to pay a penalty fee.

For example, some mortgages allow payments of up to 25% of the purchase price once a year, without charging a prepayment penalty. This means that while you might not be able to pay off your full mortgage, you could pay up to 25% of the purchase price each year without triggering a penalty.

Some lenders shift their prepayment penalty terms over the life of your loan. This means that as you get closer to the end of your original loan term, you might face lower prepayment penalty fees or no fees at all. If that’s the case, it might make sense to wait a year or two until the prepayment penalties are less or no longer apply.

When it comes to your money, you don’t want to make any assumptions. You still need to do your due diligence by asking potential lenders if they have a prepayment penalty. The Truth in Lending Act (TILA) requires lenders to provide documentation of any loan fees they charge, including a prepayment penalty. Also, under the TILA, consumers have the right to cancel a loan agreement within three days of closing on the loan without the lender taking any adverse action against them.

The Takeaway

A prepayment penalty is one fee that can be avoided by asking questions of the lender and looking at the loan documents with a discerning eye. This may hold true both when you are shopping for a loan and when you are paying your loan off.

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

SoFi 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-Q425-067
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Adding either a guarantor or cosigner to a loan can increase your odds of approval. But while these supportive roles are similar, they are not exactly the same.

Both a guarantor and a cosigner agree to cover a borrower’s debt if the borrower fails to repay what they owe. The key difference is that a cosigner is responsible for the loan right away, whereas a guarantor isn’t responsible for repayment unless the borrower fully defaults on the loan.

Whether you’re looking for a cosigner or guarantor, or thinking of acting as one or the other, there are some key differences both parties need to understand. Here’s a closer look at guarantors versus cosigners.

Is a Guarantor the Same Thing as a Cosigner?

The short answer: No.

Guarantors and cosigners fulfill similar roles: They help make it possible for a primary applicant with poor or limited credit to be approved for a loan by agreeing to take responsibility for the loan should the primary borrower become unable to pay. (These terms can also come into play when someone without a strong credit or income history is looking to rent an apartment.)

But there are some key differences between a guarantor and a cosigner. The biggest is how soon each individual becomes responsible for the borrower’s debt. A cosigner is responsible for every payment that a borrower misses. A guarantor, on the other hand, only assumes responsibility if the borrower falls into default on the loan.

Acting as cosigner versus a guarantor also impacts your credit in different ways. In addition, which role you take on affects how much access you have to information about the loan.

What Is a Guarantor?

A loan guarantor is someone who promises to pay a borrower’s debt if the borrower defaults on their loan obligation. This reduces the lender’s risk and, as a result, they might offer guarantor loans to applicants who wouldn’t qualify on their own.

Unlike a cosigner, a guarantor isn’t responsible for every payment that a borrower misses. They only need to step up when the primary borrower has defaulted on the loan. A default means a borrower has failed to repay the funds according to the initial agreement. With most consumer loans, this typically involves missing multiple payments for several weeks or months in a row.

Simply becoming a guarantor will generally not impact your credit reports and credit scores. But if the loan falls into default, leaving you responsible for all outstanding payments, it will be added to your credit report. If you fail to repay the money owed, your credit rating could be negatively impacted.

Being a guarantor for a rental property is similar to being a guarantor on a loan — it involves you vouching for the tenant. If the tenant is unable to meet their obligations under the tenancy agreement, you (the guarantor) will be legally bound to cover the overdue rent or any damage to the property.

As a guarantor, you have the responsibility of repaying the debt, but you don’t have any legal right to the loaned money, anything purchased with the loan proceeds, or to live in the dwelling if you’re acting as a guarantor on a lease.

What Is a Cosigner?

A cosigner is someone who applies for a loan with someone who may not qualify on their own and takes equal responsibility for the account. For example, many parents act as cosigners on their children’s student loans, since young people tend not to have long and robust credit histories.

Unlike a guarantor, a cosigner’s liability begins right away. Cosigners are responsible for any payments that the borrower misses. If the borrower defaults, the cosigner is also responsible for the full amount of the loan.

The debt account and payment history will appear on both the primary borrower’s credit report, as well as the cosigner’s credit report. And, depending on how the primary borrower manages the account, the loan could help or hurt both the primary borrower’s and the cosigner’s credit scores.

If the primary borrower defaults on the loan, lenders and collections agencies can try to collect the debt directly from the cosigner.

Although the cosigner is legally obligated to make payments if the borrower can’t, they have no rights to the loan proceeds.

A cosigner is not the same thing as a co-borrower in that they don’t have any claim on the loaned asset. Also, unlike a co-borrower, a cosigner’s intention is to boost the creditworthiness of the borrower, not to jointly repay the debt.

Recommended: Getting a $15,000 Personal Loan With Good or Bad Credit

Guarantor vs Cosigner: The Similarities

Both guarantors and cosigners pledge their financial responsibility for the debt to strengthen the primary borrower’s application. And, in both cases, they may become responsible for repaying the debt.

Another thing guarantors and cosigners have in common is that they do not have any right to the loaned money, or assets purchased with the money (one exception: the cosigner on a lease may be entitled to live on-site).

Guarantor vs Cosigner: The Differences

The main difference between a guarantor and a cosigner is the level of legal liability for the debt.

A cosigner is responsible for repayment of the debt as soon as the agreement is final and can request to have loan statements sent to them, so they’ll know right away if any payments have been missed. A guarantor, by contrast, is only responsible for repayment of the debt if the primary borrower defaults on the loan and will only be notified at that point.

There are also differences in terms of credit impacts. A cosigner will have the loan added to their credit report and any positive or negative payment information that the lender shares with the consumer credit bureaus can have a positive or negative impact on their credit. Becoming a guarantor, on the other hand, will not have an impact on your credit unless the primary borrower defaults on the loan.

Recommended: Guide to Unsecured Personal Loans

Personal Guarantor vs Cosigner: Pros and Cons

If you are the primary borrower and deciding between a guarantor and cosigner, the choice may come down to which kinds of loans are available (guarantor loans can be harder to find than loans allowing a cosigner) and what kind of agreement you’re entering into. If you’re signing a lease with a roommate, that person should be a cosigner rather than a guarantor.

If you’re thinking of acting as a guarantor versus a cosigner, here’s a look at the benefits and drawbacks of each.

Pros and Cons of Being a Guarantor

Pros:

•   Helps a borrower obtain a loan more easily

•   Can help a borrower get approved for a larger loan amount or more favorable rates and terms than they would be able to get on their own

•   Helps a borrower build credit and learn how to manage credit responsibly

Cons:

•   Your credit score could be impacted if the borrower defaults on the loan

•   You’ll be liable for the full debt if the borrower defaults on the loan

•   Should the borrower default, your ability to obtain another loan for a different use may be limited

Pros and Cons of Being a Cosigner

Pros:

•   Helps a borrower obtain a loan more easily

•   Can help a borrower get approved for a larger loan amount or more favorable rates and terms than they would be able to get on their own.

•   Helps a borrower build credit and learn how to manage credit responsibly

Cons:

•   Your credit could take a hit if the borrower pays late or misses payments and the lender reports the delinquency to the credit bureaus

•   You will need to make any payments the primarily borrower misses

•   If need to apply for credit for yourself, the lender may deny you because your current debt levels are too high

Recommended: How Do I Get the Best Interest Rate on a Loan?

Do Guarantors Get Credit Checked?

Yes — as part of the application process, the lender will carry out a credit check on you. However, this is normally a “soft” credit check which will not be visible to other companies and won’t impact your credit score. Generally, a guarantor will need a robust credit and income history to make up for the applicant’s shortcomings.

When Is a Cosigner or a Guarantor a Good Option?

Recruiting a cosigner or guarantor can be a good option if you have low credit scores or a limited credit history and are looking to get a personal loan, student loan, mortgage, auto loan, or other type of credit. This can not only help you qualify for the loan but also give you access to better rates and terms than you could get on your own.

Taking out a loan with a guarantor or cosigner — and making regular on-time payments on that loan — can help you build your credit. This can help you qualify for more types of loans and better rates in the future without a cosigner or guarantor.

Just keep in mind that if you ask a trusted friend or family member to act as a cosigner or guarantor and you fail to make timely payments, you could put a significant strain on your relationship. You will also be putting that person in a difficult financial position.

Questions to Ask a Guarantor or Cosigner

One of the weightiest parts of deciding to use a cosigner or guarantor is having to ask someone to do you this favor, which is a big one. It’s important that there’s mutual trust in the relationship between the borrower and cosigner or guarantor, since their actions can have an impact on each other’s finances.

Some questions to ask your cosigner or guarantor before entering an agreement include:

•   Do you have a good credit score and solid financial standing?

•   Are you willing to take on this legal and financial responsibility?

•   What will our long-term agreement be if I, as the primary borrower, fail to make repayments and force you into the legal obligation to do so?

Personal Loans That Allow You to Use a Cosigner or Guarantor

Not all lending institutions allow you to apply for a personal loan with a cosigner or a guarantor. Some only allow co-borrowers. If you aren’t able to qualify based on your own creditworthiness, you may consider asking the lender if they’ll allow a cosigner or guarantor.

Getting a personal loan with a cosigner or guarantor can make it much easier to qualify for a loan because, in the eyes of the lender, a second person agreeing to take on responsibility for the loan lessens the risk of lending to you.

The Takeaway

Guarantors and cosigners fulfill similar roles for a loan applicant, strengthening the application by taking on some level of financial responsibility for the loan.

A cosigner takes on responsibility for your payments right away, while a guarantor won’t get involved in the loan unless you end up missing several payments and are considered in loan default.

Either option could help you qualify for a personal loan with lower interest rates and better terms than you might be able to get on your own. Note: SoFi does not currently offer personal loans with guarantors.

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

Does being a guarantor affect your credit?

Yes, being a guarantor can impact your credit. It can have a negative effect on your credit if the borrower misses payments. It can also affect your ability to secure future loans since it increases your debt-to-income ratio.

What are the disadvantages of being a guarantor?

Being a guarantor can add to your debt-to-income ratio, which can lower your credit. Also, if the borrower defaults, you are liable for the loan, and your credit can also be negatively impacted.

Are guarantors and cosigners the same thing?

Both guarantors and cosigners are responsible for a loan along with the other person who took out the funds, but a guarantor is only liable if the primary borrower defaults. A cosigner is responsible right away.

Photo credit: iStock/FreshSplash

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-Q425-031

For Americans, the average credit limit sits at $32,025, according to the most recent data from Experian. That’s the typical maximum amount that a cardholder can spend on the card. A credit limit is sort of like a loan maximum — the higher the credit limit, the more money the cardholder can charge on the credit card. But when you hit the limit, you have to pay down the balance before you can spend more.

Read on to learn more about average credit limits and how you may be able to increase yours if you need access to more buying power.

What Is the Average Credit Card Limit?

The average credit card limit for Americans is $32,025, according to the most recent report by Experian. However, individual credit card limits can vary depending on a variety of factors, and can be as low as $300. For instance, there’s variance in the average credit card limit by age, as well as by creditworthiness.

Whatever your credit limit may be, it’s a critical part of understanding what a credit card is. Knowing your credit limit will help you to be aware of how much you can spend at places that accept credit card payments.

How Credit Card Issuers Determine Your Credit Limit

When you apply for a credit card, your initial credit limit depends on a variety of factors, including your credit scores, your income and debt-to-income ratio (DTI), your history with the card issuer, the card issuer’s policies and goals, and the current economic conditions. Every card issuer has its own process for determining an applicant’s credit limit. Here, some more specifics:

Your Credit Score

Your credit score plays a large role in determining your credit limit. Just like your score can affect your APR on a credit card, the higher your credit score, the more likely you are to receive a higher credit limit.

In addition, the average credit limit increases with the age of the credit history. Generally, the longer someone has had credit, the more likely they are to use it responsibly. That’s why credit companies may be more likely to offer a higher credit limit to applicants with an older line of credit and a higher credit score. Obviously, the age of your oldest line of credit is limited to your own age, so be sure to be aware of how old you have to be to get a credit card.

Your Income and Debt-To-Income Ratio (DTI)

Due to how credit cards work, card issuers are taking a risk when they extend credit to cardholders. If they think the applicant is a riskier customer, they may offer them a lower credit limit. A high income can indicate that you are able to repay what you borrow. Therefore, a high income can help you get a higher credit limit.

However, credit issuers will also consider your existing debt obligations when deciding your credit limit. Specifically, they will look at your debt-to-income ratio (DTI), which compares the amount of money you owe each month to the amount of money you earn each month.

Your debt-to-income ratio can also affect factors like whether your interest rate is above or below the average credit card interest rate.

Your History With the Card Issuer

Your history with a card issuer can also influence your credit limit. If you have an existing positive relationship with the card issuer, it may help you to get approved for a higher credit limit. However, if you have too many existing cards with an issuer, the card issuer may not want to extend you additional credit, even if you meet other criteria like having an excellent credit score.

The Card Issuer’s Policies and Goals

The credit card issuer has the authority to determine your credit limit, based on how risky they think you are as a customer. Each card issuer has its own policies and goals that it uses to determine what credit limit is afforded to each customer. In other words, your credit limit will also depend on your credit issuer.

Current Economic Conditions

One factor that’s completely out of your control when it comes to your credit limit are the current economic conditions. Since it relates to risk, the current economic environment does play a role in how credit card issuers determine your credit limit. For example, some credit card issuers lowered card limits at the start of the COVID-19 pandemic due to global economic uncertainty.

How to Increase Your Credit Limit

There are several ways to increase your credit limit. Sometimes, your card issuer will offer you a revised credit limit after you update your income information or build your credit. Other times, you may need to be more proactive by directly requesting an increase or transferring your available credit.

Update Your Income Information

One way to increase your credit limit is to keep your income information up to date with your card issuers. Sometimes your card issuer may periodically ask you if your income has changed. If not, you may need to let them know when your income rises, as a higher income can lead to a higher credit limit.

Build Your Credit

One of the best ways to increase your credit limit is to build your credit score. You can positively impact your credit by paying your bills on time, keeping your balances low by making more than your credit card minimum payment, and maintaining a low credit utilization rate.

Although this method may take the longest, it may have the most benefit because it could help you in many other financial aspects as well. For instance, it may make it possible for you to secure a good APR, or annual percentage rate, for a credit card.

Request an Increase

Most card issuers allow you to request a credit limit increase online. If this option is not available, you also can call your credit issuer to request an increase. However, be aware that a request for an increase sometimes results in a hard credit inquiry, which may hurt your credit score.

Transfer Your Available Credit

If you need a higher credit limit for a specific card (like for a large upcoming purchase), you may be able to transfer available credit from another card from the same card issuer. To check if this is an option for your cards, call your card issuer’s customer service line to request the transfer.

The Takeaway

Your credit limit represents how much you can spend on your card. While the average credit card limit was recently found to be $32,025, credit limits can vary widely depending on age, creditworthiness, your credit card issuer, current economic conditions, and more. Plus, there may be ways to increase your credit limit.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

What is a reasonable credit limit?

A reasonable credit limit may depend on a variety of factors, including your credit score, your income, and the current economic conditions, among others. The current average credit limit is $32,025, but many people will have a significantly higher or lower cap.

Can lenders change credit limits?

Lenders can change credit limits after you have been given an initial credit limit. Sometimes the card issuer will offer you a new credit limit after you update your income information or build your credit. Other times, you may need to directly request an increase. You can also consider transferring your available credit to increase your limit on a specific card.

What is available credit?

Available credit is the amount of money that is available to you to borrow, considering the current balance on your account. Credit limit, on the other hand, is the total amount that you can borrow.

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SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

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When you die, your credit card debt does not die with you. Rather, any remaining debt you have must be paid before assets are distributed to your heirs or surviving spouse. The debt is subtracted from your estate, which is the sum of your assets. If your debts exceed your assets, then your estate is considered insolvent. That could mean your loved ones don’t receive any funds at all.

Read on to learn more about what happens to credit card debt after death.

Who Is Responsible for Credit Card Debt When You Die?

An unfortunate part of understanding how credit cards work is grasping who is responsible for credit card debt after death. Typically, the estate (the assets left behind) may have to settle the debt. Relatives aren’t directly responsible for paying a family member’s credit card debts upon death, but the debt could be paid out of the money that represents their inheritance.

In addition, you may be responsible for paying your deceased loved one’s credit card debt if you cosigned for a credit card, given the responsibility cosigning carries. Joint account holders also can be held responsible for credit card debt left after death since both account holders are equally responsible for paying the credit card balance.

Authorized users, on the other hand, are not usually responsible for the outstanding balance on a deceased person’s account — unless, that is, you live in a community property state. These states, which typically hold spouses responsible for each other’s debts, include:

•   Arizona

•   California

•   Idaho

•   Louisiana

•   Nevada

•   New Mexico

•   Texas

•   Washington

•   Wisconsin

If you live in one of these states, you may have to pay your spouse’s credit card debts if they die, even if you were only an authorized user on their card.

Next Steps After a Cardholder Dies

If you have a relative or loved one who recently passed and left outstanding credit card debt, these are the steps you should take to make sure their debt is properly handled:

1.    Ask for multiple copies of the death certificate. You’ll likely need to send official copies to various credit card companies and life insurance companies. It may also be needed for other estate purposes.

2.    If you’re an authorized user on the deceased person’s credit card, stop using that card upon their death. Using a credit card after the primary cardholder’s death is considered fraud. If you make any payments on the authorized user card, the credit company will accept the credit card payments and can claim that you have taken responsibility for the entire balance of the card. If you don’t have another credit card of your own, you may want to explore how to apply for a credit card.

3.    Make a list of the deceased person’s financial accounts, including their credit card accounts. A spouse or executor of the deceased can request a copy of the person’s credit report to check for all accounts. This way, you’ll know which accounts you’ll need to handle.

4.    Notify the credit card companies of the death. You’ll want to make sure to close any accounts that were in the deceased person’s name.

5.    Alert the three consumer credit bureaus of the death. You’ll also want to put a credit freeze on the person’s account. This can help prevent identity theft in the deceased’s name. Only the spouse or executor of the estate is authorized to report this information to the credit bureaus, which include Experian®, TransUnion®, and Equifax®.

6.    Continue to make payments on any jointly held credit cards that you aren’t closing. Making the credit card minimum payment can help prevent a negative effect on your credit score.

Assets That Are Protected From Creditors

If a deceased relative’s credit card debt exceeds their total assets, don’t panic. In the instance the estate doesn’t have enough money to cover all of the deceased’s debt, state law will determine which debt is the highest priority.

Credit cards are considered unsecured loans, which are lower in priority for loan repayments after death. Mortgages and car loans are secured by collateral, so they are considered higher priority. Often, unsecured debt may not even get paid.

It’s also important to know that some types of assets are protected from creditors in the event of death. This includes retirement accounts, life insurance proceeds, assets held in a living trust, and brokerage accounts. Homes may also be protected, though this will depend on state law and how title to the property is held.

Remember: Credit card companies can’t legally ask you to pay credit card debts that aren’t your responsibility.

Credit Card Liability After Death

The best way to keep your loved ones from having to deal with your credit card debt is to responsibly manage your credit card balances while you’re alive. For instance, you can avoid spending up to your credit card limit each month to make your balance easier to pay off.

You can also take the time to look for a good annual percentage rate or APR for a credit card. This can help minimize the interest that racks up if you can’t pay off your balance in full each month.

Knowing your credit card debt won’t disappear after you die may also make you think twice before making a charge. For instance, while you can technically pay taxes with a credit card, it might not be worth it if it will just add interest to the amount you owe.

If a loved one has recently passed and you shared accounts in any way, keep an eye on your own credit reports and credit card statements. Make sure to dispute credit card charges that you think are incorrect.

How to Avoid Passing Down Debt Problems

If you want to avoid passing down the issue of sorting out your debt, you can have an attorney create a will or trust. A will or trust will offer your loved ones guidance on where you’d like your assets to go after your death, and, in some cases, could allow them to bypass the sometimes costly and time-consuming process of probate.

However, making a will or trust won’t necessarily stop debt collectors from contacting your family members after your death — even if those family members aren’t responsible for the debt. Keep in mind that the Fair Debt Collection Practices Act does prohibit deceptive and abusive contact by debt collectors, so your loved ones will have some legal protections from excessive collections efforts.

Still, it’s important to share as much information as you can about your debt with family members so that they’re aware of your finances after you are no longer there. You don’t need to share information as personal as the CVV number on your credit card or your credit card expiration date, but it is helpful for your loved ones to have an idea of how many accounts you have and what the general state of them is.

The Takeaway

Unfortunately, you don’t get automatic credit card debt forgiveness after death. While your loved ones generally won’t be held responsible for your debt — unless you have a joint account, served as a cosigner, or live in a community property state — your debts are still deducted from your estate. If you want to avoid leaving your loved ones with a mountain of debt, the most important step you can take is to responsibly manage your credit cards while you’re still here.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

Do I have to pay my deceased parent’s credit card debt?

You don’t have to pay your deceased parent’s credit card debt unless you were a cosigner on their credit card. If you were an authorized user on your parent’s credit card, you are not responsible for their debt.

Do credit card companies know when someone dies?

You should notify the credit card company when your close relative dies to close any accounts in their name. You should also notify the three consumer credit bureaus of the death to put a credit freeze on the person’s account to prevent identity theft.

Can credit card companies take your house after death?

Homes are usually protected from creditors in the event of death, though this does depend on state law and how the title of the property is held. In general, however, credit card companies usually can’t take your house after death.

Is my spouse responsible for my credit card debt?

Your spouse is not responsible for your credit card debt unless they were a cosigner on your credit card. If they were an authorized user on your credit card, they generally are not responsible for your credit card debt unless you live in a community property state (California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin).

SoFi Credit Cards are issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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