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You want to flip a house, but you don’t have enough money for a down payment — and your credit isn’t where it needs to be for a personal loan. Or, maybe you’re a small business owner who wants to own a piece of commercial real estate. People who are investing in real estate beyond their primary residence may consider a hard money loan as an option, especially if a traditional mortgage isn’t.

A hard money loan is a short-term loan commonly used by investors, such as house flippers or developers who renovate properties to sell. The loan typically uses the property as collateral. Hard money loans are usually funded by private lenders, individuals, or investor groups, rather than banks.

A hard money loan may make sense on paper, but because it typically has a shorter term than other types of loans and interest rates can be high, paying back the loan can be challenging. Defaulting on a hard money loan could mean losing the property.

What Is a Hard Money Personal Loan?

A hard money personal loan is a type of personal loan that uses collateral. While a mortgage is also a type of loan that uses property as collateral, a hard money loan is very different.

First of all, a hard money loan doesn’t come from a bank. It comes from a private lender, which may be a company or an individual. The loan will likely have higher interest rates and a shorter payback period than a traditional mortgage.

It can also be a much shorter process to be approved for a hard money loan. While a mortgage may take weeks for approval, it’s not atypical to have cash in hand within a few days of a hard money loan application.

A hard money loan also may be more lenient in terms of credit scores or assets than a traditional loan. This can be beneficial for people who are wanting to flip a house or buy an additional piece of property, who may not have enough assets on paper to be approved for a traditional mortgage, or who need a larger down payment than they have.

How Do Hard Money Personal Loans Work?

Hard money personal loans are often advertised to — and used as a tool for — house flippers, but other people may pursue a hard money personal loan as well.

Let’s say someone wants to buy a house to flip, or a piece of land to use as a rental property. They may still be building their credit, or they may not have enough money for a down payment. They may have been turned down for a mortgage, or they may not want to apply for a mortgage, knowing that it’s a time-intensive process and their finances might not be as strong on paper as they know the bank would like.

In this case, the person might turn to a hard money personal loan. Individuals, groups of investors, or private companies may specialize in offering hard money loans. Terms vary but are often less than one year, compared to 20 or more years for a mortgage. But the one constant: If you can’t pay back the loan, then you lose the collateral, which would be the property.

Other things to be aware of regarding a hard money personal loan: Interest rates may be high and the loan term is much shorter than a mortgage. This comes with a fair amount of risk.

Pros and Cons of Hard Money Personal Loans

As with any personal loan, it’s important to consider the pros and cons of the loan. It can also be a good idea to consider what-ifs, and how you might pay back the money if the original plan doesn’t work. Here, some pros and cons to think about before applying for a hard money personal loan.

Personal Loans Versus Hard Money Loans

The primary difference between an unsecured personal loan and a hard money loan is that a hard money loan is secured. Both are personal loans, but using collateral for a personal loan means the loan is secured.

Collateral can be anything of value. But in the case of a hard money loan, it’s in the form of property. A personal loan typically does not require collateral. If you were unable to pay back a personal loan, the lender could not take away your house, for example. Both types of personal loans have specific terms and conditions, and both can provide cash relatively quickly. However, many personal loans are backed by a bank or other financial institution.

Is a Hard Money Personal Loan Right For You?

Hard money personal loans may be an option for certain financial needs. But, as with any personal loan, it’s important to weigh the pros and cons, and consider what-ifs. Questions to ask may include:

•   What other avenues can I follow to raise the money I need?

•   What happens if I don’t pursue this loan?

•   If I do get this loan and plan to do a specific thing with it, what happens if that specific thing doesn’t happen the way I anticipated?

•   Can I afford this loan, including interest?

•   Could I afford this loan if my financial circumstances changed?

These questions can help you assess worst-case scenarios. You also may want to ask your potential lender any questions you have as well.

Recommended: Personal Loan Alternatives and Options

Hard Money Personal Loan Alternatives

There are potential alternatives to hard money personal loans. Some may require collateral, and others, like a personal loan, may not. Each comes with pros and cons. Your financial situation may also determine which loans you might be eligible for. If you’re building your credit, you may not have access to certain loans.

Credit Cards

If you’re purchasing land or property, you likely need cash. But for other purchases, using a credit card could be an option. If you don’t need a lump sum of money, using the line of credit that a credit card offers may work well for making periodic purchases.

However, credit cards may have high, variable interest rates. Plus, the more of your available credit you use, the higher your credit utilization ratio, which could impact your credit score.

Recommended: What Is A Personal Line of Credit & How Do You Get One?

Personal Loans

Can you buy land with a personal loan? You could. Generally, once you’re approved for a personal loan, you receive money in your account and can then use it for virtually any purpose. Some people use personal loans to pay for renovations or other home improvement projects.

But it could be challenging to get mortgage approval if you were planning on using a personal loan for a down payment, for example. A personal loan may affect mortgage eligibility.

Recommended: Do Personal Loans Affect Getting a Mortgage?

HELOC

A home equity line of credit (HELOC) is a type of revolving debt. For example, if you apply for a HELOC and are approved for $10,000, you can draw up to $10,000. Once that money is paid back, you can draw from it again for the set period of time defined in the terms of the loan.

A HELOC is a popular option for people who are doing home improvement projects. They may not need a lump sum of cash but may have ongoing expenses. Generally, interest rates on a HELOC are variable, not fixed.

Since a HELOC is a loan secured by the borrower’s home, there is a risk of losing the home if the loan is not repaid.

Recommended: How Do Home Equity Lines of Credit Work?

The Takeaway

For some people, hard money personal loans can allow them to realize their real estate goals. But hard money loans typically have high interest rates and short payback periods, which can make them risky. It can be a good idea to carefully weigh the pros and cons of a hard money loan.

A SoFi Personal Loan may be an alternative to consider. Since unsecured personal loans from SoFi do not require collateral, they could be a good option for those just entering the real estate market. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

Photo credit: iStock/JLco – Julia Amaral

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.

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Sometimes you need a loan for a venture that a traditional bank might not approve. In these instances, a peer-to-peer (P2P) loan might be what you’re looking for. Peer-to-peer lending, also known as social lending, rose out of the 2008 financial crisis. When banks stopped lending money as freely as they had in the past, potential borrowers had fewer loan options. At the same time, low interest rates meant lower returns from savings accounts or CDs.

Enter P2P lending sites. P2P lenders essentially cut out the middleman (banks and traditional lenders) and created a space for borrowers and investors to do business. Since then, the concept of lending person-to-person has taken off, with the rise of a number of peer-to-peer lending platforms.

Wondering if a P2P loan is right for you? Or if investing in P2P lending is a smart way to diversify your portfolio? Let’s take a look at some of the pros and cons.

What Is Peer-to-Peer (P2P) Lending?

P2P lending links up people who want to borrow money with individual investors who want to lend money. P2P lending sites like Prosper, Upstart, and Kiva — three prominent P2P lenders — provide low-cost platforms where borrowers can request loans and investors can bid on them.

The most common type of loan available through P2P lending is a personal loan, which provides borrowers with a lump sum of money they can use for virtually any purpose. However, other types of loans, including car loans, business loans, and home loans, are offered.

Personal loan amounts offered on P2P platforms range anywhere from $1,000 to $50,000 and repayment periods are typically 36 to 60 months. Interest rates can vary widely, from around 7.5% to 35.99%, depending on factors including the individual’s credit history and perceived risk, as well as the purpose of a loan.

The lending platforms make money from serving as the intermediary in this process. In exchange for keeping records and transferring funds between parties, they charge a fee — typically 0.5% to 1.5% of the interest earned — to the investors lending the money. Some platforms also charge origination or closing fees to the borrowers, which typically range from 1% to 8% of the loan amount.

Is Peer-to-Peer Lending Safe?

The bulk of the risk of peer-to-peer lending falls onto investors. It’s possible that borrowers will default on their loans, and that risk increases if the investor opts to lend to those with lower credit ratings. If the loan were to go into default, the investor may not get paid back.

Further, peer-to-peer lending is an investment opportunity, and returns are never guaranteed when investing. There is the risk that investors could lose some or all of the amount they invest. Unlike deposit accounts with a traditional bank or credit union, P2P investments are not FDIC-insured.

How Does Peer-to-Peer (P2P) Lending Work?

The basic P2P lending process works like this: A borrower first goes through a quick soft credit pull with the P2P lending platform of their choice to determine initial eligibility. If eligible to continue, the lender likely will conduct a hard credit pull and then assign a borrower a “loan grade,” which will help lenders or investors assess how much of a risk lending to them might be.

The borrower can then make a listing for their loan, including the interest rate they’re willing to pay. With some P2P lending platforms, the borrower has an opportunity to make a case for themselves; they can provide an introduction and describe why they need the loan. A compelling, creative listing might have more luck grabbing a lender’s attention and trust.

Next, lenders can bid on the listing with the amount they can lend and the interest rate they’d be willing to offer. After the listing has ended, the qualified bids are combined into a single loan and that amount is deposited into the borrower’s bank account.

Peer-to-Peer (P2P) Lending Examples

Here are some examples of popular peer-to-peer lending sites:

•   Prosper: Prosper can provide loans in amounts anywhere from $2,000 up to $50,000. Loan terms are two to five years, and funding can happen in as little as one business day.

•   Upstart: Upstart is an AI lending marketplace that can offer borrowers loans of up to $50,000, with loan terms of either three or five years. It’s possible to check your rate in minutes, and most loans are funded within one business day after signing.

•   Kiva: Kiva connects borrowers in need of money to fund their small businesses with a network of lenders who aren’t seeking to make a profit. Kiva requires borrowers to get some funding from one of the microlending partners. Once a certain threshold amount is met, their loan becomes available for public funding.

Peer-to-Peer (P2P) Lending for Bad Credit

It is possible to get a peer-to-peer loan with a bad credit score (meaning a FICO score below 580). However, those with lower credit scores will almost certainly pay higher interest rates.

Additionally, those with bad credit may have more limited options in lenders, though there are peer-to-peer lending platforms for bad credit. Many platforms have minimum credit score requirements, which tend to be in the range of fair (580-669) to good (670-739). For instance, Prosper requires a minimum score of 600.

If you have bad credit and are seeking a P2P loan, you might first work to improve your credit profile before applying. Or, you could consider getting a cosigner, which can increase your odds of getting approved and securing a better rate if you’re finding it hard to get a personal loan.

Peer-to-Peer (P2P) Lenders Fees

Peer-to-peer lending platforms can charge fees to both borrowers and investors. Which fees apply and the amount of these fees can vary from lender to lender.

A common fee that borrowers may encounter is an origination fee, which is typically a percentage of the loan amount. Other fees that borrowers may face include late fees, returned payment fees, and fees for requesting paper copies of records.

Investors, meanwhile, may owe an investor service fee. This is generally a percentage of the amount of loan payments they receive.

Recommended: Fee or No Fee? How to Figure Out Which Loan Option Saves You the Most

Pros of Peer-to-Peer (P2P) Lending

There are upsides to peer-to-peer lending for both borrowers and investors. However, the benefits will differ for both parties involved.

Pros of P2P Loans for Borrowers

•   Easier eligibility: The biggest advantage for a borrower getting a personal loan peer-to-peer is being eligible for a loan they might not have been able to get from a traditional lender.

•   Faster approval and competitive rates: P2P lenders might approve your loan faster and offer a more competitive rate than a traditional lender would.

•   Possible to pay off credit card debt: One way that people are using P2P loans is to crush their credit card debt. People with high credit card balances could be paying up to 24.37% APR or higher in interest charges. If they can wipe it out with a P2P loan at a lower interest rate, it can save them a lot of money.

•   Option to finance upcoming expenses: Those who are facing a lot of upcoming expenses might find it more cost-effective to take out a P2P loan rather than put those expenses on a high-interest credit card.

Pros of P2P Loans for Investors

•   Promising alternative investment opportunity: Some see P2P lending as a promising alternative investment. When you lend money P2P, you can earn income on the returns as the borrower repays you. Those interest rates can be a few percentage points higher than what you might earn by keeping your money in a savings account or a CD. While there is some risk involved, some investors see it as less volatile than investing in the stock market.

•   Option to spread out risk: P2P lenders also offer many options in terms of the types of risk investors want to take on. Additionally, there are ways you can spread the amount you’re lending over multiple loans with different risk levels.

•   Sense of community: For borrowers and investors, the sense of community on these sites is a welcome alternative to other forms of lending and investing. Borrowers can tell their stories and investors can help give their borrowers a happy ending to those stories.

Cons of Peer-to-Peer (P2P) Lending

Though there are upsides to peer-to-peer lending, there are certainly drawbacks as well. These include:

•   Risk for investors: The biggest disadvantage of P2P lending is risk. Since P2P loans are unsecured, there’s no guarantee an investor will get their money back. The borrowers on a P2P site might be there because traditional banks already declined their application. This means investors might need to do extra legwork on their end to evaluate how much risk they can take on.

•   Potentially higher rates for borrowers: While P2P lenders might approve a loan that a traditional bank wouldn’t, they might offer it with a much higher interest rate. In these cases, it could be wiser to search for alternatives rather than accepting a loan with a costly interest rate.

•   Effort and personal exposure for borrowers: There can be a lot of effort and personal exposure involved for the borrower. Borrowers have to make their case, and their financial story and risk grade will be posted for all to see. While we’re used to sharing a lot of our lives online, sharing financial information might feel like too much for some borrowers.

•   Relatively new industry with evolving regulations: Then there’s the risk of P2P lending itself. The concept is still relatively new, and the decision on how best to regulate and report on the industry is still very much a work in progress. Some lending platforms have already hit growing pains as well. As regulations around the industry change and investors are tempted elsewhere, the concept could lose steam, putting lending platforms in danger of closing.

Recommended: 11 Types of Personal Loans & Their Differences

Peer-to-Peer (P2P) Loans vs Bank Loans

When it comes to P2P loans compared to bank loans, the biggest difference is who is funding the loan. Whereas bank loans are funded by financial institutions, peer-to-peer loans are funded by individuals or groups of individuals.

Further, bank loans tend to have more stringent qualification requirements in comparison to P2P loans. This is why those with lower credit scores or thinner credit histories may turn to peer-to-peer lending after being denied by traditional lenders. In turn, default rates also tend to be higher with peer-to-peer lending.

The Takeaway

Peer-to-peer lending takes out the middleman, allowing borrowers and investors to do business. For borrowers, P2P loans can offer an opportunity to secure financing they may be struggling to access through traditional lenders. And for investors, P2P loans can offer an investing opportunity and a sense of community, as they’ll see where their money is going. However, there are drawbacks to consider before getting a peer-to-peer loan, namely the risk involved for investors.

Whether you’re getting a P2P loan or a loan from a traditional lender, it’s important to shop around to find the most competitive terms available to you.

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

FAQ

Is peer-to-peer lending safe?

There are certainly risks involved in peer-to-peer lending, particularly for investors. For one, borrowers could default on their loan, resulting in investors losing their money. Additionally, there’s no guarantee of returns when investing.

What is peer-to-peer lending?

Peer-to-peer lending is a type of lending wherein individual investors loan money directly to individual borrowers, effectively cutting out banks or other traditional financial institutions as the middlemen. This can allow borrowers who may have been denied by more traditional lenders to access funds, and provide investors with a shot at earning returns.

What is an example of peer-to-peer lending?

Some popular P2P lending sites include Prosper, Upstart, and Kiva. Borrowers can use peer-to-peer loans for a variety of purposes, such as home improvement, debt consolidation, small business costs, and major expenses like medical bills or car repairs.

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.

If you’re strapped for cash and have a hard time qualifying for traditional loans, or you live in an underbanked area, you may be considering a pawnshop loan. They appear to be a convenient option for fast cash, but they can also come with significant disadvantages, including high fees.

Before putting your valuables down in pawn, learn more about what pawnshop loans are and how they work.

What Is a Pawnshop Loan?

A pawnshop loan is a secured, or collateralized, loan. To borrow the money, you must produce an item of value as collateral – such as a piece of jewelry, a musical instrument, electronics, or an antique – that provides backing for the loan. You and the seller agree to a loan amount and a term. If you don’t pay back the loan (plus fees) within the agreed amount of time, the pawnshop can sell the item to recoup their losses.

Pawnshops will typically offer you 25% to 60% of the resale value of an item. The average size of a pawnshop loan is $150 with a term of around 30 days.

Aside from the need for collateral, there are few other requirements to qualify for a pawnshop loan. You typically don’t need to prove your income or submit to a credit check.

Recommended: No Credit Check Loans Guide

How Do Pawnshop Loans Work?

Pawnshops don’t charge interest on the loans they offer. However, the borrower is responsible for paying financing fees that can make the cost of borrowing higher than other loan options.

Regulations around what pawnshops can charge vary by state, but you could end up paying the equivalent of many times the interest charged by conventional loans.

Say you bring in a $600 guitar to a pawnshop, and they offer you 25% of the resale value, or $150. On top of that, let’s say the pawnshop charges a financing fee of 25% of the loan. That means you’ll owe $37.50 in financing fees, or $187.50 in total.

If you agree to the loan, the pawnbroker will typically give you cash immediately. They’ll also give you a pawn ticket, which acts as a receipt for the item you’ve pawned. Keep that ticket in a safe place. If you lose it, you may not be able to retrieve your item.

You’ll usually have 30 to 60 days to repay your loan and claim your item. According to the National Pawnbrokers Association, 85% of people manage to do this successfully. When a borrower pays off a pawnshop loan, they can retrieve the item they put in pawn. For those who don’t, the pawnshop will keep the item and put it up for sale. There is no other penalty for failing to pay off your loan, but you do lose your item permanently.

Recommended: Can You Get a Loan Without a Bank Account?

The Pros and Cons of Pawnshop Loans

In general, it’s best to seek traditional forms of lending, such as a personal loan from a bank, credit union, or online lender, if you can. These loans tend to be cheaper and can help you build credit. However, if you need cash the same day and you don’t qualify for other loans, you might consider a pawnshop loan. Carefully weigh the pros and cons to help you make your decision.

Pros of a Pawnshop Loan

•   Access to cash quickly. When you agree to a pawnshop loan, you can typically walk out with cash in hand immediately.

•   No qualifications. The ability to provide an object of value is often the only qualification for a pawnshop loan.

•   Failure to pay doesn’t hurt credit. While you will certainly lose the item that you put in pawn if you don’t pay back your loan, there are no other ramifications. Your credit score will not take a hit.

•   Loans aren’t sent to collections. If you don’t pay back your loan, no collections agency will hound you until you pay.

Recommended: How Do Collection Agencies Work?

Cons of a Pawnshop Loan

•   High fees. The financing fees associated with pawnshop loans can be much more expensive than traditional methods of obtaining credit, including credit cards and personal loans. Consider that the average annual percentage rate (APR) on a personal loan is currently 12.21%, whereas pawnshop financing fees, when converted into an APR, can be 200% or more.

•   Loans are relatively small. The average size of a pawnshop loan is just $150. If you need money to cover a more costly expense, you may end up scrambling for cash elsewhere.

•   You won’t build credit. Pawnshop loans are not reported to the credit reporting bureaus, so paying them off on time doesn’t benefit your credit.

•   You may lose your item. If you can’t come up with the money by the due date, you’ll lose the item you put in pawn. (Same if you lose your pawn ticket.)

Pros and Cons at a Glance

What Is a Pawnshop Title Loan?

A pawnshop title loan is a loan in which you use the title of your car as collateral for your loan. You can typically continue driving your vehicle over the course of the loan agreement. However, as with other pawnshop loans, if you fail to repay your loan on time, the pawnbroker can seize your car.

Typical Requirements to Get a Loan Through a Pawnshop

There are typically few requirements to get a pawnshop loan, since the loan is collateralized by the item you put in pawn and the pawnbroker holds on to that item over the course of the loan. However, pawnbrokers do want to avoid dealing in stolen goods, so they may require that you show some proof of ownership, such as a receipt.

Alternative Loan Options

There are a number of benefits of personal loans that make them a good alternative to pawnshop loans. Personal loans are usually unsecured, meaning there is usually no collateral required for a personal loan. Lenders will typically run a credit check, and borrowers with good credit scores usually qualify for the best terms and interest rates. That said, some lenders offer personal loans for people with bad credit.

If you qualify for a personal loan, the loan amount will be given to you in a lump sum, which you then typically repay (plus interest) in monthly installments over the term of the loan, often two to seven years. The money can be used for virtually any purpose.

Personal loans payments are reported to the credit reporting bureaus, and on-time payments can help you build a positive credit profile.

The Takeaway

If you only need a small amount of money, you don’t qualify for other credit, or if you’re looking for a loan without a bank account, you may consider a pawnshop loan. Just beware that they are potentially costly alternatives to other forms of credit.

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

FAQ

How is a loan obtained through a pawnshop?

To borrow money from a pawnshop you must present an item of value that can act as collateral for the loan. The pawnbroker may then provide a loan based on the value of that item.

What happens if you don’t pay back your pawnshop loan?

If you fail to pay back your pawnshop loan on time, you won’t be able to reclaim the item you put up as collateral for the loan. The pawnshop will sell it to recoup their losses.

What’s the most a pawnshop loan will pay?

On average, a pawnshop will loan you about 25% to 60% of an item’s resale value. The average pawnshop loan is $150 and is repaid in about 30 days.

Photo credit: iStock/miriam-doerr

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.

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Both Buy Now, Pay Later (BNPL) and credit cards are ways to spread out the payment for a purchase over time, but they have a few key differences. Buy Now, Pay Later plans typically have a specific number of payments that are determined upfront. You’ll often pay a portion at the time of purchase, and then make regular payments over time, often with zero interest.

In contrast, when you pay with a credit card, you may not have to make any payment immediately. Instead, the credit card company will send you a monthly statement. You’ll likely need to make at least a minimum payment and will owe interest on any remaining balance. As long as you continue to make at least the minimum payments, there’s no limit to how long you can take to repay your purchase.

Read on for more on the differences between Buy Now, Pay Later vs. credit cards.

What Is BNPL (Buy Now, Pay Later)? And How It Works

BNPL (Buy Now, Pay Later) is a type of installment loan that allows customers to purchase something (either online or in-store) and pay for it over time. In recent years, there’s been a big jump in the growth of Buy Now, Pay Later programs.

Several retailers and even some credit card companies offer Buy Now, Pay Later. The details of these programs vary depending on the merchant, but there are some similarities. With a BNPL plan, generally you make an initial deposit of around 25% at the time of purchase. Then, you’ll make a series of installment payments until your balance is paid off, similarly to how you would with layaway.

Recommended: When Are Credit Card Payments Due

Pros and Cons of Buy Now, Pay Later

Next, consider the pros and cons of Buy Now, Pay Later:

What Is a Credit Card? And How It Works

A credit card is a type of revolving credit that allows you to make charges against your line of credit.

When you apply for a credit card, the issuer will do a hard pull on your credit. If approved, you’ll be given a specific credit limit that is the maximum amount you can borrow.

As you borrow against that limit when using a credit card, your available credit is reduced. Similarly, it’s replenished when you make payments.

Each month, you’ll get a statement listing all of the charges you made that month, plus any outstanding balance. If you pay off the balance in full, you won’t be charged any interest due to how credit cards work. However, if you pay less than the full amount, you’ll owe interest on any remaining balance.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Pros and Cons of Credit Cards

Credit cards can serve as a useful financial tool when you use them responsibly and adhere to credit card rules. However, they also have the potential to cause harm. Here are some pros and cons of using credit cards:

Difference Between Buy Now, Pay Later and Credit Cards

While Buy Now, Pay Later plans and credit cards have some similarities, they have a few key differences. Here’s a look at BNPL vs. credit card distinctions:

What Is a Buy Now, Pay Later Credit Card?

Traditionally many Buy Now, Pay Later plans were offered by companies that were not traditional credit card companies. However, several issuers are now starting to offer credit cards with Buy Now, Pay Later features available.

With these Buy Now, Pay Later credit cards, you can combine some of the benefits of both options. You can use your credit card like you normally would (including earning rewards) and then identify larger purchases that you’d like to pay for over time with the Buy Now, Pay later card feature.

Among the companies offering such products are American Express, Chase, and Citi.

Choosing a Buy Now, Pay Later Credit Card

Credit card issuers that offer Buy Now, Pay Later credit cards each run their programs slightly differently. You’ll want to look at the terms and conditions of each credit card you’re considering to see which works best for you. If the Buy Now, Pay Later options are similar, you can compare the credit cards themselves to find the best option.

Benefits of Buy Now, Pay Later Credit Cards

These are some of the upsides of BNPL credit cards to consider:

•   Earn credit card rewards on your purchases.

•   You can finance the purchase for a variable length of time.

•   Responsible and on-time payments can help your credit score.

Risks of Buy Now, Pay Later Credit Cards

That being said, there are potential downsides to know about too, including:

•   Buy Now, Pay Later cards may encourage you to spend more than you have.

•   Unlike traditional Buy Now, Pay Later plans without credit or debit cards, you may be charged a fee to pay for your purchase over time.

•   There is likely a minimum purchase amount you must meet to be able to use the BNPL feature of your credit card.

Recommended: How to Avoid Interest On a Credit Card

The Takeaway

Buy Now Pay Later and credit cards are two ways to pay for your purchases over time. With BNPL, you’ll usually pay an initial deposit at the time of purchase, and then you’ll make several fixed payments over the course of a few months. With credit cards, you have a set credit limit; each month, you’ll get a statement with your total monthly charges and any outstanding balance. If you don’t pay your statement balance in full, you’ll owe interest on any unpaid amount. Each option has its pros and cons. Another possibility is to get a Buy Now, Pay Later credit card, which combines features from both types of plan.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Is Buy Now, Pay Later better than a credit card?

Buy Now, Pay Later and credit cards can both be the right answer depending on your specific situation, so it’s hard to say that one is better than the other for every scenario. Buy Now, Pay Later can be a good option if you want to finance a purchase over a fixed period of time with low interest and fees.

Will BNPL affect my credit score?

Generally speaking, BNPL plans do not impact your credit score as long as you make your payments on time. However, if you do not fulfill your BNPL contract, your outstanding debt may be reported to the credit bureaus, which could have a negative impact on your credit score.

Will BNPL replace the use of credit cards?

While BNPL and credit cards are both financial instruments that allow you to pay for purchases over time, they have some important differences. Since they have different pros and cons, it is unlikely that one will completely replace the other. Instead, it is more likely that both will continue to be used in different situations.

Photo credit: iStock/RgStudio

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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When you’ve maxed out on your card — or reached your credit card spending limit — it can have a negative impact on your finances. Here’s a closer look at what happens if you max out on a credit card and how it can affect your credit score, as well as how to prevent maxing out your card or bounce back if you already have.

When Is a Credit Card Maxed Out?

So, what is a maxed out credit card? Maxing out on a credit card simply means that you’ve reached the credit limit on your credit card. For instance, if you have a $20,000 credit limit on a card, and your balance hits that $20,000 mark, it’s maxed out. As such, you may not be able to put any more purchases on that card.

Recommended: What Is a Charge Card

What Happens If You Max Out Your Credit Card?

There are a number of financial impacts of a maxed-out credit card. For starters, your card will likely get declined if you try to make a purchase. This is because rather than overdrafting a credit card, your credit card is typically just turned down (though in some cases, you could instead face fees for exceeding the limit, and the charge will go through).

Additionally, you could end up paying quite a bit in interest if you can’t pay off your entire statement balance in full. Plus, it could take you a long time to pay off your balance, further increasing the interest you pay over time. Your minimum payment due may also increase, depending on how it’s calculated by your issuer.

A maxed-out credit card also means that your credit score will take a hit. That’s because your credit utilization — how much of your available credit you’re using — makes up 30% of your credit score. If you’re maxing out a credit card, it looks as if you’re overextended financially, which signals to lenders that you’re a risk.

Recommended: When Are Credit Card Payments Due

Guide to Prevent Maxing Out Your Credit Card

To avoid maxing out on your credit card, here are some steps to take:

•  Establish an emergency fund: Without an emergency fund, you’ll likely resort to using your credit card in a pinch, which could lead you to max out your credit card. To avoid ending up in this situation, aim to stash away at least three to six months of living expenses. If that seems like a tall order, start with one month of living expenses, and go from there.

•  Keep tabs on your spending: A golden rule of using a credit card responsibly is to check your credit card statements to monitor usage. Aim to check your balance at least once a week, if not more frequently.

•  Know how much of your credit you’re utilizing: Another of the golden credit card rules is to know what a reasonable balance to keep is and how much of your credit card is being utilized at any given time. For instance, if 30% is the maximum amount you’d like to maintain on your card, and your credit limit is $5,000, then $1,500 is the highest balance you should aim to carry. Many financial experts advise keeping to no more than 30% or, better still, 10% of your credit limit.

•  Request an increase to your credit limit: If you increase your credit limit, it would lower your credit use. However, keep in mind that you also run the risk of racking up a higher credit bill. When considering requesting a credit limit increase, you’ll want to make sure you won’t end up simply spending more.

How Maxed-Out Credit Cards Can Affect Your Credit Score

If you’re wondering if it is bad to max out your credit card, know that it absolutely can have a negative impact on your credit score due to how credit cards work.

When you carry a high balance on a card, it drives up your credit utilization ratio, which can drag down your score. It’s generally recommended to keep the amount of your total credit you’re using at no more than 30%, preferably closer to 10%. If your cards are all maxed out, your ratio is closer to 100%.

However, you can save your score from the negative effects of a maxed-out credit card if you can pay off the balance in full before the statement period closes. If you do this, the maxed-out balance would not get reported to the credit bureaus. That will also help you avoid interest on credit cards.

Tips on Bouncing Back from a Maxed-Out Credit Card

If you’ve hit your credit card spending limit, it is possible to recover. Here are some tips for how to bounce back from what happens when you max out your credit card.

Consider a Balance Transfer Card

Transferring your existing balance to a balance transfer card with a 0% APR interest rate could help you save money on interest. However, you’ll need to have a plan in place to pay off the balance in full before the interest rate kicks in and you’re back in the same place once again. Also note that balance transfer fees may apply, which are generally 3% to 5% of the amount you’re transferring. Also make sure you understand how a balance transfer can impact your credit, as you will likely have a hard inquiry temporarily lowering your score.

Request Help

If you’re really struggling to keep your credit card spending down or are having trouble making payments, consider working with a professional. A credit counselor or nonprofit credit counseling organization can sit down with you to learn about your debt situation and the state of your finances. From there, they can suggest a game plan to help you manage your debt.

Consider Personal Loans

Another way to bounce back from maxing out on a credit card is to take out a personal loan to pay off your credit card debt. This might make sense financially if you qualify for a lower interest rate with the loan than you have on your credit cards. It could also simplify the payment process by rolling all your debts into a single loan.

The Takeaway

If you’ve hit your spending limit on your credit cards, it can negatively impact your credit score and translate to paying more in interest over time. While it’s best to avoid, should you max out on your cards, there are ways to recover and rebuild your credit.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What happens if I max out my credit card but pay in full?

If you max out your credit card but pay off your balance in full before the statement period ends, your credit utilization ratio won’t be impacted. In turn, it won’t have a negative impact on your score.

Can I still use my card after reaching the credit limit?

After you’ve reached the credit limit on your card, you generally won’t be able to make purchases on it. Your card won’t go through, and transactions will be declined. In some cases, however, your transaction may go through and you’ll instead owe a fee.

Is it bad to max out your credit card?

Hitting the spending limit on your credit card can have a negative financial impact. First, it can bump up your credit utilization ratio, which can bring down your credit score. It also could equate to a higher monthly minimum payment, and more interest paid over time. Plus, you likely won’t be able to put any more purchases on that card.

How can maxing out your credit card affect your credit score?

When you hit the spending limit on a card and don’t pay it off before the statement period ends, it impacts your credit utilization ratio, which makes up 30% of your credit score. In turn, your credit score will take a hit. On the flip side, decreasing the balances on your card can help build your score by lowering your credit utilization.

Photo credit: iStock/nensuria

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.

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

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