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Getting a personal loan in your 20s: What you need to know
Weigh the pros and cons of borrowing while you're still learning to adult.
A good bit of your 20s are spent learning to take care of yourself in the real world. You might have taken on a full-time job, joined the gig economy, hustled your way through graduate school — or some combination of the three.
A personal loan can help when you’re just starting to build a solid financial future. But don’t be too quick to sign on the dotted line.
How 20-somethings can benefit from a personal loan
A personal loan can help you pay down debt and invest in yourself when you’re just starting out. The extra cash could remove barriers to an exciting career opportunity, returning to school and other life milestones.
Making a big move
You’ve landed a great job offer, but it’s all the way on the opposite coast. Maybe you’ve fallen in love with someone who lives a thousand miles away, or just want to see a new part of the world.
When moving your life in a new direction across the country or across the ocean, a personal loan can help you cover the upfront costs of flights, moving trucks, gas, deposits and more.
- Tip: Apply for a loan while you’re employed. Some lenders will consider your application if you’ve recently started a job. But you’ll likely find it hard to qualify for a competitive —or any — rate if you’re unemployed.
Starting a business
You might have a successful side hustle you’re looking to expand or a killer idea you’re willing to personally invest in. While some lenders offer startup financing, a personal loan could be a competitive option if you have strong personal credit and enough income to cover personal costs while getting your new enterprise off the ground.
- Tip: Find an entrepreneur-friendly lender. Online lenders like SoFi offer special programs for entrepreneurs, while others provide hardship forbearance you can rely on if your business folds. That way, your personal credit isn’t as deeply affected if things don’t go as planned.
Consolidating debt
If credit card debt is weighing you down, consider applying for a debt consolidation loan. Consolidation moves your existing debt into a term loan, ideally at more favorable rates. It can provide a path out of credit card debt and help you save over the long term if you’re extended a low APR.
- Tip: Watch for the origination fee. Many personal loan providers charge a processing fee equal to 0.5% to 6% of your loan amount, which many lenders subtract from your funds. If you see such a fee, ask how it works — you might need to take out a larger loan than you intended to pay off your debt in full.
Paying for school
Medical students, lawyers and anyone else who’s maxed out student loans might want to consider a personal loan to cover their costs. Personal loans can also help you pay for a bar exam or relocate for a medical residency if you can’t find a private student loan.
Student loans often come with competitive rates and in-school deferment options that you just won’t find with personal loans, however. While it might keep you from dropping out, a personal loan should be a last resort.
- Tip: Look for a lender that accepts cosigners. Unless you’re employed full time while in school, you might not qualify for a personal loan on your own. Applying with a trusted cosigner can help you land more competitive rates than applying on your own.
Building credit
Your credit score matters more than you might think. Yes, you need good credit to get a good deal on a credit card or mortgage. But some employers — and even landlords — look at your credit score when you apply for a job or an apartment.
If you’ve never carried debt, consider a credit-builder loan. Offered by many local banks and credit unions, these loans don’t typically allow you to access the funds until you’ve paid off the loan.
Already have a credit history but want to improve it? Taking out a personal loan can help improve your credit with responsible, on-time payments.
- Tip: Know how much you can afford to borrow. Taking out a loan you can’t afford can hurt your credit, because on-time payments make up a large part of your credit score. Use our personal loan calculator to estimate how much you can afford to borrow.
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When to avoid taking out a loan
A personal loan may not be the best idea for all situations. Before signing a contract, look into alternatives that can help you meet your financial goals.
Recurring bills
In an emergency, a personal loan can help you cover the cost of monthly bills. But you could end up in more debt than you can handle if you continually rely on loans to cover your general living expenses. Consider making a budget to cut back on personal spending, crowdfunding for help or reaching out to your support systems — friends, family or even benefits programs — before you borrow.
Vacations
Traveling can be a life-changing experience. But taking out a loan might not be the best way to see the world in your 20s. If you’re bitten by the travel bug, consider work-away programs, travel deals from companies like Groupon or good old-fashioned saving.
Unnecessary big purchases
That $5,000 rug might tie the room together, but digging into debt for unnecessary items puts you at financial risk. That’s because you’re paying interest on an already expensive item, costing you more in the long run. Unless it’s something you absolutely need, consider saving up for it instead.
Watch out for high rates and fees
Not all 20-somethings have poor credit, but chances are good that you won’t qualify for the strong rates and generous terms you might get on a loan 10 years down the line.
A few reasons for less competitive loans:
- You’ve had less time to build a credit history. The length of your credit history counts toward your credit score. Generally, the longer you’ve been paying off debt, the higher your score. It’s also a factor that some lenders consider when you take out a loan.
- Your high debt-to-income ratio. If you have massive student loan payments compared to your salary, you could have trouble qualifying for a loan. Most lenders prefer a debt-to-income ratio of 43% or less.
- You’re new to the job market. Many lenders require a minimum income and prefer applicants who are employed full time. While it’s possible to get a loan while self-employed or freelancing, it may not be easy to prove that your income is what you say it is. A higher income can typically get you larger loan amounts and more favorable rates and terms.
3 tips for managing your personal finances in your 20s
- Start saving now. Experts say you should have saved for retirement at least one year’s salary by the time you’re 30. But that’s not the only cost to save for — you never know when you might have an emergency expense.
- Pay attention to your credit. Tracking your score can help you build the credit you need to, say, buy a car or invest in a home. Many budgeting apps offer free credit score tracking that updates every month.
- Refinance your loans. Federal student loans often come with unbeatable rates and terms. But you might find a better deal out there for private student, personal or car loans. Especially if you’ve paid off a debt, earn more or have a better credit score than when you first took out the loan.
- Use apps. You don’t have to do everything yourself as you enter your post-college years. Mobile apps can help you get ahead on your student loan payments, manage your finances and even find you a job.
Bottom line
A personal loan can help you lay down the groundwork for building a strong and happy future — like moving to a new city to start a dream job. But borrowing more than you can handle could seriously hurt your personal finances and limit your future options.
Learn more in our guide to personal loans to know how to weigh benefits and find a lender.
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