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Should I Borrow Money for a Down Payment?

Can You Get a Personal Loan For a Down Payment?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated July 21, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you need a mortgage loan to buy a house, borrowing a personal loan for down payment assistance may not help you reach your goals.Borrowing a personal loan for down payment assistance may not be right for you for several reasons, including the cost factor and potential impact to your credit score.The interest rate you get on an unsecured personal loan may be higher than the interest rate you get on a mortgage or car loan. Borrowing money to make a down payment may hurt your credit score and debt-to-income ratio, which can make it harder to get full approval on a car loan or mortgage loan application.Below we highlight why getting a personal loan for a down payment on a house or car may not be right for you.

Why a Larger Down Payment is Important

Some lenders may not require a down payment. Consumers may qualify for a car loan or mortgage loan without making a down payment in some cases. A down payment, however, can minimize your borrowing costs.A larger down payment may be right for you if you’re trying to avoid having an upside down car loan. Some mortgage lenders may require a minimum down payment on a home loan, but you may bolster your initial equity by making a larger down payment than required. How much of a down payment should you put on a car? The answer depends on your personal circumstances. As mentioned above, some lenders may not require any down payment. If you qualify for a car loan with no money down, borrowing a personal loan for down payment assistance may not be right for you.Recommended: How Down Payment Affects Your Auto Loans

How Much Is Needed for a Down Payment?

Federal lending rules or financial institutions may determine how much of a down payment you need to make when securing a mortgage loan. For example, qualifying home buyers who borrow Federal Housing Administration (FHA) home loans may put as little as 3.5% down on their home purchase.A down payment can minimize your borrowing costs and bolster your initial equity, but a down payment is not always necessary. As mentioned earlier, some lenders may not require any down payment on a car or mortgage loan.

Can You Receive a Loan for a Down Payment?

If you need to buy a house or car, a consumer loan can help you meet your goals. A mortgage home loan and secured auto loan are examples of consumer loans.Can you get a loan for a down payment? Getting approved for a consumer loan is never guaranteed. As mentioned earlier, borrowing money to make a down payment may hurt your credit score and debt-to-income ratio, which can make it harder to finalize a car loan or mortgage loan.

Why You Shouldn’t Use a Personal Loan

A personal loan is a debt that typically needs to be repaid over a set term with interest. The average personal loan interest rate is typically higher than the average mortgage or car loan interest rate.Applying for a consumer lending product may hurt your credit score if the lender conducts a hard pull inquiry into your credit report. Applying for a personal loan before applying for a mortgage or auto loan may hurt your credit score and debt-to-income ratio, which can make it harder for you to meet your goals.It’s important to understand the differences between a personal loan vs. mortgage. A personal loan may not be right for you if you need to buy real estate. A mortgage lender may deny your application if it discovers a new personal loan application on your credit report. 

Alternative Methods to Increase Down Payment

Here are some alternative methods to increase your down payment:

Dip Into Your Savings

If you have sufficient funds in a money market account or savings account, you may dip into your personal savings to make a down payment on a home or car. Using your savings to make a down payment can minimize your borrowing costs.

Borrow Against a Life Insurance Policy

If you have a life insurance policy with sufficient cash value, you may borrow against the cash value of your life insurance policy. Borrowing against a life insurance policy doesn’t require a hard credit check, but you risk losing your life insurance policy if you don’t repay the loan.

Borrowing Cash From a 401(K) Retirement Plan

If you have an eligible 401(k) retirement plan, you may borrow up to $50,000 from your retirement plan and use the funds toward a down payment. A 401(k) loan doesn’t require a hard credit check, but the money borrowed is taken out of the market and will not participate in any market gains, which will adversely affect the growth of the retirement funds.One of the pros of a 401(k) loan is the interest is paid back to yourself (minus fees potentially), but defaulting can trigger burdensome income tax consequences, including an additional 10% early distribution tax if you’re under the age of 59½.

The Takeaway

Taking out a personal loan may not be right for you if you need financing to buy a house or car. Mortgage lenders may deny your application if they discover a new personal loan application on your credit report. You may have other options for making a down payment without relying on a personal loan.If you need a personal loan to make home improvements, Lantern by SoFi can help. Just fill out a simple form and compare personal loans interest rates from lenders in our marketplace.Lantern helps you compare online personal loans up to $50,000.

Frequently Asked Questions

Can you get a loan for a down payment?
What are some alternatives to fund a down payment?
What happens if you can’t pay back a down payment loan?
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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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