Should I Borrow Money for a Down Payment?

Q: Can you get a loan for a down payment?

While you technically can use a personal loan for a down payment, most mortgage lenders discourage it: adding a loan payment raises your debt-to-income ratio, making approval harder; underwriters often require down-payment funds to come from savings or bona fide gifts; and personal loan rates are typically higher than mortgage rates, increasing your overall borrowing costs.

Q: What are some alternatives to fund a down payment?

Dipping into your personal savings may be an option if you have sufficient funds in a banking account. You may use funds in a checking or savings account to fund a down payment on a home or car. Borrowing against the cash value of a life insurance policy may be another way to fund a down payment.

Q: What happens if you can’t pay back a down payment loan?

Borrowing a personal loan to make a down payment on a car or home and failing to repay the personal loan may damage your credit. Lenders may also file a breach of contract lawsuit against you if you default on a personal loan.

Can You Get a Personal Loan For a Down Payment?

Sulaiman Abdur-RahmanUpdated June 3, 2025

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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.

Deciding whether to borrow money for a home or car down payment is a significant financial choice that can impact your mortgage or auto terms, monthly payments, and long-term wealth-building potential. While borrowing can help you reach the 20% down payment threshold faster — and potentially avoid private mortgage insurance on a home — it also adds debt and interest costs to your financial obligations.Here, we’ll explore the various factors to consider when thinking about borrowing for a down payment, including the impact on your credit score, the potential for long-term debt, and alternative options that might be more suitable for your financial situation.

Why a Larger Down Payment Is Important

A larger down payment reduces the amount you need to borrow, which directly lowers your monthly payments and the total interest paid over the life of the loan. Lenders often view borrowers who contribute more equity up front as less risky, which can translate into lower interest rates and better loan terms. By putting down 20% or more, you may also avoid paying private mortgage insurance (PMI) on a home, which can add hundreds of dollars to your monthly housing costs.For cars, a larger down payment may be right for you if you’re trying to avoid having an upside down car loan. While you may not need to put down a down payment for the purchase of a car, doing so can lower your monthly payment and reduce the amount you pay in interest.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 personal loan for a down payment? Getting approved for a consumer loan is never guaranteed. Plus, 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 for other reasons, 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.

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?

Photo credit: iStock/baona

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About the Author

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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