finance

There are no time limits, but there’s still no reason to delay claiming

Reviewed by Chip Stapleton

How long does a beneficiary have to claim proceeds from a life insurance policy? If months or years have passed since the policyholder’s death, should you worry about losing out on the benefit?

The short answer is “no.” There isn’t a time limit when it comes to claiming a life insurance payout. As long as the policy was active at the time when the insured person died—that is, the premiums were paid and there are no grounds for the insurance company to deny the claim—you’ll get the money. However, for a timely payout, the earlier you can file, the better.

Key Takeaways

• There is no time limit on receiving life insurance death benefits, so don’t worry about filling a claim too late.
• To file a claim, you can call the company or, in many cases, start the process online.
• Expedite your claim by having a copy of the policyholder’s death certificate available, as well as their Social Security number and policy number.
• Once a claim has been filed and accepted, you can usually expect payment within 30 days.
• Each beneficiary must file their own claim.

How to Make a Claim

There are many reasons people delay claiming the death benefit from a life insurance policy. In some cases, they may not even know they’re the beneficiary of a loved one’s policy. In others, filing a claim is not a top priority while dealing with their loss.

If you’re the beneficiary of a life insurance policy—or even suspect that you might be—you should contact the insurance company shortly after the insured person passes away. Depending on the company, you may be able to visit its website to request that a claim form be mailed to you. Some insurers allow you to complete the entire process online.

The carrier will likely ask you to provide the insured individual’s name and date of birth. In order to expedite a claim, it may also request the insured’s Social Security number or policy number, as well as a copy of the death certificate.

Some policies have more than one beneficiary, so it’s important for each person to fill out a claim form in order to receive their payout. If you’re a contingent beneficiary—that is, you’re entitled to all or part of the death benefit if a primary beneficiary passes away before the policyholder—you may need to submit a copy of that individual’s death certificate as well.

Important

Insurance companies are required to hold funds in reserve and to pay into their state’s guarantee association fund. If they go out of business, claims will be paid from the company’s reserves. If the reserves aren’t insufficient, the guarantee association helps pay all or part of the claims.

How Long Do Claims Take?

While some companies may pay out within a few days, it can take one to two months for the insurer to send you the death benefit. And the payment can be delayed even further for a variety of reasons, such as if you sent in the wrong forms or the policy has lapsed. The company may also take longer to investigate the claim in certain situations. For example, if the cause of death is a homicide, the insurer must rule out the possibility that the person in line to receive a financial payout was involved in the incident.

In some cases, the insurance firm may outright refuse to pay the claim. If the policyholder dies within two years of taking out the insurance, the death generally falls within the “contestability period.” That means the company has the right to closely review the decedent’s medical history to make sure that all pertinent health conditions were disclosed when the policy was established.

The insurer may also look for any risky activities, such as scuba diving, that the policy owner failed to report on their application and that led to their death. If the individual died by suicide during the first two years of the policy, the company may also have the right to withhold a benefit.

Important

If you are having suicidal thoughts, contact the National Suicide Prevention Lifeline at 988 for support and assistance from a trained counselor. If you or a loved one are in immediate danger, call 911. For more mental health resources, see this National Helpline Database.

Uncertainty of Beneficiary Status

It’s always a good idea for insured adults to let loved ones know that they’re a beneficiary of a policy. Unfortunately, that doesn’t always happen. If you’re not sure whether you’re in line to receive a payout, you can check by going online and using the National Association of Insurance Commissioners’ Life Insurance Policy Locator Service, which searches its member companies for matching policies.

This service is free, but it can take up to three months to hear back. Therefore, it’s a process you probably want to start only after scouring the deceased’s personal records for more definitive information about their policy.

Even if you don’t contact the insurance company, they may find out about the policyholder’s death eventually. That’s because insurers in some states are required to regularly cross-check their list of customers against the Social Security Administration Death Master File (DMF). When they find out about the death through that process, they’ll contact any beneficiaries, although it may take substantially longer this way.

How Long Does It Take to Collect Life Insurance?

Once a valid claim has been made, it usually takes about 15-30 days to receive the payment from the insurance company, although it can sometimes take 60 days.

How Long Does It Take to Process a Life Insurance Claim?

An insurance company usually takes several days to a month to process and pay out a life insurance claim. This is because the insurer must ensure the claim is valid, verify the death certificate, and confirm the beneficiaries’ identities.

How Long Does a Beneficiary Have to Claim a Life Insurance Policy?

There is no time limit for beneficiaries to file a life insurance claim. However, the sooner you file a claim for a death benefit, the sooner you will receive your money. Filing as soon as possible makes sense because the insurer could need a month or longer to investigate the claim before paying out. This is particularly important if you need the policy proceeds to pay the deceased’s final expenses, such as funeral costs.

The Bottom Line

If you found out relatively late that you’re the beneficiary of someone’s life insurance policy, rest easy—there’s generally no time limit on when you can file a claim. However, there are a number of reasons why your payout can be delayed, so it never hurts to gather as much relevant information as you can and start the process sooner rather than later.

Some life insurance advice to consider

There are many good reasons to consider buying a life insurance policy, such as a recent marriage, a new baby, or taking on a large debt such as a home mortgage. Loved ones would have trouble paying off such a debt if something happened to you. Or perhaps you have witnessed firsthand the impact that a death has on surviving family members’ finances.

If you’re in the market for life insurance or have recently bought a policy, make sure you don’t put your family’s finances in jeopardy by making these mistakes.

Key Takeaways

• Life insurance can offer a measure of financial reassurance to your loved ones if something were to happen to you.
• The younger and healthier you are when buying life insurance, the lower your premiums are likely to be.
• It’s important to compare various types of life insurance to find the policy that’s right for you and your financial situation.
• Permanent life insurance covers you for your entire life and accumulates cash value over time. Term insurance only lasts for a certain period of time (such as 20 years) and has no cash value.
• It’s possible to own more than one life insurance policy, though you may be required to complete a medical exam to qualify for each one.

Getting Life Insurance

Life insurance is a financial contract that pays out a death benefit to one’s heirs or other beneficiaries in the event of the insured’s death. The purpose of this death benefit may be to replace any current and future income lost due to that death, to cover any outstanding debts and obligations of that person, or to leave some additional money as an inheritance or legacy.

Life insurance exists in a competitive marketplace, with many companies offering several types of policies and products. Term life insurance is the most basic form of coverage, providing a level death benefit for a set period of years (e.g., 20 years). Once the term runs out, you will need to reapply for new coverage if you so choose. Permanent life insurance can last your entire life and often comes with a cash accumulation component. The premiums on these types of policies tend to be more expensive compared to term but also come with additional benefits and value.

Regardless of which insurance you choose, the application process will be similar. You will need to provide your basic personal and financial information and complete a health survey. You will often have to undergo a paramedical exam, during which a trained health care professional will examine you and possibly request a sample of blood and urine for analysis. They gather medical information because life insurance rates are linked to the statistical probability that you will die and the insurer will have to pay out a claim.

As a result, insurance premiums are often the lowest for younger people (who are often healthier and have longer lives ahead) and for healthier people. Those with health conditions or who have riskier lifestyles (such as smokers) can expect to pay more.

Once approved, you will have to pay regular policy premiums (which can be set anywhere from monthly to annually). So long as you continue to pay your premiums, the policy will remain in force; otherwise, it may lapse and your coverage will be forfeited.

Mistake #1: Waiting to Buy Insurance

When purchasing life insurance, it’s important to consider the amount of coverage you need as well as the cost. Life insurance premiums are based on several factors, including your age and overall health.

Buying a life insurance policy sooner, rather than later, can work in your favor if you’re hoping to secure a policy at the lowest possible cost. Life insurance rates generally increase as people age or their health deteriorates. In some cases, illnesses or health problems may make you ineligible for coverage. The longer you put off the buying decision, the more the insurance will probably cost — if you can buy it at all.

Important

In addition to completing a health questionnaire, you may be required to complete a paramedical exam as part of the life insurance underwriting process.

Mistake #2: Buying the Cheapest Policy

While it is important to shop for a policy that’s affordably priced, it’s essential to consider what coverage you’re getting in return. Life insurance policies can be complicated, so it’s a good idea to learn about their features and benefits.

For example, term life insurance tends to be cheaper than permanent life. But there’s a caveat: term life insurance only covers you for a set time period, while permanent life insurance can cover you until death, as long as your premiums are paid.

If you believe you’ll only need life insurance for a certain period, say 20 or 30 years, then a term life policy can be an affordable option. On the other hand, if you’re interested in lifetime coverage or you want to own a life insurance policy that builds cash value as an investment vehicle, then it could be worth it to pay more in premiums for permanent coverage. Compare quotes for different life insurance policies to determine what you might be giving up in exchange for a cheaper deal.

The question of whether term or permanent coverage is better varies on a case-by-case basis, depending on your insurance needs and financial situation. If you buy a term life insurance policy and then later decide you want lifetime coverage, you may be able to convert your existing policy to permanent life insurance.

Mistake #3: Allowing Premiums to Lapse

When you purchase life insurance, you’re expected to pay a regular premium in return for coverage. Again, these premiums can be based on your insurance risk class, which correlates to your age, health, and other factors. If you’re considering buying a universal life policy with secondary guarantees, such as low-premium guaranteed death benefits for life or for a specified period of time, a late payment can impact the policy benefits.

Universal life is a special type of permanent policy marketed as having long-term guaranteed protection at the lowest possible rate. It is very different from term insurance. While many types of permanent policies have a cash surrender value, universal life with secondary guarantees focuses on maximizing the amount of insurance available per dollar of premium.

Some of these policies can be sensitive to the timing of premium payments. For example, if you miss a monthly payment or are more than a month late sending in your check, your guaranteed policy may no longer be guaranteed. A policy purchased with guaranteed coverage to age 100 might only provide protection to age 92 if one payment is late or missed, which could be problematic if you live longer.

Check with your company if you think you’re going to be late on a payment. Many will allow an extra 30 to 60 days without changing the policy’s guarantee.

Mistake #4: Not Monitoring Variable Life as an Investment

Variable life and variable universal life insurance, which include an investment component, are considered securities and must be registered with the SEC, according to the Financial Industry Regulatory Authority (FINRA). Since FINRA considers a variable life insurance policy an investment, you should treat it as one as well.

A variable life insurance policy is a permanent type of policy that provides life insurance protection with cash value. Part of the premium goes toward life insurance, and part goes into a cash-value account that is invested in various investments similar to mutual funds that you choose. Like mutual funds, the value of these accounts fluctuates and is based on the performance of the underlying investments. People often look to these policy values in the future as a source of funds to supplement their retirement income.

You must fund a variable life policy sufficiently to maximize its cash value growth. This means continuing to make adequate premium payments, especially during times of poor investment returns. Paying less than originally planned can have a big impact on the cash value available to you in the future. It’s also important to monitor your policy’s performance and periodically rebalance your accounts to your desired allocation, just as you would with any investment account. This will help ensure you’re not taking on more risk than you had planned when you set up your account.

Mistake #5: Overborrowing From Your Policy

Permanent life insurance policies that accumulate cash value could be a source of funds when you need to borrow money. The cash value of a permanent policy can generally be used for any reason you see fit, including tax-free withdrawals and loans, if done properly.

This is a great benefit, but it must be carefully managed. If you take too much money out of your policy and your policy lapses, or runs out of money, all the gains you’ve taken out will become taxable. Also, you may significantly reduce the death benefit available to your beneficiaries when you pass away, as outstanding loans are deducted from the death benefit paid.

If you have taken too much money out and your policy is about to lapse, you may be able to maintain the policy by making additional premium payments, assuming you can afford them. When accessing your life insurance policy’s cash value, be sure to monitor the value closely and consult your tax advisor to avoid any unwanted tax liability.

Note

Taking a life insurance loan is different from tapping policy benefits prematurely through an accelerated death benefit rider.

Can You Have Multiple Life Insurance Policies?

There’s no rule issued by life insurance companies that disallows you from owning multiple life insurance policies. And there are some scenarios where it may make sense to do so.

For instance, you may have purchased a $250,000 term life policy at age 30, only to decide at age 40 that you need more coverage. You may choose to purchase a second $250,000 term life policy to close any gaps in your financial plan. Or, you may opt to own both a term life policy and a permanent life insurance policy.

There are some things to keep in mind about owning multiple life insurance policies, however. First, multiple policies mean multiple premiums. If you’re purchasing different policies at different times, you may see a wide range between the highest and lowest premiums, depending on your age and health at the time you entered the contracts.

Applying for multiple policies may also mean submitting to multiple paramedical exams. These exams are conducted as part of the underwriting process and typically involve submitting blood and urine samples, as well as having your blood pressure and other vitals checked. While these exams are usually brief, scheduling several may be inconvenient.

Keeping up with multiple policies can also complicate things, especially if you use several permanent life policies as an investment tool. It could increase the odds of overlooking a premium due date, which could cause one of your policies to lapse.

Consider talking to your insurance agent or financial advisor about the pros and cons of owning multiple life insurance policies and what tax implications that might have, if any.

What Is the First Thing You Should Do Before Buying Life Insurance?

Buying life insurance is a process, and there is a market for insurance products. First, evaluate your financial needs and goals, and what type of coverage is best for you in order to cover those needs and goals in the event of an untimely death. Make sure you decide on both the right type of coverage (such as term vs. permanent) and the correct death benefit amount. Then, shop around for the most affordable coverage from a reputable insurer that can meet your needs.

How Long Does It Take to Receive a Life Insurance Death Benefit?

Life insurance companies typically pay out death benefit money within 60 days of receiving a valid claim.

What Factors Should I Consider When Getting Life Insurance?

First, determine how much coverage you need. There are several rules of thumb for arriving at the right amount of coverage, such as replacing several years of lost income along with any debts and other obligations you may owe now or in the future.

Next, decide whether term or permanent insurance is best for you. Term policies have lower premiums but they expire after a set number of years. They also do not accrue any cash value.

Regardless of type, insurance premiums will increase with age and are more expensive for those in poorer health.

Are Life Insurance Payouts Taxed?

Death benefits on life insurance policies are given to beneficiaries income tax-free. If, however, the death benefit increases the value of the deceased’s estate over the estate tax limit, it may be subject to estate tax.

What Is the Best Age to Buy Life Insurance?

The younger and healthier you are, the lower the premiums on any life insurance will be. Therefore, many recommend buying a policy in your 20s if possible, even if you feel that you don’t “need” it at the time.

The Bottom Line

The decision to buy life insurance is an important one. Before committing to a policy, make sure you do your homework, read your insurance contract carefully, and understand all of its provisions. While losing or never buying life insurance may not ruin your life, it will certainly hurt the people you’re buying it to protect.

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

Once you decide to buy life insurance, the next step is to determine what premium you can afford to pay to obtain the coverage and benefits you want. Premiums vary based on a number of factors, beginning with the type of policy you plan to buy.

While some policies always charge the same premium each month, others allow you to change your payments over time. It’s important to understand how this works so you can budget appropriately and make sure you get the best insurance value out of your premiums.

Key Takeaways

• If you want life insurance, you should figure out how much premium you can afford to pay.
• The premium for a policy depends on the type of life insurance.
• Term life insurance usually provides the least expensive premium but it eventually expires.
• Universal life insurance provides the most flexibility of permanent life insurance premiums whereas whole life insurance always charges the same premium.
• A policy illustration shows how your premiums would change throughout your policy.

How the Premium for Insurance Is Calculated

Life insurance companies use a variety of factors to determine how much premium they will charge for a life insurance policy. These variables include your age, sex, health rating, the assumed rate of return, payment mode, additional riders, and whether the death benefit is level or increases over time.

Some life insurance policies offer high-benefit payouts, but these higher payouts come at the cost of higher premiums. Policyholders might be tempted to use premium financing to pay the higher premiums. However, this financing is not risk-free.

The premium is also based on how long the policy is designed to last. Longer-lasting policies cost more. A 20-year term policy costs more than a five-year term policy, while a permanent policy that never expires costs the most.

Permanent policies also build cash value, which grows over time. The performance and growth of your cash value can significantly affect the premium. If your cash value grows by more than expected, you might be able to reduce your premium. Poor cash value growth could increase your future premium.

Insurance agents use illustration software provided by the carrier to model a policy’s future performance. When you receive a hypothetical illustration for permanent life insurance, it will predict your cash value growth and the cost of your life insurance over time. That way, you can plan your budget and premium payments accordingly.

Premiums and the Type of Life Insurance

The type of life insurance makes a big difference for the premiums as well. Term policies charge a lower premium because they only provide temporary coverage. The premium usually stays the same during the entire term as well. Permanent policies do not expire and cost more.

There are several different types of permanent policies. Whole life insurance policies charge a set premium that does not change. Universal life insurance policies allow you to adjust the policy up and down each year.

While this budget flexibility is nice, it also means you need to plan properly. If you pay too little premium in the early years, your policy could run short of cash value to cover the insurance costs. Then you would need to pay much higher premiums or you’d risk losing coverage. A universal life insurance policy will give you recommendations for how much to pay with a planned premium, no-lapse premium, and minimum premium.

Planned (Target) Premium

The planned (or target) premium is a suggested premium that indicates the amount of premium that should keep a given universal life policy in force in the coming years. The planned premium is based on conservative financial assumptions.

The illustration software will model the target premium. The amount is based on variables the insurance broker enters into the program, including an assumed rate of return. The assumed rate of return is important, since a higher non-guaranteed return results in a lower premium (and vice versa). However, maintaining the planned premium does not guarantee the policy will remain in force if the rate of return falls short of projected returns.

Note

Some policies are calculated to last to expected mortality or age 90, while others may be modeled to last until age 121.

No-Lapse Guarantee Premium

The no-lapse guarantee premium is the amount that must be paid to ensure that the policy will stay in force for a set number of years, regardless of actual policy performance. During the no-lapse period, the insurer guarantees the coverage will continue, even if the cash value drops to zero. However, once the guarantee period ends, the policy could lapse unless a significantly higher premium is paid. The no-lapse period can be as few as five years or last to age 121.

Important

In exchange for the no-lapse guarantee, contracts with longer guarantee periods tend to build significantly less cash value than would the same contract using the target or another non-guaranteed premium.

Minimum Premium

The minimum premium is the amount that must be paid to put the policy in force. This amount is usually insufficient to keep the coverage in force for life (unless the insured person is very young). This premium may be used, for example, when a 1035 exchange from another policy is pending. It may also be used if the policy is owned in a trust when issued, and gifts will be made to provide additional funding.

Premiums and Cash Value

Cash value builds in permanent policies on a tax-deferred basis. You can also tap into your gains tax-free through loans. In the past, investors abused this tax break. They paid very high premiums into policies relative to the death benefit to use life insurance mainly as an investment. In response, the government created rules for how much premium you can pay into these policies.

Regulatory Compliance Tests

The guideline premium test and the cash value accumulation test (CVAT) provide IRS-approved ways to determine the tax treatment of a life insurance policy. The guideline premium test requires a policy to have at least a minimum amount of at-risk death benefit (insurance that exceeds the cash value), while the cash value test compares the death benefit to the cash value. Both tests determine the policy’s corridor amount: the difference between the policy’s death benefit and its cash value. The acceptable size of the corridor varies by the type of test administered.

The corridor amount is greater when the policyholder is young, It decreases as a percentage of the total death benefit at an individual age until it eventually drops to zero by age 95. If the premium exceeds these guidelines, then the policy could be taxed as an investment rather than as insurance.

Modified Endowment Premium

The modified endowment premium is the amount that makes an insurance policy a modified endowment contract (MEC). Under the Technical and Miscellaneous Revenue Act of 1988, distributions from a policy determined to be a MEC, such as loans or cash surrenders, are potentially taxable and could be subject to a 10% penalty tax by the Internal Revenue Service (IRS). However, the death benefit remains income-tax-free.

A policy can become an MEC when the combined premiums paid during the first seven years that the policy is in force exceed the seven-pay test premium. The insurance company’s illustration software automatically calculates the seven-pay premium amounts.

The IRS has established these measures to help curb abuses that occur when insurers sell policies with a nominal amount of insurance designed to build a large amount of tax-free cash value. The seven-pay amount varies by age and type of policy.

Your insurance company can tell you the maximum premium you can pay into your policy relative to the death benefit so you avoid breaking these rules and losing the tax benefits on your cash value.

Which Policy and Premium Amount Should You Pick?

The amount of premium you should pay depends on how you design the coverage and how much you can afford.

Term policies have the lowest premiums but do not accumulate any cash value and eventually expire. Whole life policies build have cash value and carry a higher premium that doesn’t change. Universal life policies have flexible premiums and assume fixed interest rates of return. Variable universal life policies, in contrast, offer the greatest risk-reward potential, allowing the cash value to be invested in mutual fund sub-accounts.

To build the most cash value in a policy, you want to pay the maximum allowed premium and select a level death benefit that helps minimize the amount of pure insurance you are buying. You want to overfund the policy as much as policy without pushing past the rules that would turn it into a MEC.

If you want to maximize your death benefit, universal and variable policies illustrated with a high rate of return and increasing death benefit provide the highest payout at death. A policy with a level death benefit, say $500,000, includes your cash value as part of the death benefit. A policy with increasing death benefits would pay $500,000 plus any cash value. 

What Is an Insurance Premium?

An insurance premium is the amount of money you regularly pay to keep your policy in force, Some policies have higher premiums than others, while others policies (like universal life) have flexible premiums.

How Is Life Insurance Premium Determined?

Your insurance company sets your premium based on such factors as your age, health, the type of policy purchased, your death benefit amount, and whether you buy any extra benefits through riders.

How Do Premiums Work?

Life insurance premiums pay for your life insurance policy on a periodic basis (usually monthly or annually). Premiums keep your policy active; if you skip payments, your insurance company may cancel your policy. Term policies have lower premiums, as they do not accumulate value beyond the policy’s face amount. Permanent policies have higher premiums, which are used to pay for the policy and are invested in a cash-value account.

The Bottom Line

When designing life insurance coverage, the right premium really comes down to why you are buying the coverage. Is it for temporary or permanent protection? Do you prioritize cash value accumulation, the death benefit, or both?  A life insurance agent can explain all your different options to design a plan with the premium that best fits your needs.

Fact checked by Lars Peterson

The average personal loan interest rate is 25.85%. That’s based on four weeks of data from 17 lenders and the rates they quoted to approximately 72,000 potential borrowers between Jan. 1-31, 2025.

While the average personal loan interest rate is 25.85%, the rate you are quoted or receive from a lender may be higher or lower. That’s because personal loan rates are based on your creditworthiness, financial stability, and other factors.

To understand where the average personal rate falls within the advertised rates that Investopedia tracks, the range for unsecured loans spans APRs as low as 5.99% to as high as 295%. However, most lenders in our database have a maximum APR below 36%.

Below are personal loan rates our partners quoted potential borrowers in January 2025, followed by advertised personal loan rates, rate environment information, and recommendations based on our research to help you find the best personal loan for your situation.

Average vs. Advertised Personal Loan Interest Rates

Investopedia calculates average monthly personal interest rates by taking a four-week average of weekly personal loan rate data for 17 of the nation’s largest personal loan providers. Advertised personal loan rates are stated as a range of annual percentage rates (APRs) that lenders offer to borrowers of all credit quality ranges on their websites. Investopedia tracks and maintains a database of the advertised minimum and maximum APRs provided by 59 national lenders every month.

How Are Personal Loan Interest Rates Determined?

Several factors determine personal loan interest rates, including borrower creditworthiness, income, amount borrowed, and the length of the loan. Other factors can also influence each lender’s personal loan pricing, such as the availability and cost of lendable funds, delinquency rates, and loan underwriting policies.

Will Personal Loan Rates Continue to Go Down in 2025?

If the Federal Reserve continues to lower the fed funds rate at its meetings in 2025 following the 50 basis point drop announced on Sep. 18 and 25 basis point drops on Nov. 7 and Dec. 18, 2024, personal loan rates could begin to drop further. However, the Fed did not make any rate adjustments at its first meeting of 2025 on Jan. 28-29. Even if the Fed does cut rates again in Q1, other factors like the delinquency rate on personal loans could offset the lower cost of funds lenders would enjoy after a drop in prime rate, keeping personal loan rates near their current levels.

Because most personal loans are fixed-rate products, all that matters for new loans is the rate you lock in at the outset. If you already hold a fixed-rate loan, rate movements will not affect your payments. If you know you will need to take out a personal loan in the coming months, it’s likely (but not guaranteed) that rates in the future will be better than what they are now, depending on how lenders react to any Fed rate decreases. Unlike credit card rates, which are typically variable and indexed to the prime rate, fixed-rate personal loans offer the opportunity to know what you will be paying over the loan term.

It’s wise to shop for the best personal loan rates in any rate environment. The difference of 1 or 2 percentage points can quickly add up to hundreds or even thousands of dollars in interest costs by the end of the loan. Seeking out your best option is time well spent.

Lastly, don’t forget to consider how you might be able to reduce your spending to avoid taking out a personal loan in the first place or how you could begin building an emergency fund so that future unexpected expenses don’t sink your finances and necessitate taking out additional personal loans.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, and Sept. 15, 2023. Respondents were people who had taken out a personal loan or were planning to soon. We asked how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvements and other large expenditures.

Where to Get a Personal Loan

Personal loans are provided by financial institutions such as banks, credit unions, and online lenders. Most lenders give rate quotes based on your credit score, the amount you wish to borrow, and the term of the potential loan. Rate quotes generally require a soft credit check that does not impact your credit score and only involves inputting several personal details like name, address, and last four digits of your Social Security number. Once pre-approved for a loan, a more detailed application can be submitted, and the loan is often directly deposited into your checking or savings account as early as the same day.

What Type of Personal Loan Is Easiest to Get Approved For?

The easiest types of loan to get approved for generally require some kind of collateral, such as car titles or loans against future paychecks. Beware: These types of loans are considered predatory because they carry extremely high interest rates and target those with bad or no credit.

Is It Easy to Get a $5,000 Personal Loan?

The ease of getting a loan for $5,000 depends on the borrower’s credit quality, income, loan amount, and loan term. Many lenders offer loans of this size to even those with poor credit quality but usually at higher interest rates compared to borrowers with good or excellent credit scores.

What Is the Best Personal Loan?

According to Investopedia’s review of the best personal loans, Sofi was ranked as the best overall personal loan provider in September 2024. Sofi offers low interest rates, charges zero fees, and offers same-day loan funding.

The Bottom Line

While the current average personal loan rate is 25.85%, the rate for any given loan will vary depending on borrower credit and income, loan amount, and loan term. Lenders offering personal loans, such as banks, credit unions, and online financial services providers, advertise available loan rates in a broad range of APRs based on these variable factors.

How We Find the Average Personal Loan Interest Rates

Investopedia collects average quoted personal loan rates, average length of loan, and average loan amount from MoneyLion, comprising 17 of the nation’s largest online personal lenders each week, which is used to calculate a four-week average. MoneyLion’s loan data is also aggregated by credit quality range (for excellent, good, fair, and bad credit). Investopedia separately collects and displays the advertised APR ranges each month for 59 of the largest personal loan lenders in the country, including online lenders, banks, and credit unions.

Learn more about how we evaluated personal loans in our complete methodology.

Results for how people use personal loans were obtained through a national survey of 962 U.S. adults aged 20 to 75 who are currently borrowing or planning to borrow a personal loan from 70 different lenders. Respondents opted-in to an online, self-administered questionnaire from a market research vendor. Data collection occurred between Aug. 14, 2023, and Sept. 13, 2023, with semi-structured interviews conducted with 17 respondents from Aug. 30, 2023, to Sept. 15, 2023. Multiple quality checks, including screeners, attention gauges, comprehension evaluations, and logic metrics, were used to ensure only the highest quality responses were included.

Fact checked by Skylar Clarine
Reviewed by Lea D. Uradu

Modifying your home to reduce fall risks and make it easier for you to navigate as you age can help you age in place in the home that you love. While some modifications, like installing grab rails in your shower, can be done relatively cheaply, modifying your historic Victorian to wheelchair-accessible can cost tens of thousands. If you don’t have the cash, you may be able to use the equity you have in your home to modify it so that you can stay in the home longer.

Key Takeaways

• A home equity loan can help you access cash to remain in your home longer.
• Many modifications can be done cheaply. If you need expensive modifications, grants may be available.
• You may be able to remain independent longer if you sell your home and move into a more accessible one.

How a Home Equity Loan Works

A home equity loan allows you to borrow against your home’s equity to receive a lump-sum payment that you repay over a set period of time at a fixed interest rate with set monthly payments. Because a home equity loan uses your home’s equity as collateral, you can access cash at a much lower interest rate than unsecured alternatives like credit cards or a personal loan.

Before taking out a home equity loan, it’s a good idea to get estimates on modification costs so that you borrow the amount you need and aren’t tempted to spend the rest of your loan proceeds frivolously.

Home Equity Loan Alternatives to Modify Your Home

Many modifications to age in place can be done cheaply. The Cleveland Clinic has a list of dozens that can all be done for less than $50. For example, simply removing rugs can reduce your fall risk and is free. Reducing your fall risk by eliminating tripping hazards can help you avoid injuries that could land you in a care facility permanently.

If you find that you need more costly modifications, such as a wheelchair ramp, widened doorways, or a completely modified kitchen or bathroom, there are still options available without taking out a home equity loan. 

The U.S. Department of Housing and Urban Development (HUD) has an entire grant program called the Older Adult Homes Modification Program (OAHMP). With this program, HUD provides grants to local organizations that work directly with seniors. To see what grants and assistance are available in your area, call 211.

If you’re still working, budgeting and saving to modify your home is a great alternative to taking out a loan. 

If you care more about staying in your community and retaining independence for as long as possible than remaining in your current home, selling it might be a better option. Some homes, especially older ones, are simply too cost prohibitive to modify to the level that will be best for you in your 80s. Selling your home and buying one specifically built for future mobility issues may help you retain independence for longer than staying in a home with narrow doorways and four floors that would be impossible to make wheelchair accessible.

How Do I Get Approved for a Home Equity Loan?

To get approved for a home equity loan, you’ll need all the same things that you would need for a standard loan: decent credit, a low debt-to-income (DTI) ratio, and proven income high enough to pay back the loan. You’ll also need a minimum of around 15% equity in your home, although most lenders will require more.

Is a Home Equity Loan or a Reverse Mortgage Better for Remodeling?

Deciding between a home equity loan and a reverse mortgage is easy. If you can get approved for a home equity loan and have the funds to pay it back, then you will retain ownership of your home, allowing you to pass it down to your heirs and still have the option to take out a reverse mortgage later. Reverse mortgages typically have much higher fees, which means that you get less actual cash for the same amount of hard-earned equity that you built in your home than you would get from a home equity loan.

What Are the Risks of a Home Equity Loan?

If you are taking out a home equity loan before you retire, make sure that you estimate your income in retirement and that you’ll be able to pay the loan back, or be sure to pay off the loan before you retire. If you don’t pay the loan back, it will go into default, and you could lose your home. Another risk is that you could become underwater on your loans and be unable to sell your home without a financial loss if you need to move.

The Bottom Line

Aging happens to everyone. Consider the quality of life that you want for your golden years, and make changes now to ensure you can live the way you want to for as long as possible. Making modifications to age in place doesn’t have to be expensive, but if your home has characteristics that require extensive renovations, a home equity loan is a way to fund those changes. Make sure you’ll be able to pay the loan back before taking one out and check to see what grants are available in your area.

Reviewed by Chip Stapleton
Fact checked by Yarilet Perez

The dividend yield tells investors what the simple rate of return is in the form of cash dividends to shareholders. The dividend payout ratio represents how much of a company’s net earnings are paid out as dividends and is an indicator of a company’s ability to distribute dividends consistently in the future.

Key Takeaways

• Analyzing the dividends that companies pay to shareholders helps investors evaluate a firm’s health and share value.
• The dividend yield compares the amount of the dividend paid to the share price of the company’s stock.
• The dividend payout ratio compares the dividend amount to earnings per share.

Dividend Yield

The dividend yield shows how much a company has paid out in dividends over a year. The yield is presented as a percentage, not as an actual dollar amount. This makes it easier to see how much return per dollar invested the shareholder receives through dividends.

For example, a company that pays out $10 in annual dividends per share on a stock trading at $100 per share has a dividend yield of 10%. An increase in share price reduces the dividend yield percentage and vice versa for a price decline.

Dividend Payout Ratio

This financial ratio highlights the relationship between net income and dividend payments to shareholders. The dividend payout ratio is highly connected to a company’s cash flow. Investors can see income and dividend entries on the issuing company’s balance sheet.

The dividend payout ratio shows whether the dividend payments made by a company make sense given their earnings. If the number is too high, it may be a sign that too small a percentage of the company’s profits are reinvested for future operations. This casts doubt on the company’s ability to maintain high dividend payments.

Important

The dividend payout compares how much a company returns to shareholders versus how much it keeps to reinvest, pay off debt, or add to cash reserves.

When Are Dividend Yields Misleading?

Evaluating dividend yields alone can be misleading to investors. Some companies pay out dividends even when they are operating at a short-term loss. Others may pay out dividends too aggressively, failing to reinvest enough capital into their business to maintain profitability down the road. This is where the dividend payout ratio can come in handy.

How Should Investors Compare Dividend Payout Ratios?

When possible, investors should compare dividend payout ratios over some time. It is a sign of good management and financial health if the dividend payout ratios are historically stable or trending upward.

What Is a High Dividend Payout Ratio?

In extreme cases, dividend payout ratios may exceed 100%, meaning more dividends were paid out than there were profits that year. Significantly high ratios are unsustainable. Companies that have stable payout ratios and relatively high dividend yields are usually the most attractive options for investors.

The Bottom Line

The dividend yield percentage shows how much a company has paid out in dividends annually. The dividend payout ratio shows whether the dividend payments make sense given the company’s earnings. Some companies may pay out all earnings to shareholders, some may only pay out a portion, while others don’t pay any dividends to shareholders at all.

Reviewed by Pamela Rodriguez
Fact checked by Suzanne Kvilhaug

What Are Mortgage Points?

Mortgage points are used to offset the costs of mortgage and you can use them in two different ways. Origination points are mortgage points used to pay the lender for the creation of the loan itself, whereas discount points are mortgage points used to buy down the interest rate of the mortgage. Learn more about what mortgage points are and how they work.

Key Takeaways

• There are two kinds of mortgage points: origination points and discount points.
• Buyers pay origination points to the lender as a type of fee for processing the loan.
• Discount points are a way for buyers to lower the interest rate on the loan by paying up front.
• Mortgage points are typically 1% of the loan amount.
• You can use the annual percentage rate (APR) to compare the cost of loans with different points and interest rates.

How Mortgage Points Work

Mortgage points come in two types: origination points and discount points. In both cases, each point is typically equal to 1% of the total amount mortgaged. On a $300,000 home loan, for example, one point is equal to $3,000.

Both types of points are included under closing costs in the official loan estimate and closing disclosure that come from the lender.

Origination Points

Origination points compensate loan officers. Not all mortgage providers require the payment of origination points, and those that do are often willing to negotiate the fee. Origination points are not tax deductible and many lenders have shifted away from origination points, with several offering flat-fee or no-fee mortgages.

Discount Points

Discount points are prepaid interest. The purchase of each point generally lowers the interest rate on your mortgage by up to 0.25%. Most lenders provide the opportunity to purchase anywhere from a fraction of a point to three discount points.

Prior to the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, which applies to tax years 2018 to 2025, origination points were not tax deductible, but discount points could be deducted on Schedule A.

Going forward, discount points are deductible but limited to the first $750,000 of a loan. In addition, there is a higher standard deduction, so it’s advisable to check with a tax accountant to find out if you could receive tax benefits from purchasing points.

Keep in mind that when lenders advertise rates, they may show a rate that is based on the purchase of points.

Calculating Mortgage Discount Points

There are two primary factors to weigh when considering whether or not to pay for discount points.

The first factor involves the length of time that you expect to live in the house. In general, the longer you plan to stay, the bigger your savings if you purchase discount points.

The second factor to consider is whether or not you have enough money to pay for the cost of mortgage points. Many people are barely able to afford the down payment and closing costs on their home purchases, and there simply isn’t enough money left to purchase points.

For instance, on a $100,000 home, three discount points are relatively affordable at $3,000, but on a $500,000 home, three points will cost $15,000. On top of the traditional 20% down payment of $100,000 for that $500,000 home, another $15,000 may be more than the buyer can afford.

A mortgage calculator is a good resource to help you budget these costs.

Example of Paying Discount Points

Consider the following example for a 30-year loan:

• On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month.
• If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.

Purchasing the three discount points would cost you $3,000 in exchange for a savings of $39 per month. You would need to keep the house for 72 months, or six years, to break even on the point purchase. Because a 30-year loan lasts 360 months, purchasing points would be a wise move in this instance if you plan to live in your new home for a long time.

If, on the other hand, you plan to stay for only a few years, you may wish to purchase fewer points or none at all. There are numerous calculators available that can assist you in determining the appropriate amount of discount points to purchase based on the length of time you plan to own the home.

Using APR to Compare Loans

Comparing different lenders and loans with varying interest rates, lender fees, origination fees, discount points, and origination points can be very difficult. The annual percentage rate (APR) figure on each loan estimate helps make it easier for borrowers to compare loans, which is why mortgage lenders are required by law to include it on all loans.

The APR on each loan adjusts the advertised interest rate on the loan to include all discount points, fees, origination points, and any other closing costs for the loan. This metric exists to make comparison easier between loans with wildly different discount points, interest rates, and origination fees.

Are Mortgage Points Worth It?

Though money paid on discount points could be invested in the stock market to generate a higher return than the amount saved by paying for the points, the average homeowner’s fear of getting into a mortgage they can’t afford can outweigh the potential benefit they may accrue if they managed to select the right investment. In many cases, paying off the mortgage is more important.

Also, keep in mind the motivation behind purchasing a home. Though most people hope to see their residence increase in value, few people purchase their home strictly as an investment. From an investment perspective, if your home triples in value, you may be unlikely to sell it for the simple reason that you then would need to find somewhere else to live.

If your home gains in value, it is likely that most of the other homes in your area will increase in value as well. If that is the case, selling your home will give you only enough money to purchase another home for nearly the same price. Also, if you take the full 30 years to pay off your mortgage, you will likely have paid nearly triple the home’s original selling price in principal and interest costs and, therefore, you won’t make much in the way of real profit if you sell at the higher price.

How Much is One Point Worth In a Mortgage?

A mortgage point is a fee paid to the lender to lower the interest rate on a mortgage. One point is equivalent to 1% of the total loan. As an example, if your loan is for $250,000, one point is $2500.

How Much Does One Point Affect the Mortgage Payment?

One point, which is usually equivalent to one percent of the total loan amount, lowers the interest rate by about 0.25%, which might equate to several dollars per month, or more, depending on the loan size.

What Do Discount Points Cost?

Discount points cost roughly 1% of the loan amount per point. So if you had a mortgage of $350,000, one discount point would be $3,500. In return, the lender reduces the interest rate, usually by 0.25% although the amount varies.

The Bottom Line

Origination points are usually avoidable and negotiable so don’t spend too much on them. Discount points, on the other hand, can save you money over the life of the loan, but only if you can afford to buy them without lowering your down payment below 20% and having to get private mortgage insurance (PMI).

Fact checked by Marcus Reeves
Reviewed by Natalya Yashina

A gearing ratio measures a company’s overall debt against its value. To stock analysts, investors, and lenders, the gearing ratio is an indicator of the company’s financial fitness. A company may be carrying too much debt or too little debt. The amount of debt that is perceived as healthy varies by industry.

Generally, a company that has a larger portion of debt in comparison to its shareholder equity has a high gearing ratio. A company that has a small proportion of debt versus equity has a low gearing ratio.

Key Takeaways

• There are several types of net gearing ratios but all compare company equity (or capital) to company debt.
• Net gearing is the most common type of gearing ratio and is calculated by dividing the company’s total debt by its total shareholders’ equity.
• The optimal gearing ratio depends on the industry.

Gearing Ratios: An Overview

The gearing ratio tells you how much of a company’s operations is funded by equity and how much is funded by debt.

Lenders use gearing ratios when they’re considering making loans. Corporate managers use them to make decisions about their use of cash and leverage. Here’s how these ratios are interpreted:

• High Gearing Ratio: The company has a larger proportion of debt versus equity
• Low Gearing Ratio: The company has a small proportion of debt versus equity

There are several variations of the gearing ratio. They include the equity ratio, debt-to-capital ratio, debt service ratio, and net gearing ratio. Each is calculated using a different formula.

Important

High net gearing ratios can be a red flag. But they are more acceptable in certain industries. Businesses that need to invest heavily in property or manufacturing equipment often have relatively high debt.

The Most Common: Net Gearing Ratio

The net gearing ratio measures the level of a company’s overall debt compared to its value. It is the most commonly used gearing ratio in the financial markets. Most investors know it as the company’s debt-to-equity (D/E) ratio.

The D/E ratio measures how much a company is funded by debt versus how much is financed by equity. It compares a company’s total debt obligations to its shareholder equity.

The debt portion in the net gearing ratio may include the following:

• Short-term debt
• Long-term debt
• Accrued debt
• Accounts payable (AP)
• Financing agreements
• Leases

It’s important to compare the net gearing ratios of competing companies—that is, companies that operate within the same industry. Every industry has its own capital needs and relies on different growth rates.

How to Calculate the Net Gearing Ratio

The net gearing ratio (as a debt-to-equity ratio) is calculated by:

$begin{aligned} &text{Net Gearing Ratio} = frac { text{LTD} + text{STD} + text{Bank Overdrafts} }{ text{Shareholders’ Equity} } \ &textbf{where:} \ &text{LTD} = text{Long-Term Debt} \ &text{STD} = text{Short-Term Debt} \ end{aligned}$​Net Gearing Ratio=Shareholders’ EquityLTD+STD+Bank Overdrafts​where:LTD=Long-Term DebtSTD=Short-Term Debt​

Net gearing can also be calculated by dividing the total debt by the total shareholders’ equity. The ratio, expressed as a percentage, reflects the amount of existing equity that would be required to pay off all outstanding debts.

Note

Capital gearing is a British term that refers to the amount of debt a company has relative to its equity. In the U.S., capital gearing is known as financial leverage and is synonymous with the net gearing ratio.

Good and Bad Gearing Ratios

An optimal gearing ratio is primarily determined by the individual company relative to other companies within the same industry. There are, however, a few basic rules for good and bad gearing ratios:

• Higher Than 50%: A gearing ratio in this range indicates the company is highly leveraged. The company would be seen as being at greater financial risk because it is more susceptible to default and bankruptcy during times of lower profits or higher interest rates.
• Between 25% and 50%: A gearing ratio within this range is typically considered optimal or normal for well-established companies.
• Lower Than 25%: Gearing ratios that fall under this value are typically considered low-risk by both investors and lenders.

Gearing Ratios and Risk

The gearing ratio is an indicator of the financial risk associated with a company. If a company has too much debt, it has the potential to fall into financial distress. Remember: A high gearing ratio shows a high proportion of debt to equity, while a low gearing ratio shows the opposite.

Capital that is borrowed is riskier than capital from the company’s owners since creditors have to be paid back even if the business doesn’t generate income. A company with too much debt might be at risk of default or bankruptcy, especially if the loans have variable interest rates. 

On the plus side, debt helps a company expand its operations, add new products and services, and ultimately boost profits. A company that never borrows might be missing out on opportunities, especially when loan interest rates are low.

Capital-intensive companies and those with a lot of fixed assets, like industrials, are likely to have more debt versus companies with fewer fixed assets. For example, utility companies typically have high gearing ratios. This is acceptable because these companies operate as regulated monopolies in their markets, which makes their debt less risky than companies in competitive markets.

Why Are Gearing Ratios Important?

Gearing ratios indicate the degree to which a company’s operations are funded by its debt versus its equity. High ratios relative to their competitors can be a red flag while low ratios generally indicate that a company is low-risk.

What Does the Net Gearing Ratio Tell You?

The net gearing ratio is the most common gearing ratio used by analysts, lenders, and investors. Also called the debt-to-equity ratio, it measures how much of the company’s operations are funded by debt compared to its equity.

Is it Better to Have a High Gearing Ratio?

A high gearing ratio can be a blessing or a curse—depending on the company and industry. Having a high gearing ratio means that a company is using more debt to fund its operations, which may increase the financial risk. But, high ratios work well for certain companies, especially if they are in capital-intensive industries. It shows they are investing in growth.

The Bottom Line

A safe gearing ratio can vary by company and is largely determined by how a company’s debt is managed and how well the company is performing. The gearing ratio must be viewed alongside other major numbers such as earnings growth, market share, and cash flow. 

It’s also worth considering that well-established companies could pay off their debt by issuing equity if needed. In other words, having debt on the balance sheet might be a strategic business decision since it might mean less equity financing. Fewer shares outstanding can mean a higher stock price. 

Reviewed by Thomas Brock

Preference Shares vs. Bonds: An Overview

Although holders of preference shares and bonds are both entitled to regular distribution payments, preference shares do not have a maturity date and can continue in perpetuity. Bondholders are entitled to the receipt of regular interest rate payments, while holders of preference shares receive regular dividend payments.

Key Takeaways

• A bond is a fixed income instrument that represents a loan made by an investor to a borrower.
• Preference shares are shares of a company’s stock with dividends that are paid out.
• Bonds often have a maturity date, while preference shares do not.
• Bondholders have a higher chance of being paid in bankruptcy versus holders of preference shares.

Bonds

A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). Bondholders are creditors of the company, having loaned it money.

A bond has an end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments that will be made by the borrower. 

Bonds have a fixed maturity and ultimately expire, limiting the amount of interest paid out.

Bondholders, as creditors of the company, have a higher chance of being paid versus holders of preference shares, depending on the priority of the debt. Bonds may be secured by assets of the company. The principal can be paid back to the bondholder by the sale of those assets in case of a bankruptcy. Unsecured bonds are not backed by any assets of the company and have a lower likelihood of receiving any distributions.

Most bonds can be sold by the initial bondholder to other investors after they have been issued. In other words, a bond investor does not have to hold a bond all the way through to its maturity date.

Preference Shares

Holders of preference shares own a piece of the company. Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.

Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do. Unlike bond payments, which are mandatory, holders of preference shares may miss some dividend payments if the company does not make a profit. If the preference shares are cumulative, the investor is entitled to receive payment for missed dividends prior to any dividends being paid to common shareholders.

Preference shares continue as long as the company is in business, or, for redeemable stock, until the company decides to buy it back.

In the case of bankruptcy or dissolution, holders of preference shares have a higher priority over common shareholders in being paid off when the company’s assets are liquidated. As a practical matter, preference shareholders are unlikely to receive any money during a bankruptcy dissolution, as they are fairly low on the priority list for repayment.

Preference shares fall under four categories: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock.

Note

Preference shares do not come with voting rights.

Key Differences

The main difference between preference shares and bonds is that shares represent ownership of the company, while bonds simply represent a loan obligation. If the company is dissolved, bondholders are among the first in line to get a payout of the remaining assets. Preferred shareholders are further back in line, and less likely to recoup their full investment.

There are also structural differences. A typical bond pays out a fixed coupon at regular intervals, until the maturity date when the entire principal is returned to the investor. A preferred share has no maturity date: It continues paying dividends for the lifetime of the company

What Is the Difference Between Preferred Stock and Common Stock?

Preferred shares are a type of ownership share that receives a higher dividend than common stock, although they do not confer voting rights. In the event that the company dissolves, preferred shareholders have preference over common shareholders, meaning that they are more likely to recoup part of their investment.

What Are the Downsides to Preferred Stock?

Preferred shares tend to have lower liquidity than common shares, meaning that they are harder to sell at market price. In addition, they do not confer voting rights.

How Do You Convert Preferred Stock?

Some preferred shares are convertible, meaning that they can be exchanged for common shares at a fixed price and ratio. The exact terms for conversion will be spelled out in the issuance documents for the preferred stock. If the company is successful, investors can benefit from exchanging the stability of their preferred shares for the higher gains of the common shares.

The Bottom Line

Preferred stock is a type of ownership share that comes with a fixed dividend, giving it some similarities to a bond. However, bondholders have a higher priority for repayment if the company dissolves. Preferred shareholders receive a higher dividend than owners of common stock, although they do not have voting rights.

Reviewed by Robert C. Kelly
Fact checked by Amanda Bellucco-Chatham

It’s 1974. The inflation rate hit double digits in February of 1974 and would stay in double digits until May 1975.

Not much was looking any better. The stock market lost about a third of its value from the beginning of the decade to late 1974. In that same year, the unemployment rate was above 7%.

The easy money policies of the Federal Reserve were meant to generate full employment by the early 1970s. Instead, they caused inflation to soar.

Under new leadership, the central bank reversed its policies, raising interest rates steadily. Mortgage rates would climb to double digits by 1978 and kept climbing before peaking at 18.45% in 1981.

Key Takeaways

• Rapid inflation occurs when the prices of goods and services suddenly rise, eroding the purchasing power of consumers.
• The 1970s saw some of the highest rates of inflation in modern U.S. history.
• In turn, mortgage interest rates rose to nearly 20%.
• Fed policy, the abandonment of the gold standard, Keynesian economic policies, and market psychology all contributed to high inflation.
• Lower inflation would return only after a tough period of tight money and recession.

The Great Inflation of the 1970s

Overall, the macroeconomic event known as the Great Inflation stretched from 1965 to 1982. That means the economic disruption started during the era of President Lyndon B. Johnson and continued through the presidencies of Richard Nixon, Gerald Ford, and Jimmy Carter.

The most painful period began in late 1972 and continued into the early 1980s.

In his book, Stocks for the Long Run: A Guide for Long-Term Growth, Wharton professor Jeremy Siegel called this time “the greatest failure of American macroeconomic policy in the postwar period.”

Spreading the Blame

The Great Inflation was variously blamed on oil price manipulation by OPEC, currency speculators, greedy businessmen, and avaricious union leaders.

However, monetary policies that financed massive federal budget deficits deserve much of the blame. As economist Milton Friedman wrote in his book, Money Mischief: Episodes in Monetary History. inflation is always “a monetary phenomenon.”

The Great Inflation and the recession that followed ruined many businesses and hurt countless individuals. Interestingly, John Connally, the Nixon-installed Treasury Secretary with no formal economics training, later declared personal bankruptcy.

Yet these unusually bad economic times were preceded by a period in which the economy boomed or appeared to boom. Many Americans were awed by the temporarily low unemployment and strong growth numbers of 1972.

In 1972, they overwhelmingly re-elected a Republican president, Richard Nixon, and a Congress controlled by Democrats.

Causes of the Great Inflation

Upon his inauguration in 1969, Nixon inherited a recession from Lyndon Johnson, who had spent generously on the social programs of the Great Society and the Vietnam War.

Despite some protests, Congress went along with Nixon and continued to fund the war and increase social welfare spending. In 1972, for example, Congress and Nixon agreed to a big expansion of Social Security—just in time for the elections.

Nixon’s Changing Viewpoint

Nixon came to office as a supposed fiscal conservative. However, he ran up the budget deficit and eventually declared that he was a Keynesian. John Maynard Keynes was an influential economist of the 1930s and 1940s who advocated countercyclical policies in hard times, running deficits in recessions to pump money into the economy.

Before Keynes, governments had met recessionary times with balanced budgets and waited for businesses to adjust or liquidate. The object was to allow market forces to bring about a recovery without government intervention.

Nixon’s other economic about-face occurred when he imposed wage and price controls in 1971. They were a short-term success politically. Later, they would fuel the fires of double-digit inflation because, once they were removed, businesses boosted prices to recover lost ground.

Nixon’s deficits also made dollar-holders abroad nervous. There was a run on the dollar, which many foreigners and Americans thought was overvalued. Soon they were proved right.

In 1971, Nixon broke the last link to the gold standard, turning the American dollar into a fiat currency. The dollar was devalued and millions of foreigners holding dollars, including oil barons in the Middle East with tens of millions of petrodollars, saw their wealth fall. 

Election Year Politics

Still, President Nixon’s primary concern was not the U.S. dollar, or deficits, or even inflation. He feared another recession.

He and others who were running for re-election wanted the economy to boom. The way to do that, Nixon reasoned, was to pressure the Fed to lower interest rates.

Nixon fired Fed chair William McChesney Martin and installed presidential counselor Arthur Burns as his successor in early 1970.

Nixon wanted cheap money. That meant low interest rates to promote growth in the short term and make the economy seem strong as voters went to cast their ballots.

Note

Richard Nixon was forced to resign from the presidency in August 1974, as a result of the infamous Watergate scandal. His successor, then-Vice President Gerald Ford, would lose the next presidential election to Democrat Jimmy Carter.

The Politics of Cheap Money

In public and private, Nixon put the pressure on Burns. William Greider, in his book, Secrets of the Temple: How the Federal Reserve Runs The Country, Nixon is quoted as saying, “We’ll take inflation if necessary, but we can’t take unemployment.”

The nation got an abundance of both.

The key money creation number, M1, calculates the total cash in circulation at a given time. It grew from $228 billion to $249 billion between December 1971 and December 1972, according to Federal Reserve Board numbers. As a matter of comparison, in Fed chair Martin’s last year, M1 grew from $198 billion to $206 billion. M2, which measures retail savings and small deposits, grew even more by the end of 1972, from $710 billion to $802 billion.

Adding to the money supply worked in the short term. Nixon carried 49 out of 50 states in the election. Democrats easily held Congress. Inflation was in the low single digits.

However, the country paid the price in higher inflation once the election year festivities ended.

In the winters of 1972 and 1973, Burns began to worry about inflation. In 1973, inflation more than doubled to 8.8%. Later in the decade, it would go to 12%. By 1980, inflation was at 14%.

Was the United States about to become another Weimar Republic experiencing the brutal effects of crippling inflation?

The Great Inflation period would finally come to an end once later Fed chair Paul Volcker pursued a bold but painful contractionary money policy to control it.

What Is Inflation?

Prices for individual products fluctuate up and down constantly, but a continuing increase in the prices of a broad group of essential goods and services results in inflation.

When inflation occurs, consumers get less for every dollar they spend. Effectively, their income has decreased.

What Was the Great Inflation of the 1970s?

The period in the 1970s and extending into the early 1980s was a time of relentless inflation. The inflation rate, as measured by the Consumer Price Index, rose to as high as 14% in 1980.

Federal Reserve policy that promoted a large increase in the money supply is considered the main reason for the Great Inflation.

How Did the Great Inflation Affect Americans?

The steady and lasting rise in prices seen during the Great Inflation created a time of tremendous financial pressure for most Americans.

People found it difficult make ends meet. They worried about depleting their savings to cover the gap between their income and their expenses. They had to make unpleasant choices about which items to buy.

The deeply unsettling effect of inflation eroded their standard of living and their confidence in the country’s leadership.

The Bottom Line

It would take another Fed chair and a brutal policy of tight money—including the acceptance of a recession—before inflation would return to low single digits.

In the meantime, workers would endure jobless numbers that exceeded 10%. Millions of Americans were suffering from day to day by the late 1970s and early 1980s.

Few remember Fed chair Burns, who in his memoirs, Reflections of an Economic Policy Maker (1969-1978), blames others for the Great Inflation without mentioning the disastrous monetary expansion. Nixon didn’t even mention this central bank episode in his memoirs. Many who remember this terrible era blame it on the Arab oil-producers for manipulating the global oil supply.

Still, The Wall Street Journal, when reviewing this period in January 1986 wrote, “OPEC got all the credit for what the U.S. had mainly done to itself.”