What Credit Score Do You Need to Buy a Car in 2021?

Because a credit score is an important indicator for determining a consumer’s creditworthiness when buying a car, those with excellent credit histories tend to have an easier time borrowing money on favorable terms compared to those with lower credit scores. However, industry data shows that high-risk borrowers remain viable candidates for auto loans. In other words, there is no universally defined credit score needed to buy a car.

Read on to learn how your credit score can affect buying a car, plus some tips for purchasing a car with a lower credit score.

What FICO® Score Do Car Dealers Use?

There are a few different scoring models that car dealers may use for determining a customer’s credit score. They may use the FICO Auto Score 10 , an industry-specific model featuring a score range from 250 to 900. The auto industry also may use VantageScore 3.0 or the newer VantageScore 4.0 model, which has a score range from 300 to 850.

No matter which scoring model is used, a bad credit score falls on the lower end of the range and a good credit score sits on the higher end of the range.

What Is the Minimum Credit Score To Buy A Car?

There may not necessarily be a minimum credit score required to buy a car. Consumers with deep subprime credit scores from 300 to 500 have obtained financing for new and used vehicles in the second quarter of 2021, according to the credit bureau Experian’s State of the Automotive Finance Market report for that period. Although the percentage of borrowers in this category is very low, this indicates that even those with the lowest credit scores still may have access to auto financing.

Average APR by Credit Score Ranges

Consumers from all credit score categories have obtained auto loans in 2021, but car buyers with excellent credit histories tended to secure the lowest annual percentage rate (APR) financing, according to Experian’s Q2 report. When assessing what is a good credit score to buy a car, Experian’s data confirms that consumers in the super prime and prime categories obtain the lowest interest rates on average for financing.

Quarterly financing data on new vehicle purchases in the second quarter of 2021 shows the following average APRs by credit score ranges:

•  Deep subprime (300-500): 14.59%

•  Subprime (501-600): 11.03%

•  Near prime (601-660): 6.61%

•  Prime (661-780): 3.48%

•  Super prime (781-850): 2.34%

How to Buy a Car With a Lower Credit Score

Obtaining a loan to purchase a new or used vehicle when you don’t have great credit can be cumbersome, but it’s not impossible. Here are some ways a consumer with poor credit may be able to obtain auto financing:

Make a Large Down Payment

Offering a large down payment on a vehicle purchase may allow car buyers to obtain more reasonable rates and better terms for financing, resulting in more affordable monthly loan payments. By putting more money down at the time of purchase, lenders also may view the loan as less risky, thus increasing your odds of approval.

Get Cosigner Assistance

Buying a car with the assistance of a cosigner is another way to potentially bolster your chance of securing favorable financing. A cosigner agrees to share the responsibility of repaying the loan, effectively promising the lender that if you don’t make the payments they will. If the cosigner is creditworthy, it puts the buyer in a much better position to obtain financing than going it solo.

Consider a Less Expensive Car

Especially if you are buying a car with bad credit, it is important to know how much you can realistically afford to spend — and then stick to that budget, even if the dealer tries to upsell you. Additionally, finding a less costly car will reduce the amount you need to borrow, and it may be easier to get approved for a smaller loan amount than a larger one.

Benefits of Good Credit When Buying a Car

The benefit of a good credit score when buying a vehicle is that you may secure lower interest rates compared to consumers with poor credit. Unless a consumer buys a vehicle outright with cash or receives 0% APR financing, the consumer will eventually face monthly principal and interest payments until they’ve paid off the loan balance in full. Auto financing terms may vary in length, with some maturing at 60 months, 72 months or 84 months.

Car loans with a high APR may cause consumers to pay a long-term premium above and beyond the actual sales price of the vehicle.

How to Monitor and Keep Track of Credit Scores

There are a number of ways you can check your credit score, including through your credit company or another financial institution where you have an account, as well as through a credit service or credit scoring website. Contrary to what you may expect, your credit report does not include your credit score, though it does provide valuable information about your credit history and debts, which is why it can still be helpful to read over your credit report before making a major purchase like a car.

Credit scores can fluctuate over time depending upon financial circumstances, and credit score updates occur at least every 45 days. That’s why it’s important to take a look at where your score stands right before you begin the process of car shopping.

Also keep in mind that it’s common for credit inquiries to occur when you’re shopping around to see what auto loan terms you qualify for. While soft inquiries don’t affect your credit score, hard inquiries, such as those that happen when you’re comparing rates for an auto loan, can ding your score. However, most major credit scores will count multiple car loan inquiries made within a certain period of time — typically 14 days — as one inquiry.

What’s Expected in 2022?

Based on the trends outlined in Experian’s Q2 report for 2021, prime borrowers with good credit in 2022 may continue shifting away from used vehicles in favor of new vehicles. Experian’s research also shows that subprime financing remains at near-record lows, with just a fraction of car loans in 2021 going to consumers in the deep subprime risk category. These trends could continue into 2022.

The Takeaway

While it is possible to buy a vehicle with bad credit in 2021, consumers in the subprime or deep subprime risk categories may want to explore ways of improving their credit scores to help secure financing with more favorable terms. As far as what credit score you need to buy a car, any score is potentially sufficient for obtaining financing.

If you want to check your credit or work to improve your score before buying a car, SoFi Relay is a user-friendly app that allows you to easily monitor and keep track of your credit score.

Stay on top of your credit score with weekly updates.

Photo credit: iStock/tolgart


Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
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11 Types of Personal Loans & Their Differences

Even with the strictest budgeting and savviest spending, there may come a time when you face an expense that you just can’t cover with cash. It might be tempting to put the expense on a credit card. While that can be one solution, there are other options.

A personal loan is a type of loan that is offered by many banks, credit unions, and online lenders like SoFi. Unlike a mortgage loan or car loan which specifies what the money should be spent on, a personal loan doesn’t have as many restrictions and can typically be used to pay for a variety of expenses.

A variety of factors will influence which type of personal loan is right for you, like how much money you plan to borrow, your credit and income, and how much debt you already have. Read on for a few different types of personal loans explained.

Unsecured or Secured

A common type of personal loan is an unsecured personal loan. This means that there is no collateral backing up the loan. This can make them riskier for lenders. Approval and interest rates for unsecured personal loans are generally based on a person’s income and credit score, but other factors may apply.

Unlike an unsecured loan, there is some sort of collateral backing up a secured personal loan. For example, think of a home mortgage: if the borrower does not make payments, the bank or lender can seize the asset — the home — used to secure the loan as collateral.

Since secured loans involve collateral, lenders often view them as less risky than their unsecured counterparts. This can mean that secured personal loans might offer a lower interest rate than a comparable unsecured loan.

Here’s a comparison of some of the features of unsecured and secured personal loans:

Unsecured Personal Loan Secured Personal Loan
No collateral needed Requires an asset to be used as collateral
Higher interest rates compared to secured personal loan May have lower interest rate than unsecured personal loan
Approval based on applicant’s income, credit score, and other factors Approval based on value of collateral being used, in addition to applicant’s creditworthiness
Funds may be available in as little as a few days Processing time can be longer due to need for collateral valuation

Variable or Fixed Interest Rate

A personal loan with a fixed interest rate will have the same interest rate for the life of the loan. This also means you’ll have the same fixed monthly payment and, based on scheduled payments, know upfront how much interest you’ll pay over the life of the loan.

The interest rate on a variable rate loan may change over the life of the loan, fluctuating based on the prevailing short term interest rates. Typically, the starting interest rate on a variable rate loan will be lower than on a fixed rate loan, but the interest rate is likely to change as time passes. Variable rate loans are generally tied to well-known indexes, such as the 1-month LIBOR .

If you’re trying to decide on a variable or fixed-rate personal loan, this summary might be helpful:

Variable Interest Rate Fixed Interest Rate
May have lower starting interest rate than a fixed-rate personal loan Interest rate remains the same for the life of the loan
Payment amount may vary from month to month Monthly payment will not change
Might be desirable for a short-term loan if current interest rate is low If predictable payments are desired, a long-term loan with a fixed rate might be the way to go
Maximum interest rate may be capped Potential to cost more in interest payments over the life of the loan

Debt Consolidation Loan

This type of personal loan refinances existing debts into one new loan. Ideally, the interest rate on this new debt consolidation loan is lower than the interest rate on credit card debt, which may mean you spend less money in interest over the life of the loan. With a debt consolidation loan, you may only have to manage one single monthly payment.

Cosigned

If you’re struggling to get approved for a personal loan on your own, there are circumstances in which you can apply for a loan with a cosigner. A cosigner is someone who helps you qualify for the loan but does not have ownership over the loan. In the event that you are unable to make payments on the loan, your cosigner would be responsible.

Coborrowers and co-applicants are other terms you might hear if you’re interested in borrowing a personal loan with the assistance of a friend or family member. A coborrower essentially takes out the loan with you.

Your coborrower’s name will also be on the loan so they’ll be equally responsible for making sure payments are made on time. A co-applicant is the person applying for a loan with you. When the loan application is approved, the co-applicant becomes the coborrower.

Want to see if a personal loan is right for you?
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Personal Lines of Credit

Slightly different from a personal loan, a personal line of credit functions similarly to a credit card. It’s revolving credit which typically means there is a maximum credit limit, a required monthly minimum payment, and when the debt is paid off, money can be withdrawn again.

The funds in a personal line of credit are generally accessed by writing checks or using a card, or making transfers into another account.

Interest rates on a personal line of credit may be lower than the interest rates on a credit card. Like personal loans, there are both unsecured and secured personal lines of credit.

Credit Card Cash Advances

Some credit cards offer the option to borrow cash against the total cash advance limit. This is called a credit card cash advance. The available cash advance amount may be different than the total available credit for purchases — the information is typically included on each credit card statement. Depending on the credit card company’s policy, there are a few options to secure a cash advance: you can use your credit card at an ATM to withdraw money, borrow a cash advance from a credit union or bank, or request a cash advance from the credit card company directly.

Cash advances typically have some of the highest rates around. There are often additional credit card fees associated with a cash advance transaction. Check your credit card disclosure terms for full details before making a cash advance.

Different Types of Personal Loan Uses

Personal loans can be used for nearly any personal expense. Here are a few reasons people consider borrowing money with a personal loan.

Planning a Wedding

The dress, flowers, catering, photographer, venue fees — the list of wedding expenses can go on and on. While Covid-19 put a halt on many weddings and, therefore, wedding spending, wedding experts expect that celebrations, along with spending, will resume as long as it’s safe to do so. A personal loan for weddings is one option that can be used to cover all or part of costs.

Moving Expenses

Whether you’re moving across the country or just across town or, the cost of moving can add up quickly. A personal loan could potentially help you make ends meet as you’re relocating.

If you want to do a few renovations or upgrades on your new place, a personal loan could help with that too.

Consolidating Debt

Another reason people use personal loans is to consolidate debt. Debt consolidation could allow you to simplify your repayment since you may only have one single payment to keep track of every month.

Depending on the rate and terms you qualify for, consolidating your debt could potentially help you save money on interest payments while you pay down your debt.

Taking a Vacation

Planning a vacation? Maybe your niece is getting married in Greece or you and your partner are planning a honeymoon. If budgeting and saving aren’t enough to get you to your vacation goal, a vacation loan could be one option to help you fill in the gaps.

Making a Large Purchase

Whether it’s a new TV, new patio furniture, or an engagement ring, if the cost of your dream item is a little out of your budget, a personal loan could help you afford the option you really want.

The Takeaway

Armed with some knowledge about types of personal loans, you may be ready to make an educated decision about whether or not a personal loan is right for you. As you consider your options, take a look at SoFi.

There are absolutely no fees when you borrow a personal loan with SoFi and as a SoFi member, you’ll be eligible for additional benefits like career coaching.

Want to find out if a personal loan makes sense for you? You can find out if you pre-qualify, and at what rates, in just a few minutes.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Buying a Car With a Personal Loan

Buying a car, whether used or new, is a significant financial commitment. And most people probably don’t just happen to have $25,000 to $45,000 — the average prices of used and new cars in 2021 — in cash lying around. That means you’ll likely need to take out a loan to buy your car. Deciding which car to buy and understanding how to determine a car’s value and how that value depreciates over time are all considerations when making an informed decision about a car purchase.

Another important consideration is how to pay for the car. Do you specifically need a car loan to buy a car, or can you buy a car with a personal loan?

The short answer to this question is “yes,” but there are a few things to take into consideration when thinking about buying a car with a personal loan or a car loan.

If you’re buying a new car from a dealership, the benefits of using dealer financing might outweigh the drawbacks. Automakers offer financing on cars purchased through their dealerships, with low or sometimes even 0% APRs for well-qualified buyers, in an effort to compete with banks and other financial institutions.

Banks or other financial institutions may offer different interest rates, terms, and eligibility criteria than dealerships. According to consumer credit information compiled by the Federal Reserve , the average APR on a 48-month new car loan from a commercial bank in the second quarter of 2021 was 5.28%. For a 60-month new car loan from a commercial bank during the same period, the APR was 5.05%.

Lending money for a used car might be seen as a higher risk by a bank, and their interest rates typically reflect that notion. Older model vehicles are generally seen as a higher lending risk by banks than a new model because they might be less reliable and have a greater chance of failure as they age.

Is the Seller an Individual or a Car Dealer?

An individual who is selling a used car is not likely to offer financing, so a car buyer in that situation would likely need to find their own source of funds.

As mentioned above, banks do sometimes offer car loans on used cars, but the interest rate is dependent on multiple factors. In addition to looking at the applicant’s creditworthiness, which is typical of any loan application, the make, model, and age of the car are also taken into account.

When considering a personal loan to purchase a used car, details about the car aren’t considered during the application process. As the name implies, a personal loan can be taken out for any number of personal expenses — home improvements or a vacation, for example — whereas a car loan can only be taken out to pay for a car.

Differences Between Car Loans and Personal Loans

In essence, a car loan works much like a mortgage. It is paid for in monthly installments and the asset isn’t fully yours until the final payment is made. The car is the asset that secures the loan, which means if you default on payments, the lender could seize your car. The car’s title typically remains with the lender until the loan is paid in full.

Funds from a personal loan can be much more flexible, and can be used not just for purchasing a car, but for the other costs of owning a car as well. Personal loans can be secured or unsecured, with either fixed or variable interest rates. An unsecured personal loan is not tied directly to an asset, i.e., collateral, as a secured personal loan is, so there is no asset for a lender to seize in the case of default. Transferring a car’s title from one owner to another differs from state to state and is generally handled by each state’s department of motor vehicles.

While a car loan from a dealership might be able to be finalized quickly in some cases, car buyers who have a personal loan approval in hand before they go to the dealership can take a step out of the negotiation process.

Refinancing a car loan with a personal loan might be an option in some cases. Perhaps you’ve improved your financial situation since taking out your car loan and you can now qualify for a lower interest rate. Or you’d rather have a shorter-term loan than you currently have, and refinancing with a personal loan might accomplish that.

Determining the Value of a Car

Whether the car you’re considering is new or just new to you, there are a number of well-respected pricing guides to consult for an appropriate price range once you narrow down your car choices.

•   Edmunds offers a True Market Value guide.

•   Kelley Blue Book has suggested price ranges for various cars (particularly useful for used cars).

•   The National Automobile Dealers Association’s guide offers information about new and used cars, including classic cars.

•   Consumer Reports provides detailed reviews and reports about specific makes and models.

These resources simply provide a price range for the car you want. Calling car dealers for price quotes or estimates and looking for any purchase incentives or dealer financing offers are good ways to be prepared before you walk into a dealership.

Negotiating the Car Purchase

Once you know which car you want and what you can afford, how do you pay for it?

For most of us, the negotiation part of buying a new car is the most daunting. This is why you want to go in understanding the price range for your desired car — ideally, you’ll also be equipped with a few comparable quotes from other dealers.

When speaking with a car salesperson it’s a good idea to ask for the actual sales price, which can include taxes, fees, and other charges that may vary depending on the state and the dealership where the car is purchased.

Some car salespeople might talk in terms of monthly payments instead of total purchase price. But talking about monthly payments and payment periods can make it difficult to keep track of the overall price of the car.

Test-driving, negotiating, and finishing paperwork will take some time, and that’s okay. Take your time with all that goes into a car purchase and don’t let an enthusiastic salesperson rush you into making a decision that’s not a good one for you.

What Are the Costs of Car Ownership?

The sticker price, or even the possibly lower negotiated price, doesn’t reflect the true cost of car ownership. AAA’s annual “Your Driving Costs” study found the average cost of owning and operating a new car in 2021 is nearly $10,000 annually. The three biggest expenses of car ownership are depreciation, fuel, and maintenance and repairs. The study found that small sedans were the cheapest to operate, while half-ton pickup trucks were the most expensive.

Depreciation is the decline in value of an asset over time, and it tops the list of largest annual expenses of car ownership. A new car begins to depreciate as soon as it’s new owner drives it off the lot, and the depreciation continues to increase over time. Depending on the make and model of the car, how many miles it’s driven annually, and other factors, a new car could depreciate

•   10% in the first month.

•   20% in the first year.

•   40% after five years.

Another factor when considering the true cost of your car is the potential increasing maintenance costs over five or 10 years. Proper maintenance of a vehicle can go a long way toward not only keeping it in good condition, but can make it safer for the driver and passengers, as well as other drivers on the road.

The Takeaway

The biggest ongoing cost of the car, though, is the cost of the car itself. Choosing what type of loan — car loan or personal loan — generally corresponds to what type of car you’re buying, what interest rate and terms you might qualify for, and what works best for your specific financial situation. Getting pre-qualified for a personal loan before you begin shopping for a used car may help direct your car search toward vehicles that are affordable and fit your lifestyle.

SoFi Personal Loans have low rates and can be used for a variety of purposes, including purchasing a car.

Check your rate on a SoFi Personal Loan.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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What Happens if You Default on a Personal Loan?

Your car breaks down. Your furnace blows cold air. Your precious pup needs surgery — pronto.

Yep, life can be challenging when unexpected expenses pop up. When that happens, you may need to reassess how to spend the month’s budget, and you might be wondering what happens if you don’t make payments on a personal loan.

In this post, we’ll share the potential consequences of not paying back a personal loan.

What can happen if you miss one payment, of course, is quite different from what can happen if you miss several, so we’ll take you through possible ramifications along the spectrum.

What Does It Mean to Default on a Personal Loan?

Just as with a mortgage or student loans, defaulting on a personal loan means you’ve stopped making payments according to the loan’s terms. You might be just one payment behind, or you may have missed a few. The point at which delinquency becomes default with a personal loan — and the consequences — may vary depending on the type of loan you have, the lender, and the loan agreement you signed.

How Does Loan Default Work?

Even if you miss just one payment on a personal loan, you might be charged a late fee. Your loan agreement should have information about when this penalty fee kicks in — it might be just one day or a couple of weeks — and whether it will be a flat fee or a percentage of your monthly payment.

The agreement also should tell you when the lender will get more serious about collecting its money. Because the collections process can be costly for lenders, it might be a month or more before yours determines your loan is in default. But at some point, you can expect the lender to take action to recover what they’re owed.

What Are the Consequences of Defaulting on a Personal Loan?

Besides those nasty late fees, which can pile up fast, and the increasing stress of fretting about a debt, here are some other significant consequences to consider:

Damage to Your Credit

Lenders typically report missing payments to the credit bureaus when borrowers are more than 30 days late. Which means your delinquency will likely show up on your credit reports and could cause your credit scores to go down. Even if you catch up down the road, those late payments can stay on your credit reports for up to seven years.

If you actually default and the debt is sold to a collection agency, it could then show up as a separate account on your credit reports and do even more damage to your scores.

Though you may not feel the effects of a lower credit score immediately, it could become a problem the next time you apply for new credit — whether that’s for a credit card, car loan, or mortgage loan. It could even be an issue when you try to rent an apartment or need to open new accounts with your local utilities.

Sometimes, a lender may still approve a new loan for borrowers with substandard credit scores, but it might be at a higher interest rate. This means you’d pay back more interest over the life of the loan, which could set you back even further as you work toward financial wellness.

Dealing with Debt Collectors

If you have a secured personal loan, the lender may decide to seize the collateral you put up when you got the loan (your car, personal savings, or some other asset). If it’s an unsecured personal loan, the lender could come looking for payment, either by working through its in-house collection department or by turning your debt over to a third-party collection agency.

Even under the best conditions, dealing with a debt collector can be unpleasant, so it’s best to avoid getting to that stage if you can. But if you fall far enough behind to be contacted by a debt collector, you should be prepared for some aggressive behavior on the part of the collection agency. These agents may have monthly goals they must meet, and they could be hoping you’ll pay up just to make them go away.

There are consumer protections in place through the Fair Debt Collection Practices Act that clarify how far third-party debt collectors can go in trying to recover a debt. There are limits, for example, on when and how often a debt collector can call someone. And debt collectors aren’t allowed to use obscene or threatening language. If you feel a debt collector has gone too far, you can file a complaint with the Consumer Financial Protection Bureau.

You Could Be Sued

If at some point the lender or collection agency decides you simply aren’t going to repay the money you owe on a personal loan, you eventually could end up in court. And if the judgment goes against you, the consequences could be wage garnishment or, possibly, the court could place a lien on your property.

The thought of going to court may be intimidating, but failing to appear at a hearing can end up in an automatic judgment against you. It’s important to show up and to be prepared to state your case.

A Cosigner Could Be Affected

If you have a cosigner or co-applicant on your personal loan, they, too, could be affected if you default.

When someone cosigns on a loan with you, it means that person is equally responsible for paying back the amount you borrowed. So if a parent or grandparent cosigned on your personal loan to help you qualify, and the loan goes into default, the lender — and debt collectors — may contact both you and your loved one about making payments. And your cosigner’s credit score also could take a hit.

Is There a Way to Avoid Defaulting on a Loan?

If you’re worried about making payments and you think you’re getting close to defaulting — but you aren’t there yet — there may be some things you can do to try to avoid it.

Reassessing Your Budget

Could you maybe squeak by and meet all your monthly obligations if you temporarily eliminated some expenses? Perhaps you could put off buying a new car for a bit longer than planned. Or you might be able to cut down on some discretionary expenses, such as dining out and/or subscription services. This process may be a bit painful, but you can always revisit your budget when you get on track financially. And you may even find there are things you don’t miss at all.

Talking to Your Lender

If you’re open about your financial issues, your lender may be willing to work out a modified payment plan that could help you avoid default. Some lenders offer short-term deferment plans that allow borrowers to take a temporary break from monthly payments if they agree to a longer loan term.

You won’t be the first person who’s contacted them to say, “I can’t pay my personal loan.” The lender likely has a few options to consider — especially if you haven’t waited too long. The important thing here is to be clear on how the new payment plan might affect the big picture. Some questions to ask the lender might include: “Will this change increase the overall cost of the loan?” and “What will the change do to my credit scores?”

Getting a New Personal Loan

If your credit is still in good shape, you could decide to get proactive by looking into refinancing the old personal loan with a new personal loan that has terms that are more manageable with your current financial situation. Or you might consider consolidating the old loan and other debts into one loan with a more manageable payment.

This strategy would be part of an overall plan to get on firmer financial footing, of course. Otherwise, you could end up in trouble all over again.

But if your income is higher now and/or your credit scores are stronger than they were when you got the original personal loan, you could potentially improve your interest rate or other loan terms. (Requirements vary by lender.) Or you might be able to get a fresh start with a longer loan term that could potentially lower your payments.

If you decide a new personal loan is right for your needs, the next step is to choose the right lender for you. Some questions to ask lenders might include:

•   Can I borrow enough for what I need?

•   What is the best interest rate I can get?

•   Can I get a better rate if I sign up for automatic payments?

•   Do you charge any loan fees or penalties?

•   What happens if I can’t pay my personal loan because I lost my job? Do you offer unemployment protection?

Shopping for a personal loan online can be fast and convenient. With a SoFi Personal Loan, for example, you can find your interest rate in minutes without impacting your credit score.* And with SoFi, you’ll have access to live customer support seven days a week.

Is There a Way Out of Personal Loan Default?

Even if it’s too late to avoid default, there are steps you may be able to take to help yourself get back on track.

After carefully evaluating the situation, you may decide you want to propose a repayment plan or lump-sum settlement to the lender or collection agency. If so, the Consumer Financial Protection Bureau (CFPB) recommends being realistic about what you can afford, so you can stick to the plan.

If you need help figuring out how to make it work, the CFPB says, consulting with a credit counselor may help. But consumers should be cautious about companies that claim they can renegotiate, settle, or change the terms of your debt: the CFPB warns that some companies promise more than they can deliver.

Finally, as you make your way back to financial wellness, it can be a good idea to keep an eye on two things:

1. The Statute of Limitations

For most states, the statute of limitations — the period during which you can be sued to recover your debt — is about three to six years. If you haven’t made a payment for close to that amount of time — or longer — you may want to consult a debt attorney to determine your next steps. (Low-income borrowers may even be able to get free legal help .)

2. Your Credit Score

Tracking your credit reports — and seeing first-hand what helps or hurts your credit scores — could provide extra incentive to keep working toward a healthier financial future. You can use a credit monitoring service to stay up to date, or you could take a DIY approach and check your credit reports yourself. Every U.S. consumer is entitled to a once yearly free credit report available at annualcreditreport.com , which is a federally authorized source.

The Takeaway

If your debt seems daunting right now, and you’re struggling to make payments, some proactive planning could help you avoid falling so far behind that you default on your personal loan. That plan may include talking to your current lender about modified payment terms — or it might be time to consider a new personal loan to consolidate high-interest debt.

The good news is there’s help out there. And the sooner you act, the more options you may have to protect your credit and stay away from the serious consequences of defaulting.

Wondering if a personal loan is the right move for you? Learn more about how to apply for a SoFi personal loan.


*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Source: sofi.com

Perfect Credit: How to Get an Excellent Credit Score

A perfect credit score is a bit of an elusive target, as it is challenging to figure out the formula for impeccable financial health. But is the maximum number really necessary? And if so, how frequently do people achieve it? Even though lenders generally assure that anything over 700 is a good score, many people strive for the ultimate goal: 850.

After all, a credit score this impressive has countless benefits—it’s a sure sign that you understand how to manage your money and can borrow and spend with confidence. However, reaching that brag-worthy 850 takes more than just financial wellness. You also need a complete understanding of how credit works and the math behind what affects your scores day to day. In this guide, we’ll be answering questions like “what’s considered an excellent credit score?” and “what’s a great credit score?” to help you better understand what’s needed to achieve perfection. Keep reading to learn how to get an excellent credit score or use the links to answer your questions right away.

What is Credit?

Credit is what allows you to borrow money from lenders. When you apply for a loan, lenders will either approve or deny your request by assessing factors like debt-to-income ratio, employment history, and the amount of the loan. There are several types of credit, including revolving credit, service credit, and installment credit. We’ll go over the three types of credit below.

Revolving Credit

Revolving credit is a line of credit that you can keep using even after you’ve paid off the balance in full. With this kind of credit, you’ll have a limit to the amount of money you can use. For example, if a financial institution approves your credit card for $3,000, you’ll only be able to charge that amount to your account. Like any type of credit, you’ll need to make a minimum payment each month. If you only pay a portion of the amount owed, you’ll continue to revolve your debt until it’s paid off completely.

Service Credit

Service Credit is established by those who provide a service, such as utility companies, phone and internet providers, and gyms. Essentially, it’s an agreement between you and the company offering the service. Let’s take a closer look at gyms as an example. When you apply for a membership, you’ll sign a document that’ll guarantee the use of the facility only if you pay for the service.

Installment Credit

Installment credit is a type of loan that’s used toward a specific purchase. For instance, mortgages, car loans, and student loans.

When thinking of opening a new line of credit, it’s important to take into consideration the type of credit you want to open.

Why is Credit Score Important?

So, why is credit so important? Well, maybe you want to buy a car in a couple of months. To do so, you need to apply for a car loan if you don’t have the cash in hand. Or you may be planning to purchase a house, which most people can’t afford to pay in full. When it comes to making these big purchases, you’re going to want to make sure your credit is in tip-top shape.

A credit score determines if a lender will approve or deny your loan, the interest you have to pay, and the amount due each month. The higher the credit score, the lower your interest and payments will be. The lower your credit score is, the higher your interest rate and monthly payments will be, meaning you’ll end up paying more for whatever you purchased in the long run.

But lenders aren’t the only ones interested in your credit score. Here are a few other people or organizations that take a look at your credit score before making their final decision.

  • Landlords may want to know your credit score to ensure your finances are in good standing and that you can afford to pay rent.
  • Insurance companies may use your credit score to determine the rate of your policy.
  • Utility companies can also look at your credit score to see whether you’re eligible to open an account.
  • Employers often run credit checks to make sure you’re going to be a trustworthy employee.

Your credit score is an essential factor for almost every aspect of your life, whether you realize it or not. A credit score allows you to make significant financial decisions without your wallet suffering the consequences. You’ll be able to spread the costs of big purchases over time, making it more manageable. But it isn’t enough to simply have a credit score. You need a good credit score to reap the benefits.

Credit Score Range

Credit scores range from 300 to 850. The number you see on your monthly credit report is generated by VantageScore or FICO. Each company has its own credit-scoring model to determine your credit score based on several factors, such as payment history, credit history, total debt, and more. Although the scores between the two may differ, they’ll generally follow the ranges below.

  • Anything below 630 is considered a poor or bad credit score
  • Credit scores between 630 and 689 is considered a fair credit score
  • Credit scores between 690 and 719 is considered a good credit score
  • Anything above 720 is considered an excellent credit score

So, what’s a perfect credit score? 850 is considered a perfect score. We’ll be discussing what is the highest credit score and how to reach it later on. Even though you may be content with having a good credit score, there’s always room to improve.

Excellent Credit Score

As mentioned, anything above 720 is considered an excellent credit score, but what exactly does that mean for you as a borrower? For starters, you’ll increase the likelihood of getting approved for the line of credit you want. You’ll also save money during the lifetime of your loan since your interest and monthly payments will be low.

An excellent credit score has numerous advantages for you as it increases your purchasing power and puts you in the best financial position possible. Once you reach this pinnacle of success, where do you go from there?

Perfect Credit Score

According to Nasdaq, roughly 1.2% of Americans had an 850 in 2020. The benefits of an 850 credit score may include lower interest rates, easier approval for home loans or rental applications, and even a greater chance of getting hired by your dream company. But is it essential to have a perfect credit score for these opportunities? Not necessarily. Anything from 790-719 is considered “good,” while 720 and above is an excellent score. However, there’s no harm in wanting to achieve perfection.

The path to reaching that rarely seen 850 score can seem a bit confusing. Even if you pay your bills on time, have a diverse collection of credit accounts, and maintain a clean financial record, many people plateau around the 750-800 mark. So how does one build enough credit to reach the ultimate score? Let’s go through some of the most common contributors to getting the highest credit score below.

What Affects Your Credit Score?

Before we explore how you can improve your credit score, you need to know what factors affect your credit score. If you’re set on achieving an 850 score, these determinants are important to take into consideration.

Multiple Hard Inquiries

Each time you apply for a new line of credit—whether it’s for a car, credit card, or home, for example—lenders perform what is known as a hard inquiry into your history. These are not to be confused with soft inquiries, which are made by prospective employers or lenders checking out your report for preapprovals. Multiple hard inquiries tell a story that may worry lenders.

If you choose to apply for a credit card, shop around to find the best one for you before a hard inquiry occurs.

Frequent Late Payments

On-time payments are essential to your credit score. You agreed upon a specific arrangement when you accepted a loan, and lenders would like to see that you can stick to it. However, some banks allow a pass for missing a payment by a few days once every one to two years; it’s crucial to stay on top of due dates the best you can.

History of Defaulting or Charge-Offs

When late or non-existent payments extend past six months, lenders may charge-off your credit account. This means that the bank no longer trusts you to pay the owed amount. These unfortunate notes can last between six and seven years on your credit report and may lead to lenders denying future applications for new lines of credit.

Closing Old Accounts

Remember that the length of your credit history accounts for a significant portion of your score. Just because you’ve paid off a tricky balance doesn’t mean you should close the card. If this were one of your earliest cards, your history’s length would shrink with the cancellation of your account.

Keeping it Simple

Even if you pay all your balances off each month, sometimes you may get stuck at a mediocre credit score. Reaching the highest credit score will likely require you to show off your credit knowledge. As you diversify your lines of credit, you’ll be able to prove your financial expertise. By only focusing on one line of credit—such as student loans or minimal credit cards— at a time, your credit score could plateau.

Achieving the perfect credit score is all about balance. It’s possible to get in your own way without realizing it. Check in with your finances if you’re falling into any of the common traps mentioned above that could keep your credit score stagnant. Not sure how to get your credit score for free? Mint makes it easy!

How to Raise Your Credit Score

If you’re only a few points away from reaching 850, it can get pretty frustrating seeing the number remain the same month after month. To help you reach your goal, here are five ways you can raise your credit score.

Make Timely Payments

There’s no question that making your credit payments on time each and every month is one of the most important factors for your credit score. This doesn’t necessarily mean that you can’t carry a balance on revolving credit accounts, but late minimum payments incur a fee and remain on your credit report. In the end, it all comes down to creating long-term trust with lenders.

Keep Your Utilization Rates Low

Some financial experts believe that carrying a balance above 30 percent of your credit limit can damage your credit score. Though this frequently quoted 30 percent is seen as the hard and fast rule for credit utilization, experts say it is actually a cap. Carrying a balance below this amount— preferably below 20%— is ideal for raising your credit score.

This is also a reminder that carrying a balance does not negate your chances of hitting that magical 850.

Only Open Necessary Accounts

Though account diversity can help perfect your credit score, opening accounts or cards you won’t use and that have burdensome fees and stipulations can hurt your credit. Only open lines of credit when you need them. However, if you’re tempted to accept your favorite retailer’s credit card offer, for example, be sure you can pay off each purchase in a timely manner.

At the same time, be mindful of closing accounts once they’re opened. Cutting up that credit card simply because you have a new account means lowering your overall credit limit and possibly increasing your utilization rate. A card with a long life also shows your dedication to maintaining the account.

Have a Long Credit History

It’s a little confusing to learn that you don’t begin your credit journey with a perfect score. Credit scores, however, are about building a credit reputation over time. It’s simply impossible to prove how you’ll respond to paying down debt until you do so over several years. If you’ve only just begun to build credit or have minimal accounts, your score will improve as you continue to follow your set payment schedule.

Cultivate Account Variety

Whenever you hear about someone achieving the perfect credit score, they often boast their wide range of credit accounts. Each line of credit opened speaks to a different type of spending. Things like student and car loans prove that you can pay off large sums over time, and revolving accounts, such as credit cards, verify that you’re able to manage your monthly budget with confidence.

Even different credit cards can offer a variety of perks. Some people may keep a credit card open for emergencies, while others could use it to accumulate travel points or store credit. When you see each line of credit as a unique tool, you’re more likely to approach credit spending with a healthy mindset. In turn, this shows up in your long-term credit report and helps your score grow.

Summary: How to Achieve Perfect Credit

The perfect credit score is achievable with a little strategy and plenty of patience. The ultimate number—a score of 850—is possible over time and with the proper financial knowledge. Most importantly, understand that credit scores can fluctuate as your life changes. Focus on your overall financial wellbeing and it may be within your reach sooner than you think.

Source: mint.intuit.com

Should I Save for a Down Payment on a House or Pay Off Debt?

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Dig Deeper

Additional Resources

You need cash for a down payment to buy a house. But your existing monthly debt payments and credit also affect your ability to borrow, your interest rate, and the lender fees you’ll pay. Which says nothing of financial upsides and downsides to buying versus renting a while longer.  

So how do you choose between paying off your debts and savings for a down payment?

It depends on your personal finances, so consider the following factors while you decide how to prioritize your savings. 

How Debt Affects Your Mortgage Application

Before getting into the other factors that go into your decision, you first need to understand how lenders review your loan application. 

When you apply for a mortgage, the bank or broker looks at your income, your debts, your assets, and your credit history. They use this information to calculate how much to lend you, at what interest rate and points, and with what down payment. 

Debt Ratios

Mortgage lenders calculate two debt-to-income ratios when you apply: a “front-end” and “back end” ratio. 

Your front-end debt ratio is based solely on your housing expenses if you were to borrow money to buy a house. Lenders typically cap borrowers’ housing expenses at 28% of their gross monthly income. So, if you earn $5,000 per month, lenders limit your monthly loan payment to $1,400. Housing expenses include your mortgage principal and interest, property taxes, homeowners insurance, and any homeowners’ or condo association fees. 

Where it gets slightly more complicated is your back-end ratio, which includes all your monthly debt payments. Lenders usually cap borrowers’ back-end debt ratio at 36% of their gross monthly income. That includes not just your prospective mortgage payment, but all your other monthly debt payments including auto loans, personal loans, student loans, credit card minimum payments, child support, alimony, and any other obligatory payments. 

Continuing the example above, say you earn $5,000 per month, but you owe $500 each month on a car loan, $400 toward student loans, and $100 toward credit card balances. Since most mortgage lenders cap you at a 36% back-end ratio, that means a maximum of $1,800 each month going to all your debt payments combined. Since you already have $1,000 going toward other debts, lenders would only approve you for a mortgage with an $800 payment — including principal, interest, property taxes, homeowners insurance, and association fees.

By paying off one or more of those outstanding debts, you can qualify for a much higher mortgage loan. 

Credit

Your credit score and history determine your interest rate, lender fees, and down payment. While you can buy a home with bad credit, it costs far more, both in down payment and monthly loan payments. 

If you have bad credit, consider improving your credit score before you buy a home. Which you can start by paying off your other debts. 

That kills multiple birds with one proverbial stone: you eliminate debts, which increases the loan amount you qualify for, and boosts your credit score, which helps you qualify for a cheaper loan with a lower down payment. Wins all around. 

Down Payments & PMI

If you put down less than 20% when you buy a home, the lender requires you to pay for mortgage insurance. Among conventional loans, it’s called private mortgage insurance (PMI); among FHA loans, it’s called mortgage insurance premium (MIP). It can add $100 or more to your monthly payment. 

The distinction matters, because conventional loans allow you to remove PMI once you pay the balance down below 80% of your home’s value. However FHA loans no longer allow that — they require you to keep paying MIP for the entire life of your loan. That means you should avoid FHA loans if possible, and the better your credit score, the better your odds of getting a conventional loan. 

When you take out a conventional loan, you ideally want to put down 20% to avoid PMI entirely. It adds another wrinkle to the decision of whether to put more money toward a down payment or toward paying off debts. But even if you borrow more than 80% of the home price, at least you can remove PMI once you pay down your loan balance. 


Non-Mortgage Factors Affecting Your Decision

Your mortgage approval and loan terms aren’t the only factors that go into your decision. 

Consider the following as well, as you decide what makes most sense for you. 

Cost of Renting vs. Owning in Your Market

In some markets, it costs far more to own a home than to rent an equivalent one. And vice versa in other markets. 

Look no further than San Francisco. People love to complain about rents in San Francisco, but they’re a steal compared to home prices. 

The median rent for a three-bedroom home in San Francisco is $4,567 per RentData.org, while the median home price is $1,504,311 per Zillow. At a 4% mortgage rate for a 30-year loan, principal and interest comes to $7,182 per month. At a property tax rate of 1.1801%, property taxes on a median home come to $1,479 per month. Add another $200 for homeowners insurance and you have a monthly housing payment of $8,861 — nearly twice the cost to rent. And that says nothing of home maintenance and repairs, which renters delegate to their landlord. 

In markets where it costs more to own than rent, there’s little rush to become a homeowner. Prioritize paying off debts over saving for a down payment. 

How Long You Plan to Stay

American culture has built a mythology around homeownership. But as demonstrated above, it doesn’t always make sense. 

Nor are market rent and home pricing the only reason to rent. Renting allows flexibility: you only commit to one year at a time, if that. When you buy a home, it takes years to build enough equity to cover both your initial purchase closing costs and your subsequent selling costs. 

If you don’t know how long you want to live in your next home, rent rather than buy. Take the time to pay down debts and improve your credit score. 

That goes doubly if you’re thinking about buying a home with a partner, but you’re not 100% confident in your long-term future together. 

The Interest Rate on Your Other Debts

The interest rates on your other debts matter. The higher they are, the more urgently you should pay them off. A 5% interest rate on a car loan comes with far less urgency than a 50% rate on a loan from the mob, to use an extreme example. 

While you may not owe the mob, many Americans do carry credit card debts with interest rates ranging from 15% to 30%. Consider any loan with an interest rate in the double digits “urgent.” 

Bear in mind that it often makes sense to pay off one debt but not another before saving money to buy a home. For instance, if you have credit card debt at 25% interest and a car loan at 5%, consider paying off the credit card balance but leaving your car loan in place. 

Your Ability to Suspend or Reduce Other Debt Payments

Since the bank uses your minimum required payments to calculate how much loan you can afford, decreasing minimum payments may increase your loan amount without you having to pay off any debt. It works best with loans you want to keep, such as those with low interest rates.

For example, many student loans permit you to suspend or alter your payment plan for a year or two. That makes it easier to qualify for a larger loan without having to pay off any of the low-interest student debt.

With credit card debt, you can consider a balance transfer to a credit card with a lower APR rate or a promotional period free of any interest. Don’t open a new card just before you apply for your mortgage however, as this can temporarily ding your credit score.

Your Appetite for House Hacking

I don’t have a housing payment, and it makes a huge impact on my savings rate. 

Consider getting creative and exploring ways to house hack. In the traditional model, you buy a multifamily property and move into one unit, while renting out the others. Your neighboring tenants ideally pay enough in rent to cover your monthly mortgage payments and some of your maintenance costs. 

Alternative house hacking models include bringing in housemates, renting out a basement or garage apartment, renting part of the home on Airbnb, or any number of other house hacking tactics. 

I’ve known renters who found ways to house hack. But you have more options when you own your own home. 

If the idea appeals to you, and you’re willing to do some research on how to make it happen, buying a home sooner rather than later often makes sense. 

Access to Other Funding Sources for Your Down Payment

Some people have family members who might help them out with a down payment — but would never give them money to pay off credit card debt that they racked up through their own financial mismanagement. 

In those cases, you can put your own savings toward paying off debts, and accept loans or gifts from family members to help with your down payment. Keep in mind that conventional mortgage loans don’t technically allow you to borrow the down payment, but they do allow gifts. 

You can also pull money from your retirement accounts to cover your down payment, tax- and penalty-free. Each retirement account comes with its own rules and limitations for withdrawing funds for a down payment, so do your homework. 

Research other creative ways to come up with a down payment. You might find that you can put your own savings toward paying off your debts, even as you raise your down payment elsewhere.

Tax Implications

I hesitated to even include this, because too many people overemphasize the importance of the mortgage interest deduction. But Uncle Sam does play favorites with homeowners and allows them to deduct the interest paid on their home mortgage each year, along with their property tax bill. 

That only helps you if you itemize your deductions, of course. If you take the standard deduction — as many more Americans now do, after it was raised by the Tax Cuts and Jobs Act of 2017 — the mortgage interest deduction doesn’t impact your taxes at all. The law also put a $10,000 cap on state and local tax deductions on your federal income tax return, limiting your ability to write off property taxes in high-tax cities. 


A Framework for Deciding Whether to Pay Down Debts or Save a Down Payment

First and foremost, reevaluate whether you should buy a home right now at all. Research rents versus homeownership costs in your area, and try this nifty rent vs. buy calculator from Realtor.com. Ask yourself how long you plan to stay in your next home, and if you don’t know or if it could be less than three years, continue renting for now while you become debt-free. 

If you decide that you definitely want to buy, calculate your back-end debt ratio, and how much money it leaves for a mortgage payment. Don’t forget property taxes, insurance, and homeowners’ association fees. If a 36% cap doesn’t leave you with much room for a housing payment, consider paying off debts. Use the free mortgage limit calculator from Chase to help you run the numbers. 

If you’re paying more than 8% to 10% on some of your debts, consider paying them off before saving for a home. Try the debt avalanche method to knock out your highest-interest debts quickly. 

In contrast, if you plan to house hack, or if you can raise your down payment from money other than your own savings, consider prioritizing your down payment. Buying a home helps you even more if you itemize your deductions, but don’t base your decision on that factor alone. 

Don’t forget to leave yourself an emergency fund, so you don’t find yourself panicking when a $3,000 repair bill comes due 30 days after you settle on your new home. 


Final Word

As you run the numbers in the calculators above, be careful to avoid framing your future housing payment in terms of the most you can possibly afford. It’s a recipe for overspending on housing, and leaving no money for groceries, entertainment, or travel. 

Instead, ask yourself “What’s the least I can spend on housing and still be satisfied with my home?” By reframing the question, you’ll look for homes that meet your requirements rather than looking at homes that stretch your housing budget to their absolute limits. 

Better yet, skip that game entirely and either house hack or find a job that provides free housing. The suburban American dream of the white picket fence is overrated anyway. 

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Source: moneycrashers.com

Using a Personal Loan to Pay Off Credit Card Debt

People talk all day long about their workouts, favorite apps, and their love lives, but bring up the subject of money, especially credit card debt, and suddenly everyone clams up.

But just because we don’t talk about debt doesn’t mean it’s not an issue. After all, the average American household carrying a credit card balance has over $5,500 in credit card debt in 2021. But how do you pay off credit card debt? One method to consider: taking out a personal loan.

How Using a Personal Loan to Pay Off Credit Card Debt Works

Personal loans are a type of unsecured loan that a borrower can take out for almost any purpose, including paying off credit card debt. Loan amounts can vary by lender and will be paid to the borrower in one lump sum after the loan is approved. The borrower then pays back the loan — with interest — in monthly installments that are set by the loan terms.

Many unsecured personal loans come with a fixed interest rate that won’t fluctuate or change over the life of the loan. An applicant’s interest rate will be determined by a set of factors, including their financial history, credit score, income, and other debt, among other factors. Typically, the higher an applicant’s credit score the better their interest rate will be, as they may be seen as a less risky borrower. Lenders may offer individuals with low credit scores a higher interest rate, presuming they will be more likely to default on their loans.

When using a personal loan to pay off credit card debt, the loan proceeds are used to pay off the cards’ outstanding balances, consolidating the debts into one loan. Ideally, the new loan will have a much lower interest rate than the credit cards. Consider that the average credit card interest rate is about 16% , while the average personal loan rate is about 9.5% , according to the Federal Reserve. By consolidating credit card debt into a personal loan, a borrower’s monthly payments can be more manageable and cost considerably less interest.

Finally, using an unsecured personal loan to pay off credit cards also has the benefit of ending the cycle of credit card debt, without resorting to a balance transfer card.

Balance transfer credit cards are just credit cards that usually have an introductory offer of a low rate (or a 0% rate) on balance transfers to the new card. This might seem like an appealing offer. But if the balance isn’t paid off before the promotional offer is up, the card holder could end up paying an even higher interest rate than they started with. Balance transfer cards often charge a balance transfer fee, which could ultimately increase the total debt.

Taking Out a Loan to Pay Off Credit Card Pros and Cons

While on the surface it may seem like taking out a personal loan to pay off credit card debt could be the best solution, there are some potential drawbacks to consider as well. Here’s a look at some of the pros and cons.

Pros Cons
Lower interest rate: Personal loans may charge a lower interest rate than high-interest credit cards. Consider the average interest rate for personal loans is under 10%, while credit cards charge over 16% on average. Lower rates aren’t guaranteed: If you have poor credit, you may not qualify for a personal loan with a lower rate than you’re already paying. In fact, it’s possible lenders would offer you a loan with a higher rate than what you’re paying now.
Streamlining payments: When you consolidate credit card debt under a personal loan, there is only one loan payment to keep track of each month, making it less likely a payment will be missed because a bill slips through the cracks. Loan fees: Lenders may charge any number of fees, such as loan origination fees, when a person takes out a loan. Be mindful of the impact these fees can have. It’s possible they will be costly enough that it doesn’t make sense to take out a new loan.
Pay off debt sooner: A lower interest rate means there could be more money to direct to paying down existing debt, potentially allowing the debtor to get out from under it much sooner. More debt: Taking out a personal loan to pay off existing debt is more likely to be successful when the borrower is careful not to run up a new balance on their credit cards. If they do, they’ll potentially be saddled with more debt than they had to begin with.
Credit score boost: It’s possible that taking out a personal loan could boost the borrower’s credit score by increasing their credit mix and lowering their credit utilization by helping them pay down debt. Credit score dip: If closing the now-paid-off credit cards after taking out a personal loan is a temptation, perhaps reconsider doing so. Closing credit accounts that have been on a person’s credit report for some time could shorten their length of credit history and possibly negatively affect their credit score.

So You’ve Decided to Apply for a Personal Loan to Pay Off a Credit Card. Now What?

The steps for paying off a credit card with an unsecured personal loan aren’t particularly complicated, but having a plan in place is important.

Getting the Whole Picture

It can be scary, but getting the hard numbers — how much debt is owed overall, how much is owed on each specific card, and what the respective interest rates are — can give a sense of what personal loan amount might be helpful to pay off credit cards.

Searching Personal Loan Options

These days, most — or all— personal loan research can be done online. A personal loan with an interest rate lower than the credit card’s current rate is an important thing to look for. Origination fees, which can add to a person’s overall debt and possibly throw off their payoff plan, is another thing to watch out for.

Paying Off the Debt

Once an applicant has chosen, applied, and qualified for a personal loan, they’ll likely want to immediately take that money and pay off their credit card debt in full after they receive the loan proceeds.

The process of receiving a personal loan may differ. Some lenders will pay off the borrower’s credit card companies directly, while others will send the borrower a check that they’ll then have to deposit and use to pay off the credit cards themself.

Hiding Those Credit Cards

One potential risk of using a personal loan to pay off credit cards is that it can make it easier to accumulate more debt. The purpose of using a personal loan to pay off credit card debt is to keep from repeating the cycle.

Consider taking steps like hiding credit cards in a drawer and trying to use them as little as possible.

Paying Off Your Personal Loan

A benefit of using a personal loan to consolidate credit card debt is that there is only one monthly payment to worry about instead of several. Not missing any of those loan payments is important — setting up a monthly reminder or alert can be helpful.

Applying for a Personal Loan to Pay Off Credit Cards

With online applications, the process for getting a personal loan can be quick and easy, and some lenders may provide live customer support.

Applying online typically doesn’t take more than a few minutes. And there are more options than ever with innovative fintech startups doing what they can to make the process of refinancing your credit card debt quick and easy.

Again, there’s also the potential for saving. Of course, everyone’s situation varies, but you can use SoFi’s credit card interest calculator and personal loan calculator to do the math on your own.

Budgeting Debt Payoff

Before embarking on paying off credit card debt, a good first step is pulling together a budget, which can help a person better manage their spending. And they might even find money in their budget to put towards that outstanding debt.

If a person has more than one type of debt, for instance, a mortgage, student loan, and maybe a car loan, they may want to think strategically about how to tackle them.

Some finance gurus recommend taking on the debt with the highest interest rate first, a strategy known as the avalanche method. As those high-interest-rate debts are paid off, there is typically more money in the budget to pay down other debts.

Another approach, known as the snowball method, is to pay off the debts with the smallest balances first. This method gives a psychological boost, with small wins early, and over time can allow room in the budget to make larger payments on other outstanding debts. Of course, for either of these strategies, keeping current on payments for all debts is essential.

Ready for a Personal Loan to Pay Off Credit Card Debt? Use SoFi Today!

SoFi Personal Loans have low interest rates and fixed monthly payments, which can be helpful when paying off high-interest debt. The online application is quick – find your rate in just two minutes without any commitment to continue. If you’re approved, the funds are deposited directly into your account.

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The Takeaway

High-interest credit card debt can be a huge financial burden. If a person is only able to make minimum payments on their credit cards, their debt will only increase, and they’ll find themselves in a vicious debt cycle. Personal loans are one potential way to end that cycle, as a tool to pay off debt in one fell swoop and hopefully replace it with a single, more manageable loan.

Remember, however, personal loans aren’t for everyone. While they typically have lower interest rates than credit cards, they are still debt and should be considered carefully and used responsibly.

Ready to get rid of your credit card debt? Check your rate on a SoFi personal loan in just a few minutes.


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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Partial Payments for Debts

Whether you’re paying for college, buying a house, or starting a business, it’s common to take on debt at some point in your life. Repaying that debt typically involves making a fixed or minimum monthly payment by a certain day each month.

But what happens if money is tight and you don’t have enough to make that monthly payment?

It might seem like making a partial payment is better than paying nothing at all. However, that’s not necessarily the case. Depending on the lender or creditor, a partial payment may be looked at the exact same way as a late or missed payment.

Though partial payments might help lower your balance and reduce the interest that accrues on your debt, lenders and creditors generally don’t see them as on-time payments and may still consider your account as in default.

If you’re thinking about making partial payments, here’s what you can expect to happen — and what you can do instead.

Recommended: Prepayment Penalties: Why They Exist and How to Avoid Them

What is a Partial Payment?

A partial payment on a debt is any payment smaller than the minimum amount due, as specified by the creditor.

Credit cards have minimum payment amounts, which can vary depending on your balance and annual percentage rate (APR). Other types of debt, such as car loans and mortgages, typically have set monthly payments that don’t vary as much.

Partial payments typically do not typically satisfy a creditor’s payment requirements for loans, credit cards, and other debt. And, not paying the full amount could be treated the same as a missed payment.

Why Do Customers Make Partial Payments?

Generally, customers make partial payments if they’re dealing with financial hardship or other money issues that make them unable to cover all their monthly expenses.

Even a sound budget can go off the rails when emergency expenses, such as medical bills or car repairs, arise. When bills are due, paying for necessities, like food, housing, and utilities, are usually a higher priority than long-term debt.

People who are out of work due to the pandemic (or other reasons) and collecting unemployment benefits may also consider making partial payments on debt for a period of time.

Recommended: How to Start an Emergency Fund (and Why You Should)

Does a Partial Payment Affect Your Credit Score?

It could. If you pay less than the minimum amount due on a credit card or loan, it likely won’t satisfy your creditors and they will still consider it a missed payment. In addition to hitting you with a late fee, they may also report to the credit bureaus that your payment is late.

By law, creditors can’t notify credit bureaus of a late payment until it’s 30 days past the due date. Paying the remainder of what you owe for that month prior to the 30-day mark can keep a late payment from showing up on a credit score, though you could still be liable for fees and penalties set by the creditor for making a late payment.

Because your payment history makes up 35% of your FICO® Score, having a late payment on your record can cause your score to drop.

Lenders consider a borrower’s repayment track record as a primary indicator of their ability to pay back future debt, which is why payment history is the largest component of most credit scores.

The impact of late and partial payments on your credit score will vary based on your existing credit history and how far behind you are on payments. Accounts that go unpaid for several months will do more harm to a credit score than a single late payment.

Over time, the impact of a late payment on your score will diminish and, after seven years, it will be removed from your credit report.

Recommended: How to Build Credit Over Time

Other Downsides of Making a Partial Payment

Falling short of what you owe can create other issues besides putting a dent in your credit score. Creditors may impose fees and take additional measures to secure repayment.

Here’s a closer look at what could happen if you only make partial payments on these common types of debt.

Auto Loans

What happens to your auto loan will depend on your agreement and history with the lender. If you’ve never missed a payment before, they may be willing to accept a partial payment for now.

Depending on the state, defaulting on your car loan can mean vehicle repossession, which can involve selling the car at public auction or electronic disabling the car to prevent it from being used. It can be a good idea to check the contract terms to learn what the lender is authorized to do and when.

Credit Cards

Unless you’ve come to a prior agreement with the credit card company, partial payments likely won’t satisfy your account’s minimum payment requirements.

Even if you pay something towards the bill, your account will likely still become delinquent, and the credit card company may report the late payments to the credit bureaus.

Failing to pay the minimum amount on a credit card bill also typically comes with late fees. Delaying payment further can result with additional consequences, such as freezing your credit card and sending your debt to a collection agency.

Recommended: How Do Credit Card Payments Work?

Mortgages

Making partial payments on a mortgage can be considered defaulting on the loan and even trigger the foreclosure process.

Prior to foreclosure, borrowers will likely incur late fees and receive a notice of default when the mortgage payment is a few months past due.

In general, a foreclosure can’t begin until 120 days after the first missed mortgage payment. That means you have some time to pay the amount that’s past due before the lender starts the foreclosure process.

Student Loans

Partial payments on student loans could cause them to become delinquent one day after the payment due date unless alternative arrangements are made with lenders.

With federal student loans, your loans typically enter default when you miss or only make partial payments for 270 days. The lender can then report the default to the credit bureaus. In addition, the government can garnish your wages, and even keep your tax refund.

A possible exception: If you have an income-driven federal student loan repayment plan, your monthly payment could be as low as $0 if your income dips low enough.

With private student loans, the rules will depend on the lender. If you remain delinquent for 90 days or more, the delinquency may be reported to the credit bureaus. If the account continues to be delinquent, you could fall into default, at which point private lenders can take legal action.

Recommended: How to Get Out of Student Loan Debt: 6 Options

Alternatives to Making Partial Payments

Before making a partial payment, you may want to consider some alternatives:

Reaching Out to Your Creditor

It can be a good idea to contact the creditor or lender before the payment is due to explain your situation and what you can afford to pay that month.

You may also want to ask about a “hardship repayment plan.” This type of plan could potentially allow you the option of minimal or no payment, a temporary reduction or suspension in account interest, or interest-only payments. You may want to keep in mind, however, that interest-only payments won’t decrease your principle — or the size of your loan. Some programs last a month, and others up to six months or so.

Contacting a Nonprofit Credit Counseling Agency

These agencies can help by negotiating lower interest rates with your current creditors. This can often result in lower monthly payments. If you are able to work out a plan, the payment you make may no longer be considered a “partial payment,” but instead an agreed-upon amount.

Considering Debt Consolidation

If you have multiple credit cards with high-interest rates and you’re having trouble paying the minimum on each, you may want to look into whether a debt consolidation program might help. The process involves taking out a personal loan at a bank or other reputable lender and then using it to pay off your credit cards.

You then end up with one loan to pay back, ideally at a lower interest rate. Typically, a closed-end loan like a personal loan means higher monthly payments, since personal loans have fixed terms. This is great news for borrowers who want to pay down their debt sooner, but it might not be the right choice for everyone.

Recommended: 6 Strategies for Becoming Debt Free

The Takeaway

If cash flow is tight, you might consider making a partial payment on a debt, hoping that paying something will prevent a late fee or a late payment from showing up on your credit report.

However, borrowers don’t typically get any extra credit for making a partial effort. If the monthly minimum or fixed payment hasn’t been paid in full, the lender will likely mark the payment as missed.

While partial payments may help chip away at your account balance, you can still end up facing fees, a reduced credit score, and potentially loan default.

If you’re unable to make full payments on your debt, it can be a good idea to contact your creditor as soon as possible to let them know about your financial situation first. In some cases, they may be able to offer alternative payment plans, forbearance, or postponement.

Setting up — and sticking to — a monthly spending budget can help you avoid having to make partial payments.

Looking to keep better tabs on your money, so you always have enough to pay your bills? With a SoFi Money® cash management account, you can spend, save, and earn competitive interest all in one account. And, you can easily track your weekly spending (and make sure you’re not overdoing it) right in the dashboard of the SoFi app.

Learn how SoFi Money can help you stay on top of your personal finances.

Photo credit: iStock/mapodile


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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Source: sofi.com