The least expensive and potentially easiest way to buy a car with bad credit is to pay cash outright for it. That way, no one even needs to check your credit history, and you don’t pay interest expense of any kind.
However, that’s not a path everyone can take, especially with the rising costs of new and used cars. The average MSRP for a new vehicle in 2023 was $34,876, and used vehicles aren’t much cheaper. The average cost of a used vehicle in mid-2023 was more than $27,000.
Even if you have money saved up and can afford to drop it all at once on a car or truck, if you’re looking to build up your credit for the future, a cash purchase won’t help you with that. So, understanding how to buy a car when you have bad credit might be important. Luckily, we’ve got plenty of tips to help you manage this financial step.
What to Consider When Buying a Car With Bad Credit
Buying a new—or new to you—vehicle can be exciting. But before you show up to browse at a dealership and get caught up in negotiations, it’s helpful to do some research and consider your financial situation. Some things to consider include:
What you can afford. When you don’t have great credit, you might feel like you’re lucky to get a loan. This can lead to taking any deal you’re offered, which might be a mistake. Before you start shopping for vehicles or financing, take a realistic look at your income, expenses, and monthly budget. Know what you can afford to pay each month for a car payment, insurance, fuel, and maintenance, and stick to that budget.
Your deal-breakers. You might not be able to get your dream car, but you also don’t want to get stuck with something that doesn’t work for you at all. Decide on a few deal-breakers, and don’t get talked into a vehicle that doesn’t meet those basic needs just because you think you can get a loan for it. For example, a family of six may not be satisfied with a sedan that seats five, no matter how great the deal or loan terms are.
Your credit. Check your credit so you know where you stand. This can help you understand what type of loan you may be able to get and ensure you don’t run into surprises during the financing step.
Tips for Getting a Car Loan With Bad Credit
Once you understand your personal finances, you can move on to applying for a car loan. Here are some tips for buying a car with bad credit if you need a loan to do it.
Correct Any Errors on Your Credit Reports First
When you review your credit situation, order your credit reports from all three major bureaus. Look for any inaccurate information, particularly any error that might be hurting your credit, and dispute it with the credit bureau.
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For example, if you see that your credit card company reported a higher balance than you actually carry or that you’re shown as late on a payment when you’ve always paid on time, these issues could be dropping your score unnecessarily. The Fair Credit Reporting Act requires that credit bureaus review your dispute in a timely manner and delete or edit information that turns out to be incorrect.
Addressing inaccurate negative information on your credit report could help you improve your credit, which might help you get a better deal on a car loan.
Pay Down Revolving Credit Card Balances
Another way you might be able to improve your credit is by paying down credit card and other revolving credit balances. This can improve your overall credit utilization rate, which may in turn help increase your score. It also helps make lenders more comfortable taking a chance on you. If you don’t currently owe high balances to others, they may see you as someone who’s more likely to make a car payment on time every month.
Make a Bigger Down Payment
The issue with trying to get a car loan with bad credit is that lenders consider you a higher-risk borrower than someone with good credit. In short, they’re worried you might leave them holding the balance on the loan, so they want to reduce their risk as much as possible.
Lenders attempt to reduce their risk by not approving people with certain credit scores, charging higher interest, and limiting the size of loan they’re willing to offer. For example, a lender might only approve you for a loan up to $20,000. You can work with that, even if you want a car that’s $27,000, if you can make a big enough down payment. In this hypothetical example, you’d need to pay $7,000 or more down to bring the balance within the range of loan the lender is willing to approve.
Get a Cosigner
Another way you can reduce risk for a lender and potentially increase your chances of getting approved for a car loan is by getting a cosigner. A cosigner is someone who agrees to be responsible for the loan if you don’t make your payments. Typically, this needs to be someone with good credit and the income to make the loan payments.
Always consider this step carefully. You need a cosigner who’s willing to take this step with you, and if your financial situation changes and you truly can’t afford the vehicle in the future, your cosigner may be responsible for the payments. It’s helpful to have a solid plan for making your car loan payments and communicating everything up front with your cosigner.
Get Preapproved for a Car Loan
Going out to buy a car without any financial backing can increase your chances of getting caught up in the moment and signing on the dotted line of a lackluster deal. Instead, consider getting preapproved for a vehicle loan so you know exactly how much buying power you have. A preapproval may also help you negotiate a better deal, because the car dealership or seller doesn’t have any financial power to hold over you.
Improving Your Credit for the Future
Once you get a car loan despite bad credit, ensure you take steps to improve your credit in the future so your next time buying a car is easier. Make your car loan payment on time every month to build up a stronger payment history, and avoid taking out loans and racking up credit card debt unnecessarily. When you’re ready to start looking for a car loan, visit Credit.com to get free, no-obligation quotes from our network lenders.
“Mortgagor” is just another word for someone who is borrowing money from a mortgage lender (the “mortgagee”) to purchase real estate. It’s not every day that you see the term “mortgagor” and it doesn’t roll off the tongue easily. You might even think perhaps it’s misspelled. But when it comes to financial matters, half the battle is understanding the jargon. In this case, the good news is that even if you have never heard of a mortgagor, it’s just another word for being the borrower on a home loan.
The Function of a Mortgagor
The mortgage universe can be a bit complex and it’s helpful to understand the basics of mortgages. So let’s take a closer look at the mortgagor’s role. The mortgagor makes monthly payments to the mortgagee as specified in the loan agreement. The terms of a mortgage can vary widely. For example, depending on the applicant’s credit history, the interest rate may be higher or lower than the average.
A mortgagor may choose from different types of mortgage loans. Some loans have a fixed interest rate and a term of 30 years, though many lenders offer loan lengths of 20, 15, or 10 years. A fixed-rate mortgage has an interest rate that remains the same during the life of the loan. A variable-rate mortgage is one in which the interest rate moves up and down with the market.
The bottom line: Mortgagors must pay back the loan in a timely fashion. If not, mortgagees can force foreclosure of the home or other real estate — the collateral for the loan. 💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.
How a Mortgagor Gets a Mortgage Loan
A mortgagor applies to a mortgagee for a mortgage. Conventional mortgage loans are originated by private lenders like banks, credit unions, and mortgage companies. Certain private lenders also originate FHA, VA, and USDA loans; those loans are insured by the Federal Housing Administration, Department of Veterans Affairs, and U.S. Department of Agriculture. Government-backed loans are often easier to qualify for and may have more lenient terms and lower interest rates.
No matter what kind of mortgage loan you seek, expect to jump through some hoops and produce much documentation to prove you are creditworthy and have the means to pay back what you borrow. A prospective lender will do a hard credit inquiry into your credit scores and credit history. So it’s helpful to understand what makes up your credit scores. Important factors include your credit history, how long you’ve had your lines of credit open, your payment history, and debt-to-income ratio, which is the total amount of your monthly debt payments divided by your gross monthly income. If your debt-to-income ratio is high, that may be a no-go in the eyes of a lender, who may see you as tapped out with no real wiggle room to take on a mortgage.
To purchase a home, buyers often take on a mortgage loan for the price minus any money they put forth as a down payment. While you may be able to get an FHA loan with 3.5% down, or a VA loan with no down payment at all, the median down payment is around 13% of the value of the home.
Contractual Obligations of Mortgagors
A deal is a deal is a legally binding deal. Once the ink dries on that mortgage, you’re locked into your commitment to pay as you said you would. If you veer off course, you’re at risk of losing the home, as there is a lien on the real property as collateral for the loan. At the very least, late or missed payments will cause your credit score to dip, which could be problematic the next time you need to show your credit score, be it for a car loan or maybe even to a potential employer.
Equity of Redemption
If this phrase sounds important, it is. You’ll be thankful for it if you have gotten behind on your mortgage. Equity of redemption, also called right of redemption, will give you a chance to get caught up and keep your home before a foreclosure sale.
When you miss payments, the mortgagee can start the foreclosure process. The lender can take back the house and sell it at auction to pay off the debts. If this process has begun, you may be able to redeem the mortgage using equity of redemption. Understand that you’ll need to come up with the money to pay off the principal, interest, and expenses under equity of redemption. Realistically, if you’re in financial trouble, a funding source to pay off the loan is unlikely.
Some states have a law that gives mortgagors the right to redeem the home for a period of time after the foreclosure sale. With the statutory right of redemption, usually the borrower must pay the bid price, plus interest and fees, to the buyer of the property at the foreclosure sale.
Rights of Mortgagors
While it doesn’t have to be a battle royal, when it comes to mortgagee vs. mortgagor, the mortgagee holds the keys to the kingdom. The lender puts up the money, and if the borrower can’t make the mortgage payments, the lender has the right to take the house. That’s not to say you are without a few good things in your back pocket, like the aforementioned rights of redemption. You can also ask that your mortgage be transferred to a third party, but only if the mortgagee is not in possession of the property. 💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.
Mortgagors vs Mortgagees
To lessen any confusion, here’s a quick look at who does what.
Mortgagor
Mortgagee
Makes monthly payments
Receives payments
Meet all terms of the mortgage
Sets loan terms, including length of loan, payment due dates, and interest rate, and communicates them clearly
When the loan is paid in full, gets the deed
Can seize property if mortgagor stops paying
The Takeaway
Understanding the lingo can help you be more confident as you embark on your homebuying journey. Do your research, pull together your financial documents, find a home you love and soon you, too, could become a mortgagor.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
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SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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.
Personal loan amounts range from $2,000 to $100,000, which may not be enough to buy a regular home but could work if you need a small mortgage for a tiny or mobile home.
Personal loan interest isn’t tax deductible like a mortgage.
You can typically receive faster funding with a personal loan than a mortgage.
With median home sale prices approaching $400,000 at the end of 2023, a personal loan typically won’t give you the borrowing power you need to buy a home compared to a regular mortgage, However, if you’re in the market for a tiny home or a manufactured home, a personal loan may be a great financing choice. If not, a personal loan can help you tidy up your finances so you can qualify for a mortgage to buy your dream home.
Can you use a personal loan to buy a house?
Yes, if you can find a home at a price within standard personal loan amount limits (typically between $2,000 and $100,000) and can afford the payment timeline. That’s probably not enough to buy a regular home, but it may be perfect if you need a small mortgage for a tiny home or a mobile home.
Using a personal loan to buy a tiny home
Personal loans may be the right financing fit to buy tiny homes with prices averaging between $30,000 and $70,000. Mortgage lenders often shy away from loans below $100,000 because they aren’t profitable. In other cases, tiny homes don’t fit minimum property requirements. For example, tiny homes are typically less than 400 square feet, which is less than the Federal Housing Administration’s minimum.
Personal loans are typically unsecured, which means you won’t risk losing your home if you can’t make the payments. One disadvantage of a loan versus a mortgage is you can’t write off personal loan interest because it’s not tax-deductible like mortgage interest.
Using a personal loan to finance a manufactured home
On average, you’ll pay between $86,100 and $158,633 to buy a manufactured home, which means you could use a personal loan to buy one on the lower end of the price range. If you don’t plan to attach your home to land that you own, you may not be able to get mortgage financing, which makes personal loans a good option.
A personal loan may also be cheaper than a chattel loan, an expensive type of financing used to buy mobile homes that aren’t considered real estate.
6 ways you can use a personal loan to buy a house
If you’re buying a standard family home, you can use a personal loan to spruce up your finances to help you qualify for a home loan.
If you’re saddled with multiple credit card payments at high interest rates, you can use a personal loan for debt consolidation to combine them all into one monthly payment. Rates are typically lower than credit cards, and you’ll reduce your credit utilization ratio, which has a major impact on your credit score.
If your scores improve, lower monthly payments could help you qualify for a higher sales price or a better interest rate. Having fewer monthly payments reduces the chances of a late payment, which can really damage your credit score.
You’ll need a credit score of 780 or higher to get the best mortgage interest rates with the lowest closing costs. You could see a big boost to your credit score if you pay off maxed-out credit cards with a debt consolidation loan.
Besides allowing you to qualify for a higher-priced house, a lower interest rate can save you thousands of dollars in interest charges over the life of a 30-year mortgage.
If you took out an auto loan with a short term (12 to 36 months) to buy a new car, the payment will affect your debt-to-income (DTI) ratio, which measures how much total debt you have compared to your income. The higher your DTI ratio, the lower the mortgage amount you can qualify for.
If you’ve found your forever home but have been told your mortgage DTI ratio is too high, consider replacing your short-term auto loan with a longer-term personal loan. Keep in mind that you’ll end up paying more in interest if you choose a longer loan term than the loan you’re paying off.
If you don’t have enough saved up for a down payment for a house, consider putting the savings from steps one and two above into a down payment savings account. The more you put down, the lower your monthly mortgage payment will be. If you can swing a 20% down payment, you’ll avoid monthly mortgage insurance on a conventional mortgage.
Mortgage underwriting guidelines don’t allow you to use money from an unsecured loan like a credit card or personal loan toward your down payment or closing cost requirement to buy a home. However, there is an exception if your loan is secured to an asset like a car.
Mortgage lenders will allow you to use funds from a secured personal loan to qualify if you meet the DTI ratio requirements with the new payment. You’ll also need to provide paperwork to prove you own the asset and document the value of the asset with some third-party service (like Kelly Blue Book for a car loan).
If you’re trying to buy a home in a competitive market, your agent may recommend an all-cash offer, which may involve bidding more than the asking price on the home. If you’re short of funds to make an offer and need a quick path to extra cash, a personal loan may be worth a look.
Many personal loan lenders can get you cash within a day or two, which keeps you in the running against other cash buyers. If you want to pay the personal loan off once you’ve purchased the home, you borrow the funds against your home’s equity with a home equity loan, HELOC or a cash-out refinance.
Pros and cons of using a personal loan to buy a house
Pros
Replace multiple debts with one easy-to-remember monthly payment.
Improve your credit scores by paying off revolving credit card debt.
No assets are required for collateral.
Faster funding times than most mortgage products.
Can use debt consolidation savings to build a down payment fund.
Cons
Payment may affect your DTI ratio.
Rates are often higher than home equity loan and HELOC rates.
Shorter terms mean higher monthly payments than home equity products.
Potential prepayment penalties and high origination fees.
Personal loan interest isn’t tax-deductible for a home purchase.
Can you use a personal loan for a down payment?
The answer is a definite no if it’s an unsecured personal loan. However, as mentioned above, if the personal loan is secured by an asset like a car, collectible, artwork or other asset, then lenders will usually allow the borrowed funds to count toward your down payment. You’ll need to qualify with the extra payment and prove you own the secured asset.
Whether you’re buying a house or a car, financing a wedding or vacation, embarking on a major home renovation, paying for rising medical costs, or even consolidating debt, you might need to take out a loan.
But what about when you’re retired?
Even though they don’t earn a traditional income from a paying job, retirees can still take out loans. Requirements for retirees to secure a loan might be a little stricter, but it’s certainly possible.
Below, we’ll dive into loans for retired people — how they work, common types, and where to find them.
What Are Retiree Loans?
A retiree loan is any loan that you take out in retirement. It doesn’t refer to one specific type of loan, but rather a collection of loan types available to anyone in retirement, as long as they qualify.
Qualifying for a loan as a retiree can be more challenging than someone who is still employed full-time, since lenders like to see steady income. But many retirees have reliable sources of income outside of a job that can help them qualify. 💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.
Considerations for a Loan
When considering loans for retired individuals, lenders may consider a number of income sources, as well as an applicant’s debt-to-income ratio and credit score.
Retirement Income
One of the main sources of income for seniors who no longer work is their retirement accounts. If you are retired, you might receive regular payments from an IRA, 401(k), pension, and/or Social Security.
Collectively, these accounts make up your retirement income. And they may be significant enough to take out a retiree loan, like a personal loan, car loan, or even a mortgage.
Fixed Income
Retirees may have other sources of fixed income beyond their retirement income. For example, retirees might earn income from investments, earn annuity income, or receive spousal or survivor’s benefits. Retirees may also generate revenue from rental properties.
If any of these are limited sources of income — that is, they’ll run out eventually — the lender might require proof that you’ll at least receive that income for a set number of years. Without that proof, they might not factor in that source of income when determining loan eligibility.
Some retirees continue to work, whether full- or part-time or even as a contractor. If you’ve taken up a side hustle, like driving for a rideshare service or acting as a consultant in the field from which you retired, your 1099 income may also help when applying for a loan in retirement.
Assets
Retirees who have a significant portion of their money tied up in assets may be able to leverage those assets to secure a loan. For example, mortgage lenders might offer a securities-backed loan.
Securities-backed loans offer retirees liquidity without selling their assets. Instead, the lender can claim ownership of your assets — stocks, bonds, and real estate, for instance — if you default on your loan.
Because investment values fluctuate, a lender will likely consider only a reduced value of your assets (up to 70%). This protects them in the event that your assets decrease in value during the life of the loan.
Debt-to-Income Ratio
Lenders consider more than just your income when you apply for a loan, especially in retirement. They’ll also look at your debt — and thus your debt-to-income (DTI) ratio.
Your debt-to-income ratio is a calculation of all your monthly debts divided by your gross monthly income. This might include credit card debt, mortgage payments, car loans, personal loans, and even student loans.
For example, if your monthly debts total $2,000 and your monthly income is $10,000, your DTI ratio is 2,000 / 10,000. That’s 0.20, or 20%.
The higher your DTI ratio, the less likely a lender is to approve you for a loan. While requirements will vary by lender and the type of loan you’re applying for, you’ll likely have a harder time securing a loan if your debt-to-income is 50% or higher.
Credit Score
As with any other loan, lenders will also factor in your credit score when you apply for a retiree loan. By improving your credit score, you increase your chances of getting a loan.
So what affects your credit score? Generally, five key factors can influence your rating:
• Credit utilization
• Payment history
• Credit history length
• Credit mix
• New credit
Retirees generally have longer credit histories, especially if they keep credit cards open and have been paying a mortgage for decades. By paying your bills on time, keeping your credit usage down, and resisting the temptation to apply for new credit cards, retirees may be able to raise their credit scores ahead of applying for a larger loan in retirement.
Where to Find a Retiree Loan
Retirees can look for loans in the same places that other borrowers do. Financial institutions like banks and credit unions generally offer a wide range of loans, from mortgages and car loans to personal loans and debt consolidation loans. Your own bank or credit union is a good place to start.
Where you get a retiree loan can also depend on the type of loan. For example, if you’re purchasing a new car, the dealership may help you find financing. When you work with a real estate agent to buy a home, they might put you in touch with a lender.
Common Retiree Loans
Retirees have access to a wide range of loans depending on their needs. Here are some of the most common types of retiree loans you might come across:
Home Equity Loan
A home equity loan allows you to borrow against the equity you’ve built in your house. You generally need to have paid off at least 15% to 20% of your home to have enough equity for a loan; the more you’ve paid off, the larger the loan could be.
You might use a home equity loan to fund a renovation project, medical payments, or even debt consolidation. But remember, your house serves as collateral, so it’s important to make your payments.
Reverse Mortgage Loan
Reverse mortgage loans are available to people who are 62 or older who have paid off most of their mortgage or own their homes outright. When you get a reverse mortgage, you retain the title to the home and don’t have to pay the loan (and interest) until the last surviving borrower has moved out permanently.
Reverse mortgage loans are not for everyone. Weigh the pros and cons of a reverse mortgage before moving forward.
Debt Consolidation Loan
Retirees who are struggling with various debts may choose to consolidate in a single loan, ideally at a lower interest rate. Consolidating your debt means only a single monthly payment, but it could extend the number of years it’ll take you to be debt-free. 💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.
401(k) Loan
If you’re strapped for cash ahead of retirement, you may be able to borrow from your 401(k) account balance before you start receiving distributions. Doing so has certain tax implications to review with your accountant.
Unfortunately, you cannot take out an IRA loan, though if you’re 59 ½ or older, you may be able to make early withdrawals penalty-free.
Personal Loan
You can take out a personal loan for almost anything — wedding costs, home improvements, even credit card debt consolidation. Personal loan interest rates and terms vary depending on the length of the loan. For example, SoFi offers personal loans with low interest rates, and there are no fees required.
Just make sure you have the right credit score for a personal loan before applying. Bad credit borrowers may qualify, but the interest rates can be significantly higher.
Payday Loan
Seniors in retirement may also take out payday loans in an emergency, but keep in mind that there are a lot of risks with payday loans, including high costs.
Requirements for Getting a Personal Loan as a Senior Citizen
Lenders have similar requirements for all applicants, including retirees. The notable difference is that your sources of income will be different from an employed individual receiving a steady paycheck.
Here’s what lenders will generally look for when deciding to approve your loan application:
• Your sources of income (retirement distributions, Social Security, investment revenue, part-time work, etc.)
• Age (some lenders may not give out loans to borrowers who are 75 or older)
• Credit score
• Debt-to-income ratio
• Collateral or assets
The Takeaway
Retiree loans refers to any loan you take out in retirement. Depending on your needs and financial goals, it may make sense to apply for a personal loan, home equity loan, 401(k) loan, debt consolidation loan, or other loan type. Retiree loan requirements are similar to those of any other borrower; you’ll just have to demonstrate other sources of income since you’re no longer employed full-time.
You’ll also need a low debt-to-income ratio and a high credit score.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
FAQ
What are retiree loans?
Retiree loans are any type of loan you get in retirement. Retirees may take out personal loans, mortgages or reverse mortgages, home equity loans, and even debt consolidation loans.
What are the requirements for a retiree loan?
Requirements for a retiree loan are similar to those of other borrowers. Lenders will need to see all your sources of income, and you’ll also need a low debt-to-income ratio (generally below 50%) and high credit score (requirements vary by type of loan). You’ll also need assets to back up a secured loan.
Where can I get a retiree loan?
Retirees can look for loans anywhere that other borrowers might apply for a loan. Common retiree loans include home equity loans, 401(k) loans, debt consolidation loans, and personal loans. Because retirees typically no longer have a traditional source of income (i.e., a paying job), they may have to meet additional requirements to qualify for a loan.
Photo credit: iStock/SDI Productions
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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’s website .
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.
Student loans give many college students the opportunity to finance their education. Being well-informed on the nuts and bolts of student loans can make it easier to fund your education, while still keeping your eye on long-term goals like starting a career and saving for the future.
10 Student Loan Questions, Answered
There are many different types of student loans, with different loan amounts, costs, benefits, and repayment terms. In short, student loans are complicated. But don’t stress. We have answers to questions on everything from the difference between federal and private student loans to interest rates to when and how you’ll need to start repaying your loans. Let’s dive in. 💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.
1. How Do I Apply for Federal Student Loans?
To apply for federal student loans, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA®). This opens the door to many forms of financial aid, including grants, work-study, and federal student loans.
After you submit the FAFSA, you’ll receive a Student Aid Report (SAR) via email or regular mail. The report includes your responses to the FAFSA questions as well as your Student Aid Index (SAI), formerly called Expected Family Contribution (EFC). Your SAI is a number that is used to determine your eligibility for federal financial aid.
Schools that receive information from your FAFSA will be able to tell you if you qualify for federal student loans. Almost every American family qualifies for federal student loans. Direct Subsidized Loans (in which the government covers your interest while you are in school and for six months after you graduate) are awarded based on financial need. Direct Unsubsidized Loans (in which you are responsible for all interest that accrues on the loan) are not need-based.
2. How Do I Fill Out a FAFSA Form?
You can fill out the FAFSA online at StudentAid.gov . While the FAFSA is known for being a confusing and complex application to complete, the form was streamlined for the 2024-2025 award year. Applicants can now skip as many as 26 questions, and some applicants may be able to complete it in as little as ten minutes.
While the FAFSA is typically available starting on October 1 for the following academic year, the new 2024-2025 FAFSA will not be available until December 31, 2023.
The first step to filling out the FAFSA is to create an FSA ID through StudentAid.gov, which serves as an electronic signature. Both you and your parents will need to create your own unique FSA ID. You’ll then want to check what information you’ll need to fill out the FAFSA and gather it before you begin.
The online FAFSA is typically processed by the Department of Education within three to five days, and then the information is sent to the list of schools you provided (keep in mind that you can list schools that you have not yet applied to.) The colleges use your FAFSA information to determine financial aid eligibility.
3. What is the Difference Between Private Student Loans and Federal Ones?
Federal student loans are funded through the government and are strictly regulated. To qualify for them, students must fill out the FAFSA. Private student loans, by contrast, are funded by banks, credit unions, and other private lenders.
Federal student loans for undergraduates don’t require a credit check and rates are set by Congress each year. Federal student loans also come with guaranteed benefits and protections, including income-driven repayment plans, deferment and forbearance options, and forgiveness programs.
Private student loans do require a credit check and rates are set by individual lenders. Generally, borrowers (or their parent cosigners) who have strong credit qualify for the lowest rates. Loan limits vary by lender, but you can often get up to the total cost of attendance, which is more than you can borrow from the federal government.
Since private student loans generally have higher interest rates than federal student loans and lack the same protections, it’s generally recommended that you tap all forms of federal aid, including federal student loans, before applying for private student loans.
Recommended: Private vs Federal Student Loans
4. How Much Does College Cost?
The average cost of tuition and fees for the 2023-2024 school year is $42,162 at private colleges, $23,630 for out-of-state students at public universities, and $10,662 for in-state residents at public schools, according to U.S. News.
The actual amount you will pay for college will depend on where you choose to go and how much financial aid, including need-based and merit-based aid, the school awards you.
If you submitted the FAFSA, each school that accepts you will also send you a financial aid award letter, also known as the student aid package or school offer. This letter will include the annual total cost of attendance and a list of financial aid options. Typically, your financial aid package will be a mix of gift aid, meaning financial aid that doesn’t have to be repaid, and federal student loans, which you have to repay with interest. The award letter is specific to that university or college, so you’ll receive a different letter from every school that accepts you as an incoming student.
5. Is College Worth the Cost? What Are the Benefits?
College represents an investment in yourself and your future, and only you can decide how much that’s worth. So, we’ll focus instead on the potential benefits of going to college. The most obvious benefit is that, if you want to pursue certain careers, you’ll likely need the appropriate college education and training.
Studies show that college graduates earn significantly more money, accumulated over a lifetime, than those who did not attend. Earning your degree of choice requires a solid plan and commitment, and these are excellent strategies and skills to develop before entering the working world. Plus, people often make lifelong friendships at college, and many universities have a strong alumni network, which can be helpful on many levels as you begin your career.
6. What Can Student Loans Be Used For?
Funds from federal and private student loans can be used for a variety of education-related expenses, including tuition, fees, textbooks, computers/software, transportation to and from school, housing (on or off campus), meal plans or groceries, and housing supplies (e.g., sheets, towels, etc.).
Basically, if the expense is essential to your educational success — meaning it supports your living arrangements, basic daily needs, or attendance at school — it’s likely a permissible use of student loan funds.
Recommended: Using Student Loans for Housing and Living Expenses
7. What is a Grace Period for Student Loans?
For most federal student loans, after you graduate, leave school, or drop below half-time enrollment, you have a six-month grace period before you must begin making payments. Grade periods for private student loans can vary by individual lender.
The student loan grace period is designed to give students a chance to find employment before their monthly loan payments kick in.
You are not required to make interest or principal payments during the grace period. However, if your loan isn’t subsidized by the government, interest will still accumulate during the grace period and be added to your balance, or capitalized, if you don’t pay it before your first loan payment is due. Making at least interest-only payments even when it’s not required can save you a significant amount of money over the life of your student loans.
8. How Do I Repay Student Loans?
Repayment on federal student loans generally begins after the six-month grace period. The standard repayment plan for federal student loans is 10 years, but borrowers are able to select one of the other repayment plans at any time without incurring any costs.
Federal student loans also offer income-driven repayment plans, which tie the borrower’s monthly payment to their income. While this may make the loan more expensive in the long-term, it can make the monthly payments more affordable. When deciding on a repayment plan, you want to consider factors like your income, estimated monthly payments on the student loan, and your overall budget. Over time, you may find it helpful to reevaluate the payment plan you’ve selected as your financial situation may change.
To determine the repayment options available with a private student loan, check directly with the individual lender.
If you have higher-interest Direct Unsubsidized Loans, graduate PLUS loans, and/or private loans, you may be able to refinance your student loans after you graduate at a lower interest rate. This could lower the total cost of your loans and make repayment easier.
9. Can I Repay Student Loans Early?
Yes, you can generally pay off student loans, including federal student loans and private student loans, early without incurring prepayment penalties. You may want to reach out to your lender first to make sure they will apply your extra payments to your principal, rather than towards your next payment.
There are many benefits to paying off your student debt early. You will save on student loan interest and get out of debt faster. However, you’ll want to make sure you have enough income to cover a higher monthly payment. Paying too much toward your student loan could cause you to fall short on essential bills like rent or a car loan. It might also delay saving for other goals.
Recommended: 6 Strategies to Pay off Student Loans Quickly
10. How Can I Apply for a Private Student Loan?
If you decide to apply for a private student loan to help pay for college, it’s a good idea to shop around and compare lenders. Your school’s financial aid office may be able to provide you with a list of lenders that they work with. However, you’re not restricted to this list.
Before you choose a lender, it’s a good idea to review factors including interest rate, loan terms, any additional fees associated with the loan, and the repayment plans available at each lender. Many lenders will allow potential borrowers to get prequalified to find out how much they may qualify to borrow and at what rates.
Another thing that may be worth considering is if the lender has any sort of programs for borrowers who run into financial difficulties down the road and may have trouble making payments on their student loans. Some lenders offer unemployment protection that allows eligible borrowers to temporarily pause payments on their student loans should they lose their job through no fault of their own. 💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.
The Takeaway
Student loans can be instrumental in helping you pay for college, but it’s important to understand how they work before borrowing. Broadly, there are both federal and private student loans. Federal student loans are backed by the federal government and come with unique benefits like income-driven repayment plans and forgiveness programs.
Private student loans are offered by private lenders and generally require potential borrowers to undergo a credit check during the application process. Since private student loans tend to have higher interest rates and lack federal protections, you generally want to consider federal loans first.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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.
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, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
You made it! The sun is setting on 2023 and dawning on 2024. Among other personal reviews, the changing of years is the perfect time to refocus on your finances. Let’s spend a few minutes discussing:
Conducting a year-end financial review
Setting goals for next year
Conducting a Year-End Financial Review
We want our year-end financial review to do two important things:
Provide clear, actionable data on our previous year’s finances.
But without requiring days’ worth of time to conduct.
So we’re going to focus the review in 7 major areas:
Spending (including Unexpected Expenses)
Income
Saving
Net Worth
Investing, Allocation, Etc.
Insurance and Estate Planning
Progress on Previous Goals
Spending
Spending is the most time-consuming part of the review. But you can’t skimp here! A poor understanding of household spending is one of the deadliest sins of personal finance. It’s all too easy to assume your spending is under control when it’s not. That poor assumption is the difference between financial health and financial decay.
So – what exactly should you be measuring?
Total dollars spent. Personally, I like measuring monthly.
Categories you spent on. Think groceries or housing or debt repayment. If you’re curious, I shared my personal budget categories here. You should be able to identify if you spent $4000 on groceries…or $8000!
Unexpected expenses. How do you handle unexpected expenses and/or items not covered by your basic monthly budget? This answer is highly correlated to financial success/failure. Ask yourself:
Did your emergency fund do its job this year? Is it in a healthy place right now?
Did you stick to your budget? Or did you allow the allure of “shiny objects” to pull your purse strings in a regrettable way?
Income
What was your household income for the year? How did it change from last year? And how do you expect it to change in the year ahead? Most importantly, how does your income compare to your spending? aka how’s your cashflow?
Saving
How much did you contribute to (or withdraw from) your savings accounts this year? The same for your Roth IRA, your 401(k), or any other savings/long-term investing accounts.
Note: this should only focus on your contributions, not whether the investments in your accounts went up or down.
Net Worth
Update your net worth, tracking all of your assets and debts. How did your net worth change over the year? Personally, this is something Kelly and I have started doing monthly. It gives us a high-level understanding of our household’s financial health.
Net worth does include whether your investment accounts have gone up or down. After all, investing is one of the reasons we’re all here on The Best Interest! 🙂
But I urge you to not let investments/Net Worth fool you during a year-end review! For example, most of us would have seen our net worth decrease in 2022, as it was a bad investing year. The opposite is true in 2023 – the S&P 500 is up 25% year-to-date!
If we measure on Net Worth alone, the poor investment returns in 2022 could “wash away” our other good financial habits. Similarly, the great investment returns in 2023 could “sweep under the rug” our bad habits.
Investing: Allocation, Performance Etc.
The year-end review is a great time to look at all of your investing accounts. 401(k), IRAs, taxable accounts, etc.
First, review your allocation and rebalance as necessary.
“Allocation” is the percentage of stocks, bonds, alternatives, etc. that comprise your portfolio. As different assets perform differently throughout the year, our portfolio allocations drift from their “target allocation.” The act of “rebalancing” is the process of making trades in your accounts to return to that pre-defined “target allocation.”
You should also review your performance.
Are your accounts up? Or down? By how much? The main reason for tracking performance is to understand if your accounts are on-pace with the underlying “benchmarks.”
For example, let’s take a retiree with a 50% stock, 50% bond portfolio. We can look at some basic indicies and see that so far this year:
The S&P 500 (stocks) is up 25%
The bond AGG index is up 2.5%
So, roughly speaking, I’d expect this retiree’s portfolio to be up ~13-14%. If their performance is drastically different than ~13-14% (up or down!), I’d want to understand why. Some reasonable reasons could be:
Their stocks investments are more value-heavy (the Dow Jones is only up ~13% this year) or growth-heavy (the NASDAQ is up ~46% this year)
They own individual stocks instead of owning indexes.
They own individual bonds, not funds.
At the end of the day, this is an exercise in asking, “Does my investment performance match my expectations? If not, why not?”
Insurance, Estate Planning, Etc.
Death isn’t a fun subject. I won’t need to beat it to dea…hmmm..
Nevertheless, you should check annually to make sure:
Progress on Previous Goals
It’s time to check in on last year’s goals. Did you accomplish what you’d hoped in 2023?
If not, why not? The curiosity to ask “why” is the best way to grow.
Setting Goals for 2024 (and Beyond)
Now it’s time to look ahead. What are some of the smartest financial goals you can set for yourself?
Saving
Savings goals take many forms. As your finances improve, your savings goals will evolve.
Perhaps the most basic is saving for an emergency fund. You should have money set aside in your bank account simply to act as a safety net should life get hard.
Retirement saving is another common set of goals. For example, my “basic” retirement savings goals are ensuring I get my employer match on my 401(k), and then maxing out my Roth IRA contributions for the year.
And then there’s “saving for an X” goals. A new house, your first car, a trip to Thailand. When you hope to have large outlays of money, it makes sense to create a savings goal for yourself. Some people call these “sinking funds.”
Reduce/Control Spending
As I wrote earlier, “A poor understanding of household spending is one of the deadliest sins of personal finance.” Controling your spending is a wonderful goal. But it’s easier said than done.
To be successful here, you must measure. You need data. You’ve got to understand how much you’re spending today and set a realistic, measureable goal for reduction.
How to do that “measuring?” I love the budgeting app YNAB. I’m also a fan of simple spreadsheets, if that’s more your style. If you’re looking for something to do today, I’d start by downloading your past 3-6 months of credit card statements and/or bank account statements. What do your transactions look like? How much are you spending? And where?
Increase Income
What can you do to increase your income this year?
Personally, I’m not a fan of recommendations like “find a new side hustle” or “get a second job.” The point isn’t to work ourselves to the bone in pursuit of money.
Instead, I’d focus on questions like, “How can I be more efficient?” or “How can I secure a raise at work?” or, especially in the modern economy, “Will a job/career change lead me to higher income?”
Even a minor pay bump, when magnified by decades, makes a huge difference.
Pay Off Debt
Debt reduction is another common goal, but I recommend caution here. Make sure you separate the math of debt reduction from the psychology of it.
The math says that interest rates matter. Low interest debt (~5% or lower) isn’t that bad, and doesn’t need to be paid off quickly. High interest debts (~8% or more) should be highly-prioritized. Credit cards, for example, with 20%+ interest rates are a five-alarm fire for your finances. The mid-level debts (6-7%) are a coin flip.
But the psychology of debt payoff is highly personal. Some people can’t stand debt, and having a 2% car loan keeps them awake at night. If this is you, I encourage you to priorize your sleep and pay down that low-interest debt! But just know that, mathematically, it’s not optimal.
It’s ok. Personal finance is a mix of numbers and psychology. We’re not automatons, and sometimes our brains trump what the numbers tell us.
The numbers: currently, risk-free savings accounts are paying 4.5% – 5%. Why use $1000 to pay off a 2% loan when you could instead earn 5% interest?
Invest More…
Investing is the flywheel of wealth creation. Put your army of dollars to work creating more dollars. Annual investing goals make sense. Most of my work is focused on investing. I won’t go too deep here. But I’m 100% behind investing early and often.
Put Together a Financial Plan
A financial plan is a bridge between your comprehensive financial ecosystem and your personal values and desired outcomes. The process of financial planning makes you realize, “It’s more than money. It’s about your life.”
A good financial plan is more than that bridge, though. Using another transportation metpahor, a financial plan is a lighthouse in the financial fog. It provides vital direction and (in rough terms) distance to where you need to go.
Considering the number of people whothink, “I have no idea where my finances are…” …I’d say putting together a financial plan is a wonderful goal for 2024.
Go Get Your Goals!
Happy New Year! I hope you had a great 2023 and kickoff 2024 with verve.
I’d love to hear from you if finances are part of your 2024 goals! Drop a Comment or shoot me an email: [email protected].
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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Most people in the US have at least one credit card. These cards are a popular, convenient way to pay for items as you go about your day, tapping and swiping. They can also allow you to buy items that you can’t afford to pay for in one fell swoop, such as airfare to Hawaii or a new laptop.
But they have downsides, too; perhaps most notably, their high interest rates. At the end of 2023, one analysis found that the average interest rate was nudging close to 25%; two years earlier, the rate was hovering around 15%. That’s a considerable increase.
Here, you’ll learn more about how and why credit card payments can balloon as interest rates rise. You’ll also read advice on keeping your credit card in check, which can benefit your financial wellness.
How Interest Is Calculated
If you’re confused by all of the fine print that accompanies a credit card offer or the thought of an annual percentage rate (APR) calculation makes you wince, you probably aren’t the only one. To understand how rising rates can affect your credit card payment, it helps to understand a bit about how credit card interest is calculated.
• First, there are two types of consumer loans: installment loans and revolving credit. A mortgage, student loan, or car loan are all examples of installment loans. With an installment loan, the borrower is loaned an amount of money (called the principal), plus interest to be paid back over a designated amount of time.
• Revolving credit, on the other hand, is not a loan disbursed in one lump sum, but is a certain amount of credit to be used by the borrower continuously, up to a designated limit. A credit card is revolving credit. A borrower’s monthly payment is determined by how much of the available credit they are using at any given time; therefore, minimum payments may change from month to month.
Installment credit is sometimes easier than revolving credit to understand and calculate. First, installment loans often come with fixed rates, which means that the interest rate doesn’t change (unless you miss payments). For example, the rate on a federal student loan or a 30-year fixed mortgage won’t change, even if government-set interest rates shoot to the sun.
Revolving credit almost often has a variable rate, which means that the interest rate applied to the credit balance fluctuates.
The average rate on credit cards is quoted as an annual percentage rate, or an APR. The APR is the approximate interest rate that a borrower will pay in one year. Why approximate? The prime rate could fluctuate based on when the Fed changes the federal fund target rate. 💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.
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How Credit Card Interest Rates Change
Generally, when the Fed raises the federal funds rate, it can slow economic growth because it dissuades banks from lending money — and discourages consumers from borrowing at a subsequently higher interest rate. Raising rates is also used as a technique to combat rising inflation.
While this may be a normal and natural part of an economic cycle, rising rates can be frustrating for anyone who is currently carrying a credit card balance.
Credit card interest rates have risen as a result of 11 rate hikes enacted by the Federal Reserve (the Fed) since March 2022. Although the Fed does not control interest rates on credit cards directly, credit card interest rates are often pegged against the prime rate, which changes with the federal funds rate.
What Does a Rising Prime Rate Mean for Credit Card Holders?
A change in interest rates is likely to impact anyone with a variable rate on their credit card balance. When the Fed raises federal funds interest rates, it can be expected that credit card interest rates may follow.
How much would your credit card interest rate increase? It depends on your credit card. Generally, credit cards move in sync with rate hikes, which usually happen in quarter-percent increments.
However, the Fed has said, as of the end of 2023, that they don’t plan to raise rates further in the immediate future.
How to Combat a High Credit Card Bill
Here are some ideas for battling a high credit card bill and potentially paying less in interest over time:
1. Pay More Than the Minimum Payment
If at all possible, pay off as much of your credit card balance as you can each month. Making payments greater than the minimum amount due can help reduce your balance. The faster you can work on reducing the actual principal balance on your credit card, the less interest you’ll likely pay. If you only pay your credit card’s minimum payment, you may wind up in debt longer and paying more interest in the long run.
2. Switch to a Balance Transfer Card
Balance transfer credit cards typically have 0% APR introductory offers lasting for several months to a couple of years. If you’re serious about getting rid of your debt, you could transfer your debt over to one of these cards and then actively work on paying off the debt while you’re not paying interest.
If you do this, make sure to look for a card that has no transfer fee. Beware: If the root of the problem is actually overspending, this will not be a good long-term solution. Sometimes, 0% APR cards have interest rates that jump up dramatically after the trial period is over. And the 0% APR may no longer apply if you make a new purchase on the card.
3. Negotiate a Lower Rate
You might be surprised to find out that a credit card rate can be negotiable. It may be worth giving your credit card company a call and seeing whether they can reduce your rate.
When talking to the person on the other end of the line, explain your situation, be kind to them, and see what happens. Again, this isn’t a permanent solution or a guaranteed outcome, but it could help give you a leg-up on the payback journey.
4. Sign up for Credit Counseling
You might benefit from professional credit counseling to help with your credit card debt. The National Foundation for Credit Counseling (NFCC) is a nonprofit organization that offers free and affordable advice for people who are struggling to manage debt on their own. If you’re unable to envision a path to paying down debt, it could be a good idea to ask for assistance.
5. Consider a Personal Loan
One tactic to consider in an environment where prime interest rates are rising is paying off credit card balances with a fixed-rate unsecured personal loan.
These are sometimes referred to as “debt consolidation loans” and allow a qualified borrower to pay off high-interest debt, such as credit cards, with this lower-rate personal loan. With a fixed-rate personal loan, the rate never changes (as long as payments are made on time), and it helps provide the borrower with a defined plan to pay off the debt.
If you decide to go this route, it’s a good idea to shop around to ensure that you’re getting a fair rate. You can get a personal or debt consolidation loan from banks, credit unions, and online lenders.
To compare estimated personal loan interest charges to credit card interest charges, you can use a tool like a personal loan calculator.
Shopping for a Personal Loan
Each lender sets its own terms for making these types of loans, so be sure to ask lots of questions about rates, terms, and fees.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Inside: Learn how many months it usually takes for your budget to start working effectively. Plus explore successful budgeting strategies.
Learning to budget can often be a challenging process, but its benefits are irreplaceable. Initially, it might feel overwhelming, as it involves accounting for every small expenditure, adhering to a fixed financial plan, and exercising self-control.
The frustration often emerges from unexpected expenses or changes in income, like getting a raise or having to make a new car loan payment.
However, this ongoing process ultimately fosters financial discipline, enables goal-setting, offers a clear financial picture, and encourages proactive handling of money matters, making the frustration worthwhile.
According to experts, it could take up to three months to adapt to a new budget.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
The Essential Role of Budgeting
Financial budgeting plays a critical role in managing resources efficiently, informing financial goals, prioritizing initiatives, optimizing financing opportunities, and offering flexibility in various situations.
These reasons make it a highly regarded tool in business and personal finance.
Defining Financial Budgeting
Financial budgeting is a systematic approach to managing your finances by mapping out your income and expenditures over a designated period.
This process provides a framework to guide your financial decisions, which aids in achieving your monetary objectives.
It’s essentially an overview of your financial position, goals, and cash flows.
How many months does it usually take for your budget to start working as a budget should?
As per our expert opinion, it typically takes around three months for a budget to start functioning effectively.
When starting a new budget, it’s normal not to see results immediately.
This time frame allows for adjusting to new spending habits, dealing with unexpected costs, and instilling a sense of discipline and control over your finances. Remember, budgeting requires patience and commitment.
Practicing Efficient Budgeting Techniques
Now, the key to being successful is having a few budgeting tricks up your sleeve.
I can guarantee you that budgeting is actually freeing. This is how you do it!
The Process of Getting One Month Ahead
Getting one month ahead in your financial budgeting means living off last month’s income.
In this practice, you pay November’s bills with October’s income, for example, essentially preventing you from spending money you haven’t earned yet.
To set up this process, create a monthly budget, determine your income and expenditures, establish your spending goals, and ensure your income exceeds your spending. More than likely, you will have to save money to get one month ahead of bills completely. YNAB can help you with this.
YNAB
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Pros:
Comprehensive approach to budgeting, helping you plan monthly budgets based on your income.
Offers expert advice, making it suitable for those who require an in-depth, forward-thinking budgeting strategy.
Superior synchronization skills make it the winner in this area.
YNAB has extra features like goal setting for budgeting, shared budgeting tools for partners.
Option to manually add and upload transactions from accounts each month.
YNAB prioritizes user privacy.
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Familiarizing with Zero-Based Budgeting
Zero-based budgeting is a method where every penny of your income is allocated to different categories, from necessary and discretionary spending to savings and debt payments.
You start each month with a fresh budget, balancing out your expenses and income to zero. This approach demands meticulous attention to detail and is best suited for individuals with a fixed income and predictable expenses.
Executing the Envelope Method
The envelope method involves assigning an envelope (physical or digital) to each spending category, such as grocery or utilities, and putting cash into each envelope for planned expenditure. Once the cash in an envelope finishes, it means you’ve exhausted your budget for that category.
This method, as per expert suggestion, instills discipline and curbs overspending, making it an ideal choice for cash-driven individuals. Connecting this method with digital tracking systems is possible with the cashless envelope system to cater to those using debit or credit cards.
12 Effective Strategies to Make Budgets Work
These strategies not only allow the allocation of resources efficiently, but also help set realistic financial goals, prioritize projects based on their potential cash flow, and explore optimal chances to reach financial independence.
Moreover, having a budgeting plan in place also ensures flexibility to adjust to unanticipated financial challenges, contributing to long-term wealth creation.
1. Determine Goals and Objectives
Start your budgeting process by clearly defining your financial goals and objectives. Are you aiming to buy a new home, fund your education, or build an emergency fund?
Whatever aspiration you have, short- or long-term, incorporating them into your budget amplifies your drive and focus on achieving them.
This goal-driven strategy aligns your budgeting with your needs and wishes, creating a financial roadmap toward your envisioned milestones. Consider these smart financial goals to get you started.
2. Better Planning, Fewer Surprises
Planning your budget effectively requires a thorough consideration of all personal budget categories.
Also, incorporate both short and long-term financial goals into your budget by prioritizing them, such as purchasing a home, taking a vacation, or furthering your education. Regularly reviewing and adjusting your budget accordingly, based on changes in income or unexpected expenses, can also ensure you stay on track.
Utilizing a variety of budgeting tools, like spreadsheets, apps, or budgeting software, can simplify this process and help keep you accountable.
Quicken
Personal finance and money management software allows you to manage spending, create monthly budgets, track investments, retirement and more.
I have used this platform for over 20 years now.
Pros:
Birds-eye view of your complete financial picture.
Conveniently download your spending activities, and automatically categorize them (Quicken connects to over 14,000 financial institutions).
Track investments with it’s features like portfolio analytics, retirement goals, and market comparison.
Cons:
Little complex to use at first, the learning curve is moderate.
Yearly subscription-based model to use the platform.
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3. Reduced Financial Stress through Budgeting
A successfully implemented budget significantly reduces financial stress by providing an accurate picture of your financial health.
With a well-defined budget, worries about overspending, living from paycheck to paycheck, or falling into debt diminish. Monitoring and updating your budget will allow you to feel more confident and secure about your financial standing, paving the way to monetary stability.
4. Deciding When to Review Your Budget More Frequently
An effective budget is not a set-and-forget one; it requires regular check-ins and updates. A bill calendar is very helpful.
A recommended starting point is a monthly review. However, when first starting out, you will need to review your budget monthly until you find it working for you.
Other situations may need more frequent check-ins according to changes in income, financial goals, or unexpected expenses.
5. Spot Potential Room for Improvement
Budgeting provides a realistic view of your spending patterns, allowing you to identify areas of improvement.
Upon reviewing your budget, you might notice unnecessary expenditures or categories where expenses consistently exceed budgeted amounts. Such insights help you re-evaluate your spending habits and update your budget accordingly.
This phase coupled with a no spend challenge involves being brutally honest with yourself, taking into account your needs, wants, and financial realities.
6. Analyze Your Expenses and Income
Critical examination of your income and expenses is crucial for successful budgeting. Begin by calculating your total income, then list and categorize your monthly expenses into fixed and variable.
Pinpointing the difference between the totals can highlight whether you’re living within your means.
If your income surpasses your spending, consider investing the surplus.
Conversely, if your expenses outnumber your earnings, think about ways to increase income or decrease spending.
7. Set Limits for Your Budget Items
Setting reasonable spending limits for your budget categories ensures financial discipline. Check each category of spending—groceries, entertainment, or personal care, for instance—and contemplate areas you can cut back.
Ask around to see how much others are spending in certain categories in your neighborhood.
Remember, your budget should be flexible and realistic to your lifestyle, ensuring you don’t feel deprived. Embed small “wants” into your budget to keep the whole process enjoyable and sustainable.
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8. Create a System for Tracking Your Expenses
Creating an efficient system for tracking expenses is vital to maintaining control over your finances. This could be a simple spreadsheet, a manual ledger, or budgeting apps on your smartphone.
Tally every cent spent, dividing your expenses into their respective categories—rent, food, clothing, utilities, etc.
This way, you get a detailed insight into your financial habits and can identify potential areas for savings. The method isn’t as important as its thoroughness in ensuring no expense gets overlooked.
9. Track Your Spending with a Spreadsheet
Spreadsheets are an optimal resource for tracking spending. You can utilize an online template, like Tally, or make one yourself from scratch.
As you spend, record each transaction under the fitting category. This real-time monitoring can help spot overspending, analyze spending habits, and adjust budgets as needed.
So, if you’re a whiz with Excel or Google Sheets, tracking expenses this way might be your best bet.
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10. Budget for Emergencies
Budgeting for the unexpected is an essential aspect of sound financial planning. Financial emergencies don’t knock before they occur; therefore, creating a buffer in your budget helps you face them without plunging into debt.
As an expert, we suggest an emergency fund of one month of income or at least $1000. Then, start a rainy day fund with three to six months of expenses.
Having these funds built into your budget ensures you’re financially covered for challenging situations such as job loss, medical emergencies, or sudden home repairs.
11. Talk to Your Family About Your Budget
Talking to your family about your budget ensures everyone understands and works towards your financial goals. This discussion becomes especially crucial if you’re budgeting for a household.
I always provide my family with an overview of the budget, explaining how it works and how we can achieve our goals. Being open about your financial plan can foster greater accountability, and cooperation to achieve shared financial objectives more seamlessly.
12. Look for Ways to Make Money
Increasing your income can be an effective strategy to make your budget work better, rather than solely focusing on cutting expenses.
By finding ways to earn more money, for example by taking a part-time job, freelancing, selling unused items, or investing, you add flexibility to your budget and reduce the pressure on spending.
Moreover, the additional income could be directed towards savings, debt repayment, or funding your personal goals as identified in your budget plan.
Financial Budgeting FAQs
Starting a budget begins by assessing your total income, followed by identifying and categorizing your expenses.
Once done, subtract your expenses from your income to understand your financial standing.
Next, set your financial goals—short term and long term.
Then, allocate your earnings across different categories, maintaining a balance between savings, expenditures, and other aspirations.
Review and adjust this plan periodically to ensure it aligns with your financial landscape.
Budgeting should ideally start as soon as a person starts earning money. It’s never too early to begin planning where your money should go, and late starters can still benefit significantly.
Budgeting is a lifelong practice that guides you to live within your means, handle emergencies smoothly, and achieve your financial goals efficiently. It’s an indispensable tool for ensuring monetary success and stability.
Successful Budgeting as an Essential Life Skill
Successful budgeting is undeniably an essential life skill. It not only helps you live within your means but also provides a clear direction towards your financial goals.
Mastering this skill early on can lead to effective financial decision-making, lesser financial stress, and a more secure way of life.
There will be fluctuations in your budgeting, so you can start to forecast your budget. It also reinforces the value of discipline and planning, offering improved self-management and positive monetary habits.
Ultimately, progressing from just surviving to thriving financially is the goal, and disciplined budgeting is a tool to get you there.
This is just one step towards becoming financially independent.
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Generally, you shouldn’t use a home equity loan or HELOC to buy a car.
Although they may offer longer terms and lower monthly payments, home equity loans currently carry higher interest rates than auto loans.
Because cars lose value over time, they’re not worth the risk of diluting your ownership stake in your home and risking foreclosure.
It might make sense to use home equity financing to buy a car and for another aim, like a big home improvement project.
The most common way to buy a new car is with a car loan, of course. But auto loans are not the only financing game in town. If you’re a homeowner, it might be tempting to tap into your equity to purchase those wheels, via a home equity loan or a HELOC, its credit-line cousin.
This approach, however, involves vastly different considerations than an auto loan. Here’s how to determine whether using a home equity loan to buy a car is the best option for you.
Should I use my home equity to buy a car?
Frankly, no. Avoid buying a car using home equity, if possible.
With a home equity loan, your home is the collateral for the debt. If you fall behind on repayment, the lender can foreclose on the home. Translation: You could lose it.
That goes for home equity lines of credit (HELOCs), too. Can you use a HELOC to buy a car? Sure. But should you? Probably not, and for the same reason: That line of credit uses your home as collateral, putting what’s likely one of your biggest assets at risk.
Generally, it’s best to tap your home equity if you’re going to spend the funds on projects or expenses that further your financial or professional well-being, such as renovating your house or paying college tuition. Because cars don’t hold their value well over time, it doesn’t make sense to tie your home up with financing for one — you’d be repaying a loan on an item that won’t be worth much when all is said and done. (In contrast, real estate generally appreciates over time, especially when money is spent to improve the property.)
Differences between home equity loans and auto loans
Auto loans
Home equity loans
HELOCs
Collateral required
Car
Home
Home
Typical repayment terms
2 to 5 years
5 to 30 years
10 to 20 years (after 5-10 year draw period)
Usual rate type
Fixed
Fixed
Variable
Repayment schedule
Monthly
Monthly
Monthly interest-only repayments during the draw period (usually the first 5-10 years); monthly payments during the repayment period
Fees
Origination fee (0.5-1% of loan amount); documentation fee
Closing costs (avg. 1% of borrowing amount)
Closing costs (avg. 1% of borrowing amount)
Home equity loans and auto loans are both types of secured debt: that is, they are backed by something that acts as collateral for the loan. While a car loan is secured by the car you purchase, a home equity loan is secured by your home. In both cases, if you fail to repay, the lender has the right to seize, respectively, the car or the house.
However, the repayment terms are very different: You could have as long as 30 years to repay a home equity loan, versus the typical two to five years associated with an auto loan. Depending on how much you borrow with the home equity loan, this longer timeline could mean you have much lower monthly payments compared to the payments on a five-year car loan.
Remember, however: A car is a depreciating asset. By the time you’re finished repaying a 15 or 20-year home equity loan or HELOC, your car won’t be worth nearly as much as what you borrowed (and paid in interest) to get it. A new car loses 23.5 percent of its value after about one year and 60 percent in the first five years, according to Edmunds.
If you’re hoping to save money on interest with a home equity loan, think again. While home equity loans did have lower interest rates compared to auto loans for some time, that trend has reversed. Now, many auto loan offers are lower or comparable to the rates on home equity products: As of December 2023, new car loan APRs were running more than a percentage point lower, on average, than home equity APRs.
In addition, you might need to pay closing costs for the home equity loan, which are typically 1 percent of the principal (though they can run you anywhere from 2 percent to 5 percent) — an expense you wouldn’t be on the hook for with an auto loan.
The pros and cons of using home equity to buy a car
Home equity loans and HELOCs were once more of a universal financing go-to, because their interest was tax-deductible — no matter what you used the funds for — provided you itemized deductions on your tax return. That changed with the Tax Cuts and Jobs Act of 2017. It decreed the interest could only be deductible if the loan went towards improving, repairing or buying a home; it also made itemizing deductions less feasible in general.
So now, there are more risks than rewards when it comes to getting a home equity loan for a car. That said, let’s look at the pros and cons of using a home equity loan vs. car loan to buy a vehicle.
Pros of using a home equity loan to buy a car
Longer term, lower payments: Home equity loans are structured in such a way that you can repay the money over a much longer period of time. Most car loans last between two and five years; a home equity loan lasts between five and 30 years. If you only borrow the amount you need for the car, this longer timeline might translate to lower monthly payments, all other things being equal.
Flexibility in using funds: If you take out a home equity loan or HELOC to buy a car, you don’t necessarily need to use all the money on your vehicle. If you take out $50,000 of your home’s equity, for example, you might use $20,000 to buy the car and $30,000 on a kitchen remodel. Since the larger chunk of money would go toward improving your home, money you’ll theoretically get back when you sell, this strategy makes better financial sense than using a home equity loan to buy a car alone. You might also be able to deduct the interest on the sum spent on the kitchen, if you itemize on your tax return.
Cons of using a home equity loan to buy a car
Decreased equity: By getting a home equity loan, you’re depleting some of your ownership stake, which has serious implications. For one, you might end up needing that equity in an emergency. For another, you might find you’ve taken on too much debt, in-between your first mortgage and the home equity loan. This could eat into your bottom line if you need or want to sell the home in the future (home equity loans must be repaid in full if a home is sold).
More onerous application: Applying for home equity financing is somewhat akin to taking out a mortgage and, in addition to your financials, the lender will consider the home’s value and the amount of your ownership stake. Bottom line: We’re talking weeks or even months for approval, vs. days with auto loans.
Foreclosure risk: If you can’t or don’t repay the home equity loan, you won’t lose the car, but you could lose your home — a much more important asset.
No financial gain: A car loses value over time, so, with a decades-long home equity loan term, you might be paying for an asset that isn’t worth much in the end. If your car is no longer usable, this could also put you in the unenviable position of repaying a home equity loan while financing a new vehicle.
Closing costs: Some home equity loans come with upfront closing costs. If you can afford to pay these, you might be better off putting some (or all) of those funds toward a down payment on an auto loan instead.
Bottom line on buying cars with home equity loans
It’s possible to use your home equity to take out a loan for a car, but it’s a risky move. With the interest rates on home equity loans and HELOCs creeping up, it makes more sense to compare auto loan offers first.
Of course, this assumes you’re taking out a home equity loan for a car purchase – and nothing else. If you plan to use only some of the funds to purchase a car and the rest for other, more investment-worthy aims — like, say, building a new garage to house those new wheels — it can still make sense to tap your equity.
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Editorial Disclosure:Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.
Snapshot: Provided that you’re a student, you can gain access to fantastic cash back rates (anywhere from 1% – 10%, depending on the category), even if you have no prior credit. Did we also mention the annual_fees annual fee?
Pros
Cons
annual_fees annual fee
This card allows balance transfers but there’s no introductory APR for them
3% cash back on dining, select streaming services, entertainment and grocery store purchases
Potentially higher APR
A potential for relatively low APR for a student credit card
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Like what you see? Learn how to apply for the Capital One SavorOne Student Cash Rewards Card
Capital One SavorOne Cash Rewards Card – which you generally have to have at least a good credit score to qualify for (and it has a higher regular APR)*.
You get access to amazing cash back rates on dining and grocery shopping – which are common expenses – in addition to a flat 1% cash back on everything else. This card does have a relatively high APR (see how it compares to other cards) but no annual fee, so as long as you pay your statement on time, you won’t have to worry about interest. (Paying your credit card bill on time will also help you build good credit in preparation for your next card, auto loan, or apartment application, after you graduate).
When you’re just starting out on your own having no credit or bad credit can be a barrier to many things you need in adulthood, like an apartment lease, a car loan or a halfway decent credit card. You need credit to get credit, and most of the time the options aren’t great.
This card is great (actually). Like we said before, many of this card’s benefits are very similar to the card_name. But where you need great credit to qualify for that card, you can qualify for the same benefits by being in school.
So if you’re worried about a low credit score, or maybe you’ve just turned 18 and are starting out on your own and have no credit, provided that you’re a student (among other qualifying factors) this is a great credit card to apply for.
Great Rewards for Dining
If you’re cramming for a test and just don’t have the time to plan out meals and need to Uber Eats some food to keep the study session going uninterrupted, at least you’ll be making a whopping 10% (10%!) cash back on your splurge (through 11/14/2024). 3% cash back on grocery store purchases (excluding superstores like Walmart® and Target®) is also great – not only are groceries a regular expense, but 3% is a decently high rate for a cash back category.
Whether you’re the kind of shopper who loves spending time researching a great deal, or you don’t have the mental energy to pay attention to such things, this card has you covered. Not only does it have great cash back rates, but it also has a varied enough mix of rewards categories that you can earn cash back without having to go out of your way to make unusual purchases.
Like what you see? Learn how to apply for the Capital One SavorOne Student Cash Rewards Card
The Drawbacks
No Introductory APR
If you’re looking for a 0% APR offer, you won’t find it with this card. That means you can’t use this card to make a major purchase you can pay off over a year or two without accruing interest. That’s certainly not a deal breaker for most students, but it’s something to consider.
Potentially High APR
It’s hard to say what ongoing APR you will get when you apply for this card, the quoted range is quite wide at reg_apr,reg_apr_type. If you qualify for a lower APR, great! But if you end up paying a higher APR, that could be a drawback. Especially if you want to rely on this card to help you cover larger purchases.
Is It Worth It?
For students who eat out or grab coffee on the go a lot, this card may be a good option. It lets you earn decent cash back perks, and as long as you pay off your statement every month, that’s cash in your pocket.
What Are The Credit Limits For Capital One SavorOne Student Cash Rewards Card (Minimum and Maximum)?
Your credit limit is determined by your credit history and factors such as income. From what we’ve seen other users report, credit limits may range from $300 to $700 (at least initially), though approvals could certainly fall outside those ranges.
How Soon Can I Increase My Credit Limit After Being Approved For A Capital One SavorOne Student Cash Rewards Card?
Capital One may let you request a credit limit increase after 6 months, though approval of the increase is not guaranteed. During that time you will need to demonstrate that you can handle your credit responsibly, which means both using and paying off your bill on-time.
How Good Is A Capital One SavorOne Student Cash Rewards Card For Building Credit?
This is an excellent card for building credit because you don’t necessarily need great credit to get it. Capital One is a well-recognized credit card provider that typically reports payment history to the credit bureaus. That helps you build a stronger credit profile.
Learn more about how to apply for the Capital One SavorOne Student Cash Rewards Card here:
Advertiser Disclosure: Credit.com has partnered with CardRatings for our coverage of credit card products. Credit.com and CardRatings may receive a commission from card issuers.