Using a Personal Loan to Pay Off Credit Card Debt

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.

By taking out a personal loan to pay off credit cards, you can use the funds from the loan to pay off your credit card debt. In turn, this will consolidate your multiple credit card payments into one monthly debt payment and potentially allow you to secure a lower interest rate. Still, there are pros and cons to consider if you’re thinking about getting a personal loan to pay off credit cards. Read on to learn more.

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

Personal loans are a type of unsecured loan. There are a number of uses of personal loans, 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, though there are different types of personal loans. An applicant’s interest rate is 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 the lender may view them as a less risky borrower. Lenders may offer individuals with low credit scores a higher interest rate, presuming they are 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. This is why it’s also sometimes referred to as a debt consolidation loan. Ideally, the new loan will have a much lower interest rate than the credit cards. By consolidating credit card debt into a personal loan, a borrower’s monthly payments can be more manageable and cost considerably less in 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 offer an introductory rate that’s lower or sometimes even 0%. 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. Plus, balance transfer cards often charge a balance transfer fee, which could ultimately increase the total debt someone owes.

Understanding Credit Card Debt vs. Personal Loan Debt

At the end of the day, both credit card debt and personal loan debt are both simply money owed. However, personal loan debt is generally less costly than credit card debt. This is due to the interest rates typically charged by credit cards compared to those of personal loans.

The average credit card interest rate is nearly 17% APR. Meanwhile, the average personal loan rate is 9.41%, according to the Federal Reserve. Given this difference in average interest rates, it can cost you much more over time to carry credit card debt, which is why taking out a personal loan to pay off credit cards can be an option worth exploring.

Keep in mind, however, that the rate you pay on both credit cards and personal loans is dependent on your credit history and other financial factors.

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 the pros and cons:

Pros

Cons

Potential to secure a 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 an APR 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.

How Frequently Can You Use Personal Loans to Pay Off Credit Card Debt?

Taking out a personal loan to pay off credit cards isn’t a habit you should get into. Ideally, it will serve as a one-time solution to dig you out of your credit card debt.

Applying for a personal loan will result in a hard inquiry, which temporarily lowers your credit score. If you apply for new loans too often, this could not only drag down your credit score but also raise a red flag for lenders.

Additionally, if you find yourself repeatedly reamassing credit card debt, this is a signal that it’s time to assess your financial habits and rein in your spending. Although a personal loan to pay off credit cards can certainly serve as a lifeline to get your financial life back in order, it’s not a habit to get into as it still involves taking out new debt.

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. Here’s what you can expect.

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 you a sense of what personal loan amount might be helpful to pay off credit cards.

Choosing a Personal Loan to Pay off Credit Card Debt

These days, you can do most — or all — personal loan research 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 for, and qualified for a personal loan, they’ll likely want to immediately take that money and pay off their credit card debt in full.

Be aware that 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 for debt consolidation 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.

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. They might even find money in their budget to put toward 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 offers a psychological boost through small wins early on, 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.

Where Can You Get a Personal Loan to Pay off Credit Cards?

If you’ve decided to get a personal loan to pay off credit cards, you’ll next need to decide where you can get one. There are a few different options for personal loans: online lenders, credit unions, and banks.

Online Lenders

There are a number of online lenders that offer personal loans. Many offer fast decisions on loans, and you can often get funding quickly as well.

While securing the lowest rates often necessitates a high credit score, there are online lenders that offer personal loans for those with lower credit scores. Rates can vary widely from lender to lender, so it’s important to shop around online lenders to find the most competitive offer available to you. Be aware that lenders also may charge origination fees.

Credit Unions

Another option for getting a personal loan to pay off credit cards is through credit unions. You’ll need to be a member in order to get a loan from a credit union, which means meeting membership criteria. This could include working in a certain industry, living in a specific area, or having a family member who is already a member. Others may simply require a one-time donation to a particular organization.

Because credit unions are member-owned nonprofits, they tend to return their profits to members through lower rates and fees. Additionally, credit unions may be more likely to lend to those with less-than-stellar credit because of their community focus and potential consideration of additional aspects of your finances beyond just your credit score.

Banks

Especially if you already have an account at a bank that offers personal loans, this could be an option to explore. Banks may even offer discounts to those with existing accounts. However, you’ll generally need to have solid credit to get approved for a personal loan through a bank, and some may require you to be an existing customer.

You may be able to secure a larger loan through a bank than you would with other lenders.

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 one minute without any commitment to continue. If you’re approved, the funds are deposited directly into your account.

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 continue to increase, and they’ll find themselves in a vicious debt cycle. Personal loans are one potential way to end that cycle, allowing you 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 1 minute.

FAQ

Can you use a personal loan to pay off credit cards?

Yes, it is possible to use a personal loan to pay off credit cards. After securing a personal loan, you will use the loan proceeds to pay off your existing credit card debt. Then, you will begin making payments to repay the personal loan.

How is your credit score impacted if you use a personal loan to pay off credit cards?

When you apply for a personal loan, the lender will conduct what’s known as a hard inquiry. This will temporarily lower your credit score. However, if you make on-time payments, and if taking out a personal loan improves your credit mix, your credit score can bounce back over time.

What options are available to pay off your credit card?

Taking out a personal loan to pay off credit cards is certainly an option, but it’s not your only choice. You can also pay off credit card debt with a balance transfer credit card, by exploring a debt payoff strategy like the snowball or avalanche methods, or by consulting a credit counselor or enrolling in a debt management plan.


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.
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. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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
.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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How to Recertify Your Income Based Repayment for Student Loans

How to Recertify Your Income Based Repayment for Student Loans

Once you are in an Income-Based Repayment (IBR) plan, you will need to recertify your income based repayment annually, by providing updated information about your income and family size. The government uses this information to calculate your payment amount and adjust it if necessary.

You can easily recertify online or by mail. Read on to find out when to recertify your income-based repayment, how to do it, and more.

What Is Income Based Repayment?

Income Based Repayment plans are offered for federal student loan borrowers to help make their payments more manageable. It’s an option to keep in mind when choosing a loan or if your current federal loan payments are high relative to your income. The program is intended to set your student loan payment at an amount that is affordable to you each month.

There are four income-driven repayment programs, including the income-based repayment plan. For all of these plans, your payment amount is generally based on a percentage of your discretionary income, defined by the U.S. Department of Education. In the case of IBRs, discretionary income is “the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.”

IBR payments are determined as 10% of your discretionary income if you are a new borrower, someone with no outstanding balance on a Direct Loan or Federal Family Education Loan (FFEL) when they receive one of these loans on or after July 1, 2014.

If you’re not a new borrower, payments are generally 15% of your discretionary income.

Your payment will never be more than the 10-year Standard Repayment Plan amount, which is the standard repayment plan for the Federal Direct Loan program and FFELs.

Each income-driven repayment plan has a different loan period. For IBRs, it’s 20 years for new borrowers and 25 years for those who aren’t considered new borrowers.

Any loan balance that remains unpaid at the end of the repayment period will be forgiven.

Recommended: Your 2022 Guide to Student Loan Forgiveness

Which Federal Loans Are Eligible for an Income Based Repayment Plan?

IBR plans are available for the following types of federal loans:

•   Direct Subsidized Loans

•   Direct Unsubsidized Loans

•   Direct PLUS Loans made to graduate or professional students

•   Direct Consolidation Loans that did not repay any PLUS loans made to parents

•   Subsidized Federal Stafford Loans

•   Unsubsidized Federal Stafford Loans

•   FFEL PLUS Loans made to graduate or professional students

•   FFEL Consolidation Loans that did not repay any PLUS loans made to parents

•   Federal Perkins Loans, if consolidated.

Income Based Repayment plans are not available to FFEL PLUS loans or Direct PLUS loans that are made to parents. They are also not available for Direct Consolidation Loans or FFEL Consolidation Loans that repaid PLUS loans to made parents.

Recommended: 4 Student Loan Repayment Options — and How to Choose the Right One for You

What Is Student Loan Recertification?

You will only need to apply for an income-driven repayment plan once. When you do, you will be required to provide information about your income. You may be asked to provide your adjusted gross income if you’ve filed a tax return in the last two years or your income doesn’t differ that much from the income you reported on your tax return.

If your income is significantly different from the income on your tax return, or you haven’t filed one in the last two years, you may be asked for alternative documentation. The government will require you to recertify your income information and family size at least once each year.

How to Recertify Income Based Repayments

You can take care of your IBR recertification online at studentaid.gov . Filing your application online ensures that it is sent to each of your loan servicers. Alternatively, you may provide paper applications to each of your loan servicers if you haven’t filed a tax return in the last two years or your income has changed significantly since you filed your last return.

To file online, go to the student aid website above, click on “Manage My Loans,” and then click on “Recertify an Income-Driven Repayment Plan.” You’ll need to log in with your federal student aid ID.

Then enter information about your family, including family size, your marital status, and your spouse’s income, if applicable. You can connect directly to your tax return to verify your income information. And if your income has changed since your last tax return, you can send in more recent pay stubs.

To recertify by mail, you can download the Income-Driven Repayment Plan Request form , fill it out and attach the required documents. You’ll send the request to the address provided by your loan servicer.

When to Recertify Income Driven Repayment Plans

The government paused income-driven repayments as part of its COVID-19 relief program. The program included suspended loan payments, 0% interest, and stopped collections on defaulted loans. Payments will remain paused through May 1, 2022. Paused payments will count toward IDR forgiveness.

Borrowers are not required to recertify before their payments restart. The earliest they might be required to do so is November 2022.

In normal times, you are required to recertify your income and family size each year, two months before your current 12-month payment period ends. If your income decreases or your family grows, you may recertify earlier than that to help ensure that your payment stays manageable.

If you fail to recertify your IBR plan by the annual deadline, your monthly payment will switch to the amount you would pay under the Standard Repayment Plan. You’ll be able to make payments based on your income again when you update your income information.

The Takeaway

Income Based Repayment plans are available to most federal student loan borrowers and can be a great way to make sure your student loan repayments work with your budget. Recertification is a critical step each year to alert the government to changes in your situation that might affect your payment size.

Refinancing is another way to manage your student loan debt, especially if you have private loans that don’t qualify for government assistance programs. If you’re considering refinancing federal loans, just be sure the amount you save outweighs the benefits of income-driven programs, potential student loan forgiveness, or other federal loan protections, all of which you lose access to when you refinance.

Visit SoFi to explore options for student loan refinancing. SoFi offers a competitive rate, flexible terms, no hidden fees, and no prepayment penalty — and you can view your rate in 2 minutes.

FAQ

Can you recertify student loans early?

Yes, you can recertify early, and it may even be a good idea if your family has grown or your income has decreased.

How do I recertify my student loans?

You can recertify your student loans online at the Federal Student Aid website (studentaid.gov), or by downloading and mailing in the Income-Driven Repayment Plan Request form with any supporting documentation.

When should I recertify my student loans?

You should recertify your student loans two months before your current 12-month payment period ends.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. 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.

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Student Loans: Refinance vs. Income Driven Repayment

Refinancing Student Loans vs Income Driven Repayment Plans

If you’re having trouble making your student loan payments or just want to know if you can make a change to your payments, it’s worth looking into the options, such as refinancing student loans or an income-driven repayment plan.

Student loan refinancing is available for both private or federal student loans while income-driven repayment plans are only an option for federal student loans. Here’s what to know about both options as well as the pros and cons of each.

What Is Student Loan Refinancing?

When you refinance a student loan, a private lender pays off your student loans and gives you a new loan with new terms. For example, the interest rate and/or the loan term may change. You can’t refinance loans through the federal government, however. You can only refinance federal student loans (or private student loans) through a private lender.

If you’re a graduate with high-interest Direct Unsubsidized Loans, Graduate PLUS loans, and/or private loans, a refinance can change how quickly you pay off your loans and/or the amount you pay each month.

Pros of Student Loan Refinancing

When considering refinancing your student loans, there are several benefits. You can:

•   Lower your monthly payments: Lowering your monthly payment means you can save money or spend more in other areas of your life instead of putting that cash toward paying student loans. (Depending on the length of the loan term, however, you may end up paying more in total interest.)

•   Get a lower interest rate than your federal student loan interest rates: This can result in paying less interest over the life of the loan (as long as you don’t extend your loan to a longer term.)

•   Decrease your debt-to-income ratio (DTI): Your DTI compares your debt payments to your income. So if you lower your monthly payments, you could be lowering your DTI ratio –and a lower DTI can help when applying for a mortgage or other type of loan.

Recommended: What’s the Average Student Loan Interest Rate?

Cons of Student Loan Refinancing

That said, refinancing federal loans can have some drawbacks as well. They include:

•   No longer being able to take advantage of federal forbearance: When you refinance your student loans through a private lender, you no longer qualify for federal forbearance, such as the Covid-19-related payment holiday. However, it’s worth noting that some private lenders offer their own benefits and protections after you refinance.

•   No longer being able to tap into income-driven repayment plans, forgiveness programs, or other federal benefits: Refinancing federal student loans means replacing them with private loans — and forfeiting the protections and programs that come with them.

•   Possibly seeing your credit score get dinged: Your lender may do a hard credit history inquiry (or pull), which can affect your credit score.

What Are Income Driven Repayment Plans?

Put simply, income-driven repayment plans are plans that base your monthly payment amount on what you can afford to pay. Under the Standard Repayment Plan, you’ll pay fixed monthly payments of at least $50 per month for up to 10 years. On the other hand, an income-driven repayment plan considers your income and family size and allows you to pay accordingly based on those factors — for longer than 10 years and with smaller loan payments. Income-driven repayment plans are based on a percentage of your discretionary income.

You can only use an income-driven repayment plan for federal student loans. If you qualify, you could take advantage of four types of income-driven repayment plans:

•   Revised Pay As You Earn Repayment Plan (REPAYE Plan): You typically pay 10% of your discretionary income over the course of 20 years (for loans for undergraduate study) or 25 years (for loans for graduate or professional school).

•   Pay As You Earn Repayment Plan (PAYE Plan): You typically pay 10% of your discretionary income but not more than the 10-year Standard Repayment Plan amount over the course of 20 years.

•   Income-Based Repayment Plan (IBR Plan): As a new borrower, you typically pay 10% of your discretionary but never more than the 10-year Standard Repayment Plan amount over the course of 20 years. If you’re not a new borrower, you’ll pay 15% of your discretionary income but never more than the 10-year Standard Repayment Plan amount over the course of 25 years.

•   Income-Contingent Repayment Plan (ICR Plan): As a new borrower, you typically pay the lesser of the two: 20% of your discretionary income or a fixed payment over the course of 12 years, adjusted according to your income over the course of 25 years.

How do you know which option fits your needs? Your loan servicer can give you a rundown of the program that may fit your circumstances. You must apply for an income-driven repayment plan through a free application from the U.S. Department of Education.

Note: Every income-driven plan payment counts toward the Public Service Loan Forgiveness Program (PSLF). So if you qualify for this program, you may want to choose the plan that offers you the smallest payment.

Recommended: How Is Income-Based Repayment Calculated?

Pros of Income Driven Repayment Plans

The benefits of income-driven repayment plans include the following:

•   Affordable student loan payments: If you can’t make your loan payments under the Standard Repayment Plan, an income-driven repayment plan allows you to make a lower monthly loan payment.

•   Potential for forgiveness: Making payments through an income-driven repayment plan and working through loan forgiveness under the PSLF program means you may qualify for forgiveness of your remaining loan balance after you’ve made 10 years of qualifying payments instead of 20 or 25 years.

•   Won’t affect your credit score: This may be one question you’re wondering, whether income-based repayment affects your credit score? The answer is: no. Since you’re not changing your total loan balance or opening another credit account, lenders have no reason to check your credit score.

Cons of Income Driven Repayment Plans

Now, let’s take a look at the potential downsides to income-driven repayment plans:

•   Payment could change later: The Department of Education asks you to recertify your annual income and family size for payment, which is recalculated every 12 months. If your income changes, your payments would also change.

•   Balance may increase: If your monthly payment ends up being lower than the interest accrued, the remaining interest could be added to your overall loan balance.

•   There are many eligibility factors: Your eligibility could be affected by several things, including when your loans were disbursed, your marital status, year-to-year changing income, and more.

Refinancing vs Income Driven Repayment Plans

Here are the factors related to refinancing and income-driven repayment plans in a side-by-side comparison.

Refinancing

Income-Driven Repayment Plan

Lowers your monthly payments Possibly Possibly
Changes your loan term Possibly Yes
Increases your balance Possibly Possibly
Is eventually forgiven if you still haven’t paid off your loan after the repayment term No Yes
Requires an application Yes Yes
Requires yearly repayment calculations No Yes

Choosing What Is Right for You

When you’re considering whether to refinance or choose an income-driven repayment plan, it’s important to take into account the interest you’ll be paying over time. It could be that you will pay more interest because you lengthened your loan term. If that’s the case, just make sure you are comfortable with this before making any changes. Many people who refinance their student loans do so because they want to decrease the amount of interest they pay over time – and many want to pay off their loans sooner.

That said, if you’re thinking about a refinance option, you’ll also want to make sure you are comfortable forfeiting your access to federal student loan benefits and protections.

Refinancing Student Loans With SoFi

Refinancing your student loans with SoFi means getting a competitive interest rate. You can choose between a fixed or variable rate – and you won’t pay origination fees or prepayment penalties.

Find out if you pre-qualify to refinance your student loans with SoFi in just a few minutes.

FAQ

Is income-contingent repayment a good idea?

Right now, the federal government has put a hold on federal student loan repayment. However, once the payment pause expires, it might be a good idea for the right situation, particularly if you have a low income or are unemployed. Having trouble making your student loan payments and already “using up” options for unemployment deferment or economic hardship could make income-contingent repayment worth it.

You may defer payments if you receive public assistance, serve in the Peace Corps, make less than minimum wage or fit into the poverty guidelines, you may defer payments. If you can’t find employment at all, you may defer payments for up to three years.

What are the disadvantages of income based repayment?

The biggest disadvantage of income-based repayment is that you stretch out your loan term from the standard repayment plan of 10 years to longer — up to 25 years. This means that more interest will accrue on your loans and you could end up paying more on your loan before your loan term ends.

Does income based repayment get forgiven?

Yes! Making payments through an income-driven repayment plan as well as working toward forgiveness through the Public Service Loan Forgiveness (PSLF) program means that after 10 years of qualifying payments, you could get any remaining loan balance forgiven, instead of after 20 or 25 years.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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.

Photo credit: iStock/m-imagephotography
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Title IV Financial Aid: What It Is and How It Works

Title IV Financial Aid: What It Is and How It Works

Federal financial aid funds are generally referred to as Title IV under the Higher Education Act of 1965 (HEA) and are administered by the U.S. Department of Education. Title IV funds may come from grants, work-study, or student loans. It’s important that students understand all of their options when it comes to paying for college.

Here are some more details about Title IV financial aid, how it works and how these funds can help pay for school-related expenses.

What Is Title IV?

Under the HEA, Title IV refers to federal financial aid funds. Title IV of the HEA authorizes student financial aid programs of the federal government, which are the primary source of direct federal support to students attending certain institutions of higher education (IHEs). These institutions include public, private nonprofit, and proprietary institutions, which must meet a variety of criteria to participate in Title IV programs.

Federal aid awarded to students can be used to pay for tuition and fees, room and board, books and supplies, and transportation. Federal financial aid is mainly distributed to students through federal student loans, grants, and work-study.

In 2021, Federal Student Aid (FSA) processed more than 17.6 million FAFSA® forms — otherwise known as the Free Application for Federal Student Aid. In 2021, $112 billion was delivered via Title IV financial aid to more than 10.1 million postsecondary students and their families. These students attended 5,600 active institutions of postsecondary education that participate in federal student aid programs.

Different Types of Title IV Funds

Title IV doesn’t include all forms of financial aid that can be used to help pay for college. Here is what Title IV does cover.

•   Direct Subsidized Loans are a type of federal student loan available to undergraduates where a borrower isn’t generally responsible for paying interest while in school. Direct Subsidized Loans are only available to students who demonstrate financial need.

•   Direct Unsubsidized Loans are loans available to undergraduates and graduates where a borrower is fully responsible for paying the interest regardless of the loan status. Interest accrues from the date of disbursement and continues throughout the life of the loan.

•   Direct PLUS Loans are federal loans available to graduates or professional students and parents of dependent undergraduate students to help pay for college or career school.

•   Direct Consolidation Loans are federal loans that allow the borrower to combine multiple federal student loans into a single new loan.

•   Federal Grant Programs offer eligible students financial assistance by the U.S. government out of the general federal revenue. Title IV covers several federal grant programs, including Federal Pell Grants, the Federal Supplemental Educational Opportunity Grant Program, the Teacher Education Assistance for College and Higher Education (TEACH) Grant Program and the Iraq and Afghanistan Service Grant Program.

•   Federal Work-Study Program is a federally-funded program that offers part-time employment to students in financial need, allowing them to earn money to help pay for school-related expenses.

Who Is Eligible for Title IV?

To be eligible for federal student aid, you must meet basic eligibility requirements . Students must:

•   Demonstrate financial need for most programs.

•   Be a U.S. citizen or an eligible non-citizen.

•   Have a valid Social Security number.

•   Be enrolled or accepted for enrollment as a regular student in an eligible degree or certification program.

•   Enrolled at least half-time for Direct Loan Program funds.

•   Maintain satisfactory academic progress.

•   Sign the certification statement on the FAFSA stating that you are not in default on a federal student loan, you do not owe money on a federal student grant, and you will only use federal student aid for educational purposes.

•   Show you’re qualified to obtain a college or career school education by having a high school diploma or its equivalent or enrolling in an eligible career pathway program and meeting one of the “ability-to-benefit” alternatives.

Some Title IV programs have additional eligibility criteria specific to the program. Check with your school’s financial aid office for more information or questions on a particular program.

Recommended: FAFSA Guide

What Can Title IV Loans Be Used For?

Title IV loans can be used for tuition and fees, room and board, books and classroom supplies, transportation and even some eligible living expenses. Tuition is typically the largest expense. According to the College
Board
, the average college tuition including fees for a private four-year nonprofit institution in 2021-2022 is $38,070 while the average for a public, out-of-state four-year institution is $27,560 and $10,740 for a public four-year institution with in-state tuition.

Beyond tuition, Title IV loans can also be used to purchase books and school supplies, like a backpack, laptop, and notebooks. To help reduce costs, you can purchase used textbooks or rent them through your school or other services. Title IV loans can also help cover housing expenses and food costs, even if you live off-campus, and pay for the maintenance of your car, fuel, or bus and taxi fares.

If Title IV loans are used inappropriately, the school can report it to the Department of Education via a hotline and you may be held liable for those funds.

Recommended: Using Student Loans for Living Expenses and Housing

Title IV Payments

As mentioned, grants, scholarships, and work-study attained through Title IV generally don’t need to be repaid. However, as mentioned, student loans do need to be repaid.

Once you graduate, drop below half-time enrollment, or leave school, your federal student loan goes into repayment and you must make Title IV payments. However, if you have a Direct Subsidized Loan or a Direct Unsubsidized Loan, there is a six-month grace period before you are required to start making regular payments. Graduate and professional student PLUS borrowers will be placed on an automatic deferment while in school and for six months after graduating, leaving school, or dropping below half-time enrollment.

When your loan enters repayment, your loan servicer will automatically enroll you on the Standard Repayment Plan, which spreads monthly payments over a 10-year period. This can be changed at any time for free. You can also make prepayments on your loan while you are in school or during your grace period.

Your loan servicer will provide you with a repayment schedule with the due date of your first payment, the number and frequency of payments and the amount of each payment. Your monthly payment depends on your chosen repayment plan. Most Title IV loan services will send out an email when your billing statement is ready to be viewed online.

What to Do if Your Title IV Loans Aren’t Enough

If your Title IV loans aren’t enough to cover all costs, there are other options.

You can apply for scholarships or grants, which are a form of gift aid that typically do not need to be repaid. Scholarships are awarded based upon various criteria, such as academic or athletic achievement, community involvement, job experience, field of study, financial need and more. Most grants for college are need-based.

Another option is a part-time job. Your school may have job boards that list on-campus jobs for students or you could check external job sites for part-time opportunities.

Once you’ve exhausted every other option, private student loans are another possibility to consider. Private student loans can be used to cover college costs, but they are issued by banks, credit unions, and online lenders rather than the federal government. Private student loans are also credit-based and the lender will have their own eligibility criteria. The lender will typically review factors including your credit history, income, debt, and whether you’re enrolled in a qualified educational program. If you don’t have enough credit history or enough proof of income, you may choose to apply with a cosigner. Adding a cosigner with an established credit history can help improve your application and potentially allow you to qualify for a more competitive loan.

If you take out student loans, you can refinance them after you graduate to save money when it’s time to repay. Refinancing involves taking out a new loan and using it to repay all your existing loans, which can include federal loans and private loans. Refinancing student loans with a private lender also means forfeiting federal loan benefits like deferment, forbearance or income-driven repayment plans.

Recommended: I Didn’t Get Enough Financial Aid: Now What?

The Takeaway

Title IV financial aid has given millions of students the means to afford and attend college, university and trade school. And if you don’t receive enough Title IV aid, it doesn’t mean you’re out of luck when it comes to funding your college education. By applying for scholarships, taking on part-time jobs, applying for private student loans or refinancing, you can make your dreams a reality.

If refinancing seems like an option for you, consider SoFi. It only takes minutes to apply, even with a cosigner, and there are no fees, period.

Check out student loan refinancing with SoFi and find what works for you.

FAQ

What is the purpose of Title IV?

Federal Student Aid is responsible for managing the student financial assistance programs under Title IV of the HEA. The FSA’s mission is to ensure that all eligible students benefit from federal financial assistance throughout postsecondary education.

What is included in Title IV?

Title IV provides grant, work-study, and loan funds to students attending college or career school.

Is Title IV a loan?

Title IV does include federal student loans such as Direct Unsubsidized and Subsidized loans. However, Title IV funds are also distributed to students through federal grants and work-study programs.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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 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.

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
.

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.
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.

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What Is the Difference Between APR and Interest Rate on a Personal Loan?

What Is the Difference Between APR and Interest Rate on a Personal Loan?

Even if you’ve had personal loans explained to you in simple terms, there’s a lot to know when you’re making such a big financial decision. One common misunderstanding for borrowers is the difference between the loan’s APR and the loan’s interest rate.

Although these two terms are often used interchangeably, they refer to slightly different concepts. Let’s take a closer look.

What Is Interest?

For starters, let’s talk about interest. Interest is the cost you pay for the privilege of taking out a loan — the money you’ll owe along with the principal, or the amount of money you’re borrowing.

Interest is expressed in a rate: a percentage that indicates what proportion of the principal you’ll pay on top of the principal itself. Interest may be simple — charged only against the principal balance — or compound — charged against both the principal balance and accrued interest itself. Typically, personal loan rates are an expression of simple interest.

Recommended: Interest Rate Definition: What You Need to Know

Loan APR vs Interest Rate

So now that we know what interest is and how it’s expressed, what’s the difference between an APR vs. interest rate?

APR stands for Annual Percentage Rate and specifically designates how much you’ll spend, as a proportion of the principal, over the course of one year. Furthermore, the APR includes any additional charges on top of interest, such as origination or processing fees, which a straight interest rate does not.

In other words, APR is a specific type of interest rate expression — one that’s more inclusive of additional costs.

Interest Rate

APR

Expression of how much will be paid back to the lender in addition to repaying the principal balance Expression of how much will be paid back to the lender in addition to repaying the principal balance
Includes interest only Expresses cost of the loan over one year including any additional costs, such as origination fees

Why Is My Personal Loan APR Different Than the Interest Rate?

If your personal loan’s APR differs from its interest rate, that indicates that there are additional fees, such as origination fees, included in the total amount you’re being charged. If there were no fees, the APR and interest rate would be identical!

How Important Is APR vs Interest Rate?

No matter how it’s expressed, the interest rate on your loan is very important — because it’s how much you’ll pay in addition to the principal balance. That amount can add up very quickly. Let’s look at an example of a relatively simple personal loan.

Say you take out a personal loan for $5,000 to cover some home repairs. Assuming it’s a simple-interest loan with an interest rate of 5% and a term of five years, you’ll pay back a total of $6,250 — an additional $1,250 on top of the amount you needed in the first place.

APR vs Interest Rate on Revolving Credit Accounts

Personal loans aren’t the only financial product that involve APR and interest rate. Revolving credit accounts — including credit cards — also have interest rates expressed as APR. However, with credit cards, these two rates are one and the same: APR is just the interest rate, and the terms can be used interchangeably.

Credit card issuers may charge other fees, e.g., cash advance fees, late fees, or balance transfer fees as applicable to individual usage. But it’s impossible to predict the type or amount of fees that might be charged to any one card holder.

Although these two expressions are the same, it’s important to understand that the interest rate on credit cards and other revolving credit accounts is usually compound interest, which is precisely why it can be so easy to spiral into credit card debt. When interest is charged on the interest you’ve already accrued, the total goes up quickly.

A single credit card account can have multiple APRs, depending on how the credit is used.

•   Purchase APR: the standard APR for general purchases.

•   Cash advance APR: the rate charged for cash advances made to the card holder.

•   Balance transfer APR: may begin as a low or zero promotional rate, but increase after the introductory period ends.

•   Penalty APR: may be charged if a payment is late by a predetermined number of days.

What Is a Good Interest Rate for a Personal Loan?

The interest rate on your personal loan — or any financial product — will vary based on a wide variety of factors, including your personal financial history (such as your credit score and income) as well as which lender you choose, how big the loan is, and whether or not it’s secured with collateral.

The average personal loan rate hovers between about 10% and 22% at the time of this writing, though some lenders may offer personal loans with interest rates as low as 5% to 6%.

Getting a Good APR on a Personal Loan

To get the best rate on your personal loan, there are some financial factors you can influence over time. Here are some action items to consider.

Improving Your Credit Score

It’s been said before, but it’s true: the higher your credit score, the better your chances are of achieving favorable loan terms and lower interest rates — not to mention qualifying for the loan at all. While there are loans out there for borrowers with bad credit and fair credit, improving your credit score can make your loan a lot more affordable over time.

Paying Down Your Debts

One way to significantly improve your credit score is to pay down your debts. And along with the opportunity to improve your credit, paying down debt will also improve your chances of being approved for a loan because your debt-to-income ratio is one factor lenders look at when qualifying you for a loan — not to mention the fact that it’ll make keeping up with your monthly loan payments a lot easier if you have more leeway in your budget.

Be Careful When Applying for Credit

Applying for too much credit at once can be a red flag for lenders and ding your credit score, so if you’re getting ready to apply for a personal loan, auto loan, or mortgage, try to limit how many times you’re having your credit score pulled.

Credit scoring models do allow for rate shopping, however, so it’s still a good idea to compare multiple lenders over a limited amount of time — a 14-day period is recommended — to find the lender that works best for your financial needs. If done in a short window of time, multiple hard credit pulls for the same type of loan will count as just one.

Recommended: Soft vs Hard Credit Inquiry

The Takeaway

Personal loans and other financial lending products come at a cost: interest. That’s the amount you’ll pay on top of repaying the principal balance itself. Interest is expressed in a percentage rate, most commonly APR, which includes both the interest and any other fees that can increase the cost of the loan.

If you’re looking for a personal loan, whether to fund medical expenses, home repairs, or some other financial goal, SoFi Personal Loans may be the option for you. There are no origination or repayment fees with unsecured personal loans from SoFi, and there are a variety of terms offered to work with many budgets.

Check your rate today

FAQ

Why is my personal loan APR different than the interest rate?

If the APR on your personal loan is different than the interest rate, it means the lender is charging additional fees, such as origination fees or others.

How important is APR vs interest rate?

The APR is a particularly important figure to look at since it also includes additional costs, giving you a more holistic picture of the price of the loan product.

What is a good APR and interest rate for a personal loan?

Personal loan interest rates vary widely, but can start as low as 5% depending on your personal financial history, the type and amount of the loan you’re borrowing, and your lender.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. 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. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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
.

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