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Loan stacking is the process of applying for multiple loans within an extremely short timeframe to get a lot of money fast. It typically occurs with borrowers applying online for funding, and both individuals and businesses may pursue this path to secure cash.

While loan stacking isn’t technically illegal, it can lead borrowers to take on more debt than they can comfortably repay, potentially wreaking havoc on their credit scores. Meanwhile, lenders stand to lose a lot of money via loan stacking, as borrowers may default on these loans at a higher rate than with single loans. For this reason, some have policies against it written into their loan terms.

In short, loan stacking is probably not a smart move, even if you’re trying to shore up your finances quickly. Here’s a closer look at this practice.

Defining Loan Stacking

Loan stacking is defined as taking out multiple loans in a short period of time in order to access large amounts of money. It typically happens via securing loans online.

While many consumers have multiple personal loans or credit cards, loan stacking is different because of the speed with which the loan applications are submitted and processed.

Some people and businesses may be legitimately trying to secure multiple loans (say, they’ve discovered they can’t increase the amount of a personal loan they already have and urgently need to fund major home repairs).

However, others who engage in loan stacking may have no intention of ever repaying the loans and just want access to large amounts of cash fast. This can constitute loan stacking fraud.

How Loan Stacking Works

Given the speed with which many online lenders approve applications — faster, sometimes, than hard inquiries can show up on a credit report — borrowers may be able to secure multiple loans from different lenders in quick succession. When that happens, the borrower may be approved for large amounts of credit that they might not otherwise have qualified for. (A lender might have declined to offer a loan if the applicant’s credit report reflected the other loans being sought.) With a significant amount of debt secured, these borrowers could default on one or all of their loans.

That said, many financial institutions are wise to the ways of loan stacking and may include language against it in the fine print of the contract you sign to apply for the loan.

That means that if you’re engaging in loan stacking, you’re breaking the contract, which could nullify it or, in extreme cases, constitute fraud.

Recommended: What Are Personal Loans Used For?

Risks and Consequences of Loan Stacking

If you feel you need a lot of money in a short amount of time, loan stacking can be tempting. However, there are some serious risks and consequences to consider.

•   Increased debt burden: Obviously, if you borrow a lot of money, you’re going to owe a lot of money — more than you may be reasonably able to pay off. This can add to your financial stress and keep you from other goals, such as saving for the down payment on a house.

•   High interest costs: The vast majority of loans will cost you money over time. Even if you qualify for interest rates on the lower end of the spectrum, when you have multiple loans at the same time, interest can quickly add up.

•   Potential default: If you fail to repay your loans on time, they may go into default and be sent to collections. This can negatively impact both your credit score and your financial well-being. Collections agencies can call you to collect a debt, but they’re prohibited from repeatedly or continuously calling to harass you, and must stop contacting you if you request in writing that they do so.,

•   Negative credit impact: Aspects of loan stacking can negatively affect your credit score over time. (The amount you owe, for instance, accounts for 30% of the calculation. Getting a stack of loans will send debt higher and likely lower your score.) High interest charges and surging debt levels can cause you to make late payments or miss them altogether, further harming your three-digit number.

In these ways, loan stacking can have significant negative implications for your financial and overall well-being.

Recommended: Understanding Personal Loan Interest Rates

Legal and Ethical Considerations

Along with the negative ramifications on your financial standing and credit report, there are also legal and ethical reasons to think twice before loan stacking.

•   As mentioned above, some lenders have explicit policies against taking out multiple loans at the same time. While loan stacking may not technically be illegal, this means that you’d be breaking the lender’s rules.

•   If you carefully read the fine print on the application, you may see that you’re required to disclose existing debts and liabilities, such as a personal loan, a home equity line of credit (HELOC), or other loans or credit lines. These disclosure requirements mean that if you provide false or incomplete information, it may be considered misrepresentation on the application. At the very least, the lender may have grounds to take action, including voiding the contract, if it discovers what you’re doing.

•   In more serious cases (say, in which other crimes occur), fines, legal fees, and even jail time could be involved.

Alternatives to Loan Stacking

If you’re making the wise decision to avoid loan stacking, there are alternatives that could help you get the financial relief you need without the risks that this tactic carries.

•   Taking out debt consolidation loans: If the reason you’re looking to borrow money is to pay off other money you’ve borrowed, debt consolidation might be the right answer. This involves taking out a new personal loan to consolidate your debt (or balance transfer credit card) to pay off your existing debt and simplify your life by making just a single payment each month.

This financial move, if it involves personal loans, may offer the added bonus of lowering your overall interest rate.

•   Participating in credit counseling: Bad credit habits are unlikely to resolve themselves without intervention. This means that even if you successfully pay down your debt, you might find yourself right back in the same “I owe too much” place in a few months or years. Credit counseling can help you get out of debt and ensure you avoid it going forward.

Counseling is often offered as a complimentary service or for a low fee by nonprofit organizations. A certified counselor can help you assess your situation and take steps to better manage your money.

•   Negotiating with current lenders: Even if they don’t advertise it, many lenders will negotiate with you to help lower your monthly payments or extend the time you have to repay your loan. Extending a loan can involve paying more interest over the life of the loan, but it may be a wise move if money is tight and you’re struggling with debt.

•   Exploring other funding sources: Taking out a single, large personal loan might be a better idea than loan stacking. In addition, you could also look into borrowing funds from friends and family or peer-to-peer (P2P) lending, a method of borrowing in which people borrow and lend money to one another without a bank being involved.

If you’re considering loan stacking, it may be a smart step to consider these alternatives and find one that fits your current situation.

Recommended: How to Apply for a Personal Loan

The Takeaway

Loan stacking, taking out multiple loans online from different lenders in a short time frame, can be a dangerous move that can worsen a bad financial situation. It can lead to considerable debt and hefty interest charges, harming your credit score and your financial and emotional status.

If you need cash quickly, other options, such as securing a single personal loan, may be a better path forward.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is loan stacking legal?

While loan stacking is technically not illegal, some lenders may have explicit policies against it. This means you may not be qualified for additional credit or borrowed funds if the lender sees that you’ve recently successfully applied for another loan. Additionally, using someone else’s name or personal information to apply for a loan is identity theft or identity fraud, which is a crime.

Can you stack personal loans?

While it’s certainly possible to have more than one personal loan, loan stacking on purpose can backfire. If you borrow more than you can afford to pay back on time, you can tank your credit score. Furthermore, these days, many lenders are wise to loan stacking, and they may not approve your application if they see another recent hard credit check on your file.

What are the risks of loan stacking?

Loan stacking can quickly put the borrower deeply in debt, potentially making it impossible to repay the loans in a timely fashion, which can be devastating for their credit score and financial well-being. Additionally, since many lenders see loan stacking as a risk to their business, some have beefed up their underwriting process to prevent loan stacking, so you may simply be denied. Finally, if you falsify any information on your loan application or apply for multiple loans with no intention of repaying them, you may be guilty of application fraud, which can lead to fines and other consequences.

Photo credit: iStock/porcorex

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Closing a credit card can hurt your credit in some situations. If you already have good to excellent credit, closing one credit card generally won’t have a huge impact on your credit score. However, there are a few scenarios where closing a credit card can hurt your credit score, such as when doing so might shorten the length of your credit history or send your credit utilization rate soaring.

Learn more about the potential consequences of closing a credit card as well as alternatives to explore to avoid possible impacts on your credit score.

Ways Closing Your Credit Card Can Affect Your Credit Score

If you’re worried about whether it hurts your credit to close a credit card, you should know that there are two main ways that canceling a credit card can indeed affect your credit score.

Through Credit Card Utilization Ratio

The first way that canceling a credit card affects your credit score is by raising your credit card utilization ratio. Your utilization ratio (sometimes called your utilization percentage) is the total amount of available credit that you’re actually using. If you have a credit card with a $10,000 limit and you regularly spend $5,000 on that card each month, you’d have a utilization ratio of 50% ($5,000 is half of $10,000).

Having a low utilization ratio is generally considered a positive factor in determining your credit score. Lenders prefer when you’re not using all of your available credit, since doing so can be an indicator of financial distress. Typically, you should be using no more than 30% of your credit limit across all your lines of credit, and ideally no more than 10%.

When you cancel a credit card, you lower the total amount of your available credit line, which will generally raise your credit card utilization ratio.

Example: Say you have two credit cards.

•   On credit card A, you have a balance of $5,000 and a credit limit of $10,000.

•   On credit card B, you have no balance and a credit limit of $10,000, too.

•   So, on these two cards, your combined limit is $20,000. The fact that you have a $5,000 balance means your credit utilization is $5,000 out of $20,000, or 25%.

•   If you close credit card B, you now have a balance of $5,000 with a $10,000 limit. Your utilization ratio rises to 50%.

If you close credit card B, your credit utilization could rise, and your credit score could be lowered.

Recommended: What Is the Average Credit Card Limit?

Impact on the Length of Credit History

Another way that canceling a credit card can affect your credit score is by impacting the average length of your credit history. The average age of your credit accounts is another factor in determining your credit score, with an older average being better. You’ll especially see an impact on your score if you close a card that you’ve had for a very long time, and the impacts of a bad credit score are myriad. Credit can be harder to secure and more expensive.

When Canceling a Credit Card Might Make Sense

There are several scenarios when canceling a credit card might be the right financial move, such as when:

•   Your card has a steep annual fee that isn’t worth it. One of the most common reasons for when to cancel your credit card is if you have a card with an annual fee and you’re no longer getting enough benefits to justify paying that cost. It doesn’t make sense to pay an annual fee of $100 or more a year if you’re not getting much benefit from having the card, and there are plenty of credit cards that come with no annual fee.

•   You have multiple credit cards and want to streamline your finances. Another scenario is if you have multiple credit cards and want to simplify your finances. With how credit cards work, missing a payment can have a big negative impact on your credit score. So, if you’re in a situation where you have too many credit cards and are having trouble keeping payments straight, it may be a good idea to simplify your life and cancel some of your credit cards.

•   You have a high interest rate on a card. Particularly if you need to carry a balance for whatever reason, ditching a card with a high interest rate might be in your best interest. That will save you from paying more than necessary in interest charges.

•   You want to replace a basic or secured credit card. Another reason you might consider canceling your card is if you have a very basic starter credit card. Or, perhaps you have a secured credit card and want to upgrade to an unsecured card. Especially if your credit score has changed for the better since you opened that card, you could secure better terms and potentially the opportunity to earn rewards as well.

Recommended: When Are Credit Card Payments Due?

When It Might Make Sense to Keep the Credit Card Account Open

On the other hand, there can be good reasons to keep your credit card accounts open as well. This includes if:

•   Your card doesn’t have an annual fee. If the card has no annual fee, you could always keep the card open and not use it, rather than closing the account. When you close an account, the next time the credit bureaus are updating your credit score, your score may decrease. Keeping your credit card open instead could prevent that.

•   You don’t have many accounts open. One of the factors that’s used to determine your credit score is your mix of accounts. If you don’t have many accounts open, closing one of your few accounts could ding you in this area, possibly dragging down your credit score. Plus, it could cause your available credit to take a big hit, which would increase your credit utilization.

•   Your only reason for canceling is not using your card very often. Given the potential impacts to your credit, if you don’t have much reason to cancel a credit card, you’re likely better off keeping it open due to the importance of good credit. That way, you won’t risk driving up your credit utilization or lowering the average age of your accounts, both of which can cause your score to drop. Plus, there aren’t any penalties for not using a credit card frequently.

Recommended: What Is a Charge Card?

Guide to Closing a Credit Card Safely

To close a credit card safely, there are a few things that you’ll want to keep in mind before canceling your card.

Automatic Payments

If you have any automatic payments being charged to the card, you’ll want to contact the vendors and change them to another card if you own multiple credit cards. Once you close your credit card account, if a vendor attempts to charge your account, the charge will likely be denied. This could lead to interruptions in other areas of your life, especially if it’s for something crucial, such as rent or utilities.

Paying Your Balances in Full

Simply closing your credit card account doesn’t eliminate your responsibility for any charges already on the account. You’re still just as responsible and liable for the total balance on your account, so you should pay off your balance in full. If you don’t pay the full balance when you close the account, your card issuer will still issue you monthly statements, and interest will continue to accrue.

Redeeming Your Rewards

If you have a credit card that allows you to earn cash back, travel, or other rewards, you’ll want to redeem those rewards before you close your account. Once you close your account, you may not be able to access them, and it’s possible that you will lose some of your hard-earned rewards. To avoid that possibility, you should redeem your rewards before canceling your credit card account.

Recommended: Tips for Using a Credit Card Responsibly

Alternatives to Canceling a Credit Card

If you’re worried about how closing a credit card can hurt your credit, there are alternatives to explore.

Downgrade to a No-Fee Card

If one of the reasons you’re considering canceling your credit card is to avoid paying an annual fee, you may be able to downgrade the card instead. Many credit card issuers offer a variety of different cards, and only some of them come with annual fees. Downgrading to a no-fee card will keep your account open without you having to pay the annual fee.

Negotiate With Your Credit Card Company

Another option is to negotiate with your credit card company. Most credit card issuers don’t want you to cancel your card, so you may be able to negotiate for better terms. This might include waiving the annual fee, lowering the interest rate, or getting additional rewards. It never hurts to call your credit card company to ask what they might be willing to do.

Put Your Card Away

If you’re considering canceling your credit card because you’re worried about overspending on the card, you also have the option to just take it out of your wallet. Depending on your situation, simply placing the card in your sock drawer, for instance, might prevent you from overspending without you having to actually close the account.

Recommended: How to Avoid Interest on a Credit Card

Check Your Credit Report Before Closing an Account

If you’ve decided to close your credit card account, it can be a wise move to check your credit report both before and after canceling your card. If you’re concerned about how checking your credit score affects your rating, remember that it won’t impact it.

Also, keep in mind that you have different credit scores, so take some time to check each one before and after closing your account. That way, you’ll have an accurate idea of how closing your credit card impacted your credit score.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

The Takeaway

While closing a credit card likely won’t have a huge impact on your credit score, it can lower it, especially in certain situations. Unless you have a good reason for closing your account, you may want to consider keeping your credit card open. Instead, you could consider downgrading to a no-fee card, negotiating with your credit card company, or just taking your card out of your wallet.

Looking for a new credit card? Consider credit card options that can make your money work for you. See if you're prequalified for a SoFi Credit Card.

FAQ

Is closing a credit card bad?

Closing a credit card isn’t usually bad, but it may lower your credit score in some situations. Instead, consider alternatives to closing your credit card, such as downgrading your card or negotiating with your card issuer.

Is it better to cancel unused credit cards or keep them?

In many scenarios, it’s preferable to just keep your credit card accounts open, even if you don’t regularly use them. This allows the average age of your accounts to increase and also lowers your utilization ratio as you have access to a higher total of available credit. Both of these factors can help build credit.

Does closing a credit card with a zero balance affect your credit score?

When you close a credit card, even if you have a $0 balance, your credit score might drop. This is because closing your card could lower the average age of your accounts and/or increase your credit utilization ratio. Instead of canceling your credit card, consider negotiating with your card issuer for a lower interest rate or lower fees.

How much does your credit score drop if you close a credit card?

If you already have good or excellent credit, closing a credit card generally won’t have a huge impact. If you have a low credit score, however, it’s possible that closing a credit card can hurt your score even more. This is especially true if the card you close is one you’ve had for a long time or one with a high credit limit.

Photo credit: iStock/wichayada suwanachun

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A loan is a sum of money that’s borrowed and then paid back, both principal and interest, within a specific time frame. The interest you pay is for the privilege of getting that lump sum of cash in hand.

Whether it’s to continue your education or buy a house, borrowing money can be the key to meeting longer-term goals, both financial and personal. There are many different kinds of loans available, including unsecured personal loans, secured mortgages, and many other options in between.

Here, you’ll learn the basics of lending, including a few of the most common types of loans, what you’ll need to successfully apply for them, and what you should know before making the significant, and at times risky, decision to borrow money.

Definition and Basic Concepts

As soon as you start shopping for loans of any kind, there are a few terms you’re likely to hear, some of which may be unfamiliar. Get up to speed with this glossary of words commonly used to define and describe loans.

•   The principal is the amount of money you’re borrowing from the lender. For instance, if you take out a loan for $17,500, then the principal amount is $17,500. However, every time you make a payment, you’ll pay both principal and interest, which is why you’ll end up paying back more than $17,500 altogether. (It may also be possible to make additional, principal-only payments, which can help you pay the loan off more quickly and pay less interest overall.)

It’s worth noting that this concept of principal is a key way in which loans vary from credit lines: With a loan, you typically get a lump sum of cash, while with a line of credit (such as a home equity line of credit (HELOC) or a credit card), you borrow varying amounts as you need funds.

•   Interest is the money you pay to the lender for the privilege of taking out the loan — or the cost of the loan. Interest is often expressed as an APR, which includes any additional fees as well as the interest itself.

•   A loan’s term is the lifespan of the loan, or the length of time you’ll have to pay it back. For example, a personal loan might have a 60-month (five-year) term, meaning you’ll make 60 monthly payments to repay the loan in full (unless you pay it off early). Mortgages tend to have longer terms: typically 15 or 30 years.

•   Collateral refers to an asset that, as part of the loan agreement, the lender can seize in the event you fail to repay what you owe. A loan with collateral is known as a secured loan, and common collateral items include vehicles (as with an auto loan) and houses (as with a mortgage).

•   Your lender might be a bank, credit union, or an online financial institution. It’s whichever business is lending you the money and collecting your payments.

•   The borrower is the person or entity borrowing money and paying it back as outlined in the loan agreement.

💡 Quick Tip: Not sure what certain loan terms mean? Check out the Personal Loans Glossary for a simple guide to the basics.

Types of Loans

While there are many different kinds of loans out there — home loans, auto loans, personal loans, and even holiday loans — they can all be separated into two main categories: secured loans and unsecured loans.

Secured Loans

As briefly mentioned above, secured loans are those that are backed by collateral.

Collateral gives the lending institution a guarantee that they’ll get a valuable asset out of the deal if the borrower fails to repay the loan in full. That means the loan is less risky for the lender, and they may therefore have slightly less stringent qualification requirements or charge a lower interest rate.

Unsecured Loans

Unsecured loans, by contrast, are those that are not backed by collateral. Unsecured personal loans are sometimes also called “signature loans,” since all you’re offering as collateral is your signed promise to repay the loan. Because they’re riskier for lenders, unsecured loans may have higher interest rates as well as more stringent eligibility requirements.

Unsecured loans can usually be used for just about any legal purpose, from home renovations to wedding costs. Many people take out personal loans for debt consolidation as a path to paying off high-interest credit card debt.

Common Loan Terms

While the specific agreement of your loan will depend on multiple factors, including your lender and the type of loan you’re taking out, there are a few features that many different types of loans share.

APR

Your interest rate will likely be expressed as an APR. APR includes not only the interest itself but also the other costs associated with the loan, such as origination fees.

APRs can vary tremendously depending on an array of factors, including the economy, the size of the loan, the type of loan, and your credit score and history. At the low end, some people who took out a mortgage in late 2020 or in 2021 may have an APR below 3.00%. Others who have less-than-stellar credit scores might currently have an APR of 30.00% if they are seeking out a personal loan on the larger, riskier side.

The higher your APR, the higher the cost of the loan. People with higher credit scores and positive financial profiles are more likely to qualify for lower-APR loans, which can save them substantial amounts of money in interest over time.

Recommended: What Is a Personal Loan?

Fixed vs Variable Interest Rates

Along with APR, you should also understand the difference between fixed and variable interest rates.

•   As the name implies, fixed interest rates don’t vary over the entire lifetime of the loan. That means you can enjoy regular, predictable payments of the same amount every month.

•   Variable-rate loans, on the other hand, can fluctuate with the market (though they’re usually governed by caps that keep the rate from rising over a certain percentage). Variable-rate loans may have lower rates at first, making them attractive, but payments can rise substantially over the lifetime of the loan. Or, in some economic climates, they might fall lower. In either scenario, a variable rate can make budgeting more difficult.

Amortization

Amortization describes the way a loan is gradually paid off (both principal and interest) over time. Payments are typically made according to a particular schedule, such as monthly for a certain number of years.

For example, with a fixed-rate home loan, you’ll typically find that the mortgage amortization occurs so that, toward the beginning, the bulk of your payment is going toward interest rather than principal. (This helps ensure the bank gets paid for their service up front.) Over time, a greater and greater percentage of the payment will go toward the principal. However, the actual amount you’re paying each month will never change.

You can see the effect of amortization for yourself using a mortgage calculator.

Prepayment Penalties

Prepayment penalties refer to costs the lender might charge if you pay off a large portion of your loan early or repay the entire loan before the term has elapsed. Prepayment penalties help lenders make money on loans where they won’t receive the full term’s worth of interest. Prepayment penalties can help compensate the bank for this loss of interest income.

For borrowers, though, these charges can feel like punishment for what’s generally a positive financial behavior: paying off your debt early. Whenever possible, it can be wise to look for loans that don’t charge prepayment penalties.

Loan Process

So, now that you understand a bit more about how loans work, consider how you go about getting one.

While each lender will have their own specific procedures and policies, the basic loan process can be broken down into four steps.

•   Application. The lender will collect information from you about your employment history, income, and other financial factors and verify your identity. These days, loan applications can usually be filled out online, though you may also be able to apply in person or over the phone.

•   Approval. Once your lender verifies all your information — usually including a hard credit check — they’ll either approve or deny your application. If you’ve been approved, you’ll be informed about the approval, though it still may take some time for the money to come through.Timing on these steps can vary greatly. A personal loan might get same-day approval, while a home equity loan, which typically involves a home appraisal, could take weeks.

•   Disbursement refers to the money you’ve borrowed actually hitting your account. You may be able to set up a direct deposit so the funds can find their way into your bank account without any additional steps, but in other cases the lender might cut you a physical check. With a home loan, a closing with various parties and/or their lawyers present might be required.

•   Repayment is the phase of the loan where you pay back the funds borrowed (the principal) and interest and fees over time. This typically reflects the agreement drawn up when your application was approved. As discussed above, the repayment period, or term, could be as short as a year or two or as long as several decades.

Factors Affecting Loan Approval

Applying for a loan doesn’t guarantee you’ll be approved. After all, before transferring a large sum of money, your lender is going to want to feel confident that you can repay the debt.

Some of the most important factors that affect loan approval are your credit score and credit history, income, debt-to-income ratio (DTI), and the value of any collateral you put on the table. Here’s a closer look.

•   Your credit score is a three-digit number (typically between 300 and 850) that summarizes your credit history and how well you’ve repaid debts in the past. You may actually have multiple credit scores due to different scoring models and the fact that each of the three major credit bureaus may report somewhat different information. Credit score monitoring can help you understand the health of your credit file over time.

•   Your income is the amount of money you have coming in, usually from employment (but also potentially from investment interest or other sources). Lenders generally want to see a reliable flow of income to help ensure borrowers will be able to continue making payments over the entire lifetime of the loan.

•   Your debt-to-income ratio or DTI is an expression of the amount of income you have every month compared to the amount of money that’s already promised to other creditors. Depending on the loan and the lender, you may be able to qualify for certain loans with a DTI of up to 50%, but generally, the lower, the better. For instance, some mortgage lenders won’t offer a mortgage to borrowers with a DTI higher than 36% unless they meet additional criteria.

•   For secured loans, the value of your collateral, such as the car or home you’re financing, is also considered as part of the calculus. A high-value asset or collateral makes the deal substantially less risky for banks, since they’ll still get some value out of the loan even if you don’t repay it.

Pros and Cons of Borrowing

Sometimes, borrowing money really can be a smart financial move, but it almost always comes with costs, so it’s important to think through the decision carefully. Here are some of the basic pros and cons of borrowing money.

Pros:

•   Loans can help you access longer-term goals, such as homeownership or college education, that might not be possible if you had to pay out of pocket.

•   In some cases, short-term debt can help you increase your financial standing in the long term. For example, student loans can help you gain skills that increase your earnings, mortgages can allow you to own an asset that may appreciate over time, and personal loans used for loan consolidation could help you improve your overall financial standing faster.

•   With unsecured personal loans, you can use the funds for just about any purpose — making them flexible and convenient.

•   Some loans are quick and accessible. Certain types can send money your way in just days.

•   Making on-time payments can help build your credit score over time.

Cons:

•   In almost all cases, loans cost money. Over time, high interest rates can mean purchases cost far more than they would in cash.

•   If you fall behind on payments or carry large balances of revolving debt, loans could have a negative impact on your credit score.

•   Loans payments can stretch your budget, making it difficult to make ends meet each month and accomplish other financial goals, such as saving for retirement.

•   Certain kinds of loan applications can be time-consuming and can leave you waiting a long while to learn whether or not you’re approved.

•   If you have a secured loan, you risk losing your collateral if you can’t keep up with your payments.

•   If you have a lower credit score, borrowing money can be more expensive, which can make your loan debt burdensome.

Alternatives to Traditional Loans

While traditional loans from a bank have long been available to borrowers, there are alternative resources worth considering if you need cash.

•   Credit cards are a common way for people to pay for things today with money they hope to have tomorrow. However, it’s wise to avoid using a credit card to buy more than you can afford to pay off before the grace period ends. Credit cards tend to have high interest rates (and higher still if you take a cash advance), and compounding can get out of hand fast.

•   Lines of credit, such as a personal line of credit or a HELOC, may allow you to borrow funds up to a limit, with accruing interest.

•   Cash advance apps can help you access money from your next paycheck early, though the amount available tends to be relatively small.

•   Peer-to-peer (P2P) lending platforms are an alternative way to borrow that’s funded primarily by private investors. Some people who’ve been turned down for traditional loans may still qualify for P2P loans.

•   Family loans can work in some instances — depending, of course, on your family finances and dynamics. To avoid putting strain on a relationship, it’s often a good idea to formally write up a loan agreement including any required interest, the expected loan term, and what happens if the borrower defaults.

•   Buy now, pay later options can allow you to purchase an item and pay it off in installments, sometimes interest-free. This could be a way to snag, say, a new kitchen appliance when you don’t have cash in hand.

•   Payday loans allow you to borrow against your next paycheck, but proceed with extreme caution. In some cases, they can have APRs of 1,500%.

The Takeaway

A loan involves accessing a sum of money that you repay over time with interest to the lender, according to the terms of your agreement. Borrowing money can help you achieve your dreams, such as owning your own home or getting a graduate degree — but it usually comes at a cost. It’s always worth proceeding with caution before signing on the dotted line. Understanding the full cost of the loan and its pros and cons will help you make an informed decision.

Are you considering a personal loan for debt consolidation, travel, home renovations, or another purpose? See what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How does interest on a loan work?

Interest is the price you pay for the privilege of borrowing money. With most loans, interest is expressed as an annual percentage rate (APR), which includes not only the interest rate itself but also any additional costs of the loan, such as origination fees.

What’s the difference between a loan and a line of credit?

With a loan, you usually receive a lump sum of money up front which you then repay over the course of months or years. With a line of credit, instead of a lump sum, you receive a credit limit — the maximum amount you can borrow based on your financial credentials. From that amount, you borrow what you need up to your limit, and you can repay the line of credit and borrow again.

How do I choose the right type of loan for my needs?

The first step to choosing the right loan for your needs is to understand that there is a huge array of financial products available. What are loans can vary tremendously. For example, if you need money to buy a vehicle, a secured auto loan may have lower interest rates than a personal loan, while a personal loan may be the right option for a wedding. It’s also worthwhile to shop around with different lenders once you know the type of loan you want so you can find the best possible loan terms, including the lowest interest rate.

Are there tax implications for taking out a loan?

There could be tax implications, and you may want to check in with a tax professional regarding your particular situation. The interest you pay on a mortgage is usually tax-deductible, and because personal loans have to be repaid, they’re not considered income and you won’t have to pay taxes on the disbursement. If the loan is forgiven, though, the cancellation of the debt may be considered its own form of income and may be subject to taxation on that basis.

Photo credit: iStock/efetova

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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.

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Paying off a mortgage early, if doable, seems like the smartest plan in the world. But the question remains: Should you pay off your mortgage early? Dedicating most of your money to a home loan means you may not be able to fund your business, investments, a college fund, an emergency fund, travel, or fun purchases.

There are a lot of scenarios where your money may be put to better use elsewhere.

Here’s what to consider before you decide to go all-in on paying off your mortgage early.

When Should You Pay Off Your Mortgage Early?

Sometimes, paying off your mortgage early could make sense. For example:

You Have a Rainy Day Fund

You have emergency savings, the 3-6 months of living expenses in reserve that experts recommend.

And your college savings plan, if that’s a need, is funded.

You’re Funding Your Retirement

You’re contributing the max to your 401(k), IRA, and other retirement accounts. If that’s not the case, you may want to do that before paying off the mortgage.

You Want to Reduce Monthly Expenses Ahead of Retirement

If a mortgage takes up a large portion of your monthly expenses, it may make sense to eliminate the mortgage payment if you know you’re going to be on a limited income soon (such as retirement).

You Want to Save on Interest Costs

Take a look at the loan you signed, or any mortgage calculator tool for that matter. On many standard 30-year loans, you may pay just as much or more in interest as you do in principal. Paying off a home mortgage loan early could save you a lot of money in interest over the life of a home loan.

Reasons to Hold Off on Paying Off Your Mortgage Early

If you’re in the fortunate position of contemplating paying off your mortgage early, there are a few reasons to rethink doing so.

Investment Offers Possibility of Higher Return

If investments provide a return greater than the interest rate you’re paying on your mortgage, it may not make sense to pay off your home loan right now. Remember, past performance doesn’t guarantee future returns, so you’ll want to periodically evaluate how investments are performing against your mortgage interest rate. Many investments also have better liquidity than a mortgage. However, you’ll want to make sure to consider your risk tolerance and investment objectives when deciding to invest instead of paying down your mortgage.

What about buying a rental property instead of paying off a mortgage? Purchasing investment property could generate cash flow, and adding to a real estate portfolio is one way to build generational wealth.

You Still Have High-Interest Debt

Mortgages tend to have much lower interest rates than credit cards do. If you’re a “revolver” who carries balances from one month to the next or in a family of revolvers, paying off that debt first makes sense.

Nearly half of U.S. families report carrying revolving credit card balances, and the average revolving balance per cardholder is about $6,500-$6,800, according to recent data.

How to Pay Off Your Mortgage Early

If paying off your mortgage makes sense for your financial situation, it’s helpful to know how to pay off your mortgage early. A handful of strategies may work for different types of mortgages.

Biweekly or Extra Monthly Payment

One strategy homeowners use to pay off their mortgage early is to pay biweekly. If you pay every two weeks instead of monthly ($1,000 every two weeks, for example, instead of $2,000 a month), by the end of the year, you’ll have made a full extra payment. Mortgage servicers may charge fees if you do this, though.

If you want to get more aggressive, making an extra payment every month will decrease the principal quickly. You’ll want to make sure the payment is applied to principal only.

Paying a bit extra every month is one sure way to shrink total interest paid and the loan term. For a mortgage loan of $450,000 at a 5.60% fixed rate for 30 years, total interest paid would be about $480,005. Putting $400 more toward the mortgage payment every month would whittle total interest paid to approximately $355,000 — a savings of around $125,000. And the mortgage would be paid off in 23-24 years instead of 30 years.

Refinance to a Shorter Term

Changing a 30-year mortgage to a 15-year term with a mortgage refinance will likely result in a larger monthly payment (depending on how much you owe) but a substantial amount in interest savings.

With a shorter mortgage term, payments eat into the principal more quickly. If you stack extra payments on top of a 15-year mortgage, you’ll quickly decrease your loan balance on your way to a paid-off mortgage. Refinancing doesn’t have to happen with your current lender, so consider shopping for a mortgage to see what rate and terms you can get if you’re going this route.

Recast Your Mortgage

Recasting your mortgage involves making a large lump sum payment toward the principal and having your lender reamortize the mortgage. Your monthly mortgage payment will be recalculated based on how much you owe after the large payment. The term and interest rate will stay the same.

With a recast, you don’t have to go through the loan application process, and the administrative fee is usually around a few hundred dollars.

To decide on a mortgage recast vs. refinance, weigh the pros and cons of each.

Make Lump-Sum Payments

Making lump sum payments will go far toward paying down your mortgage. Just make sure the payments go directly toward the principal.

Get a Loan Modification

A loan modification alters the terms of your original loan to make it more affordable, often by adjusting the interest rate or extending the loan term. This mortgage relief option is reserved for those experiencing financial hardship.

Changes to the terms of the mortgage are designed to potentially lower the mortgage payment so that the homeowner avoids foreclosure. Talk to your lender if you’re thinking about going this route.

Recommended: Home Loan Help Center

The Takeaway

Paying off your mortgage early is a lofty goal, but if you have other financial needs or can make a better return elsewhere, it may make sense to keep your mortgage. Make sure you consider all options before you make your decision.

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.

FAQ

Do property taxes go up when you pay off your mortgage?

No. Property taxes don’t change based on whether or not you’ve paid off your mortgage. If you do pay off your mortgage, it might seem like you’re paying more because you’ll pay taxes all at once or in a couple of larger installments.

What happens to escrow when you pay off your mortgage?

When a mortgage is paid off, an escrow account, if one was in place, is closed, and any remaining funds are returned to the homeowner. They then become responsible for paying property taxes and insurance directly. If there’s extra money in the escrow account, it will be sent back to the homeowner when the mortgage is paid off, and the escrow account is closed.

How does paying off your mortgage early affect your credit score?

Your credit score won’t be greatly affected by paying off your mortgage early. The account will remain on your credit for 10 years as a closed account in good standing.

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.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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These days, there’s no shortage of people spouting financial advice. The problem is, not all of it is good. Following unsound financial advice, without doing your due diligence, can lead to poor decisions and serious financial mistakes.

When it comes to money guidance, it’s important to realize that most people aren’t experts and learn to recognize the difference between solid and terrible advice. By doing so, you can prevent a future financial fiasco.

Money Advice That May Be Bad (for Your Situation)

Financial advice isn’t one-size-fits-all. Some people may think they know what’s best for you, but chances are, their pointers don’t pertain to your personal circumstances.

The advice they offer may have worked great for them but not for you. Staying savvy whenever you get unsolicited counsel is key to protecting your financial health.

Here are 11 examples of money tips you should take with a grain of salt and, quite possibly, avoid at all costs.

1. Renting Is A Waste of Time

While it may be the American dream to own a home for many people, not everyone can or even wants to take on the expense and burden that comes with it. When you own a home, you’re in charge of paying for property taxes, homeowners insurance, maintenance costs, and more. All of these expenses can add up to more than monthly rent.

Owning also means if anything breaks or gets damaged, paying for home repairs will come out of your pocket. When something goes wrong with a rental, it’s your landlord’s responsibility. Renters also typically have lower utility bill payments because things like heat, water, and electricity are often included in your rent. Depending on where you live, you may also have access to amenities such as a gym, a pool, or a parking garage.

Renting could, in fact, help you keep more money in your bank account and use that to, say, pay down student loans or credit card debt.

2. Follow Your Passions

Although it sounds nice, following your passions professionally rarely pays the bills. And it can also put you in a very competitive and crowded field if your passion is a popular one, such as acting, singing, cooking, or creating art.

Passion might fuel you for a while, but unless you’re lucky enough to turn it into a profitable full-time career, you’re probably juggling a day job, various side hustles, or living with roommates. There’s nothing wrong with having a passion, but if it’s not your main source of income, it might be more sensible to switch to a plan B. Then you can focus on your strengths, build on your skills, and maximize your potential. Doing so increases your chances of being better able to financially support yourself.

3. Your Credit Score Does Not Matter

This bit of advice should sound the alarm bells. A subpar credit score can hold you back from achieving important goals and even gaining employment. Having positive credit helps lenders recognize your creditworthiness and overall trustworthiness.

Your three-digit score impacts whether you’ll get approved for credit cards, mortgages, and other types of loans. A higher credit score also can help you snag better terms and a lower interest rate for a loan once you’re approved. Landlords, insurance companies, and employers may also do a credit check when you’re applying for an apartment, car insurance, and even a job.

4. You Cannot Be Financially Successful With a 9-5 Job

There’s a lot of advice out there that tells you to avoid being “chained to a desk” and to pursue more entrepreneurial ways to be successful. People can certainly achieve financial success without a 9-to-5 job, but the majority of individuals need a steady paycheck, medical coverage, and paid sick days.

Working 9-to-5 also gives you the chance to build a nest egg if your job offers a 401(k) plan. If there’s also a company match offered by your employer, that’s akin to free money and well worth nabbing.

5. Never Use a Credit Card

Be wary of someone who tells you to avoid getting or using a credit card. Their bad advice may stem from their own experience as an irresponsible card holder. Despite the warnings and horror stories you hear, credit cards don’t always lead to trouble or financial ruin.

Rather, credit cards can offer you one of the best ways to establish credit and show that you’re fiscally responsible, especially if you pay your balance in full every month. Having credit cards helps in an emergency and when your cash reserves are low. Other benefits include valuable perks that card companies offer, such as points, cash-back rewards, and airline miles.

6. You Don’t Have to Worry About Retirement Until Later

When you’re in your 20s or 30s, retirement may seem too far off to make it a priority. Friends, family, and acquaintances may tell you to enjoy your youth and not worry about old age until later.

However, the sooner you start to save, the more money you’ll have later on thanks to compounding interest, which builds earnings on your investment and on that investment’s interest. Putting off saving until midlife can put you behind the eight ball, causing you stress and anxiety as you try to make up for lost time. Start early by taking advantage of your employer-sponsored 401(k) or contributing to a Roth IRA. Imagine how much better off you’ll be if you’re 65 with 40 years of savings versus only 15 or 20 years of savings.

Recommended: 10 Personal Finance Basics

7. The Best Way to Save Is Through a Savings Account

Back in the day, putting money in a savings account was often considered the gold standard for safely socking away your money. Talk to an older relative, and you’ll hear about how 40 years ago or so, they managed to live off their savings account interest, when rates of around 10% were common.

Today, on the other hand, you might get 4.00% annual percentage yield (APY) or more on your savings, if you get the top interest rate (typically found at online banks vs. traditional banks). While a savings account is a solid place to put your money for near-term goals (like an emergency fund), it can be wise to look further afield as well. You may want to meet with a financial advisor to discuss your long-term goals and hear what options might help you achieve them. You might consider, say, how investing can help you build wealth or ways to pump up a child’s college fund more quickly.

If you’re not sure where to start, talk to a Certified Financial Planner or financial advisor who can help set you up with an investment portfolio. Financial advisors and planners do charge for their services, so shop around. If you’re concerned about the cost of a financial advisor, you might want to try getting investment recommendations from a less expensive automated robo advisor.

Recommended: Robo Advisor vs. Financial Advisor: Which Should You Choose?

8. YOLO (You Only Live Once)

YOLO, or “you only live once,” can be the rallying cry to spend freely — say, to lease a pricey convertible or take that trip to Cancun. While it’s true that you only have one life to live, engaging in irresponsible, unmoderated spending can lead to consequences down the road.

Going overboard with the YOLO mantra now can catch up with you when you’re older, potentially leaving you without any financial cash cushion or safety net or saddled with high-interest debt. It’s not a pretty picture.

Bottom line: Your YOLO-inspired shortsightedness and poor money management habits could leave you wishing you’d reined in spending and focused on managing your money better.

Recommended: Tips for Creating a Financial Plan

9. College Is a Waste of Time

Gaining knowledge and education is currency, literally. Research has found that having a college degree significantly increases a person’s job prospects and earning potential. For instance, an updated landmark Georgetown University study found that prime-age workers holding a bachelor’s degree earn $81,000 at the median, 70% more than workers with only a high school diploma. Workers with more education may also benefit from greater economic stability throughout their careers.

College not only gives you the knowledge you need for a chosen profession, but it can also help you develop important soft skills (character traits and interpersonal attributes). For example, communication, teamwork, problem solving, and decision making are all soft skills that college students develop and employers pay close attention to when hiring.

10. You Only Have to Pay the Minimum Every Month

Some of the worst financial advice you can get is to only make minimum credit card payments. It’s actually better to pay off your balance in full when the statement comes. Why? Otherwise, you’ll end up paying interest that will keep your bill increasing and making it all the harder to whittle down your debt.

Credit card interest rates are notoriously high (typically over 19% as of May 2026), and paying only the minimum can keep you in debt for years. There are helpful credit card payoff calculators online that can help you find the best schedule to get rid of your debt.

11. File for Bankruptcy

It may be tempting to follow the “Why not just file for bankruptcy?” suggestion if your financial problems seem insurmountable. Some people will tell you that bankruptcy is the best way to get out of financial difficulty and make a fresh start.

Although the idea of starting over may have some appeal, declaring bankruptcy involves many drawbacks. For example, filing for bankruptcy results in long-term damage to your credit, which will stay on your report for 7-10 years, becomes part of the public domain, and makes it much harder to qualify for a mortgage, among other loans. Bankruptcy also doesn’t cover certain debts, such as student loans, child support, or government-owed taxes. So declaring bankruptcy may relieve some but not all financial hardship.

Before seriously contemplating bankruptcy, try seeking other alternatives, including consulting a credit counseling agency, consolidating your debt, and negotiating with creditors. These steps can help address the issues you’re having without taking that more drastic step, which should be considered a last resort.

Recommended: Understanding Bankruptcy: Is It Ever the Right Option?

How Bad Advice Leads to Bad Decision Making

Taking someone’s money advice as gospel without careful thought and research is one reason why people may make poor financial decisions. Emotions are another. Debt can bring on feelings of helplessness, low self-esteem, and loss of hope. It’s also linked to depression and anxiety. When these emotions overwhelm you, you might feel desperate enough to follow bad financial advice just to know you’re doing something.

Tips for Avoiding Bad Advice

There are ways you can protect yourself from the traps of bad financial advice. Consider these suggestions:

•   Carefully assess whether the advice someone gives you makes sense for your lifestyle and money goals. If you have any doubts about what they’re touting, trust your gut and don’t follow the advice.

•   Educate yourself on the basics of personal finance by listening to podcasts or reading books written by credible money experts. You can also find accurate information and finance articles online on sites such as consumerfinance.gov.

•   Avoid taking money advice from random people on social media. Many of the social influencers who tell you how to get rich are not always legitimate and often make claims that are too good to be true.

•   When in doubt, seek out a qualified professional, such as a certified financial advisor or a Certified Financial Planner. Although not licensed to give you the same type of financial advice that a planner or an advisor can, a financial coach can also help you understand the fundamentals of finance, how to attain your goals, and develop better money management skills.

The Takeaway

There’s no shortage of bad financial advice out there, and some of it might even sound good. It can encourage reckless financial behavior, whether that means overspending on YOLO moments or not worrying about saving for retirement until it’s too late. It’s wise to remember that solid money advice will come from trusted sources and be tailored to your specific situation, needs, and goals. Do the due diligence before letting someone else’s advice sway your money management plans. You could dodge some serious financial risks.

One bit of financial advice that most experts will agree on is that earning high interest on your money and paying low fees is a win-win combination.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How do I know if my financial advisor is bad?

A good financial advisor takes into account your individual circumstances and doesn’t offer nonpersonalized, cookie-cutter advice. First and foremost, a good advisor should spend time getting to know you, your needs, and your goals. Signs of a bad financial advisor include pressuring you to make decisions, not letting you know how they’re paid, not being able to explain things in a way you can understand, encouraging you to put all your money into one investment, and not returning your calls or emails.

Who should I listen to for financial advice?

A certified financial professional can be a good bet, but there are other places to go to for financial information. Bank or credit union officers, your employer’s human resources department, and credit counseling agencies may be able to answer questions or make referrals. There are also government websites you can check out.

Can I sue my financial advisor if they give bad advice?

Yes — if you’ve lost money because your advisor misled you, gave you bad counsel, mismanaged your investments, or took other unlawful or unethical actions, you can sue for damages. Keep in mind though that it’s not a slam dunk. The merits of your case need to be strong and your claims provable, and an experienced investment fraud attorney can help to recoup your losses.

Photo credit: iStock/MicroStockHub

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