Quick loans for bad credit can look mighty attractive. However, products like payday loans and auto title loans can have major drawbacks, including short repayment periods and sky-high interest rates.
In fact, short-term loans can be so expensive that borrowers often end up paying exponentially more than they would if they’d financed the purchase some other way. And many loan holders end up re-borrowing, starting a vicious cycle that can quickly spin out of control.
So when you need money now, what should you watch out for — and what are some savvier alternatives to predatory loans? In this article, we’ll lay it all out.
What Are No Credit Check Loans?
No credit check loans, as their name implies, are loans that offer quick cash to borrowers without requiring a credit check. This means the lender doesn’t review your credit history or credit score when deciding whether to give you a loan. However, not requiring a credit check makes these loans risky for the lender, which is part of how they can justify high interest rates and fee schedules.
And when we say high, we mean high. It’s not hard to find payday loans with effective interest rates of about 400%, and sometimes they go much higher.
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No Credit Check Loans: Borrower Beware
Rather than a set interest rate, payday loans will often charge $10 to $30 for every $100 borrowed. If a payday lender charges $15 for a $100 two-week loan, that’s the equivalent of a 391% APR.
Here’s how those numbers can work out when it comes to real money. If a payday lender charges $10 for every $100 borrowed, you would owe $50 in interest for a $500 loan, and the $550 would be due on your next payday. If you are unable to repay the loan in full when it’s due, you will typically get hit with a fee, and then the cycle repeats itself. After a few months of rollovers, you can end up owing more in interest than the actual loan amount.
Another word to the wise: The fine print on short-term predatory loans can include a variety of fees, including change fees, mandatory subscription charges, and early repayment fees. These fees can quickly add up. On average, borrowers end up paying $520 in fees on a two-week payday loan for $375.
It’s clear to see how these loans, though small in size, can lead to big financial problems. Even under the best of circumstances, it can be difficult to get ahead of short repayment terms and steep interest rates and fees.
Two of the most common types of these no-credit check loans are payday loans and auto title loans.
• Payday loans As you might have guessed, payday loans are designed to be repaid on the borrower’s next payday — generally within two to four weeks. Because payday loans do so often carry predatory interest rates and terms, some states have limited the size and interest rate of payday loans, but even small loans with lower interest rates can lead to financial trouble.
• Auto title loans Also referred to as “title loans,” these are another common type of short-term personal loan that doesn’t require a credit check. In the case of a title loan, the borrower gives the lender the title of their car as collateral for a cash loan of up to about 50% of the value of the car. The borrower is still allowed to drive the car, but the loan principal plus interest is generally due within 30 days — again at astronomical rates. If the borrower is unable to pay the loan, they risk having their car repossessed.
Other lenders offer similar types of short-term, high-interest rate personal loans, sometimes advertising online loans with “no credit check required” or “guaranteed loan approval.”
Even if they aren’t called payday loans or title loans, borrowers would be wise to pay attention to the loan’s terms and conditions, particularly interest rates, fees, and expected repayment schedules.
Generally speaking, too-good-to-be-true financial products are often just that. Staying informed about the full implication of the loan’s terms and doing the math to work out how much you will end up paying over time can help borrowers avoid a potentially disastrous financial situation.
As financially harmful as no check credit loans can be, there still might be instances in which borrowers need quick access to money. Fortunately, there are some alternatives worth consideration.
For starters, borrowers might turn their attention to why they need the money in the first place. Short-term loans are often taken out to repay existing debt, an approach that might result in the borrower going even further into debt to try to scramble out of the hole.
In this scenario, attempting to negotiate the existing debt with current lenders might be a better tactic. Sometimes, credit card issuers and other lenders might offer repayment options to ease the immediate financial burden. It’s a tactic that’s worth asking a creditor about.
Another option: borrowing from friends and family. While this can come with its own set of pitfalls, family loans are unlikely to create the same kind of debt spiral short-term cash loans might.
In order to keep things friendly, you’ll want to set out a formalized loan agreement with interest rates and terms, similar to what you’d expect to sign for a traditional loan from a financial institution. This avoids any confusion and helps keep the transaction as objective as possible.
Credit unions are another source of small-dollar, payday loan alternatives — and importantly, credit unions are subject to a federal interest rate cap and other limits that keep these loans from becoming exorbitantly expensive.
And although they’re generally not an ideal solution, credit cards may carry lower interest rates than short-term cash loans. Some borrowers might also be able to utilize a promotional 0% interest rate period in order to aggressively pay off debt during the promotional period without paying interest.
Another alternative is a traditional personal loan from an online lender. While these loans usually do require a credit check and specific approval requirements, some online lenders will extend loans to applicants with imperfect credit histories. Rates are typically higher. However, they likely won’t be nearly as high as payday loans. You may be able to get a better rate by applying for a secured personal loan (which requires using an asset as collateral) or including a co-applicant on the loan agreement.
The Takeaway
While no credit check loans can certainly be attractive, their high interest rates and associated fees can make them costly over time. Borrowers may not be able to repay the loans plus interest in the short repayment term required, which could lead to a debt treadmill scenario and, possibly, negative credit history consequences.
If you’re interested in exploring other personal loan options, SoFi could help. SoFi’s unsecured personal loans come with competitive, fixed interest rates and there are no fees required. Checking your rate will not affect your credit score.
See if a personal loan from SoFi is right for you.
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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.
You may have heard that you should spend three months’ salary on an engagement ring. But that rule of thumb (formulated and advertised by the diamond industry) is now considered pretty outdated.
Instead, it can be a good idea to consider not only your income, but also your savings, current debt, living expenses, partner’s preferences, other costs involved in planning the wedding, and (bottom line) what you feel comfortable spending.
How you plan to pay for the ring can also impact how much you can afford to pay for it. Options include saving up and paying cash, using a credit card, financing the ring through the jeweler, or using a personal loan. And, each payment avenue has its pros and cons.
What follows are some guidelines that can help you figure out how much you should spend on an engagement ring, along with options for covering the cost.
The Average Cost of an Engagement Ring
According to The Knot’s 2022 Jewelry and Engagement Study, the average cost of an engagement ring is around $6,000.
While that number may represent the average, the amount couples actually spend on a ring varies widely. In The Knot’s study, roughly one-third of respondents spent between $1,000 to $4,000 on their engagement ring, and 8% shelled out less than $1,000.
Why do rings vary so much in price? The cost of an engagement ring depends on a number of factors, including the size and quality of the stone, where the gem was sourced, how the gem is set, and the type of metal chosen (such as yellow gold, white gold, or platinum). There may also be markups that come along with a popular brand name.
Diamond engagement rings, sourced from a mine, tend to be the most expensive choice. But there are many other, less costly options, such as lab-grown diamonds, moissanite (a lab-grown gem that looks like a diamond), and semi-precious gemstones (such as tourmaline, morganite, and aquamarine).
Whether you’re in the market for a large, eye-catching dazzler or a more dainty design, the good news is that these days there are ways to accomplish almost any look for a range of price points.
While paying in cash can be the simplest (and often the cheapest) option, it may not be feasible for all couples. Below are some other payment options that you may want to consider, along with their pros, cons, and potential costs.
Financing an Engagement Ring Through Your Jeweler
Many jewelers offer financing options, but just because you’re buying from a jeweler does not mean you have to use the financing they offer. It can be a good idea to take note of the following:
• Promotional offers Some jewelers offer a 0% introductory interest rate during a set period of time. But after that period of time, interest rates may be very high.
• Down payment requirements Some jewelers may require a certain percentage down payment prior to financing.
Financing through a jeweler directly may make sense if you’re confident you can pay back the loan prior to the end of the promotional period. As with any loan, it’s likely that there will be a credit check prior to being approved for financing.
Buying an Engagement Ring With a Credit Card
Putting a large purchase like an engagement ring on your credit card can be a simple solution at the moment, but may become a financial headache in the future. Here are some things you may want to consider before getting out the plastic.
• Interest rate If you put the engagement ring on a card with a relatively high interest rate and don’t pay it off right away, the ring will end up becoming significantly more expensive over time. Also, keep in mind that many credit cards have a variable interest rate, which means the interest rate at the time of purchase could go up.
• Credit-utilization ratio A large purchase like an engagement ring can mean using a significant percentage of credit available on your card. Having a high credit-utilization ratio may negatively affect your credit score.
• Rewards and protections Some buyers like putting large purchases on credit cards because of the consumer protections offered by the card. They also may want to take advantage of the rewards offered by the credit card company. Those rewards, however, may only be worth it if you can pay the amount back in full at the end of the billing cycle or during a 0% interest promo rate.
Using a Personal Loan to Finance an Engagement Ring
A personal loan is another avenue for engagement ring funding. A personal loan from a bank, credit union, or online lender may have a lower interest rate than a jeweler financing program. Personal loans also typically have significantly lower interest rates than credit cards.
A personal loan also works differently than jeweler financing and credit cards. With a personal loan, you’ll get the money in your bank account and can then pay the jeweler as though you were paying in cash. You then pay back the loan (plus interest) in monthly amounts set out in the loan agreement.
Here are some things you may want to consider before using a personal loan to pay for an engagement ring.
• Interest rate In many cases, a personal loan interest rate is fixed, meaning it doesn’t change after the agreement has been signed. This means that you know exactly how much you will need to pay back for the length of the loan.
• Loan terms You may have an option to pick the length of the loan. Shorter loans may mean you’re paying less interest over time but have larger monthly payments.
• Loan costs There may be fees associated with the loan, including an origination fee when the loan begins and a prepayment penalty if you pay off the loan before the end of the agreed-upon term.
• “What if” scenarios Some lenders provide temporary deferment for people facing financial hardship, such as a job loss.
Spending three months’ salary for an engagement ring is a long-standing tradition, but these days there is no one-size-fits-all formula for how much you should spend on an engagement ring. Ultimately, it’s a personal decision and will depend on your current and predicted income, current debt, expenses, savings, and preference.
If paying for an engagement ring upfront in cash isn’t feasible, you may want to look into different financing options and compare their pros, cons, and costs.
Your jeweler may offer financing, for example. Or, you may be able to take advantage of a credit card that has a 0% or low introductory interest rate and pay the balance off before the rate goes up.
Another option is to take out a personal loan. You may be able to find one that offers a more competitive interest rate than other ring financing options. You might also be able to fold in other upcoming costs as part of a wedding loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
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Your borrowing power refers to how much credit you can get based on your financial history, including your credit history and score. Having strong borrowing power is essential if you ever want to get a mortgage, car loan, personal loan, or any other type of financing. It can also help you qualify for loans and credit cards with more favorable rates and terms. What follows are 10 effective strategies to boost your borrowing power and increase your financial opportunities.
How to Boost Your Borrowing Power
Whether you’re interested in borrowing money to make a major purchase or using a personal loan to consolidate high interest debt, here are some simple ways to increase your borrowing capacity.
1. Check Your Credit Reports
Lenders determine how much they will lend you (and if they will lend to you at all) primarily based on your credit score and history. So a great first step is to get copies of your three credit reports, and read each one over carefully. This allows you to see where you stand, as well as check for any mistakes or inaccuracies (like payments marked late when you paid on time or someone else’s credit activity mixed with yours).
You can request free copies of your credit reports from three major credit bureaus — Equifax, Experian, and TransUnion — through AnnualCreditReport.com . If you find any errors, you’ll want to file a dispute with the appropriate credit agency.
2. Be a Responsible Borrower
To show creditors that you are a safe bet, you’ll want to make sure you pay all of your bills on time. Also try to keep your credit card balances low — this impacts your credit utilization ratio (the percent of available credit you are actually using), which has a significant impact on your credit score. To calculate your credit utilization, add up all of your revolving credit balances and credit limits, divide your total balance from your total limit, and multiply that number by 100 (to get a percentage). Ideally, you want to keep credit utilization below 30%.
3. Show Financial Stability
Stability and consistency in your financial and employment history can bolster your borrowing power. Lenders generally prefer borrowers who maintain a consistent residence and have a steady job and a reliable income source. This showcases your reliability as a borrower and boosts your chances of getting approved for loans with favorable terms.
4. Consider a Co-Borrower
If your individual borrowing power is limited, using a co-borrower (such as a spouse or a family member) can significantly enhance your chances of loan approval. A co-borrower is a joint applicant who shares ownership of the loan and responsibility for payments. (This is in contrast to a cosigner, who is only liable for the loan if the primary borrower fails to make payments.) Depending on the co-borrower’s income, they may be able to help you qualify for a higher loan amount, as well as better rates and terms.
5. Shop Around
Lenders vary in terms of how much they loan out, and to whom, so it’s a good idea to explore multiple lenders, including traditional banks, online lenders, and credit unions, and compare loan options before making a decision. Some lenders will allow you to “prequalify” for a loan, which can give you a good idea of how much of a loan they will offer you and at what rate. This only requires a soft credit check and won’t impact your credit score.
6. Pay Down Existing Debt
Reducing your existing debts can have a positive impact on your credit score. Not only that, it enhances your debt-to-income (DTI) ratio, a key factor considered by lenders. Your DTI ratio measures how much of your monthly gross income goes toward debt payments. This gives lenders insight into your ability to make another monthly payment and how large a payment you could handle.
To calculate your DTI, add together your fixed monthly payments (like mortgage/rent, auto loans, credit cards, and other personal loans), then divide that number by your gross monthly income (the amount you earn before taxes and other deductions). As a rule of thumb, lenders prefer a DTI ratio of 36% and under to approve you for a loan.
7. Increase Your Income
Another way to improve your DTI is to increase your income. Even if you have a large amount of debt, a high enough income can often offset it. As long as you have enough money coming in to handle your current debt and take on a new loan, a lender may not cap how much you are able to borrow.
If you have some time before you need to apply for a loan, you might look into ways to bump up your income, such as taking on a side hustle, asking for a raise, or looking for a new job that pays a higher salary. This could help you qualify for a larger loan amount.
8. Don’t Leave Any Income Out
As mentioned above, your income plays a key role in how much you can borrow. So you want to be sure to include all sources of income, including:
• Monthly salary
• Alimony
• Child support
• Side-gig income
• Rental income
• Investment property income
Including all of your income can lower your DTI ratio, increasing your borrowing power.
9. Consider a Longer Loan Term
Generally, the longer your loan term, the lower your monthly payment. A longer loan term — and lower monthly payment — may allow you to borrow more money with less impact on your DTI ratio, giving you eligibility for a larger loan. However, you’ll want to keep in mind that extending the term of a loan typically means paying more in interest over the life of the loan, increasing your total borrowing cost.
10. Consider Offering Collateral
You may be able to borrow more with a secured vs. an unsecured loan. With a secured loan, you put up something valuable (such as property, a vehicle, or a savings account) as collateral. The lender can take possession of this collateral if you fail to pay back loan funds as agreed. This lowers risk for the lender and, as a result, they may be willing to offer you a larger loan and/or a lower rate. If you’re already offering collateral, offering something of more value might boost the amount you’re approved for.
The Takeaway
If you’re thinking about applying for a loan for a large purchase, to consolidate other debts, start a business, or for any other purpose, it’s a good idea to look into ways to improve your borrowing power. You can start doing this right away by reviewing your credit reports, staying on top of your bills, paying down debt, using only a portion of your credit card limits and, if possible, boosting your income.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
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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.
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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Whether you’re borrowing money from a lender or depositing money in a savings account, interest rates will play into your financial picture. And understanding exactly how they work is crucial to making the best possible decisions for your money.
Here’s the scoop.
Interest Rate Definition
Interest rate is the cost of borrowing or the payoff of saving. Specifically, it refers to the percentage of interest a lender charges for a loan as well as the percentage of interest earned on an interest-bearing account or security.
Interest rates change frequently, but the average personal loan interest rate is dependent on several factors, including the amount borrowed, credit history, and income, among others. A borrower with an excellent credit score and a dependable income, for instance, will likely be considered low risk and may be offered a lower interest rate. On the flip side, some vehicles like payday loans are considered riskier for lenders and tend to have higher interest rates.
Whether you’re borrowing or saving money, the interest rate is applied to the balance during set periods of time called compounding periods.
For borrowers, this extra charge can add to outstanding debt. For savers, savings interest can be one way to earn money without much effort.
Let’s look at some specific examples.
You might take out a personal loan with an APR of 5.99%. That means you’ll pay an additional 5.99% of the loan balance each year in addition to the principal payments, which is paid to the lender for servicing the loan.
Or, if you hold a high-yield savings account that offers a 1% APY return, you can expect that account to grow by 1% of its balance each year.
Of course, the interest you might earn in a savings account is usually substantially lower than what you might earn on higher-risk investments.
And when it comes to any of the multiple uses of a personal loan, paying interest means you’re paying substantially more than you would if you were able to cover the expense out of pocket.
Fixed vs Variable Interest Rates
Lenders charge fixed or variable interest rates. What’s the difference between the two? Let’s take a look.
As the name suggests, fixed interest rates remain the same throughout a set period of time or the entire term of the loan. Fixed rates can be higher than variable rates. Borrowers who prefer more predictable payments — or are borrowing when interest rates are low — may decide to go with a fixed-rate loan.
Pros of Fixed Interest Rates
Cons of Fixed Interest Rates
Rates won’t increase
Fixed rates can be higher than variable rates
Predictable monthly payments
Borrowers would need to refinance to get a lower rate, which may involve paying more in fees
Consistent payment schedule can make budgeting easier
Borrowers won’t benefit if interest rates decrease
Variable interest rates change periodically, depending on changes in the market. This means the amount of your payments will vary. Generally speaking, variable-rate loans can be riskier for consumers, so they tend to have lower initial rates than fixed-rate loans. However, it’s important to note that when interest rates rise, so can the cost of borrowing. When borrowers decide to renegotiate from a variable-rate to a fixed-rate loan, they may face additional fees and a new loan length.
A variable-rate loan may be a good move for borrowers who plan to pay off the loan quickly or can take on the risk.
Pros of Variable Interest Rates
Cons of Variable Interest Rates
Monthly payments may go down when interest rates decrease
Interest rates fluctuate depending on changes in the market
Rates can be lower (at first) than fixed-rate loans
Repayment amounts can vary, which can make budgeting difficult
Borrowers may receive better introductory rates when taking out a loan
May face extra fees and extended payoff time if you renegotiate to a fixed-rate loan
Types of Interest
While all interest does one of two things — accrue as a result of saving money or in payment to the bank for a loan — it can be calculated and assessed in different ways. Here are a few common types of interest rates explained.
Simple Interest
Simple interest is interest that is calculated, simply, based on the balance of your account or loan. This is unlike compound interest, which is based on the principal balance (the original money you borrowed) as well as interest accrued over time.
Most mortgages and auto loans are calculated using simple interest. That means you won’t pay additional interest on any interest charged on the loan.
For example, let’s say a driver takes out a simple interest loan to pay for a new car. The loan amount is $31,500, and the annual interest rate on the loan is 4%. The term of the loan is five years. The driver will pay $580.12 per month. After five years, when the loan is satisfied, they will have paid a total of $34,807.23.
Compound Interest
Compound interest, on the other hand, means that interest is charged on not only the principal but also whatever interest accrues over the lifetime of that loan.
Say you take out an unsecured personal loan in the amount of $20,000 to pay for home remodeling. The loan is offered to you at an interest rate of 6.99% compounded monthly, and you must also pay an upfront fee of $500 for the loan. You’ll pay it back over the course of five years.
Over the course of those 60 payments, you’ll pay $3,755.78 in interest, not including the $500 extra you paid in fees. Each month, you’ll pay back some of the principal as well as the interest charged to you.
By the time you’re done with your home remodel, you’ll have paid $24,255.78 altogether, and that’s on a personal loan with a fairly low rate. In other words, you’ll have paid 20% more for the project than you would have if you’d funded it out of pocket.
Amortizing loans are common in personal finance. If you have a home loan, auto loan, personal loan, or student loan, you likely have an amortizing loan.
Amortization is when a borrower makes monthly (usually equal) payments toward the loan principal and interest. Early payments largely go toward the calculated interest, while payments closer to the end of the loan term go more toward the principal.
The interest on an amortized loan is calculated based on the balance of the loan every time a payment is made. As you make more payments, the amount of interest you owe will decrease.
To see how payments are spread out over the life of the loan, borrowers can consult an amortization schedule. A mortgage calculator also shows amortization over time for a loan.
But here’s a look at a sample calculation:
Let’s say you take out a $200,000 mortgage over 10 years at a 5% fixed interest rate. Your monthly payments will be $2,121.31. Next, divide the interest rate by 12 equal monthly payments. That equals 0.4166% of interest per month. This means that in the first month of your loan, you’ll pay $833.33 toward interest and the remaining $1,287.98 toward your principal.
Now, how about the second month? To calculate what you’ll owe, deduct your monthly payment from the starting balance. (This will give you the “balance after payment” for the chart.) Be sure to add to the chart the $833.33 you paid in interest and the $1,287.98 you paid toward the principal. Repeat the calculation of monthly interest and principal breakdown for the rest of the chart, which includes 12 months of payments.
Date
Starting Balance
Interest
Principal
Balance after payment
July 2023
$200,000
$833.33
$1,287.98
$198,712.02
August 2023
$198,712.02
$827.97
$1,293.34
$197,418.68
September 2023
$197,418.68
$822.58
$1,298.73
$196,119.95
October 2023
$196,119.95
$817.17
$1,304.14
$194,815.80
November 2023
$194,815.80
$811.73
$1,309.58
$193,506.23
December 2023
$193,506.23
$806.28
$1,315.03
$192,191.19
January 2024
$192,191.19
$800.80
$1,320.51
$190,870.68
February 2024
$190,870.68
$795.29
$1,326.02
$189,544.66
March 2024
$189,544.66
$789.77
$1,331.54
$188,213.12
April 2024
$188,213.12
$784.22
$1,337.09
$186,876.03
May 2024
$186,876.03
$778.65
$1,342.66
$185,533.37
June 2024
$185,533.37
$773.06
$1,348.25
$184,185.12
Precomputed Interest
Loans that calculate interest on a pre-computed basis are less common than loans with either simple or compound interest. They’re also controversial and have been banned in some states. Precomputed interest has been banned nationally since 1992 for loans with terms longer than 61 months.
This method of computing interest is also known as the Rule of 78 and was originally based on a 12-month loan. The name is taken from adding up the numbers of the months in a year (or a 12-month loan), the sum of which is 78.
Interest is calculated ahead — precomputed — for each month and added to each month’s payment, giving more weight to interest in the beginning of the loan and tapering off until the end of the loan term. In the case of a 12-month loan, the first month’s interest would be 12/78 of the total interest, the second month’s interest would be 11/78 of the total interest, and so on.
Here’s an example: Let’s say a borrower takes out a personal loan with a 12-month term that will accrue $5,000 in interest charges. According to the Rule of 78, here’s what the borrower would pay in interest each month:
Month
Fraction of total interest charged
Monthly interest charge
1
12/78
$769
2
11/78
$705
3
10/78
$641
4
9/78
$577
5
8/78
$513
6
7/78
$449
7
6/78
$385
8
5/78
$321
9
4/78
$256
10
3/78
$192
11
2/78
$128
12
1/78
$64
A loan with precomputed interest has a greater effect on someone who plans to pay off their loan early than one who plans to make regular payments over the entire life of the loan.
APR vs APY
Whether compound or simple, interest rates are generally expressed as APR (Annual Percentage Rate) or APY (Annual Percentage Yield). These figures make it easier for borrowers to see what they can expect to pay or earn in interest over the course of an entire year of the loan or interest-bearing account’s lifetime.
However, APY takes compound interest into account, whereas usually APR does not — but on the other hand, APR takes into account various loan fees and other costs, which APY might skip.
APR (Annual Percentage Rate)
APY (Annual Percentage Yield)
Expresses what you pay when you borrow money
Expresses what you earn on an interest-bearing account
Factors in base interest rate over the course of one year
Factors in base interest rate over the course of one year
Lenders use several factors to determine the interest rate on a personal loan, including details about your financial background and about the loan itself. What kind of financial questions can you expect?
When lenders talk about a borrower’s creditworthiness, they’re usually referring to elements of your financial background. This may include:
• Your credit history
• Your income and employment
• How much debt you already have
• Whether you have a cosigner
The loan terms can also affect the rate. For example, personal loan rates can be affected by:
• The size of the loan
• The duration of the loan
Loan term is something borrowers should be thinking about as well. A longer loan term might sound appealing because it makes each monthly payment lower. But it’s important to understand that a longer-term loan may cost you significantly more over time due to interest charges.
💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.
Interest Rates and Discrimination
Generally speaking, the higher your credit score and income level, the easier it is to qualify for loans with better terms and lower interest rates — which, of course, can make it more difficult for people in lower socioeconomic positions to climb their way out.
Discriminatory lending has had a long history in the U.S. Before federal laws protecting against discrimination in lending practice, lenders would regularly base credit decisions on factors such as applicant’s race, color, religion, sex, and other group identifiers rather than their creditworthiness.
The practice of “redlining” was begun in the 1930s as a way to restrict federal funding for neighborhoods deemed risky by federal mortgage lenders. It persisted for decades, and the detrimental effects can still be felt today by residents of minority neighborhoods.
Since residents of redlined neighborhoods were excluded from approval for regular mortgage loans, they were forced to look for other financing options, which were often exploitive. If they could not find any lender willing to loan to them, they continued renting, unable to gain equity in homeownership.
The Takeaway
The interest rate is the cost of borrowing money — it’s a percentage of the total amount of the loan. It can also refer to the rate at which interest is earned on money in a savings account, certificate of deposit, or certain investments. The amount of interest you’ll pay is usually expressed using percentages, which will be listed as either APR (Annual Percentage Rate) or APY (Annual Percentage Yield), depending on which kind of financial product you’re talking about.
Lenders charge fixed or variable interest rates. Fixed interest rates remain unchanged for a set period of time or for the life of the loan, and may be a smart choice for borrowers who want a predictable payment schedule or are taking out a loan when interest rates are low. Variable interest rates can change depending on the market, which means the payment amount will vary. Though potentially riskier, these loans may offer lower initial rates. However, when interest rates rise, so can the cost of borrowing.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
What is the definition of interest rate?
An interest rate is expressed as a percentage and is used to calculate how much interest you would pay on a loan in one year (APR), or how much you would earn on an interest-bearing account in one year (APY).
What is an example of an interest rate?
Simple, compound, or precomputed interest rates are types of interest rates commonly used.
What is the difference between interest and interest rate?
Interest is the money you’re charged when you take out a loan — or earn for leaving your money in a deposit account to grow. Interest rate is the percentage you’re being charged or are earning.
What happens when interest rates are high?
Interest rate increases tend to lead to higher interest rates on personal loans, mortgages, and credit cards. It can also mean costlier financing for borrowers.
Can you adjust the interest rate on a personal loan?
Possibly. One way to lower the interest rate on a personal loan is to refinance it with another lender.
Photo credit: iStock/Remitski
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.
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.
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.
Unlike student loans or mortgages, personal loans have a relatively short repayment timeline — typically around two to five years. Still, there may be situations when you want to pay off the remaining balance on a personal loan even faster. Is that possible? The short answer is “yes” and, in many cases, it can be a wise decision.
But if there’s a prepayment penalty, then this loan payoff may be more costly than you’d expect. Learning how a prepayment penalty might affect your payoff amount can be helpful in making the decision whether or not to pay off a personal loan early. And if you’re gathering information about a personal loan early payoff without incurring a prepayment penalty, you do have some options.
How to Manage Your Personal Loans
Securing a personal loan may be top of mind for borrowers, but just as important is figuring out how to repay the debt. Having some basic info on hand — such as your monthly take-home pay, the cost of your essentials and non-essentials, and short- and long-term savings goals — will help.
While there’s no one-size-fits-all strategy to budgeting, here are two popular budgeting methods to consider:
• 50/30/20 budget. With the 50/30/20 budget strategy, your take-home pay falls into three main buckets, according to percentages: 50% to “needs” (housing, utilities, groceries, etc.), 30% to “wants” (take-out meals, entertainment, travel costs, etc.), and 20% to savings (emergency fund; IRA or other retirement contributions; debt repayment and extra loan payments, etc.)
• Zero-Sum Budget. This type of budget calls for earmarking every dollar you earn for either savings or discretionary spending. First, you assign monthly after-tax income dollars to non-negotiable bills, such as rent and groceries. Then you assign leftover funds to discretionary spending and saving, which could include making extra payments on a personal loan.
Tips to Pay Down Your Personal Loan
Creating a budget is one tool to consider, but here are other loan repayment strategies you may want to explore if you want to pay off the debt faster.
• Switch to biweekly payments. Ramping up payments from once a month to twice a month could help you reduce the principal amount of a loan — and potentially pay off the debt — faster. It may even decrease how much interest you end up paying over the life of the loan.
• Make extra payments when possible. Exceeding your minimum loan payments
may help accelerate your loan repayment and potentially minimize the cost of high interest rates.
• Tap a second source of income. Starting a side hustle is one way to boost your income, and you can put the extra cash toward your debt. You can also use tax returns, work bonuses, even birthday gifts to pay down a personal loan faster.
• Refinance your loan. When you refinance a loan, you’re essentially replacing your old loan with a new loan that has a different rate and/or repayment term. Depending on the new rate and term, you may be able to save money on interest and/or lower your monthly payments.
• Round up monthly payments. Over time, rounding up payments to the nearest $50 or $100 could slightly accelerate your payment schedule.
It’s important to note that many personal loans come with early payment fees, which could undo whatever money you would have saved on interest. More on that below.
💡 Quick Tip: Fixed-interest-rate personal loans from SoFi make payments easy to track and give you a target payoff date to work toward.
Can You Pay Off a Personal Loan Early?
It’s unlikely that a lender would refuse an early loan payoff, so yes, you can pay off a personal loan early. What you have to calculate, though, is whether it’s financially advantageous to do so. If a personal loan early payoff triggers a prepayment penalty, it might not make financial sense to do so.
Understand Prepayment Penalties
If and how a prepayment penalty is charged on a personal loan will be stipulated in the loan agreement. Reviewing this document carefully is a good way to find out if the penalty could be charged and how your lender would calculate it.
If you can’t find the information in the loan agreement, ask your lender for the specifics of a prepayment penalty and for them to point out where it is in the loan agreement.
There are a few different ways a lender might calculate a prepayment penalty fee:
• Interest costs. In this case, the lender would base the fee on the interest you would have paid if you had made regular payments over the total term. So, if you paid your loan off one year early, the penalty might be 12 months’ worth of interest.
• Percentage of your remaining balance. This is a common way for prepayment penalties to work on mortgages, for example, and you’d be charged a percentage of what you still owe on your loan.
• Flat fee. Under this scenario, you’d have to pay a predetermined flat fee for your penalty. So, whether you still owed $9,000 on your personal loan or $900, you’d have to pay the same penalty.
It may sound strange that a lender would include this kind of penalty in a loan agreement in the first place. Some lenders may, though, to ensure you’ll pay a certain amount of interest before the loan is paid off. It is an extra fee that, when charged, helps lenders recoup more money from borrowers.
Avoiding Prepayment Penalties
If your loan has a prepayment penalty, it could be in effect for the entire loan term or for a portion of it, depending upon how it’s defined in the loan agreement. However, you have some options.
For starters, you could simply decide not to pay the loan off early. This means you’ll need to continue to make regular payments rather than paying off the personal loan balance sooner. But this will allow you to avoid the prepayment penalty fee.
Or, you could talk to the lender and ask if the prepayment penalty could be waived.
If your prepayment penalty is not applicable throughout the entire term of the loan, you could wait until it expires before paying off your remaining balance.
Another strategy is to calculate the amount of remaining interest owed on your personal loan and compare that to the prepayment penalty. You may find that paying the loan off early, even if you do have to pay the prepayment penalty, would save money over continuing to make regular payments.
Does Paying Off a Personal Loan Early Affect Your Credit Score?
Personal loans are a type of installment debt. In the calculation of your credit score, your payment history on installment debt is taken into account. If you’ve made regular, on-time payments, your credit score will likely be positively affected while you’re making payments during the loan’s term.
However, once an installment loan is paid off, it’s marked as closed on your credit report — “in good standing” if you made the payments on time — and will eventually be removed from your credit report after about 10 years.
So does paying off a loan early hurt your credit? Short answer, yes. Paying off the personal loan early might cause it to drop off of your credit report earlier than it would have, and it may no longer help your credit score.
If You Pay Off a Personal Loan Early, Do You Pay Less Interest?
Since a personal loan is an installment loan with a fixed end date, if you pay off a personal loan early, you won’t pay less interest. You won’t owe any interest anymore because the loan will be paid in full.
Advantages and Disadvantages of Paying Off a Personal Loan Early
There are definitely some advantages to personal loan early payoff. One obvious benefit is that you could save on interest over the life of the loan.
For example, a $10,000 loan at 8% for 5 years (60 monthly payments) would accrue $2,166.50 in total interest. If you could pay an extra $50 each month, you could pay the loan off 14 months early and save $518.42 in interest.
Not owing that debt anymore can be a psychological comfort, potentially lowering bill-paying stress. If you’re able to make that money available for something else each month — maybe creating an emergency fund or adding to your retirement account — it might even turn into a financial gain.
If you no longer owe the personal loan debt, you’ll essentially be lowering your debt-to-income ratio, which could positively affect your credit score.
That said, if your personal loan agreement includes a prepayment penalty, paying off your personal loan early might not be financially advantageous. Some prepayment penalty clauses are for specific time frames in the loan’s term, e.g., during the first year.
If you pay off the loan during the penalty time frame, it could cost you just as much money as it might if you had just paid regular principal and interest payments over the life of the loan.
You might be thinking of a personal loan early payoff so you can put your money to work somewhere else. But if the interest rate on the personal loan is relatively low, it might make financial sense to put your extra money toward higher-interest debt, or to contribute enough to an employer-sponsored retirement plan so you can get the employer match, if one is offered.
Another thing to consider is whether paying off your personal loan early will hurt your credit. As mentioned above, making regular, on-time payments to an installment loan like a personal loan can have a positive effect on your credit score. But when the loan is paid off, and marked as such on your credit report, it’s not as much help.
Advantages of early personal loan payoff
Disadvantages of early personal loan payoff
Interest savings over the life of the loan
Possible prepayment penalty
Could alleviate debt-related stress
Extra money could be better used in another financial tool
Lowering your debt-to-income ratio
Removing a positive payment history on the loan early could negatively affect your credit
More cushion in your monthly budget
Taking money from another budget category might leave an unintentional financial gap
What Happens If You Don’t Pay Back a Personal Loan?
Let’s say your personal loan payment is due by the 1st of every month. One month, the 10th arrives and you realize you haven’t paid what you owe. You’ll likely be considered delinquent on the loan. You may also be hit with a late fee, and your credit score could be impacted.
When Is a Loan Considered to Be in Default?
What happens if you stop making payments on a loan altogether? Then you’ll likely be considered in default on the loan. Note that there’s no set amount of time when a loan is considered in default — a borrower may be one payment behind or they may have missed 10 in a row. It depends on the type of loan, the lender, and the loan agreement.
What Happens When You Default on a Personal Loan?
When you default on a personal loan, you’ll likely be charged late fees. But you may face other consequences, such as:
• Your credit may be damaged. Creditors may report payments that are more than 30 days late to the credit bureaus. The missing payments could end up on your credit reports and stay there for up to seven years. This could cause your credit scores to drop and may pose an issue the next time you apply for new credit.
• You may need to deal with debt collectors. If you fall far enough behind to be contacted by a debt collector, you may encounter aggressive behavior on the part of the collection agency. However, keep in mind that the Fair Debt Collection Practices Act limits just how far debt collectors can go in trying to recover a debt. If you feel a debt collector has gone too far, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).
• You could be sued. A lender or collection agency may file suit against you if they believe you aren’t going to repay the money you owe on a personal loan. If the judgment goes against you, your wages could be garnished, or the court could place a lien on your property.
• Your cosigner may be impacted. If you have a cosigner or co-applicant on your personal loan, and you default on that loan, they could be impacted. For example, a debt collector could contact you and your cosigner about making payments. And if your credit score drops because of a default, theirs may drop, too.
If you’re facing a loan default, there are some things you can do now to help yourself. A good first step is to contact the lender, preferably before your next payment is due. Explain your situation to them, and find out if they can offer you any relief measures — for example, temporarily deferring loan payments.
You may also want to reach out to a credit counselor. They can work with you to create a budget that covers the essentials and frees up funds so you can pay down what you owe.
Depending on your situation, it may also be a good move to contact a lawyer. Having legal assistance is especially crucial if you’ve been served with a lawsuit.
In general, there are two types of personal loans — secured and unsecured. Secured loans are backed by collateral, which is an asset of value owned by the loan applicant, such as a vehicle, real estate, or an investment account.
Unsecured personal loans are backed only by the borrower’s creditworthiness, with no asset attached to the loan. You might hear unsecured personal loans referred to as signature loans, good faith loans, or character loans. Typically, these are installment loans the borrower repays at a certain interest rate over a predetermined period of time.
Awarded Best Online Personal Loan by NerdWallet.
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Personal Loan Uses
Acceptable uses of personal loan funds cover a wide range, including, but not limited to:
While there are benefits to taking out a personal loan, it might not always be the right financial move for everyone. Personal loans offer a lot of flexibility, but they are still a form of debt, so it’s a good idea to weigh the pros and cons before signing a personal loan agreement.
💡 Quick Tip: With low interest rates compared to credit cards, a personal loan for credit card consolidation can substantially lower your payments.
The Takeaway
If you’re able to pay off your personal loan early, that’s terrific. Doing so could help you save on interest over the life of the loan, provide more of a cushion in your monthly budget, lower your debt-to-income ratio, and alleviate debt-related stress.
However, before you pay off the balance, it’s a smart idea to calculate whether it’s a good financial decision or not. If your personal loan agreement includes a prepayment penalty that could take a bite out of any savings you might see on interest costs. Removing a history of regular payments on a loan too early can have a slight negative impact on your credit. Plus, the extra money might be put to better use in another financial tool.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Is it good to repay a personal loan early?
Paying off a personal loan early can be a good financial decision, as long as any prepayment penalty charge doesn’t cost more than you might pay in interest.
If I pay off a personal loan early, do I pay less interest?
Paying off a personal loan early doesn’t affect the interest rate you’ve been paying up until that point. It would mean, however, that the total amount of interest you’d pay over the life of the loan would be less than anticipated.
Does paying off a personal loan early hurt your credit?
Because making regular, on-time payments on an installment loan such as a personal loan is a positive record on your credit report, removing that history early can have a slight negative affect on your credit.
What is the smartest way to pay off a loan?
There are a number of ways you can go about paying down debt. Two popular methods include the avalanche method (which focuses on making extra payments toward highest-interest rate debt first) and the snowball method (which calls for paying off the smallest debt first, the moving on the next largest debt, and so on).
Do you save money if you pay off loans early?
Paying off loans early could save borrowers money in interest. However, they may be hit with a prepayment penalty, which could negate those savings.
Are shorter or longer loans better?
It depends on your financial needs and goals. Generally speaking, borrowers with longer-term loans tend to pay more interest. By comparison, borrowers with shorter-term loans typically have lower interest costs but higher monthly payments.
How long can you stretch out a personal loan?
Lenders offer a range of loan term lengths, though generally speaking, most are between two and seven years.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
