Woman smiling in front of car

Buying a Car With a Personal Loan

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

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

Can a Personal Loan be Used to Buy a Car?

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

•   Are you buying a new car or a used car?

•   Are you buying a car from a private individual or a dealership?

Are You Buying a New or a Used Car?

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

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

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

Is the Seller an Individual or a Car Dealer?

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

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

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

Differences Between Car Loans and Personal Loans

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

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

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

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

Determining the Value of a Car

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

•   Edmunds offers a True Market Value guide.

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

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

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

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

Negotiating the Car Purchase

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

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

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

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

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

What Are the Costs of Car Ownership?

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

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

•   10% in the first month.

•   20% in the first year.

•   40% after five years.

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

The Takeaway

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

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

Check your rate on a SoFi Personal Loan.


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

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

If you’re considering a personal loan, you might be wondering, “Does a personal loan hurt your credit?” The answer is, it depends. Personal loans can hurt your credit score, but they could potentially help it too.

We’ll talk you through how a personal loan can affect your credit score, as well as when you might consider a personal loan for your financial life.

How Is Your Credit Score Calculated?

In order to understand how taking out a personal loan can affect your credit, it can help to know the basics of how your credit score is calculated in the first place. According to FICO®, a company that generates credit score profiles, there are five principal components used to calculate your FICO Score and each are weighted by importance:

Payment History (35%): Your history of making on-time payments to lenders is a key factor in your credit score, accounting for 35% of your score.

Amounts Owed (30%): The amount of your total credit you are currently using is the second-most important factor in your credit score.

Length of Credit History (15%): The length of time you’ve had credit accounts open and in good standing is also a factor. Opening new lines of credit will bring down the average age of your credit history.

New Credit (10%): This factor takes into consideration the amount of new credit recently taken out.

Credit Mix (10%): This final factor takes into account the different types of credit you hold (credit cards, personal loans, mortgages, etc.).

Want to find out what your credit score is?
Check out SoFi’s credit score
monitoring tool in the SoFi app!


Do Personal Loans Hurt Your Credit?

Any debts you have can impact your credit, so taking out a personal loan might lead to a drop in your credit score over the short term. On the flip side, there could be ways for your personal loan to positively affect your credit score. Here’s how a personal loan could negatively — and positively — impact your credit score:

Pros and Cons of Personal Loans When It Comes to Credit

Pros Cons

•   Can add to your credit mix

•   Could improve your payment history if you pay on time

•   May help keep your credit utilization ratio in check

•   Requires a hard credit inquiry

•   May increase amounts owed

•   Could negatively impact your payment history if you miss payments

Con: Requires a hard credit inquiry

Taking out a loan often requires a hard credit inquiry, which can adversely impact your credit score. Hard inquiries remain on your credit report for two years, though they will only negatively affect your score for a year, and usually not severely.

Con: May increase amounts owed

The “amounts owed” on your credit score may increase, because you are taking on new debt. (However, if you’re consolidating credit card debt, you may reduce that debt by paying it down with a personal loan.)

Con: Could impact your payment history if you miss a payment

If you were to miss a payment on your personal loan, that could negatively impact the “payment history” component of your credit score, which specifically looks at whether you make your debt payments on time.

Pro: Can add to your credit mix

Having a new loan type (and paying it back on-time) can positively impact the “new credit” and “credit mix” components of your credit score.

Pro: Could improve your payment history if you pay on time

Making on-time payments and showing your responsible management of a personal loan is a nice checkmark for the “payment history” part of your credit score.

Pro: May help you keep your credit utilization ratio in check

If you’re using a personal loan to reduce credit card debt, it replaces a revolving debt (your credit card debt) with an installment loan (a personal loan). Revolving debt is a debt you can continue adding to even when paying it down, whereas an installment loan involves borrowing one specific amount and repaying it in — wait for it — installments. Because you won’t be able to add further debt to your installment loan, it may help you keep your credit utilization ratio under control, which could be a good thing for your credit score.

When to Consider Taking Out a Personal Loan

Given there’s not a clearcut answer to whether a personal loan can hurt your credit, you may still be wondering whether or not you should take one out. Here are some instances when it may be appropriate to consider taking out a personal loan:

•   You’re consolidating high-interest debt

•   You have an emergency expense you can’t otherwise afford

•   You’re doing a home improvement project that will add value to your home

•   It’s your least expensive borrowing option

•   You don’t have any collateral to offer

Before you take on any debt, it’s always important to consider whether it’s really necessary and whether there are any other ways to cover your costs. For instance, it’s often not recommended to take out a personal loan to pay for a vacation when you could scale back on your travel plans or simply wait until you’ve saved up enough money. It’s obviously a very different story if you have to cover the cost of a medical emergency.

You will also want to consider whether you can afford to make the payments on time and ensure you understand the total cost of the loan with interest and any fees added in. Also take into consideration whether your credit score is high enough to qualify for competitive rates and terms, as well as whether it can withstand any dips applying for a loan might cause.

The Takeaway

As long as you don’t borrow more than you can pay back and make all scheduled payments on time, a personal loan may have a positive impact on your credit score over the long term. But there’s no one-size-fits-all answer to how a personal loan will impact your credit — it really depends. What is certain is that having a stellar credit score can open doors for you, as you’re more likely to get better financing offers in the future.

If you think your credit score can weather taking out a personal loan, it’s important to shop around for the best offers. SoFi can give you a rate quote in minutes.

See what personal loan terms your credit score qualifies you for.


Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Using a Coborrower on Your Loan

Using a Coborrower on Your Loan

Qualifying for a loan is sometimes easier said than done. Just because you need a mortgage to buy your first home or a personal loan to consolidate and pay off credit card debt, doesn’t mean a lender is going to magically understand and give you the exact loan and interest rate you want.

Thankfully, if you’re struggling to qualify for a loan, you might be able to ask a friend or family member to step in to help. If they agree, essentially, you leverage their income, credit score, and financial history to help you get a loan that’s right for you.

The downside is that this type of borrowing (as in, borrowing money with another person) can get a little jargon-heavy. “Coborrower,” “co-applicant,” and “cosigner” are all terms that are going to come up. Let’s dive into the details.

What is a Coborrower?

A loan co-borrower basically takes on the loan with you. Their name will be on the loan with yours, making them equally responsible for paying back the loan. They will also have part-ownership of whatever this loan buys — for example, a co-borrower will own half of the home if you take out a mortgage together.

Spouses, for example, might coborrow when buying property, or if they are taking out a home improvement loan for a remodel. You and your co-borrower may qualify for a larger loan or better loan terms than if you were to take out a loan solo, and this way you both own the investment and are equally responsible for loan payments.

Another quick piece of jargon: A co-applicant is the person applying for the loan with you. Once the loan is approved, the co-applicant becomes the co-borrower.

Coborrower vs. Cosigner

A cosigner, on the other hand, plays a slightly different role than that of a co-borrower.

A cosigner’s financial history and credit score is factored into the loan decision, and their positive financial history can be a boon to the primary applicant’s loan application. But they do not have ownership of any property the loan might be used to purchase, they do not receive any loan proceeds, and would only help make your loan payments if you were unable to make them.

Cosigning helps to assure lenders that someone will be able to pay back the loan. Typically, a cosigner with a stronger financial history than you have, which can help you get a loan you might not qualify for on your own (or for better terms than you may qualify for on your own). Lenders might be more comfortable lending to you if your cosigner has a strong credit score and a dependable income, but loan underwriting criteria (that is, the personal financial factors used to determine who gets a loan at what rates and terms) differ from lender to lender.

For example, let’s go back to our hypothetical home-buying experience. A parent with a strong credit history might cosign their child’s mortgage, allowing the child to get a lower interest rate on their home loan than they would have on their own. The parent wouldn’t own the home, but they would have to make mortgage payments if their child couldn’t.

Benefits of a Coborrower

Having a co-borrower can help two people who both want to achieve a financial goal — like homeownership or buying a new car — put in a stronger application than they might have on their own. Because the lender will have double the financial history to consider (and two borrowers to rely on when it comes to repayment), the loan is a potentially less risky prospect for them, which could translate to more favorable terms.

Basically, having a co-borrower has the potential to improve the borrowing power for both partners involved — whereas having a cosigner is generally more beneficial to the primary applicant than it is for the cosigner.

When Does Having a Coborrower Make Sense?

Applying with a co-borrower makes the most sense when you’re working as a team toward some financial objective. Spouses buying a house together is a common example, but a joint personal loan with a partner might also be considered in order to fund home improvements or consolidate debt to get your finances in better shape before getting married. Business partners also sometimes coborrow loans to help get their ventures up and running.

Many companies, including SoFi, now allow qualified individuals to coborrow on personal loans. That means you and your coborrower (whether they’re your spouse, friend, or a member of your family) may be able to qualify for an even better interest rate and fund your financial goals that much more easily.

Awarded Best Personal Loan of 2021 by Forbes.
Low, fixed rates starting at 4.99% APR with Autopay.


The Takeaway

It’s a big decision to take out a loan, so it may be a good idea to make sure both coborrowers are 100% ready to take on this financial commitment. Both of you will be responsible for making monthly loan payments.

Thinking about coborrowing on a personal loan? Check out your rate on a SoFi Personal Loan in 1 minute.


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

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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What Happens if You Default on a Personal Loan?

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

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

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

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

What Does It Mean to Default on a Personal Loan?

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

How Does Loan Default Work?

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

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

What Are the Consequences of Defaulting on a Personal Loan?

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

Damage to Your Credit

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

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

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

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

Dealing with Debt Collectors

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

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

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

You Could Be Sued

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

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

A Cosigner Could Be Affected

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

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

Is There a Way to Avoid Defaulting on a Loan?

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

Reassessing Your Budget

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

Talking to Your Lender

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

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

Recommended: How Deferred Payments Impact Credit Scores

Getting a New Personal Loan

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

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

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

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

•   Can I borrow enough for what I need?

•   What is the best interest rate I can get?

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

•   Do you charge any loan fees or penalties?

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

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

Is There a Way Out of Personal Loan Default?

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

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

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

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

1. The Statute of Limitations

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

2. Your Credit Score

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

The Takeaway

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

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

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


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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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The Problems with Online Payday Loans and Fast Cash Lending

The Problems with Online Payday Loans and Fast Cash Lending

Life happens, which means sometimes you need cash fast, and you just don’t have it. Whether you need to pay for an emergency root canal or have unexpected home repairs, sometimes life just doesn’t wait for your next paycheck.

If you’ve spent some time researching how to access cash quickly, you might think that online payday loans are the answer. Lenders that offer payday loans typically promise you things like quick applications, no credit checks, and expedited approvals. They say you’ll get the cold hard cash you need the very next day. It’s an easy solution, and hey, what could possibly go wrong?

How Do Payday Loans Work?

Payday loans are so-called because they’re meant to be paid back the next time you get a paycheck. They’re generally for small amounts, and don’t require collateral — or even necessarily a credit check — to get them.

The catch? Payday loans come at a price—and a high one, at that. They can have interest rates of more than 600%, depending on the lender you choose and which state you’re in. (Some states have stronger protective laws, including rate caps than others.)

Such high-interest rates, not to mention other associated fees, can quickly lead to situations where you end up getting behind on the loan and have to borrow more and more in order to pay it back — especially since each loan might come due in only two weeks or a month. Soon you’re in a hole so deep you might not know how to get out. It can be costly, greatly damage your credit, or even lead to bankruptcy.

Recommended: Everything You Need to Know About No Credit Check Loans

How Much Does a Payday Loan Cost?

The short answer: a lot. But let’s look at an example.

Say you take out a $500 payday loan at an annual percentage rate (APR) of 300%. You would only pay that full 300% if you took a whole year to pay the loan off, because the APR is what you would be charged in interest over 12 months.

However, even if you only borrow money for one month, you’d have to pay 1/12 of 300%, which translates to 25%. Here’s where the math gets ugly: 25% of $500 is $125, which means that when your loan comes due at the end of its very short term, you’ll owe $625 — which might be pretty tough to meet, especially if you’re in a situation where you needed a payday loan in the first place.

What Is a Direct Payday Loan?

Payday loans are offered by a wide variety of vendors, but mainly, they all break down into two categories: direct payday loans and those offered through a broker.

Direct payday loans are those wherein the entire loan process, from application to funding to repayment, is all managed by the same company. Although these can be slightly better than indirect loans — which may involve multiple fees, longer funding wait times, and harder-to-pin-down communication — they’re still a bad idea in general.

Why Is it Best To Avoid Payday Lending?

Other than the possibility that you can get money quickly if you have bad credit, there aren’t many benefits associated with payday loans. You’ll end up paying a significant amount in interest, and you’re usually expected to pay the money back in a very short period of time — usually not more than 90 days, but two weeks on average.

The interest on your loan can also compound daily, weekly, or monthly. This means that interest charges will start accumulating on the interest you already owe, which will inflate your loan balance even more.

Depending on how much you borrowed and your financial situation, compounding interest can make it incredibly difficult for you to pay back the loan. Many times borrowers end up taking out additional loans to pay off the payday loan, which can lock them into a seemingly endless cycle of debt.

You’re also unlikely to be able to borrow a large amount of money because payday and fast cash loan lenders typically have low maximum borrowing amounts.

Just to twist the knife, you won’t even be building your credit if you do manage to pay the loan back on time, because most of these lenders don’t report your behavior back to credit bureaus. In contrast, above-board lenders will report back to credit bureaus when you’re paying your bills on time and in full, and that can boost your credit score.

What Are Some Alternatives to Payday Loans?

While in an ideal world, you’d avoid any kind of consumer debt, sometimes it’s simply unavoidable. Still, there are financially favorable alternatives to consider before you sign up for a dangerous payday loan.

Paycheck Advance

The best kind of money to borrow is money you’ve already earned. While not every employer offers it, a paycheck advance can be a relatively low-risk way to fund last-minute emergencies. An advance on your paycheck basically means getting paid earlier than you normally would, with the balance deducted from your future paycheck.

But tread carefully: many employers offer paycheck advances through apps and platforms that may assess a one-time fee or even charge interest. While the rates may not be as astronomical as payday loan rates, it’s still worth taking a second look at the paperwork to ensure you understand what you’re signing up for ahead of time.

Recommended: What to Know About Credit Card Cash Advances

Debt Settlement

Another option is debt settlement, which is where you offer a creditor a lump sum payment on a delinquent debt — a lump sum that often ends up being far less than the original amount you owed.

However, doing this does require some negotiating, and sometimes even some legal know-how, which is why many people seek the help of professional debt settlement companies. This, too, is tricky, because scams abound, and some debt settlement companies may try to charge exorbitant fees to “eliminate your debt,” all without actually doing any work on your behalf. The FTC has more information on debt settlement and how to look for a reliable firm if you choose to go this route.

Personal Loans

Many personal loans are unsecured loans — meaning no collateral is involved — that can be used to pay for just about anything. And although they tend to have higher interest rates than secured loans, like mortgages or auto loans, those rates are still much lower than payday loans.

With its lower interest rate and longer-term, a personal loan will likely cost you less money than a payday loan in the long run. And some online personal loan lenders can process your application quickly and even get you the money you need in a matter of days.

Unlike payday loans, you have to go through a credit check to qualify for a personal loan. However, if you have a steady income and meet the lender’s eligibility requirements, you’re likely to qualify for a lower interest rate than you would if you used an online payday loan.

Your repayment timeline may probably be much less stressful if you opt for a personal loan rather than a payday loan. Personal loans come with the option of longer terms — a few years instead of a few months.

And because you can pay your loan off over a longer-term, your monthly payments might be more manageable than a payday loan. There also tend to be fewer fees attached to personal loans, and you might be able to borrow more because personal loans have higher loan maximums.

Personal loans aren’t much more difficult to apply for than payday or fast cash loans. You can typically get pre-qualified online by answering a few questions about your income, financial history, and occupation.

Recommended: Personal Loan Calculator

The Takeaway

Of course, it’s always important to repay debts on time and in full to avoid late fees and exorbitant interest charges, but a personal loan is generally more manageable than a payday loan would be.

If you need cash fast, but you want to borrow money from a reputable lender without risking out-of-control interest payments, a SoFi personal loan might be right for you. Learn more today.


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

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