SoFi

Getting a personal loan is typically a simple process but many lenders require at least a good credit rating and a stable income for approval. Banks tend to have stricter qualification requirements than private lenders. The type of personal loan you get — secured or unsecured — can also have an impact on how hard the loan is to get.

Once approved, a personal loan offers a lot of flexibility — you can use the funds for a wide variety of expenses, from planned home repairs to unexpected medical bills. Unlike loans with a specified purpose, like an auto loan or mortgage, personal loan funds can be used for virtually any type of expenditure.

Here’s what you need to know about personal loans and how to increase the chances that you’ll qualify.

Types of Personal Loans

A personal loan is essentially a lump sum of money borrowed from a bank, credit union or online lender that you pay back in fixed monthly payments, or installments. Lenders typically offer loans from $1,000 to $50,000, and this money can be used for virtually any purpose. Repayment terms can range from two to seven years.

While there are many different types of personal loans, they can be broken down into two main categories: secured and unsecured. Here’s how the two types of personal loans work:

•   Secured personal loans are backed by collateral owned by the borrower such as a savings account or a physical asset of value. If the loan goes into default, the lender has the right to seize the collateral, which lessens the lender’s risk.

•   Unsecured personal loans do not require collateral. The lender advances the money based simply on an applicant’s creditworthiness and promise to repay. Because unsecured personal loans are riskier for the lender, they tend to come with higher interest rates and more stringent eligibility requirements.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Getting a Personal Loan From a Bank

In addition to the type of personal loan you choose, the lender you borrow from can have an effect on how hard the loan is to get. For many borrowers, their bank is an obvious first choice when the time comes to take out a personal loan.

Banks sometimes offer lower interest rates than other lenders, particularly if you’re already an account holder at that bank. However, they may also have steeper eligibility requirements, such as a higher minimum credit score. Compared to an online lender, banks tend to have a more time-consuming application process, and the loan may take longer to disburse.

Still, the convenience of utilizing the bank you’re already familiar with and the comfort of in-person customer service may be worth the trade-off for qualified borrowers.

Getting a Personal Loan From a Private Lender

A private online lender is a non-institutional lender that is not tied to any major bank or corporation. Online lenders are less regulated than banks, allowing faster application processes and more lenient eligibility requirements. However, some online lenders will have higher interest rates and fees compared to traditional banks, so it’s key to shop around. One of the biggest advantages of a private online lender is convenience. You can complete the entire process online and funding is typically available within the week.

Recommended: What Are Personal Loans & How Do They Work?

Is It Harder to Get a Personal Loan From a Bank or Private Lender?

Generally speaking, it may be more difficult to get a personal loan from a bank than a private lender — but your best bet is to shop around and compare a variety of personal loan options, then see where you’ll get the best interest rate.

Here are the basic differences between getting a personal loan from a bank versus a private lender at a glance:

Bank	Private Lender
Interest rates may be lower, though eligibility requirements may be more stringent	Interest rates may be higher, but eligibility requirements may be more lenient
You could get lower rates or easier qualification requirements if you have an existing relationship with the bank	Some private lenders market personal loans specifically to borrowers with poor or fair credit — though at potentially high interest rates
You may have the option to visit the bank in person for a face-to-face customer service interaction	The entire process may be done online
Loans typically take longer to process and you may have to visit a branch in person to finalize the paperwork	Funds might be disbursed the same day or within a day or two

Is It Easier to Get a Small Personal Loan?

Generally, yes. Loan size is another important factor that goes into how hard it is to get a personal loan. It’s much less risky for a lender to offer $1,000 than $50,000, so the eligibility requirements may be less stringent — and interest rates may be lower — for a smaller loan than for a larger loan.

That said, there are exceptions to this rule. Payday loans are a perfect example. Payday lenders offer small loans with a very short repayment timeline, yet often have interest rates as high as 400% APR (annual percentage rate). Even for a smaller personal loan, it’s generally less expensive to look for an installment loan that’s paid back on a monthly basis over a longer term.

Recommended: How Much of a Personal Loan Can I Get?

What Disqualifies You From Getting a Personal Loan?

There are some financial markers that can disqualify you from getting a personal loan, even with the most lenient lenders. Here are a few to watch out for.

Bad Credit

While the minimum required credit score for each lender will vary, many personal loan lenders require at least a good credit score — particularly for an unsecured personal loan. If you have very poor credit, or no credit whatsoever, you may find yourself ineligible to borrow.

Lack of Stable Income

Another important factor lenders look at is your cash flow. Without a regular source of cash inflow, the lender has no reason to think you’ll be able to repay your loan — and so a lack of consistent income can disqualify you from borrowing.

Not a US Resident

If you’re applying for personal loans in the U.S., you’ll need to be able to prove residency in order to qualify.

Lack of Documentation

Finally, all of these factors will need to be proven and accounted for with paperwork, so a lack of official documentation could also disqualify you.

How to Get a Personal Loan With Bad Credit

If you’re finding it hard to get a personal loan, there are some steps you can take to improve your chances of approval. Here are some to consider.

Prequalify With Multiple Lenders

Every lender has different eligibility requirements. As a result, it’s worth shopping around and comparing as many lenders as you can through prequalification. Prequalification allows you to check your chances of eligibility and predicted rates without impacting your credit (lenders only do a soft credit check).

Consider Adding a Cosigner

If, through the prequalification process, you find that you don’t meet most lender’s requirements, or you’re seeing exorbitantly high rates, you might check to see if cosigners are accepted.

Cosigners are family members or friends with strong credit who sign the loan agreement along with you and agree to pay back the loan if you’re unable to. This lowers the risk to the lender and could help you get approved and/or qualify a better rate.

Include All Sources of Income

Many lenders allow you to include non-employment income sources on your personal loan application, such as alimony, child support, retirement, and Social Security payments. Lenders are looking for borrowers who can comfortably make loan payments, so a higher income can make it easier to get approved for a personal loan.

Add Collateral

Some lenders offer secured personal loans, which can be easier to get with less-than-ideal credit. A secured loan can also help you qualify for a lower rate. Banks and credit unions typically let borrowers use investment or bank accounts as collateral; online lenders tend to offer personal loans secured by cars.

Just keep in mind: If you fail to repay a secured loan, the lender can take your collateral. On top of that, your credit will be adversely affected. You’ll want to weigh the benefits of getting the loan against the risk of losing the account or vehicle.


💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.

The Takeaway

You can use a personal loan for a range of purposes, such as to cover emergency expenses, to pay for a large expense or vacation, or to consolidate high-interest debt. Personal loans aren’t hard to get but you usually need good credit and a reliable source of income to qualify. The better your financial situation, generally the lower the interest rate will be.

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 hard to get a personal loan?

Personal loans aren’t necessarily hard to get but you typically need good credit and reliable income to qualify. Secured personal loans (which require pledging something you own like a savings account or vehicle) are generally easier to qualify for than unsecured personal loans

Is it hard to get a personal loan from a bank?

Banks tend to have more stringent qualification requirements for personal loans than private online lenders. Getting a personal loan from a bank can be a good move if you have good to excellent credit, an existing relationship with a bank, and time for a longer approval process.

What disqualifies you from getting a personal loan?

You will be disqualified for a personal loan if you do not meet a lender’s specific eligibility requirements. You may get denied if your credit score is too low, your existing debt load is too high, or your income is not high enough to cover the loan payments.

---

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SOPL0124011

Read more

When it comes to saving for your best financial future, you’ve got lots of options — including CD ladders.

A CD ladder, or certificate of deposit ladder, is a financial strategy that involves purchasing certificates of deposit with staggered maturity dates. It allows you to access the best aspects of CDs (namely, a relatively high yield at a relatively low risk rate) while avoiding the main downside of CDs (having your money locked away for a long period of time). It can help you access cash when and if needed without paying early withdrawal penalties.

Setting up a CD ladder up can require a bit of strategizing and shopping around to get the right arrangement for needs. Here, you’ll take a closer look at:

•   What is a CD ladder?

•   How does a CD ladder work?

•   How do you create a CD ladder?

•   What are alternatives to a CD ladder?

What Is a CD Ladder?

In order to fully understand CD ladders, first know that a certificate of deposit, or CD, is a kind of savings vehicle. You put down a lump sum — such as $500 or $5,000 — for a set amount of time (typically between six months and a few years) in exchange for a guaranteed growth rate (i.e., interest).

Generally speaking, the highest interest rates require large deposits put down for a long period of time. Your money gets locked up, and you’ll usually pay a penalty for early withdrawal.

That’s where a CD ladder comes in. It can help you feel secure that you can access your money when needed, without having to pay a penalty. You invest your money in a variety of CDs with different maturity dates. Generally, each rung, or individual CD, will mature one year later than the previous one.

Then, as each CD matures and you’re able to access your money (plus the interest you’ve earned), you can reinvest it in another CD with the longest of the terms you’ve chosen. This means you’ll continue to earn money on your investment for double the term of the longest-term CD you took out initially.

Example of a CD Ladder

Let’s say you have $15,000 to invest. You decide to set up a CD ladder with five rungs.

Here’s what that might look like:

•   $3,000 to a one-year CD

•   $3,000 to a two-year CD

•   $3,000 to a three-year CD

•   $3,000 to a four-year CD

•   $3,000 to a five-year CD

Once the one-year CD comes to fruition, you’d reinvest that $3,000, plus whatever interest it earned, into a new five-year CD — and follow the pattern for each CD as it comes due. In this way, you can continue the ladder for a grand total of 10 years, reaping and reinvesting once annually.

Of course, if rates shift or your financial situation changes and you need cash, you have a built-in backup plan. By creating a ladder, you know at least once a year, you will have the opportunity to invest your money in a different vehicle or use it for, say, an emergency or a goal you’ve been saving towards.

Keep in mind, too, that you don’t have to equally distribute your full investment among the rungs. You could invest different amounts at each level if that better suited your needs.

And you don’t need to open all of your CDs at the same bank, either. You can shop around among banks and credit unions to find the best interest rates at different levels and thereby maximize your yield.

All in all, CD ladders offer investors additional flexibility in their approach while still creating a low-risk earning strategy. Win-win!

How to Build a CD Ladder

Building a CD ladder is pretty easy. Here are the key steps:

Gather Your Funds

Save up a chunk of money that you can afford to have locked up for at least a few months or a year. If you already have the money set aside, you’re ready to move onto the next step.

Choose the Length of Time That Will Suit You

As noted above, you might decide to buy CDs with different maturity terms, or you might prefer to buy a number of ones with the same term over time, as you accrue more savings.

Research Your Options

Shop around for the best rates and terms at financial institutions you feel comfortable with. Remember, you don’t have to stick with one bank. You could buy a six-month CD from one bank offering a great rate, and a one-year one from a different bank that has a terrific APY.

Buy Your CDs

You’re now ready to distribute your savings among a series of CD ladder “rungs,” starting with a short-term maturity date and ending with a long-term maturity rate. (Many investors use five rungs, but you could use more or less if you wanted to.)

Manage Your CD Ladder

As the CDs mature, you can determine whether to withdraw the funds or invest again.

Here’s an example of what a CD ladder might look like:

Amount	Term	Interest Rate	Bank
$500	6 months	5.50%	BMO Alto
$1,500	12 months	5.51%	CIBC Bank USA
$2,000	18 months	5.65%	Hyperion Bank
$3,000	24 months	5.39%	Digital Federal Union

Recommended: Guide to Catching up on Late Payments

Benefits of CD Laddering

There are several benefits of CD ladders, including:

•   They allow you to make the most of your CD investment without locking away all the money for a long term.

•   They increase investor flexibility since you get to decide what amount you put in each CD and how long each term along the ladder is.

•   You may be able to take advantage of better interest rates since you’ll be reinvesting on a yearly basis, as opposed to having your money locked away at a certain rate for the long term.

•   Overall, CDs are a safe, FDIC-insured investment strategy, though their earning potential is also relatively low.

Recommended: Different Ways to Earn Extra Money with Interest

Drawbacks of CD Laddering

On the other hand, there are some downsides to CD laddering that are worth mentioning:

•   Even the best CDs have relatively low interest rates — so low that they may not even keep up with inflation.

•   You may be missing out on an opportunity to invest your money into the stock market, where it could stand to earn exponentially more than it would in a CD — though, of course, the stock market is a much riskier investment strategy.

•   If rates fall during the course of your CD ladder, you might wind up reinvesting your money into a CD with an even lower rate.

Alternatives to CD Ladders

Is CD laddering not sounding quite right for your needs? Here are some alternatives that might better suit your needs.

•   Putting your money into a high-yield savings account, which may offer a similar (though potentially slightly less lucrative) low-risk growth potential. The upside here: It doesn’t keep your money locked up for a long period of time.

•   Investing your money in the stock market, which is considerably riskier but may offer higher returns than CDs over the long run.

The Takeaway

CD laddering is one useful strategy for investing your money over time, allowing you to take advantage of the best parts of CDs while avoiding some of their biggest downsides (like locking away your money for years). The laddering effect, which involves staggering the CDs’ maturity dates, can give you access to some of your money every year and allow you to possibly reap a higher interest rate if the market is rising.

That said, CD ladders aren’t for everyone. High-yield bank accounts are another option to consider.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Is laddering CDs worth it?

As with any financial decision, only you can decide if laddering CDs is the right approach for your needs. If you have a lower risk tolerance and a decent amount of money to invest, it may be a strategy worth considering to earn steady interest and have regularly scheduled access to your funds.

Can you lose money in a CD?

CDs are a very low-risk investment vehicle. The funds in them are FDIC-insured up to the standard $250,000 per depositor, per account ownership category, per insured institution, which means the FDIC will refund your money up to that amount should the bank you opened the CD with fail. That said, there are some kinds of CDs which are not FDIC-insured, so you’ll want to make sure to double-check before you sign any paperwork.

When would you use a CD ladder?

A CD ladder can be a good investment strategy when you have a nice sum of money available (say, $500 to a few thousand or more), have a low risk tolerance, and can afford to lock up your money for a period of time, from six months to several years. It is best used when rates are relatively high, especially since you can shop around for the best rate at each “rung” on your ladder.

---

Photo credit: iStock/Antonbr Anton

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOBK0124012

Read more

Certificate of deposit accounts lock in your money for a certain period and guarantee an interest rate. But sometimes, life happens in the middle of the CD’s term. You have a dental emergency, your car needs new tires, or (yes, please!) a friend offers you a once-in-a-lifetime opportunity to join a trip to Barcelona but you just don’t have cash on hand to afford it. In these and other situations, you may be tempted to crack into a CD.

Should you do so, however, you will likely have to pay an early withdrawal penalty since you aren’t sticking with the agreed-to maturity term (the amount of time the CD was set for). You might forfeit some or all of the interest earned as a result. Read on to learn more about early withdrawal penalties for CDs and how to avoid them.

What Is a CD Early Withdrawal Penalty?

First, what is a CD? In simple terms, it’s an FDIC-insured time deposit. When you open a certificate of deposit account, you’re depositing money for a specific time frame. Depending on the CD, this may be as little as 30 days or as long as 10 years.

As the CD matures, your balance can earn interest. Generally, the longer the term, the higher the interest rate and APY. However, if you take money out before the maturity date, the bank can charge a CD withdrawal penalty.

Federal law sets the minimum penalty for early CD withdrawal at seven days’ interest if you withdraw money within the first six days after deposit. Banks can set the maximum CD withdrawal penalty higher.

The amount you might pay for withdrawing money from a CD early can depend on several factors, including:

•   Maturity term of the CD

•   How long the CD was open before you made the withdrawal

•   The amount of the initial deposit and the amount that’s withdrawn.

Your bank may or may not allow you to make a partial early CD withdrawal. If you’re not able to withdraw a partial amount, you might have to cash out the whole CD which could result in a larger penalty.

How to Calculate an Early Withdrawal Penalty for a CD

You’re probably wondering just how steep a penalty you’d have to pay for early CD withdrawal. Are we talking $5 or 5% of the money invested? More?

Banks are required to provide you with certain disclosures regarding your accounts, including CD accounts. So the first step in calculating what you might pay for a CD early withdrawal penalty is to review your bank’s policy.

Again, this can vary depending on the bank. So, for example, here’s what a few banks charge if you make an early withdrawal from CD accounts. All penalties are deducted from the CD’s principal.

CD Term	CD Early Withdrawal Penalty
1 year	•   180 days’ interest •   3 months’ interest •   Half of interest the money would have earned over entire term or 1% of the amount withdrawn, whichever is greater, plus $25
3 years	•   180 days’ interest •   6 months’ interest •   Half of interest the money would have earned over entire term or 3% of the amount withdrawn, whichever is greater, plus $25

You should be able to find this information readily available on your bank’s website. But if not, you can contact your bank or visit a branch to get more details on the penalties for early withdrawal from a CD. In addition to telling you what the penalty is, the bank should also be able to tell you how the penalty is calculated.

Banks may calculate the penalty for early CD withdrawal based on:

•   The amount withdrawn

•   The entire balance

•   Daily interest or monthly interest.

Calculating a CD Early WIthdrawal Penalty

Want to get a little more granular? Let’s dive into a little basic math to show you how the numbers look. Using Chase as an example, we see that the bank uses the amount withdrawn as the basis for calculating CD early withdrawal penalties. The calculation uses daily rather than monthly interest.

So the formula for calculating the penalty you might pay for an early CD withdrawal would look like this:

Penalty = Amount withdrawn x (Interest rate/365) x number of days’ interest.

So, say you have a 12-month CD that’s earning a 5% APY. You withdraw your initial $5,000 deposit six months prior to the CD’s maturity date. The math would look like this:

$5,000 x (0.05/365) x 180 = $123.29

You could also use an online CD early-withdrawal penalty calculator to figure out how much interest you might forfeit if you decide to withdraw money from a CD ahead of schedule.

Ways to Avoid Early Withdrawal Penalties for a CD

There are some options for avoiding prepayment penalties associated with early CD withdrawals. The strategies you could try include:

•   Withdrawing only the interest earned. Your bank may allow you to withdraw the interest earned on a CD without assessing a penalty. This assumes that you don’t touch the principal amount at all. This could be an attractive option if you need some quick cash but don’t necessarily need or want to withdraw your initial deposit.

•   Requesting a waiver of the penalty due to a crisis. If you are really in a bind, your bank may honor this.

•   Tapping your rainy-day money instead, but this should really only be done if you have the right reason to using your emergency fund.

•   Opening a no-penalty CD account. Banks can offer CDs that don’t charge a penalty for early CD withdrawal. The trade-off is that no-penalty CDs may offer a lower interest rate and APY, so you’d have to consider whether the convenience afforded by no-penalty CDs outweighs earning a higher rate.

•   Building a CD ladder. A CD ladder is a collection of CD accounts, each with varying maturity terms. So you might have five CDs with maturity dates spaced six months apart. The idea is that you can avoid early withdrawal penalties because your next maturity date is always on the horizon.

•   Consider a CD-secured loan. You may find some lenders who offer a CD-secured loan, but review the terms carefully and be sure you can make the payments at a time when money is tight.

Recommended: What Does Private Banking Offer?

When to Withdraw CDs Early

Withdrawing money from a CD early, even if it means triggering an early CD withdrawal penalty, could make sense in some situations. Some examples:

•   If you have an emergency situation with no other cash reserves to rely on and you want to avoid using credit, it may be the best (or only move). For example, say your car breaks down and you need $5,000 to fix it, but you only have $1,200 in your emergency fund. Then paying a CD withdrawal penalty could be worth it. This move would allow you to avoid having to charge the expense on a high-interest credit card or take out a loan.

•   Paying a penalty for early CD withdrawal could be worthwhile if your interest rate is low. You could access the funds and, with what you don’t use up, roll the money into a new CD with a higher APY. You’d have to calculate the amount of the penalty for withdrawing money early and compare that to the interest you could earn with a new CD to decide if it’s worth it or not.

Recommended: 10 Personal Finance Basics

The Takeaway

Investing in CDs can make sense if you want a safe way to earn interest on money you don’t necessarily need for the near-term. But sometimes, you’ll feel you must withdraw money early from a CD, despite the fact that you locked in for a specific term and interest rate. When doing so, you’ll face penalties, which may or may not make this transaction worth it to you. You can also follow a couple of smart money strategies to make sure you avoid triggering early CD withdrawal penalties in the future, because who wants to pay fees unless you absolutely have to?

If you hate penalties and fees, it can be wise to consider all your possibilities in terms of where to keep your money.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

What happens if I take money out of a CD early?

If you withdraw money from a CD early, you will likely be assessed a penalty, which is often all or some of the interest earned, and possibly a fee.

Can I write off a CD early withdrawal penalty?

If you wind up paying an early withdrawal penalty, you can deduct the amount from your taxes, even if it’s greater than the interest earned.

---

Photo credit: iStock/tolgart

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOBK0124011

Read more

There are plenty of budgets out there that promise to help you manage your money more efficiently, and some of them can get quite complicated. That’s why many people opt for the 70-20-10 budget rule. It’s a simple, percentage-based formula that can help you get and keep your personal finances in good order.

This system can help you get better acquainted with what you earn and where it goes, while tracking your daily spending (that’s the 70% of your after-tax earnings) plus debt repayment and saving (the 20% and the 10%). These aspects of the 70-20-10 budget are part of its appeal, and it can guide you to better money habits. Read on to learn how it works and can be adapted for your particular needs.

What Is the 70-20-10 Rule?

The 70-20-10 rule is a way to allocate your monthly income into three categories:

•   Living expenses

•   Debt repayment and short-term savings

•   Investing and donations.

Using these categories can help organize the way you think about your income — how it comes in, and importantly, how it goes out. It’s a simple and often very successful way to get a personal budget in place.

Note: If it sounds very familiar, it’s worth noting that there is also the 50/30/20 budget rule, a slightly different spin on budgeting that also works with easy-to-calculate percentages. To see a breakdown using this method, check out the 50/30/20 rule calculator.

Now, take a closer look at each of the three components of this budget tool.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure online banking app.

70% for Living Expenses

Living expenses are exactly what they sound like — expenditures you need or want to make each month. To see how much of your post-tax dollars go toward these costs every month, you’ll do a little math. You’ll add up the monthly payments that cover essentials such as housing, utilities, food, childcare, and medical expenses.

It also includes expenditures made only once or twice a year, such as auto or home insurance premiums or yearly car tune-ups. In those cases, you simply figure the total paid for the year, divide by 12, and add that number to the monthly figure.

For the purposes of the 70-20-10 rule budget, living expenses also include discretionary spending on things like shopping, entertainment, travel, gym memberships, and other non-essential items.

To get started, scan through a couple of months of your bank statements, credit card, utility, medical, housing, insurance, and cable and internet bills to see how you’re tracking. Use the common living expenses listed below as a guide.

Housing

•   Rent or mortgage and property tax

•   Utilities

•   Maintenance

•   Insurance

Transportation

•   Car payments

•   Maintenance

•   Gas and tolls

•   Parking

•   Public transportation costs

•   Taxis and ride shares

•   Auto insurance

Childcare

•   Day care

•   After-school programs

•   Tuition

•   Babysitting

•   Clothes, personal care, and related expenses

Insurance

•   Health insurance premiums (if not deducted from your paycheck)

•   Auto and home insurance premiums

•   Life insurance premiums

•   Disability income insurance premiums

Food

•   Groceries

•   Takeout and restaurants

Health

•   Deductibles, copays, and coinsurance

•   Medical and dental appointment costs not covered by insurance

•   Prescriptions and over-the-counter drugs

•   Eyeglasses and contacts

Entertainment

•   Concert, theater, and movie tickets

•   Paid streaming and podcast services

•   Books

•   Travel

Pets

•   Food, equipment and accessories, and toys

•   Flea and tick prevention/other medications

•   Vet bills

•   Pet insurance

Personal

•   Clothing/shoes/accessories

•   Hair care and other grooming

•   Toiletries/cosmetics

•   Gym membership

If your monthly number hits the 70% mark or less, congratulations. You’re living within your means. For most people, however, this first calculation will likely exceed 70%. More on what to do when that happens below. For now, keep looking at the big picture of tallying your 70-20-10 numbers.

20% for Saving and Debt Repayment

Next, you want to calculate how much it will take to hit the 20% goal of saving and debt repayment. (If you don’t have debt, hooray; you can zoom straight to saving. But many people need to use this bucket to pay off debt and save.)

If you have credit card debt, you’ll likely want to focus all or part of this 20% on paying that down so you can avoid the high interest payments. If you have college debt, the monthly repayment amount should be included here in the 20% category.

Once that’s done, you’ve cleared the decks for other savings, whether for an emergency fund (aim for three to six months’ worth of expenses) or a near-term goal such as a vacation or down payment for a home.

Depending on what and why you are saving, different kinds of savings accounts may make sense. Consider these smart options to get extra benefits:

•   High-yield savings accounts make sense if you need your money liquid (accessible) but want to earn more interest than the current rate on traditional savings accounts. Online banks vs. traditional banks often offer the best rates.

•   A certificate of deposit (CD) is another option. These accounts lock up your money at a specific interest rate for a period of time, usually from six months to a few years. What’s nice is you know how much money your money will earn, but keep in mind, if you pull your money out early, you’ll typically face penalty fees.

•   Money market accounts (MMAs) combine some aspects of a savings account with features of a checking account. You’ll earn interest on your savings (possibly in the ballpark of high-yield accounts), and you may be able to access funds via debit card or checks.

Once you’ve taken a look at your savings/debt picture, you’ll determine how best to handle the 20% rule. Depending on the size of your debts and your living expenses, you may need to temporarily allocate more or less funds to this category. More on that below.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress toward your financial goals.

10% for Donation or Additional Savings

The remaining 10% can be allocated to investing in your future, usually for retirement. Contributions to an IRA, 401(k) 403(b), self-employed retirement savings vehicles, or other long-term, tax advantaged savings plan can be best for this category. This is money that you won’t need in the short term, so it can be invested more aggressively than the savings in your 20% category.

In addition, part of this allocation can go to charitable donations. Perhaps there’s a cause you want to support, from animal rescue to medical research, or you like to donate to your college; it’s your call.

Example of the 70-20-10 Budget Rule

In terms of calculations, say your monthly income after taxes is $6,000. Here’s how that money would look on the 70-20-10 budget plan.

•   For living expenses, you would multiply 6,000 x 0.70, and see that you have $4,200 of after-tax dollars for housing, utilities, food, entertainment, and all the other items listed above.

•   For savings, you would multiply 6,000 x 0.20, or $1,200 to put toward savings and debt.

•   Lastly, you would multiply 6,000 x 0.10, and see that you have another $600 to put toward additional savings and/or donations.

Here’s the math: $4,200 + $1,200 + $600 = $6,000.

How to Customize the 70-20-10 Rule to Fit Your Needs

The beauty of the 70-20-10 plan is its simplicity — and flexibility. Once you create a budget this way, you can customize the allocations within reason to meet your own needs and financial goals over time. Creating a budget can give you peace of mind, because you’ll know you are taking care of your financial health. Here, a few tips for increasing your likelihood of success in following this plan:

Include Side Hustle Earnings and Windfalls

Bonuses, tax refunds, money from side hustles and other income should be factored in later, as they are earned; don’t consider them as part of your base income. The bulk of the extra income can be designated toward the area most in need of attention, such as paying off credit card debt or boosting emergency savings. But do feel free to set aside a small percentage of those earnings as a reward for your hard work and have some fun with it.

An important note: If not already evident, this budget technique works best for those with a steady income, who are on a payroll. If you are freelance, a gig worker, or seasonal employee and your income is variable, this may not be the best technique for you.

Adjust the Percentages When Needed

After tracking your spending and making possible cuts, you may find you still can’t fit living expenses into the 70% category. Maybe you are just starting your post-grad life, earn a lower income, or live in an area with a high cost of living.

Don’t stress out over this! If you have limited funds and lots of bills, you may have to allocate a bit more to that category and put less in short-term savings until that next raise or other income spurt comes through.

Protect the 10%

A quick note for people with lots of credit card debt: Those hefty bills are a sign that you may be spending more than your income level allows. You’ll probably do better with the 70-20-10 budget if you increase the paying debt/savings percentage to higher than 20% till your debt is lower. Take steps to reduce discretionary spending, perhaps even more than you have already.

In addition, you may find you need to make more drastic cost-cutting moves too, such as finding an apartment with less expensive rent or ditching the expensive car payments and switching to mass transit. The goal is to get costly debt under control so you can start saving for your priorities and peace of mind.

Prioritize High-Interest Debt

Whenever you find the need to adjust percentages, it may be best to avoid tampering with the 10% investing for the future allocation. The sooner you start saving for retirement, the more that money will add up over time. By the same token, older people who may need to catch up on retirement savings may want to increase this 10% allocation. One of the reasons the 70-20-10 plan can be successful is that it helps you balance both short-term needs with long-term financial planning.

If you do make percentage adjustments, be sure to continue to track expenses so you can see when you can readjust allocations back to the original 70-20-10 plan.

The Takeaway

The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis. You can also take steps toward achieving your financial goals in the short- and long-term.

As you establish a budget that works for you, don’t forget to find the right banking partner.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

---

Photo credit: iStock/baona

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

SOBK0124006

Read more

Both a loan modification and a loan refinance can lower your monthly payments and help you save money. However, they are not the same thing. Depending on your circumstances, one strategy will make more sense than the other.

If you’re behind on your mortgage payments due to a financial hardship, for example, you might seek out a loan modification. A modification alters the terms of your current loan and can help you avoid default or foreclosure.

If, on the other hand, you’re up to date on your loan payments and looking to save money, you might opt to refinance. This involves taking out a new loan (ideally with better rates and terms) and using it to pay off your existing loan.

Here’s a closer look at loan modification vs. refinance, how each lending option works, and when to choose one or the other.

What Is a Loan Modification?

A loan modification changes the terms of a loan to make the monthly payments more affordable. It’s a strategy that most commonly comes into play with mortgages. A home loan modification is a change in the way the home mortgage loan is structured, primarily to provide some financial relief for struggling homeowners.

Unlike refinancing a mortgage, which pays off the current home loan and replaces it with a new one, a loan modification changes the terms and conditions of the current home loan. These changes might include:

•   A new repayment timetable. A loan modification may extend the term of the loan, allowing the borrower to have more time to pay off the loan.

•   A lower interest rate. Loan modifications may allow borrowers to lower the interest rates on an existing loan. A lower interest rate can reduce a borrower’s monthly payment.

•   Switching from an adjustable rate to a fixed rate. If you currently have an adjustable-rate loan, a loan modification might allow you to change it to a fixed-rate loan. A fixed-rate loan may be easier to manage, since it offers consistent monthly payments over the life of the loan.

A loan modification can be hard to qualify for, as lenders are under no obligation to change the terms and conditions of a loan, even if the borrower is behind on payments. A lender will typically request documents to show financial hardship, such as hardship letters, bank statements, tax returns, and proof of income.

While loan modifications are most common for secured loans, like home mortgages, it’s also possible to get student loan modifications and even personal loan modifications.


💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

What Is Refinancing a Loan?

A loan refinance doesn’t just restructure the terms of an existing loan — it replaces the current loan with a new loan that typically has a different interest rate, a longer or shorter term, or both. You’ll need to apply for a new loan, typically with a new lender. Once approved, you use the new loan to pay off the old loan. Moving forward, you only make payments on the new loan.

Refinancing a loan can make sense if you can:

•   Qualify for a lower interest rate. The classic reason to refi any type of loan is to lower your interest rate. With home loans, however, you’ll want to consider fees and closing costs involved in a mortgage refinance, since they can eat into any savings you might get with the lower rate.

•   Extend the repayment terms. Having a longer period of time to pay off a loan generally lowers the monthly payment and can relieve a borrower’s financial stress. Just keep in mind that extending the term of a loan generally increases the amount of interest you pay, increasing the total cost of the loan.

•   Shorten the loan repayment time. While refinancing a loan to a shorter repayment term may increase the monthly loan payments, it can reduce the overall cost of the loan by allowing you to pay off the debt faster. This can result in a significant cost savings.

Recommended: What Are Personal Loans Used For?

Refinance vs Loan Modification: Pros and Cons

Loan refinance is typically something a borrower chooses to do, whereas loan modification is generally something a borrower needs to do, often as a last resort.

Here’s a look at the pros and cons of each option.

Loan Modification		Refinancing
Pros	Cons	Pros	Cons
Avoid loan default and foreclosure	Could negatively impact credit	May be able to lower interest rate	You’ll need solid credit and income
Lower your monthly payment	Cash out is not an option	May be able to shorten or lengthen your loan term	Closing costs may lower overall savings
Avoid closing costs	Lenders not required to grant modification	May be able to turn home equity into cash	You could reset the clock on your loan

Benefits of Loan Modification

While a loan modification is rarely a borrower’s first choice, it comes with some advantages. Here are a few to consider.

•   Avoid default and foreclosure. Getting a loan modification can help you avoid defaulting on your mortgage and potentially losing your home as a result of missing mortgage payments.

•   Change the loan’s terms. It may be possible to increase the length of your loan, which would lower your monthly payment. Or, if the original interest rate was variable, you might be able to switch to a fixed rate, which could result in savings over the life of the loan.

•   Avoid closing costs. Unlike a loan refinance, a loan modification allows you to keep the same loan. This helps you avoid having to pay closing costs (or other fees) that come with getting a new loan.

Drawbacks of Loan Modification

Since loan modification is generally an effort to prevent foreclosure on the borrower’s home, there are some drawbacks to be aware of.

•   It could have a negative effect on your credit. A loan modification on a credit report is typically a negative entry and could lower your credit score. However, having a foreclosure — or even missed payments — can be more detrimental to a person’s overall creditworthiness.

•   Tapping home equity for cash is not an option. Unlike refinancing, a loan modification cannot be used to tap home equity for an extra lump sum of cash (called a cash-out refi). If your monthly payments are lower after modification, though, you may have more funds to pay other expenses each month.

•   There is a hardship requirement. It’s typically necessary to prove financial hardship to qualify for loan modification. Lenders may want to see that your extenuating financial circumstances are involuntary and that you’ve made an effort to address them, or have a plan to do so, before considering loan modification.

Recommended: Guide to Mortgage Relief Programs

Benefits of Refinancing a Loan

For borrowers with a strong financial foundation, refinancing a mortgage or other type of loan comes with a number of benefits. Here are some to consider.

•   You may be able to get a lower interest rate. If your credit and income is strong, you may be able to qualify for an interest rate that is lower than your current loan, which could mean a savings over the life of the loan.

•   You may be able to shorten or extend the term of the loan. A shorter loan term can mean higher monthly payments but is likely to result in an overall savings. A longer loan term generally means lower monthly payments, but may increase your costs.

•   You may be able to pull cash out of your home. If you opt for a cash-out refinance, you can turn some of your equity in your home into cash that you can use however you want. With this type of refinance, the new loan is for a greater amount than what is owed, the old loan is paid off, and the excess cash can be used for things like home renovations or credit card consolidation.


💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.

Drawbacks of Refinancing a Loan

Refinancing a loan also comes with some disadvantages. Here are some to keep in mind.

•   You’ll need strong credit and income. Lenders who offer refinancing typically want to see that you are in a solid financial position before they issue you a new loan. If your situation has improved since you originally financed, you could qualify for better rates and terms.

•   Closing costs can be steep. When refinancing a mortgage, you typically need to pay closing costs. Before choosing a mortgage refi, you’ll want to look closely at any closing costs a lender charges, and whether those costs are paid in cash or rolled into the new mortgage loan. Consider how quickly you’ll be able to recoup those costs to determine if the refinance is worth it.

•   You could set yourself back on loan payoff. When you refinance a loan, you can choose a new loan term. If you’re already five years into a 30-year mortgage and you refinance for a new 30-year loan, for example, you’ll be in debt five years longer than you originally planned. And if you don’t get a lower interest rate, extending your term can increase your costs.

Is It Better to Refinance or Get a Loan Modification?

It all depends on your situation. If you have solid credit and are current on your loan payments, you’ll likely want to choose refinancing over loan modification. To qualify for a refinance, you’ll need to have a loan in good standing and prove that you make enough money to absorb the new payments.

If you’re behind on your loan payments and trying to avoid negative consequences (like loan default or foreclosure on your home), your best option is likely going to be loan modification. Provided the lender is willing, you may be able to change the rate or terms of your loan to make repayment more manageable. This may be more agreeable to a lender than having to take expensive legal action against you.

Recommended: 11 Types of Personal Loans & Their Differences

Alternatives to Refinancing and Loan Modification

If you’re having trouble making your mortgage payments or just looking for a way to save money on a debt, here are some other options to consider besides refinancing and loan modification.

Mortgage Forbearance

For borrowers facing short-term financial challenges, a mortgage forbearance may be an option to consider.

Lenders may grant a term of forbearance — typically three to six months, with the possibility of extending the term — during which the borrower doesn’t make loan payments or makes reduced payments. During that time, the lender also agrees not to pursue foreclosure.

As with a loan modification, proof of hardship is typically required. A lender’s definition of hardship may include divorce, job loss, natural disasters, costs associated with medical emergencies, and more.

During a period of forbearance, interest will continue to accrue, and the borrower will still be responsible for expenses such as homeowners insurance and property taxes.

At the end of the forbearance period, the borrower may have to repay any missed payments in addition to accrued interest. Some lenders may work with the borrower to set up a repayment plan rather than requiring one lump repayment.

Mortgage Recasting

With a mortgage recast, you make a lump sum payment toward the principal balance of the loan. The lender will then recast, or re-amortize, your remaining loan repayment schedule. Since the principal amount is smaller after the lump-sum payment is made, each monthly payment for the remaining life of the loan will be smaller, even though your interest rate and term remain the same.

Making Extra Principal Payments

With any type of loan, you may be able to lower your borrowing costs by occasionally (or regularly) making extra payments towards principal. This can help you pay back what you borrowed ahead of schedule and reduce your costs.

Before you prepay any type of loan, however, you’ll want to make sure the lender does not charge a prepayment penalty, since that might wipe out any savings. You’ll also want to make sure that the lender applies any extra payments you make directly towards principal (and not towards future monthly payments).

The Takeaway

Loan modification vs loan refinancing…which one wins?

It depends on your financial situation. If you’re dealing with financial challenges and at risk of home foreclosure, you may want to look into a loan modification, which could be easier to qualify for than loan refinancing.

If you’re interested in getting a lower interest rate or lowering your monthly debt payment, refinancing likely makes more sense. A refinance may also make sense if you’re looking to tap your home equity to access extra cash. With a cash-out refi, you replace your current mortgage with a new, larger loan and receive the excess amount in cash.

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 are the disadvantages of loan modification?

A loan modification typically comes with a hardship requirement. A lender may ask to see proof that your financial circumstances are involuntary and that you’ve made an effort to address them before considering loan modification.

A loan modification can also have a temporary negative effect on your credit.

Is a loan modification bad for your credit?

A lender may report a loan modification to the credit bureaus as a type of settlement or adjustment to the loan’s terms, which could negatively impact on your credit. However, the effect will likely be less (and shorter in duration) than the impact a series of late or missed payments or a foreclosure on your home would have.

---

Photo credit: iStock/AlexSecret

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SOPL0124010

Read more