Equated monthly installments (EMI) refer to a loan repayment plan that is structured with fixed payments over a predetermined period of time. Most installment loans use EMI to give borrowers a set budget to make their payments over the loan term. If you’ve ever had an auto loan, student loan, or mortgage, for example, you’ve probably made payments using EMI.

Learn more about how equated monthly installments work, plus how to calculate EMI.

What Are Equated Monthly Installments?

Different types of debt use different methods for structuring the repayment process.

What is an equated monthly installment? EMIs are payments made toward an installment loan balance. As the name suggests, the payments are spread out equally over the loan term. However, the amount you pay in interest overall depends on the method used to calculate your EMI.

The flat-rate method spreads out the interest equally over the entire loan term. This calculation is typically used on auto loans and personal loans. The reducing-balance method, on the other hand, applies the interest rate to each month’s outstanding principal, so the amount of interest you pay decreases over time. Lenders usually use this formula for mortgages, credit cards, and student loans.

In other words, using the flat-rate method typically amounts to more interest paid over time compared to the reducing-balance method using the same loan terms.

Recommended: What Is a Personal Loan?

Components of EMI Calculation

The formula to calculate EMI requires a few pieces of information about your personal loan or other debt instrument.

You’ll need to know:

•   Principal amount

•   Periodic monthly interest rate or total interest (depending on which EMI method you’re using)

•   Total number of monthly payments

With these details, you can compare the payment plan of different loan offers to see how it impacts your monthly payment and overall interest paid.

EMI Formula Explained

There are two separate formulas, depending on which method you choose.

EMI Formula for Flat-Rate Method

The monthly EMI formula using the flat-rate method is fairly straightforward. Simply add the total principal and the total interest, then divide that number by the total number of months in the loan term.

In order to do that, you first need to find the total interest paid on the loan amount. Get this number by multiplying the annual interest rate by the loan amount, and then multiply again by the number of years in the loan term.

   Interest rate * Principal * Years = Total Interest Owed

From there, you’ll add the total interest to the loan amount and divide by the number of months.

   (Principal + Total Interest) / Total Months in Loan Term = EMI

EMI Formula for Reducing-Balance Method

The formula to calculate EMI using the reducing-balance method is a little more complicated (and better for the borrower). Here’s the formula, and then we’ll give an example calculation below.

EMI = P*r(1 + r)ⁿ / [(1 + r)ⁿ – 1]

Each letter stands for the following piece of information:

•   P = Principal loan amount

•   r = periodic monthly interest rate (divide your annual interest rate by 12)

•   n = number of payments (multiply the years in the loan term by 12)

You would apply this formula to each month to see how the principal and interest payments shift over time.

Key Variables in EMI Calculation

When you look at how loan payments are calculated, it’s easy to see what variables impact your total payments. Obviously, higher interest rates result in greater loan cost. But so do longer loan terms, because you’re paying that interest over an extended period of time.

Whether you’re taking on “good” or “bad” debt, calculating the EMI with the potential variables gives you a clear picture of exactly what your payments and costs will look like.

Step-by-Step EMI Calculation

You can calculate EMI manually using different formulas for each methodology. Here’s an example using the same loan terms for the flat-rate method and then the reducing-balance method.

Let’s say you borrow $50,000 with a 5.00% interest for a three-year term.

Flat-rate method example:
First, you find the total interest paid by multiplying the loan amount by the annual interest rate and the number of years in the loan term.

$50,000 * 0.05 * 3 = $7,500 in interest paid.

Then add the interest to the loan amount and divide by the number of months in the loan term.

($50,000 + $7,500) / 36 = $1,597.22

With the flat-rate method, your monthly loan payment would be just under $1,600.

Reducing-balance method example:
First, we’ll find the monthly interest rate:
0.05 / 12 = 0.0042

Then we’ll apply all of the variables to our formula:

EMI = 50,000*0.0042(1 + 0.0042)³⁶ / [(1 + 0.0042)³⁶ – 1]

In this case, your monthly payment would be $1,498.54. In the first month, the interest would account for $208.33 and the principal would be $1,290.21. But by month 36, interest would only be $6.22 and the principal payment would total $1,492.50.

The total interest paid using the reducing-balance method is $3,947.62. That’s $3,552.40 less than the same exact loan terms using the flat-rate method to determine your monthly payments.

Tools for EMI Calculation

It’s nice to know how to calculate EMI manually, but there are several tools online that can help you get an automatic answer. It also makes it easier to compare loan offers and different calculation methods, if you have options available.

An EMI spreadsheet formula allows you to see the amortized monthly payments spread out over each year of your loan term. An online personal loan calculator shows you basic details on your monthly payments and total interest paid. You can use an EMI or amortization calculator to compare the reducing-balance method.

These tools are also helpful in comparing different types of debt, like whether it’s better to pay off a revolving credit card balance at a certain pace or use a debt consolidation loan to get on a fixed repayment schedule.

Recommended: What Is a Personal Loan?

The Takeaway

Equated monthly installment (EMI) is a type of payment borrowers make on an installment loan, such as an auto loan, student loan, or mortgage. Payments are spread out in equal amounts over the life of the loan.

The amount of interest you pay will depend on whether you use the flat-rate method or reducing-balancing method. With the flat-rate method, the interest is spread equally over the loan term. With the reducing-balance method, you pay interest based on the loan balance, which means the interest amount gradually decreases as you pay off the loan. It’s often used for home loans and many personal loans.

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.

FAQ

What factors are used to calculate EMI?

You’ll need a few different pieces of information to calculate EMI. For the flat-rate method, you need the loan amount, the annual interest rate, and the number of years in the loan term. For the reducing-balance method, you’ll need the loan amount, the periodic monthly interest rate, and the number of payments.

How does the loan term affect EMI?

A longer loan term can keep your monthly payments lower because the principal balance is spread out over time. But you’ll pay more in interest because the interest rate is applied to your balance over a longer period. Your EMI will be higher with a shorter loan term, but you’ll pay less in interest.

Can I use an online EMI calculator for accuracy?

Yes, an EMI calculator can help you quickly find out the payments using different loan terms. You just need to find out the methodology your lender uses to make sure it’s accurate. A reducing-balance calculator will provide you with an amortization schedule so you can see how your interest decreases during the loan term.

photocredit: iStock/Olga Shumitskaya
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.

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.

SOPL-Q424-020

Pharmacists graduate from college with a well-earned degree, but also with a lot of student loan debt. According to the latest data from the American Association of Colleges of Pharmacy, the average student loan debt for pharmacy school graduates is $170,444.

Fortunately, there are a variety of loan forgiveness programs for pharmacists. Depending on where you work and the type of service commitment you’re able to make, you could qualify for partial or even full pharmacist loan forgiveness.

Read on to learn about the student loan forgiveness programs for pharmacists — plus other ways to help repay your loans if you don’t qualify for pharmacist student loan forgiveness.

Can Pharmacists Get Loan Forgiveness?

It may sound too good to be true, but there is such a thing as pharmacist loan forgiveness. Many of the loan forgiveness programs for pharmacists are available at the federal level; others are offered by states. And while some programs pertain only to federal student loans, others also cover private student loans.

Recommended: Student Loan Refinancing Guide

6 Student Loan Forgiveness Programs for Pharmacists

Here are some of the top student loan forgiveness programs for pharmacists, along with their eligibility requirements.

Public Service Loan Forgiveness (PSLF)

The Public Service Loan Forgiveness (PSLF) program forgives the remaining balance on federal Direct loans, which include Direct Subsidized loans, Direct Unsubsidized loans, Direct PLUS loans (but not Parent PLUS loans), and Direct Consolidation loans.

Qualifying borrowers can get PSLF after making the equivalent of 120 qualifying monthly payments under an income-driven repayment (IDR) plan while working full-time in public service for an eligible employer such as a federal, state, local, tribal, or military government organization or a qualifying nonprofit.

If you are a pharmacist working for one of these organizations and have eligible loans, you may qualify for PSLF. To apply, sign up for an IDR plan at StudentAid.gov if you are not already enrolled in one. Then certify your employment — there is a form your employer needs to fill out — and submit it electronically. The PSLF Help Tool can assist you through the process.

Next, you’ll need to make 120 qualifying payments under the IDR plan. Once you do that, you can submit your application for forgiveness.

State Loan Repayment Program (SLRP)

Through the State Loan Repayment Program (SLRP), the Health Resources and Services Administration provides grants each year to states for loan repayment programs for primary care providers, including pharmacists, who work in shortage areas. The loan repayment is up to $25,000 per year and covers qualifying federal and private student loans.

To be eligible, an individual must be a U.S. citizen or U.S. national, have a health license or certificate in the state in which they are working, and be currently employed full-time at an eligible site. Check with your state for more information and detailed requirements.

NHSC Loan Repayment Programs

The National Health Service Corps (NHSC) has a variety of different loan repayment programs for health care providers who work at specified health sites, typically in underserved communities, for a certain period of time.

For pharmacists, the programs available include:

•   the NHSC Substance Use Disorder Loan Repayment Program, which provides up to $75,000 in loan repayment for medical professionals, including pharmacists, who treat substance use or opioid use disorders and work full-time for three years at an NHSC-approved treatment facility in an underserved community,
and

•   the NHSC Rural Community Loan Repayment Program, which offers up to $100,000 in loan repayment for medical professionals who treat substance use or opioid use disorders in a rural, underserved community full-time for three years.

In addition to the requirements mentioned above, to be eligible for either program, applicants must be U.S. citizens or U.S. nationals and have the appropriate professional health license or certificate.

National Institutes of Health Loan Repayment Programs

The National Institutes of Health (NIH) loan repayment programs are designed to recruit and retain highly qualified health professionals into biomedical and biobehavioral research careers. Because of the high cost of education, these individuals often leave research to go into private industry or practice.

The NIH loan repayment program may help health professionals, including pharmacists, by repaying up to $50,000 in qualified education debt in exchange for either extramural (not employed by NIH) or intramural (employed by NIH) status.

To be eligible, you must be a U.S. citizen, U.S. national, or permanent resident with a qualifying degree, and have total qualified educational debt equal to or in excess of 20% of your institutional base salary. You must also meet qualified research requirements and research funding requirements, depending on whether you have an extramural or intramural position.

Indian Health Service Loan Repayment Program

The Indian Health Service (IHS) Loan Repayment Program can help qualifying individuals, including pharmacists, repay their health profession education loans for up to $50,000 in exchange for a two-year service commitment in health facilities that serve American Indian and Alaska Native communities.

You may qualify if you:

•   Are a U.S. citizen

•   Are registered for Selective Service (if you are a male)

•   Have a health profession degree or are in your final year

•   Have a pharmacy license

•   Commit to practice at an Indian health facility

You must also begin service on or before September 30 for two continuous years of practice. You can extend your contract annually until your student debt has been paid off.

Health Resources and Services Administration Faculty Loan Repayment Program

Individuals who come from a disadvantaged background, have an eligible health professions degree or certificate, including a pharmacy degree or certificate, or are a faculty member at an approved health professions school with a contract for two years or more working full- or part-time may qualify for loan repayment through the Health Resources and Services Administrative faculty loan program.

If you are eligible, you could receive up to $40,000 in loan repayment assistance for qualifying educational loans, plus funding to offset the tax burden of the award.

What to Do If You Don’t Qualify for Pharmacist Student Loan Forgiveness

If you don’t qualify for pharmacist student loan forgiveness, there are still ways to make repaying your student loans easier. Below are two options to consider.

Income-Driven Repayment

Income-driven repayment (IDR) plans base your monthly student loan payment amount on your income and family size, which can help lower your payments. The remaining balance will be forgiven by the end of your repayment period, which is either 20 or 25 years, depending on the plan.

The federal government offers the following types of income-driven repayment plans:

•   Income-Based Repayment (IBR) plan: Under the IBR plan, a borrower’s monthly payments are generally equal to 15% of their discretionary income.

•   Saving on a Valuable Education (SAVE) plan: SAVE is designed to lower your payments based on income and family size. If your monthly payment isn’t enough to cover the accrued monthly interest, the government will cover it for you, preventing your balance from growing due to unpaid interest.

Under SAVE, borrowers with a $12,000 principal balance or less and who made 10 years of monthly payments, would receive loan forgiveness. However, the SAVE plan has been blocked in court and is essentially in limbo at this time, and new borrowers cannot enroll in it. Borrowers who were already enrolled in SAVE were placed in forbearance and owe no payments and their interest does not accrue.

•   Pay As You Earn (PAYE) repayment plan: With PAYE, payments are generally equal to 10% of your discretionary income. While the PAYE plan was closed to new enrollment in July 2024, it was reopened to new enrollment in mid-December 2024. It also offers credit to eligible borrowers enrolled in the SAVE plan toward Public Service Loan Forgiveness (PSLF) and IDR plans once they get out of forbearance and enroll in PAYE.

•   Income-Contingent Repayment (ICR) plan: The ICR plan offers monthly payments that are either the lesser of what you would pay on a repayment plan with fixed monthly payments over the course of 12 years, adjusted based on your income, or 20% of your discretionary income. ICR was also closed in July 2024, but was reopened to new enrollment in December 2024.

You can apply for one of these income-driven repayment plans online through your loan servicer or by submitting a paper form. You can select the IDR plan you’d like or ask your servicer to choose a plan for you based on the lowest monthly payment possible.

Refinancing

If an IDR plan isn’t right for you, you may want to explore refinancing student loans to save money. When you refinance student loans you replace your old loans with one new loan from a private lender. Ideally, your new loan would have a lower interest rate or more favorable loan terms.

With student loan refinancing, you can refinance federal student loans, private student loans, or both. However, be aware that when you refinance federal loans, they become ineligible for federal benefits like income-based repayment plans and forgiveness.

A student loan refinancing calculator can help you determine if refinancing makes sense financially for your situation.

The Takeaway

Pharmacists who are struggling to repay their student loans may be eligible for any one of a number of different student loan forgiveness programs or loan repayment programs to help them tackle their debt.

And those aren’t the only options for potential relief: Borrowers who don’t qualify for these programs can consider income-driven repayment plans or student loan refinancing to help manage their student loan payments.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

Photo credit: iStock/PeopleImages

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSLR-Q424-016

If you’ve graduated from veterinary school, you’ve likely accumulated significant student loan debt. And no wonder — four years of vet school generally costs $155,000 to $436,000, including tuition, fees, and living expenses.

It may seem challenging to pay off what you owe for vet school, but there are plans and programs that can help. Read on to learn about how to pay for vet school and what you need to know to choose the best repayment method for you.

How Long Does It Take to Pay Off Vet School Loans?

For veterinary school graduates, the average vet school debt is $147,258, according to the American Veterinary Medical Association. So how long does it take to pay off that kind of vet school debt? It could take a decade or more to pay back vet student loans, depending on a number of factors, including the specific amount you need to repay and your income.

Doing a quick calculation can help you determine what your monthly loan payments would be and the time required to repay what you owe. For example, let’s say that you have a student loan amount of $147,258 with an 8.00% interest rate. If you’re on the standard repayment plan for federal student loans, which is 10 years, your payments would be $1,786.65 a month. With interest, you would end up paying $214,398 for your loans in total.

A monthly payment of almost $1,800 may be more than some vet school grads can afford. Fortunately, there are ways to lower your payments, including income-driven repayment plans, student loan forgiveness programs, and student loan refinancing.

Income Driven Repayment Plans

Income-driven repayment (IDR) plans base your federal monthly student loan payments on your income and family size. Under an IDR plan, you repay your federal student loans over 20 or 25 years, depending on the plan, and your remaining balance is forgiven at the end of the repayment period.

There are different IDR plans, including income-based repayment (IBR), income-contingent repayment (ICR), Pay As You Earn (PAYE), and Saving on a Valuable Education (SAVE), which was formerly the REPAYE plan.

PAYE vs. REPAYE/SAVE

PAYE is a plan that was closed to new enrollment in July 2024, but reopened in mid-December 2024 to give borrowers more options to keep their payments low, according to the Department of Education (DOE). The reopened PAYE offers credit to eligible borrowers enrolled in the SAVE plan, which has been blocked in court, toward Public Service Loan Forgiveness (PSLF) and IDR plans.

Here’s how the PAYE and SAVE plans work.

•   PAYE: Borrowers enrolled in the PAYE plan pay nothing on the first $22,590 of income if they are single (or $46,800 for a family of four). They make payments that are equal to 10% of their discretionary income above those amounts. (Discretionary income is defined as the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.)

•   SAVE (formerly REPAYE): This plan was designed to lower payments based on a small portion of an individual’s adjusted gross income (AGI). If the borrower made their full monthly payment, the government would cover the rest of the interest that accrued that month. Under SAVE, borrowers with a $12,000 principal balance or less and who made 10 years of monthly payments would receive loan forgiveness. However, as mentioned, the SAVE plan has been blocked in court and is essentially in limbo at this time, and new borrowers cannot enroll in it.

Borrowers who were already enrolled in SAVE were placed in forbearance by the DOE. While in forbearance, they don’t owe payments on their loans, nor do their loans accrue interest. However, the time borrowers spend in forbearance does not give them credit toward PSLF or satisfy the requirements of IDR plans. The newly reopened PAYE allows them to get out of forbearance, enroll in PAYE, and start making loan payments that can help them work toward PSLF and IDR.

Student Loan Forgiveness

With student loan forgiveness, an eligible borrower is forgiven from paying back a portion or all of their federal student loans, typically in exchange for working in a certain type of job. For instance, the Public Service Loan Forgiveness program for federal loans forgives the remaining balance on federal Direct loans after 120 qualifying monthly payments made under a repayment plan when the borrower works for an eligible employer.

To be eligible for PSLF you must:

•   Be employed by the federal, state, local, or tribal government or a nonprofit organization

•   Work full-time for that agency or organization

•   Repay your loans under an income-driven repayment plan

•   Make a total of 120 qualifying monthly payments, as noted above

You can use the Federal Student Aid’s employer search tool to find out if your employer qualifies you for PSLF.

In addition to PSLF, there are a number of other forgiveness programs and loan repayment programs for veterinary graduates. You can locate them through the American Veterinary Association. You can also check with your state for any student loan forgiveness programs they may offer to veterinarians.

Switching Loan Repayment Plans

If you’re not happy with the loan repayment plan you’re currently enrolled in, you can change it by requesting a new plan from your loan servicer. This will usually require you to submit an application and additional information.

There are a number of repayment plans to choose from. Besides IDR plans, there are fixed federal repayment plans that base your payments on your loan balance, interest rate, and repayment period. You may qualify for one of these plans if you have Direct Subsidized or Unsubsidized loans, PLUS loans, or Consolidation loans. These repayment plans include:

•   Standard Repayment Plan: The standard plan requires you to pay a fixed amount over 10 years (or 10 to 30 years for Consolidation loans).

•   Graduated Repayment Plan: On the graduated repayment plan, your payments are lower at first and then they increase, usually every two years. With this plan, you’ll pay off your loans within 10 years (or up to 30 years with Consolidation loans).

•   Extended Repayment Plan: You must have more than $30,000 in outstanding Direct loans or more than $30,000 in FFEL Program loans to qualify for the extended repayment plan. On this plan, your payments may be fixed or graduated, and you pay them off within 25 years.

Upcoming IDR Changes to be Aware Of

There have been changes in some of the IDR plans. As discussed, a federal court issued an injunction that blocked the SAVE plan. In addition, the PAYE and ICR plans were closed by the DOE in the summer of 2024 after SAVE was introduced. However, as of December 18, the PAYE plan was reopened by the DOE, along with the ICR plan. Borrowers enrolled in SAVE who were placed in forbearance can now enroll in PAYE or ICR to earn credit toward PSLF and income-driven repayment. That means they will start making loan payments again, and the interest on their loans will begin to accrue.

Tips for Restarting Loan Payments

If you are restarting your loan payments, there are some strategies that can help you determine whether you’re on the best repayment plan for your situation and that the repayment process goes as smoothly as possible.

•   First, make sure you know who your loan servicer is. This is the entity that handles your loan payments. Your account dashboard at StudentAid.gov should have this information.

•   Confirm or update your contact information with your loan servicer and on your StudentAid.gov account

•   Take a good look at the repayment plan you’re on and think about whether an IDR plan might be a better option for you. As mentioned, an IDR plan may lower your payments because it bases your monthly payment on your income and family size. However, it typically takes longer to repay your loans on an IDR plan.

•   Consider whether student loan refinancing might help you repay your student loans. When you refinance student loans, you replace your current loans with one new loan from a private lender. Ideally, the new loan will have a lower interest rate or more favorable terms if you qualify, which may be helpful if you’re refinancing student loans to save money.

A student loan refinancing calculator can help you figure if refinancing could be financially beneficial. Just be aware that refinancing federal loans makes them ineligible for federal benefits such as income-driven repayment plans and federal student loan forgiveness.

Recommended: Student Loan Refinancing Guide

SAVE Plan Changes

If you are enrolled in the SAVE plan, which has been blocked in court, and you’re currently in forbearance, you do not have to make loan payments and interest is not accruing on your loans. The DOE says this is likely to remain the case until at least mid-2025, depending on further development by the 8th Circuit Court of Appeals. But if you want to earn credit toward IDR or PSLF, you can now enroll in the reopened PAYE or ICR plans and begin making loan payments.

The Takeaway

Vet school student debt can be significant, but there are plans and programs to help borrowers repay their loans. You can explore income-driven repayment plans, fixed repayment plans, and student loan refinancing to see which option makes the most sense for you.

There have been a number of changes to some of the IDR plans, including SAVE and REPAYE. If you are currently enrolled in SAVE and in forbearance, you can now enroll in the PAYE plan and start working toward IDR and PSLF credits.

Or, if you don’t need access to federal benefits and programs, you may decide that refinancing is a better choice for you. Whatever option you choose, be sure to weigh the pros and cons to make an informed decision.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

Photo credit: iStock/SeventyFour

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSLR-Q424-007

What Is the Set-Off Clause?

What is a set-off? A set-off clause is a financial agreement that effectively removes unnecessary back and forth payments between two groups. Consider the example of two banks that owe each other for various debits. They would ask, who owes the most money? Is any money owed to them? If so, subtract that amount, and the net difference is the final bill.

The set-off clause gets a little more complicated, however, when applied to banks, borrowers, and outstanding debts. In essence, the set-off clause allows banks to draw from deposit accounts when a debtor owes them money.

Keep reading to explore details of the set-off clause and how it’s used in the everyday world by financial institutions.

Understanding the Set-Off Clause

The set-off clause is a financial agreement made between two parties that allows one group’s debt obligation to be offset by the other group’s debt obligations to them. If two groups both owe money to each another, the one with the largest debt pays the difference between the two debts.

All in all, its purpose is to remove unnecessary payments between two parties. However, the set-off clause is often invoked by banks and financial institutions when a debtor defaults on payments on a loan product or owes an outstanding balance.

Definition and Purpose

Set-off legal definition: A set-off occurs when there are mutual debt obligations between two parties, but one party’s debt is reduced by the amount the second party owes to them.

The original purpose of a set-off clause is to reduce the amount of unnecessary back and forth between two parties. But when it comes to financial institutions, there are many reasons for its existence. One purpose is to provide stability to banking institutions. Because loans are essentially secured through deposit accounts, banks can continue to operate without fear of liquidity issues.

A simpler purpose is that it makes collecting debts a lot easier and faster. Of course, there are many types of debt, which may determine how remittance is pursued.

How Set-Off Clauses Work

Set-off clauses may be invoked by financial institutions when a borrower has checking or savings accounts with the same lender they have a debt with. Should they overdraw or owe unpaid fees to the lender, the lender has the right, via the set-off clause, to pull money from the borrower’s deposit accounts to settle unpaid debts.

Depending on the agreement and local laws, the lender or bank may not even have to notify the borrower when the clause is invoked.

Where You’ll Encounter Set-Off Clauses

You’re likely to find a set-off clause with credit cards, loans, and even bank account agreements.

For banks, this language is often mentioned throughout the account agreement. Many banks exercise their right of set-off to deduct funds from an account holder’s deposit account when that account holder owes an outstanding amount because of fees, overdrafts, or unpaid monthly payments.

But remember: The right of set-off normally only goes into effect when the account holder uses the same institution for their checking and other banking needs.

Legal Basis for Set-Off Clauses

Common law rights apply to set-off clauses when two parties are reconciling debts between them. If party A owes $75 and party B owes $50, both debts can be finalized by party A paying party B $25.

This, in turn, leads into contractual agreements where one party is allowed to deduct money owed to them when those debts go unpaid. However, certain regulatory frameworks must be followed in order for the financial institution to remain compliant.

All financial institutions operating in the United States must adhere to regulatory laws. In general, if you have a complaint, you will want to contact the Consumer Financial Protection Bureau or your state banking regulator.

Implications for Borrowers and Account Holders

A set-off can have a big impact on your personal finances, especially if you’re unprepared for it. Because banks usually don’t have to notify account holders of set-offs, you may suddenly realize your account balances are lower than they should be. That can make you susceptible to overdrawing or not having enough funds to cover necessary expenses.

If you’re vulnerable to a bank invoking the set-off clause, you may want to take the appropriate steps to protect your finances.

Protecting Yourself from Set-Off Actions

To protect yourself from a bank or financial institution invoking the set-off clause, the first step is to understand it. If you’ve already signed an agreement with a set-off clause, you may want to reread through it. If it doesn’t make any sense to you, call the institution and ask to speak with an account specialist who can explain the clause and when it may be invoked.

If you haven’t signed any agreements yet, the terms may be negotiable. While set-off clauses are pretty standard, if your finances are strong, the bank may be willing to rewrite the terms to the contract so they are more favorable to you.

Another option may be to switch banks and close your bank account. As long as the new bank is not affiliated with the original lender, your money may be safe from the set-off clause. However, keep in mind that the lender may be able to take legal action against you. If they do, your assets may be put in jeopardy.

You may be wondering if closing a bank account impacts your credit score. As long as your account has a positive balance, closing it shouldn’t affect your credit score. If you have any automatic payments set up, just make sure you update those accounts so they stay current.

Recommended: How to Split a Joint Bank Account

Alternatives to Set-Off for Banks

When invoking the set-off clause isn’t an option, banks may take other measures, such as sending your debt to a debt collector, restructuring your loan so you can make your payments more easily, or even taking legal action. To avoid any negative consequences, you may want to consider taking out a personal loan for debt consolidation.

How debt consolidation works is simple: Apply for a personal loan and use that loan to pay off your debts at (ideally) a lower interest rate. You’ll likely save money in interest, and you may even have a lower monthly payment, too.

You can take out personal loans for credit card debt, student loans, car loans, or even other personal loans with higher interest rates. You can pay off multiple forms of debt with a personal loan.

Recommended: Beginner’s Guide to Good and Bad Debt

The Takeaway

A set-off clause is legal language that allows a lender to draw from a debtor’s deposit accounts in the event they default on a loan. But typically, it’s only implemented when the debtor uses the same financial institution for their loan as they do their checking and banking needs. To protect yourself against a set-off, read over your loan or account agreement and reach out to your financial institution with any questions. You may also choose to move your bank account to a new bank.

If you’re struggling to make payments, consider taking out a personal loan to pay down your debts. You could potentially get out of debt sooner, save money in interest, and may even save money with a lower monthly payment.

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.

FAQ

Can banks use set-off without notifying me?

The answer to this boils down to your loan agreement and local laws, but in most situations the bank does not have to notify the borrower when it invokes the set-off clause.

Does the set-off clause apply to joint accounts?

A set-off clause shouldn’t apply to joint accounts unless both people are on the loan and are both liable for payments.

Can I dispute a set-off action by my bank?

Yes, a set-off action can be disputed, but the bank may well be within its rights. To determine if the bank acted improperly, you’ll need to read through your loan agreement with the bank. If you’re positive the bank acted illegally, first contact the bank and begin a dialogue with them. If that doesn’t resolve the matter, you may need to file a complaint to the appropriate authorities and seek legal counsel.

How does the set-off clause affect my credit score?

A set-off clause being enacted should not impact your credit score. However, if you’ve been missing payments and are in default, then any late payments will have a negative impact on your credit score.

photocredit: iStock/shapecharge
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.

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

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 .

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.

SOPL-Q424-022

Here’s what an employee savings plan offers: It is a tax-advantaged investment plan that an employer makes available to members of their staff. The employer may or may not contribute a company match of some level in addition to the money contributed by their employees. These accounts can typically be used at a later date by the employees, who can tap the funds for long-term goals such as retirement or for healthcare expenses.

One benefit of employee savings plans is that they can simplify the saving process. The employer typically takes automated deductions from a worker’s paycheck before income tax is assessed. In this way, these savings plans may increase your contributions to retirement savings contributions while also saving on taxes.

What Is an Employee Savings Plan?

Some employers offer an employee savings plan to help employees invest for retirement and other long-term financial goals, like a down payment on a house. Leveraging an employee savings plan is one of the first steps to building a simple savings plan you can stick to.

Each employee chooses how much they want to contribute to the plan each month. That amount is then deducted from the employee’s paycheck each month. If paychecks are distributed biweekly, the contribution will likely be split up between the two.

The automated process can help make it easier to save, and employees generally have the option to change their contribution amount based on their needs and goals.

Employee savings plans contributions are made on a pre-tax basis. That means the funds are transferred to your savings plan before taxes are taken from your paycheck. This allows account holders to save money while paying taxes on a smaller portion of your salary.

In some cases, your employer may offer a matching contribution to any funds you contribute to your employee savings plan. Usually, there is a match limit equivalent to a certain percentage of your salary.

For instance, imagine your employer matches your contributions up to 3% of your salary and you earn $75,000 a year. That amounts to $2,250.

As long as you contribute at least $2,250 to your plan, your employer will give you the same amount, for a total of $4,500 — plus anything over that amount you decide to contribute.

Recommended: How to Switch Banks

Types of Employee Savings Plans

There are several types of employee savings plans you may have access to through your job.

Many organizations offer qualified defined contribution plans, which means it qualifies for pre-tax contributions and tax-deferred growth. Private companies offer these through 401(k) plans, while public or non-profit organizations generally offer 403(b) or 457(b) plans.

Another type of employee savings plan you may see is a health savings account (HSA). Some companies will offer this kind of account to their team.

If you have a high-deductible health plan (HDHP), this plan lets you save money tax-free to pay for qualified medical costs that aren’t covered by insurance.

A profit-sharing plan is less common, but also helps you save for retirement. Employees own shares of the company and receive distributions from the company either quarterly or annually. However, as an employee, you cannot add your own contribution to a profit-sharing plan.

A defined benefits plan, also known as a pension plan, is another type of employer-sponsored plan. In this type of plan, employees are offered a specific benefit, which may be based on factors like your years of service at the company.

These days, very few companies offer this type of benefit, instead opting to offer a 401(k) plan or other similar option.

What Are the Benefits of an Employee Savings Plan?

There are a number of advantages to using an employee savings plan. The first is that contributions are tax-free. In most cases, income taxes are paid at the time of withdrawal. That may reduce the amount of taxes you’ll have to pay on your overall salary.

So even though your take-home pay is smaller because of those automatic contributions, your taxable income is also less. Plus you have a growing investment account to help you prepare for retirement or other goals.

Another advantage of participating in an employee savings plan is that your employer could offer a free contribution match as part of their benefits package to retain team members. According to a Bureau of Labor Statistics report, 51% of employers who offer 401(k) plans provide some kind of company match.

Employer-sponsored retirement saving plans also come with larger annual contribution limits compared to individual retirement accounts (IRAs). The 401(k) contribution limit for individuals is $23,000 for 2024 ($23,500 for 2025). A traditional IRA, on the other hand, only allows you to contribute $7,000 for tax years 2024 and 2025.

If you’re age 50 or older, both types of plans do allow for an extra catch- up contribution. With a 401(k), you can add an extra $7,500 for 2024 and 2025 (in 2025, those aged 60 to 63 can contribute an extra $11,250). With an IRA, catch-up contributions are limited to $1,000 for both tax years.

What to Look Out For

While there are a number of advantages that come with an employee savings plan, there are also some pitfalls to beware of. Consider these points:

•   Some employers require you to work at the company long enough to become vested before you can access your matched funds. Being fully vested means that you’ve reached the minimum number of years to be able to make withdrawals from your employer match.

•   If you leave the company before becoming vested, you do get all of the contributions (and growth) you’ve made in your plan. But if you leave before becoming vested, you may lose the matched funds from your employer.

In some cases, you may receive a percentage of that money based on how long you’ve been there. Either way, it’s important to find out these details from the human resources department at your company, especially if you’re thinking about a job change.

•   Another downside to an employer savings plan is that although your contributions are tax-free, you do have to pay federal and state income taxes when you make withdrawals.

•   Another factor to consider is your tax bracket. Some people may expect to be in a higher tax bracket during their prime working years, so the immediate tax deduction may be helpful. Others may end up being in a higher tax bracket after they’ve accumulated wealth over decades and reach retirement age.

•   In addition to paying income taxes on your withdrawals, employee savings plans also typically come with a 10% early withdrawal penalty if you take out cash from, say, a 401(k) before reaching 59 ½ years old. There are some exceptions to this penalty, but be aware of it should you be considering making an early withdrawal.

•   Also remember that your plan contributions are investments that are subject to risk. It’s not like a savings account through a financial institution that offers a yield based on your deposits. You will typically be responsible for crafting your portfolio and managing your investments. The options available to you may vary based on the specific plan offered by your employer.

•   No matter how much you contribute, the value of your plan is impacted by the performance of your investment choices, regardless of how much money you contributed over the years. It is also helpful to review your goals regularly and gauge your risk based on your time horizons.

For instance, investors may opt to invest in riskier investment vehicles when they’re younger because the potential for gains may outweigh the risk. As they get older and approach retirement, they may begin to allocate less money to those higher-risk investments.

•   Finally, be aware of any administrative fees that come with your plan. The average cost is 0.37% of invested assets per year for the largest plans and 1.42% for the smallest plans; fees will probably vary based on the plan.

Explore different options available within your plan to choose the one that makes sense in terms of both investments and fees.

Recommended: How to Automate Your Finances

Borrowing from Your Employee Savings Plan

Many employee savings plans designed to save for retirement allow you to borrow funds from your account if you choose to. The IRS has limitations, such as only being able to borrow the lesser of 50% or $50,000.

You’ll pay interest just as you would with any other loan, but that money gets paid back into your account. This may be one option to consider if you find yourself in need of cash, but there are several drawbacks to be aware of.

The loan terms only apply while you remain at the job providing the employee savings plan. If you leave your job with a loan balance, you must repay the full amount by the due date of your next federal tax return.

Another consideration is that if you don’t pay the loan back by its due date, it counts as a distribution and you will likely have to pay income taxes and penalty on the money.

You’ll also miss out on the growth those borrowed funds may have experienced, which could set back your retirement goals. When considering different types of savings accounts, it’s wise to acquaint yourself with a variety of possible scenarios.

The Takeaway

An employee savings plan can be an advantageous way to save towards retirement and other goals. It can be especially beneficial if your employer offers matching contributions, which can help boost your savings.

By starting early and automating the process, you can build an investment account with robust contributions throughout your career.

An employee savings plan may be just one part of a well-rounded financial portfolio, but there are other types of savings accounts that can be useful. For shorter-term goals, like an emergency fund, it may be worth looking into another type of account, like a checking or savings account.

SoFi Checking and Savings is an online bank account that allows users to save and spend in one place. You’ll earn a competitive annual percentage yield (APY) and pay no account fees, which can help your money grow faster.

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.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 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 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

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 4.00% 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 12/3/24. 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.

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.

SoFi Invest®