Debt Payoff Archives

Feb

2025

Student Loan Grace Period: How Long Is It?

By Maureen Shelly | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

As you prepare for life after graduation, one important step is figuring out whether you’re required to make monthly student loan payments right away or if you have what’s called a “grace period.”

Read on to learn what a grace period is, when it starts, and how you might extend yours. You’ll also find a simple financial to-do list to tackle before you start making student loan payments.

Key Points

• Grace periods allow new graduates time to get settled before starting student loan payments.

• Federal student loans typically have a six-month grace period; some Perkins loans have nine months.

• Private student loans may or may not offer a grace period. Those that do typically offer a six-month grace period for undergraduates.

• Interest accrues during the grace period for most federal and private student loans.

• Making early payments can reduce interest costs and the principal balance of student loans.

What Is a Grace Period for Student Loans?

A student loan grace period is a window of time after a student graduates and before they must begin making loan payments. The intent of a grace period is to give new graduates a chance to get a job, get settled, select a repayment plan, and start saving a bit before their student loan payment due dates kick in. Most federal student loans have a grace period, and some private student loans do as well.

Grace periods also apply when a student leaves school or drops below half-time enrollment. Active members of the military who are deployed for more than 30 days during their grace period may receive the full grace period upon their return.

How Long Do Student Loan Grace Periods Last?

The grace period for federal student loans is typically six months. Some Perkins loans can have a nine-month grace period. When private lenders offer a grace period on student loans, it’s usually six months as well.

Keep in mind that, as noted above, not all student loans have grace periods.

Which Student Loans Have a Grace Period?

Whether you have a grace period depends on what kind of loans you have. Student loans fall into two main buckets: federal and private student loans.

Federal Student Loans

Most federal student loans have grace periods.

• Direct Subsidized Loans and Direct Unsubsidized Loans have a six-month grace period.

• Grad PLUS loans technically don’t have a grace period. But graduate or professional students get an automatic six-month deferment after they graduate, leave school, or drop below half-time enrollment.

• Parent Plus loans also don’t have a grace period. However, parents can request a six-month deferment after their child graduates, leaves school, or drops below half-time.

Keep in mind: Borrowers who consolidate their federal loans lose their grace period. Once your Direct Consolidation Loan is disbursed, repayment begins approximately two months later. And if you refinance, any grace period is determined by your new private lender.

Private Student Loans

The terms of private student loans vary by lender. Some private loans require that you make payments while you’re still in school. When private lenders do offer a grace period, it’s usually six months for undergraduates and nine months for graduate and professional students.

At SoFi, qualified private student loan borrowers can take advantage of a six-month grace period before payments are due. SoFi also honors existing grace periods on refinanced student loans.

If you’re not sure whether your private student loan has a grace period, check your loan documents or call your student loan servicer.

Will Interest Accrue During the Grace Period?

For most federal and private student loans, interest is charged during the grace period — even though you aren’t making payments on the loan. In some cases, this interest is then added to your total loan balance (a process called capitalization), effectively leaving you to pay interest on your interest.

In 2023, federal regulations changed so that the interest that accrues during a borrower’s grace period is not capitalized. According to the federal student aid website, “the interest that accrues during your grace period will be added to the outstanding balance of your loan, but it will not be capitalized.”

Smart Ways to Use Your Student Loan Grace Period

If you are in a financially tight spot after you graduate or during your break from school, a student loan grace period can offer some much-needed breathing room. Here’s how you can put your grace period to good use.

Organize Your Finances Before Payments Begin

Take this time to create a new post-grad budget. Which approach you use is up to you: the 70-20-10 Rule, the envelope budget method, or zero-based budgeting. The important thing is to determine your monthly income and expenses, setting aside enough to pay down debts and save a little.

Enroll in Autopay to Avoid Late Fees

Missed student loan payments can incur penalties and hurt your credit score. Setting up autopay means one less thing you have to remember. Some student loan lenders (like SoFi!) will even discount your interest rate for setting up automatic payments.

Make Early Payments to Reduce Interest Costs

Just because you don’t have to make payments toward student loans during a grace period doesn’t mean you can’t. If you are in a financial position to make payments — even interest-only payments — during a grace period, you should. It can help keep your loan’s principal balance from growing on certain types of student loans and the accruing interest from potentially capitalizing during your grace period.

Explore Repayment Plan Options Before the Grace Period Ends

Once your grace period is over for your federal loan, you’ll be automatically enrolled in the Standard Repayment plan. However, if you’re concerned about making your payments, several income-driven repayment plans are available. These plans generally reduce your payment to a small percentage of your discretionary income.

Consider Consolidating or Refinancing Your Student Loans

These two terms are often used interchangeably, but there are important differences between them. Both consolidation and refinancing combine and replace existing student loans with a single new loan.

A Direct Consolidation Loan allows you to combine several federal student loans into one new federal loan. The resulting interest rate is the weighted average of prior loan rates, rounded up to the nearest ⅛ of a percent. However, as noted above, borrowers who consolidate their federal loans lose their grace period.

Student loan refinancing is when you consolidate your student loans with a private lender and receive new rates and terms. Your interest rate — which ideally would be lower — is determined by your credit history.

Can You Extend Your Student Loan Grace Period?

If your loan doesn’t qualify for a grace period or you want to extend your grace period, you have options. You may delay your federal student-loan repayment through deferment and forbearance.

What’s the difference? Both are similar to a grace period in that you won’t be responsible for student loan payments for a length of time. The difference is in the interest.

When a loan is in forbearance, loan payments are temporarily paused, but interest will accrue during the forbearance period. This can lead to substantial increases in what you’ll pay for your federal loans over time. You’ll want to consider forbearance very carefully, and look into other options that might be available to you, like income-driven repayment plans. (The good news is that for most types of loans, the interest that accrues during forbearance no longer capitalizes.)

During deferment, by contrast, interest will not accrue on Direct Subsidized Loans, Subsidized Federal Stafford Loans, Federal Perkins Loans, and subsidized portions of Direct Consolidation Loans or Federal Family Education Loan Program (FFEL) Consolidation Loans. Other types of federal loans may still accrue interest during deferment, and that interest will capitalize upon exiting deferment unless you were enrolled in an income-driven repayment plan.

While grace periods are automatic, you’ll need to request a student loan deferment or forbearance and meet certain eligibility requirements. In some cases — during a medical residency or National Guard activation, for example — a lender is required to grant forbearance.

Pros and Cons of Using Your Full Grace Period

A grace period can be beneficial since it gives you time to get your financial situation in order before you need to start repaying your loans. However, there are also disadvantages to a grace period. Here are some pros and cons to weigh as you’re thinking about when to start paying student loans.

Pros

• A grace period gives you time to find a job after graduation and start earning a salary.

• You can create a budget and start saving money to put toward your student loan payments.

• For those with Direct Subsidized loans, interest does not accrue on these loans during the grace period

Cons

• With many student loans, interest does accrue, which increases the overall amount you need to repay.

• The interest may also capitalize and be added to the principal balance of your loan so that you’re effectively paying interest on the interest.

• Having more debt to repay can increase your debt-to-income (DTI) ratio, which could impact your credit score and your ability to borrow money for other purposes, such as taking out a mortgage.

The Takeaway

Federal student loan grace periods are typically six months from your date of graduation, during which you don’t have to make payments. Most federal student loans have grace periods. Private student loan terms vary by lender. However, some lenders, like SoFi, match federal grace periods for undergrad loans.

During your grace period, you may want to make payments anyway, even interest-only payments, to prevent your balance from growing. The grace period is a good time to create a new budget, choose a repayment plan, and set up autopay.

If you have trouble making your payments, you have options, from income-driven repayment plans to loan consolidation to refinancing.

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.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

How do I know if my student loan has a grace period?

To find out if your student loan has a grace period, check your loan documents. As part of the terms and conditions stated on the documents, you should find information about a grace period if there is one, including how long it is. If you can’t find your loan documents or you’re still not sure if your loan has a grace period, call your loan servicer.

Can I start making payments before my grace period ends?

Yes, you can start making payments before your grace period ends. If you can afford to do so, making early payments can help keep your principal balance from growing and interest from accruing and potentially capitalizing. Even if you make interest-only payments, it can help reduce the total interest you’ll pay on the loan.

What happens if I don’t make a payment after my grace period?

If you fail to make student loan payments after your grace period ends, your loan could eventually go into default. A student loan is considered in default once you are nine months late on your payments. This could damage your credit rating and your future ability to take out a loan. If you’re having trouble making your loan payments, contact your loan servicer right away to see what your options are. You may be able to apply for income-driven repayment, forbearance, or deferment.

Does refinancing affect my grace period?

Whether refinancing affects your grace period depends on the lender. Some private lenders, like SoFi, will honor your grace period, but with others, student loan repayment may begin right away. Check with your refinancing lender.

Are grace periods the same for federal and private student loans?

No, grace periods are not the same for federal and private student loans. Federal student loans typically have a six-month grace period, though some Perkins loans have a nine-month grace period. Not all private lenders offer a grace period. Those who do typically offer a six-month grace period for undergraduates, and nine months for graduate students.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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.

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.

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

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

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.

SOSLR-Q125-024

Feb

2025

What Is Bankruptcy? – Is It Ever the Right Option?

By Julia Califano | Debt Payoff, personal_loan | No Comments

Filing for bankruptcy is a legal proceeding when a person or business cannot pay their debts. It can be a chance to eliminate a great deal of financial stress, put an end to collection calls and letters, and provide an opportunity to remake your financial life. Even so, declaring bankruptcy is not something you should take lightly.

While bankruptcy can, in some cases, reduce or eliminate your debts, it can also have serious consequences, including long-term damage to your credit score. That, in turn, can hamper your ability to obtain new lines or credit, and even make it difficult to get a job or rent an apartment.

Key Points

• Bankruptcy is a legal proceeding when a person or business cannot pay its debts, with options tailored to different financial situations.

• Chapter 7 bankruptcy typically involves liquidating nonexempt assets to pay off debts, with remaining debts discharged.

• Chapter 13 bankruptcy generally requires a court-approved repayment plan over three to five years.

• Specific eligibility criteria must be met to file for either Chapter 7 or Chapter 13 bankruptcy.

• Both bankruptcy types aim to provide a fresh financial start, despite differing approaches, requirements and resulting decreases in credit scores.

Bankruptcy Defined

For individuals, there are two main kinds of bankruptcy:

Bankruptcy is defined as a legal proceeding that is triggered when a person or a business is unable to repay its debts or obligations. This process can offer a hard reset for people who can’t pay their bills.

When the bankruptcy procedure gets underway, the debtor’s assets are assessed (and this can range from money in bank accounts to real estate and beyond) and may be used to pay back some of what the person or business owns.

What Are the Types of Bankruptcy?

For individuals, there are two main different kinds of bankruptcy:

• Chapter 7 Also known as “liquidation bankruptcy,” this is bankruptcy in its most basic form. With this type of bankruptcy, your nonexempt possessions, such as homes and cars, are sold to repay existing debts. After this, many (if not all) of your debts are canceled outright in a four- to six-month process.

• Chapter 13 Chapter 13 Also known as a “reorganization bankruptcy,” this is a court-approved plan in which you use your income to make payments on your debts over a three- to five-year period. Some of your debts may also be discharged.

The main difference between the two options is that Chapter 7 allows the debtor to eliminate all dischargeable unsecured debt, whereas Chapter 13 allows for payments to be made on those debts. Here are a few more points to consider:

• You may be prevented from filing for Chapter 7 bankruptcy if you earn enough income to repay your debts in a Chapter 13 bankruptcy plan. On the other hand, you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low.

• If you have substantial equity in your home, you could potentially lose your home if you file for Chapter 7. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.

• Chapter 13 bankruptcy stays on your credit report for seven years, while Chapter 7 bankruptcy stays on the report for 10 years.

• Some debts, like child support obligations, alimony, student loans, and some tax obligations, cannot be wiped out in either type of bankruptcy.

• Also keep in mind that bankruptcy won’t relieve you of your obligation to pay your mortgage, though it might make your mortgage payments easier to make by getting rid of other debts.

When To Consider Bankruptcy as a Solution

Life circumstances and financial situations can vary significantly from person to person, so there is no hard and fast rule for when to declare bankruptcy.

However, you may want to start by asking yourself the following questions:

• Are you unclear on exactly how much you currently owe?

• Are you only able to make minimum payments on your credit cards?

• Are you getting calls from debt collectors?

• Do your financial problems make you feel hopeless, out of control, or scared?

• Are you using your credit card to pay for necessities because you have so little cash in your checking account?

• Are you thinking about debt consolidation?

If you answered yes to two or more of these questions, you may want to at the very least give your financial situation more thought and attention.

You may also want to start doing some research (or, if possible, speak with a consumer law attorney) to see if your debt qualifies for bankruptcy, as well as how filing for bankruptcy would affect your life and financial situation.

Alternatives to Bankruptcy

While bankruptcy can sometimes be the best way to get out from under crushing financial burdens, it is not the only way. There are alternatives that can often reduce your debt obligations without some of the negative consequences of bankruptcy. Here are a few you may want to consider.

Credit Counseling

A counselor or counseling service specializing in helping people with debt problems might be able to come up with a solution that has not occurred to you, such as a modified payment plan or debt consolidation.

According to the Federal Trade Commission, you’ll want to look for a nonprofit credit counseling program, such as those offered by universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service. You can also find a nonprofit agency that offers bankruptcy counseling through the National Foundation for Credit Counseling .

Keep in mind that not all not all nonprofit organizations offer free services, so it’s a good idea to do your research before you sign up for any type of credit counseling services.

Negotiating with your Creditors

Creditors would often rather settle a debt with you than have it discharged in bankruptcy. Debt settlement is an agreement between you and your creditors that you will pay a lump sum, possibly far below what you owe, in order to settle the matter.

But it may not be quite as tidy as it sounds. The creditors take a loss, and likely so will your credit score. You’ll also still need to pay taxes on the forgiven amount, because it will be considered revenue (money you’re getting back).

There are debt settlement companies out there to help you negotiate with creditors, but not all are created equal — some of them charge steep fees and can’t guarantee they will get you the settlement that makes the most sense for you.

It’s a good idea to carefully vet any debt settlement company you are considering working with.

Recommended: Money Management Guide

Cutting Back on Expenses

You may want to give some deep thought to the way you live and currently spend your money. Your lifestyle and financial habits may be what inched you toward bankruptcy in the first place. A good way to start is to set up a personal budget, which involves looking at what’s coming in and what’s going out each month, and then looking for places to trim spending.

Even small steps, like making your own lunch, walking instead of burning gas by driving, keeping the heat or air conditioning use to a minimum, and brewing your own coffee could help you free up cash and transfer money to go toward paying your debt.

While it can be tough to live on a budget at first, with time, you may find yourself becoming more solvent and less burdened.

Debt Consolidation

With debt consolidation, you roll all your debts into one new loan account, preferably with a lower interest rate. This can enable you to pay off your debt and make one monthly payment going forward.

Having just one payment may make it easier to manage your existing debt, and could possibly save you on interest as well.

Refinancing or Modifying Your Mortgage

If your credit is still good enough, you may be able to refinance your mortgage to a new rate that could get your monthly payment low enough that it saves you from bankruptcy.

If you’re not able to refinance at a lower rate, you may be able to qualify for a mortgage modification. A mortgage loan modification is a change in your loan terms that could reduce your monthly payment.

If your lender allows it, it could involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing (or reducing) your principal balance.

You’ll want to keep in mind, however, that if you receive a loan modification and you still can’t make the payments, you could be at risk of losing your home.

Life After Bankruptcy

Bankruptcy can be the path forward from overwhelming debt. There are steps to take afterward to help get your finances back on track.

Focus on your credit. Your credit score will typically be negatively impacted and significantly so. You’ll need to be diligent about paying your bills on time and also taking steps to rebuild your score. A secured credit card, which involves you putting down a deposit that serves as collateral and your credit limit, could be a valuable move to make.

Consider cosigners. If you need to buy a car or are planning to buy a house in the near future, investigate having cosigners (perhaps a close relative) on your loans to help you gain approval. Or you might see if a trusted friend or relative would be willing to offer you a loan.

Seek financial counseling. Having a professionally prepared financial plan to move forward with after this difficult experience can be a source of insight, information, and support. Also, skilled guidance can help you steer clear of taking on too much debt in the future. In addition, you can learn some solid financial principles, such as automatic transfers to build an emergency fund to handle future challenges that require a quick infusion of cash.

The Takeaway

Bankruptcy is a legal proceeding that can help you get out from under crushing debt. The process involves either liquidating (or selling off) your assets to pay your debts or adhering to a court-ordered repayment plan. However, bankruptcy information stays on your credit report for seven to 10 years and can also make it difficult to get credit, buy a home, or sometimes get a job.

Before considering bankruptcy, you may want to first explore other debt management options.

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Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

What debts can be discharged through bankruptcy?

In general, credit card debt, medical bills, and personal loans are dischargeable in bankruptcy. However, not all debts can be discharged. For instance, you may still owe child support, alimony, some unpaid taxes, and other debts.

Will I lose all my assets if I file for bankruptcy?

It depends on your specific situation. Here are some of the assets that can be lost when you file for bankruptcy: real property (meaning land and buildings), personal property (such as jewelry, art, clothing), and intangible assets, such as retirement accounts and alimony.

How does filing for bankruptcy affect my credit score?

Filing for bankruptcy can significantly lower your credit score, and it can stay on your credit report for seven to 10 years. There isn’t a specific figure for how much it will drop, but there is a tendency for those with a higher starting score to see a bigger decrease than those whose score was lower from the beginning.

How does one file for bankruptcy?

Typically, you file for bankruptcy by consulting with a lawyer who specializes in this type of proceeding, gathering necessary documents, attending a credit counseling course, filling out the appropriate forms and submitting them with a filing fee, attending a meeting of creditors, and then determining whether a repayment plan is possible or learning about the discharge of debt.

Will I lose my car if I am bankrupt?

Whether you can keep your car after bankruptcy will depend on such factors as the type of bankruptcy, the value of the vehicle, and whether you can pay for it or not.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 3.80% 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.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

This content is provided for informational and educational purposes only and should not be construed as financial 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.

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 .

This article is not intended to be legal advice. Please consult an attorney for advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

SOBNK-Q125-078

Feb

2025

APR vs Interest Rate

By Dana Webb | Debt Payoff, Student Loans, student_loan, Terminology | No Comments

When the interest rate and annual percentage rate (APR) are calculated for a loan — especially a large one — the two can produce very different numbers, so it’s important to know the difference when evaluating what a loan will cost you.

Basically, the interest rate is the cost of borrowing money, and the APR is the total cost, including lender fees and any other charges.

Let’s look at interest rates vs. APRs for loans, and student loans in particular.

Key Points

• The interest rate is the cost of borrowing the principal amount, expressed as a percentage.

• The annual percentage rate (APR) includes the interest rate plus additional fees, providing a total cost view.

• Higher interest rates result in higher monthly payments and total costs over the loan term.

• Additional fees in the APR include closing costs, origination fees, and mortgage points.

• Considering both interest rate and APR is crucial for making informed loan decisions.

What Is an Interest Rate?

An interest rate is the rate you pay to borrow money, expressed as a percentage of the principal. Generally, an interest rate is determined by market factors, your credit score and financial profile, and the loan’s repayment terms, among other things.

How Interest Rates Work

Most people who take out a home mortgage loan opt for a fixed-rate mortgage. The borrower repays the amount borrowed, plus interest, in equal monthly installment payments over a period of 10, 15, 20, or 30 years. The higher the interest rate, the more they will pay each month and over the life of the loan. To see how interest rates affect payment amounts, try plugging different rate numbers into a mortgage calculator.

Some homebuyers opt for an adjustable-rate mortgage. In this scenario, there is typically an introductory period with an interest rate that might be lower than the available rate on a fixed-rate loan. But after that, the rate can periodically adjust (up or down), following market rates.

What Is APR?

If a loan were to have no other fees, hidden or otherwise, the interest rate and APR could be the same number. But because most loans have fees, the numbers are usually different.

How APRs Work

An APR is the total cost of the loan, including fees and other charges, expressed as an annual percentage. Compared with a basic interest rate, an APR provides borrowers with a more comprehensive picture of the total costs of the loan. The bulk of mortgage fees come in the form of closing costs and origination fees. Generally, closing costs average 3% to 6% of your mortgage loan principal, but each lender is different. Some borrowers also pay for mortgage points, also known as discount points, to lower the interest on their home loan. All of this would factor into the APR. Understanding these costs can help you get a clear picture of the total cost of a loan.

The federal Truth in Lending Act requires lenders to disclose a loan’s APR when they advertise its interest rate. In most circumstances, the APR will be higher than the interest rate. If it’s not, it’s generally because of some sort of rebate offered by the lender. If you notice this type of discrepancy, ask the lender to explain.

APR vs. Interest Rate Calculation

The bottom line: The interest rate percentage and the APR will be different if there are fees (like origination fees) associated with your loan.

How is APR Calculated?

To calculate APR, you first need to add the interest and the total fees for your loan. Then you divide by the principal amount borrowed. Divide the result by the total number of days in your loan term (for a 20-year loan, for example, you would divide by 7,300). Multiply the result by 365 (to get a yearly number) and then again by 100 (to arrive at an APR percentage).

Here’s the APR formula:

APR = ((Interest + Fees / Loan amount) / Number of days in loan term) x 365 x 100

Let’s say you’re comparing loan offers with similar interest rates. By looking at the APR, you should be able to see which loan may be more cost-effective, because typically the loan with the lowest APR will be the loan with the lowest added costs.

So when comparing apples to apples, with the same loan type and term, APR may be helpful. But lenders don’t always make it easy to tell which loan is an apple and which is a pear. To find the best deal, you need to seek out all the costs attached to the loan.

You may find that a low APR comes with high upfront fees, or that you don’t qualify for a super-low advertised APR, reserved for those with stellar credit.

How Are Interest Rates Calculated?

Calculating the total interest you’ll pay on a home loan is pretty simple with online tools. You can see the total interest you’ll pay on a loan quickly by plugging your loan amount, interest rate, and loan term into a mortgage calculator. (If you want to see what your monthly payment will be when you factor in property taxes and home insurance, use a mortgage calculator with taxes and insurance.)

How APR Works on Home Loans

Not all homebuyers understand the true cost of their mortgage loans. If you’re considering multiple loan offers (perhaps you’ve gone through mortgage prequalification with a few lenders), you can look at the APRs on the offers to compare them against one another.

One caveat regarding APR: Because fees associated with a home mortgage are usually paid at the beginning of the loan, the APR won’t reflect the true annual cost of the loan if you sell the property or refinance before the mortgage term is up.

How Interest Rates Work on Home Loans

Most home mortgages are amortizing loans, so although the monthly payment on a fixed-rate loan remains constant, the amount of interest you’ll pay with each payment will differ. Typically, more of a borrower’s monthly payment is made up of interest early in the life of the loan; as the loan ages, the reverse is true and more of the payment chips away at the principal. An amortization table for your loan should be provided in your loan documents.

Benefits of Government-Backed Mortgages

Some would-be homeowners find themselves comparing different types of mortgages (as well as different interest rates and APRs) when considering how to finance their purchase, and government-backed mortgages will have a different profile than conventional loans.

A government-backed mortgage such as an FHA loan or a VA loan may have a low down payment (or no down payment), which is a key benefit, especially for first-time homebuyers, who typically have fewer resources to pull from. It may also have different upfront fees than a conventional mortgage. An FHA loan, for example, usually requires mortgage insurance. If the borrower makes a down payment of 10% or more, after 11 years the lender can remove the mortgage insurance requirement, but many borrowers need to refinance to get rid of the insurance payment. The cost of this mortgage insurance factors into the APR.

The Takeaway

APR vs. interest rate is a key factor you’ll want to consider when deciding on a loan, because the APR reflects the fees involved in the loan. Even when it comes to government-backed home loans, fees are part of the story. So don’t just look at a loan’s interest rate — take the time to compare the APR as well.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What’s a good APR?

A good APR will depend on your individual profile as a borrower, with your credit score being a key factor. To see how the APR you’re being offered on a home loan compares with the national average, search for “national average XX-year mortgage APR” (with XX being your loan term in years). Then look at the percentages side by side.

What’s a good interest rate?

A good interest rate is one that’s below the posted national average interest rate for your loan type when you search online. Borrowers with less-than-stellar credit scores won’t qualify for the best rates, however, so what’s a good interest rate for you will depend on your personal credit score and financial profile.

Does 0% APR mean no interest?

Zero percent APR means that no interest is charged for a set period of time. This is a term commonly seen on credit card offers and car loans. If you go this route, make sure you note the length of the no-interest promotional period and that you make your payments on time during the period, as missing payments can trigger interest to build on the debt.

Does refinancing your mortgage help lower rates?

Refinancing your mortgage may help lower your interest rate if rates have dropped since you initially purchased your home, or if your credit score and other aspects of your financial profile have improved significantly. It’s important to consider closing costs associated with a refinance, however, before deciding that it makes sense to chase a lower rate.

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.

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

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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.

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.

SOHL-Q125-064

Feb

2025

Understanding Different Types of Loans: A Quick Guide

By Janet Schaaf | Debt Payoff, Financial Independence, personal_loan | No Comments

A personal loan is a type of loan offered by many banks, credit unions, and online lenders, and there are an array of options to suit different needs. Personal loans typically don’t place restrictions on how you use the funds, which means they can be a useful source of cash for anything from medical bills to wedding costs to home renovation expenses.

Deciding which kind of personal loan best suits your needs can depend on such factors as how much money you plan to borrow, how soon you plan to pay it back, your creditworthiness and income, and how much debt you already have. To make the best selection, delve into the different types of personal loans available.

Key Points

• Personal loans offer flexible funding for expenses like medical bills and debt consolidation.

• Unsecured loans do not require collateral but may have higher interest rates and stricter approval criteria vs. secured loans.

• Fixed rate loans provide consistent monthly payments, while variable rate loans have fluctuating interest rates.

• Other types of personal loans can include medical loans and credit builder loans.

• Key factors to consider when evaluating personal loan options include the interest rate, repayment timeline, and whether collateral is required.

Unsecured Personal Loan

A common type of personal loan is an unsecured personal loan. This means there’s no collateral required to back up the loan, which can make them riskier for lenders. Approval and interest rates for unsecured personal loans are generally based on a person’s income and credit score, but other factors may apply. In terms of how your credit score impacts a loan, you can expect higher credit scores to merit more favorable (or lower) interest rates.

Secured Personal Loan

Unlike an unsecured loan, there is some sort of collateral backing up a secured personal loan. For example, think of it working in the same way a home mortgage does — if the borrower does not make payments, the bank or lender can seize the asset (in this case, the home) that was used to secure the loan.

In terms of accessing this kind of personal loan, collateral could include such assets as:

• Cash in the bank

• Real estate

• Jewelry, art, antiques

• A car or boat

• Stocks, bonds, insurance policies

Since secured loans involve collateral, lenders often view them as less risky than their unsecured counterparts. This can mean that secured personal loans might offer a lower interest rate than a comparable unsecured loan.

Here’s a comparison of some of the features of unsecured and secured personal loans:

Unsecured Personal Loan	Secured Personal Loan
No collateral needed	Requires an asset to be used as collateral
May have higher interest rates than secured personal loans	May have lower interest rates than unsecured personal loans
Approval typically based on applicant’s income, credit score, and other factors	Approval typically based on value of collateral being used, in addition to applicant’s creditworthiness
Funds may be available in as little as a few days	Processing time can be longer due to need for collateral valuation

Fixed Rate Loan

A personal loan with a fixed interest rate will have the same interest rate for the life of the loan. This means you’ll have the same fixed payment each month and, based on your scheduled payments, can know upfront how much interest you’ll pay over the life of the loan. This can help people budget appropriately as they put funds towards the common uses for personal loans, such as a major dental bill or travel plans.

Variable Rate Loan

On the other hand, the interest rate on a variable rate loan may change over the life of the loan, fluctuating based on the prevailing short-term interest rates. Typically, the starting interest rate on a variable rate loan will be lower than on a fixed rate loan, but the interest rate is likely to change as time passes. Variable rate loans are generally tied to well-known indexes.

If you’re trying to decide on a variable- or fixed-rate personal loan, this summary might be helpful (you might also consider crunching the numbers using a personal loan calculator):

Variable Interest Rate	Fixed Interest Rate
May have lower starting interest rate than a fixed-rate personal loan	Interest rate remains the same for the life of the loan
Monthly payment amount may vary during the loan’s term	Monthly payment amount will not change
Might be desirable for a short-term loan if current interest rate is low	May be a better option if predictable payments are desired for a long-term loan and/or interest rates are rising
Maximum interest rate may be capped	Potential to cost more in interest payments over the life of the loan if interest rates drop

Debt Consolidation Loan

This type of personal loan refinances existing debts into one new loan. Ideally, the interest rate on this new debt consolidation loan would be lower than the interest rate on the outstanding debt. This would allow you to spend less in interest over the life of the loan.

With a debt consolidation loan, you may only have to manage one single monthly payment versus, say, paying multiple credit card bills. This streamlining of monthly debt payments can be another major perk of this type of loan.

Cosigned Loan

If you’re struggling to get approved for a personal loan on your own, there are circumstances in which you can apply for a loan with a cosigner. A cosigner is someone who helps you qualify for the loan but does not have ownership over the loan. In the event that you are unable to make payments on the loan, your cosigner would, however, be responsible.

Co-borrowers and co-applicants are other terms you might hear if you’re interested in borrowing a personal loan with the assistance of a friend or family member.

• A co-borrower essentially takes out the loan with you. Unlike a cosigner, your co-borrower’s name will also be on the loan, so they’d be equally responsible for making sure payments are made on time.

• A co-applicant is the person applying for a loan with you. When the loan application is approved, the co-applicant becomes the co-borrower.

Recommended: Typical Personal Loan Requirements

Personal Line of Credit

Slightly different from a personal loan, a personal line of credit functions similarly to a credit card. It’s revolving credit, which typically means there is a maximum credit limit, a required monthly minimum payment, and when the debt is paid off, money can be withdrawn again.

The funds in a personal line of credit are generally accessed by writing checks, using a card, or by making transfers into another account.

Interest rates on a personal line of credit may be lower than the interest rates on a credit card. Like personal loans, there are typically both unsecured and secured personal lines of credit available.

Credit Card Cash Advance

Some credit cards offer the option to borrow cash against the card’s total cash advance limit. Doing so is called taking a credit card cash advance. The available cash advance amount may be different than the total available credit for purchases — that information is typically included on each credit card statement.

Depending on the credit card company’s policy, there are a few ways to secure a cash advance: You could use your credit card at an ATM to withdraw money, borrow a cash advance from a credit union or bank, or request a cash advance from the credit card company directly.

Cash advances typically have some of the highest interest rates around, higher still than your regular annual percentage rate (APR). There are often additional credit card fees associated with a cash advance transaction. Check your credit card disclosure terms for full details before taking a cash advance.

Payday Loan

Payday loans are short-term, high-interest loans that are designed to be repaid on the borrower’s next payday. They are often for small amounts of cash and can involve triple-digit interest rates. An example: A $15 finance charge on a loan of $100 that’s due in two weeks has an annual interest rate of 391% if not paid on time. In other words, it can be wise to proceed with extreme caution when accessing cash this way since the amount owed could skyrocket.

Credit Builder Loan

As the name suggests, credit builder loans are a kind of loan that can help a person with no or low credit to positively impact their standing. Unlike most loans which give you funds at the start of the loan, a credit builder loan provides the cash at the end of the loan term. Here’s how they usually work:

• The lender puts the loan’s money into a separate account, such as a savings account or a certificate of deposit (CD).

• The borrower makes regular payments to the lender, which over time pays off the loan’s principal plus interest.

• After the loan has been paid off, the money is released to the borrower.

These payments can be reported to the credit bureaus. If the loan is managed responsibly, this activity can help build the borrower’s credit score.

Medical Loan

A medical loan is usually an unsecured loan that can be applied to medical expenses, such as out-of-pocket costs, copays, hospital bills, and the fees for emergency and elective procedures, among others. You can often find them through banks and online lenders, and they may offer features that make them appropriate for those recovering from health issues, such a period of 0% interest.

The Takeaway

Personal loans can offer a source of cash to be used in a variety of ways. There are various kinds of loans available, such as secured and unsecured, variable and fixed interest rate, and more. Doing research on these different sources of funding can help you make an educated decision about whether a personal loan is right for you and, if so, which type suits your needs best.

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.

🛈 SoFi offers a number of different personal loan options. See if one suits your needs.

FAQ

How many types of personal loans are there?

There are many different types of personal loans. Some popular options include secured vs. unsecured (meaning no collateral is needed) loans; fixed vs. variable rate loans; and personal loans designed for specific purposes, such as a debt consolidation, medical, or credit builder loan.

How much is a $20,000 loan for 5 years?

The cost of a $20,000 loan for five years will depend on a variety of factors, such as the interest rate and whether it’s fixed or variable. As an example, a personal loan of $20,000 for 5 years at a fixed rate of 8% would have a monthly payment of $472 for a total repayment of $23,584, meaning you’d pay $3,584 in interest over the life of the loan.

What is the largest personal loan I can get?

How large a personal loan you can get will usually depend on your credit score, income, and debt-to-income (DTI) ratio. Many lenders offer personal loans at up to $40,000–$50,000, but some may approve loans for up to $100,000 if a prospective borrower qualifies.

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 .

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 Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

SOPL-Q125-025

Feb

2025

Debt Buyers vs Debt Collectors

By Stacey Leasca | Debt Payoff, personal_loan | Comments Off

While these two services may sound similar, debt buyers purchase past-due accounts from lenders, whereas debt collectors work on behalf of whoever owns the debt in an attempt to get the borrower to pay.

If you find yourself struggling with debt, it’s important to understand what may happen to your debt so you can better work through the situation. That’s why it can be smart to know the difference between a debt buyer and a debt collector. Both of these services are used by lenders, like banks, to move debts off of their liability balance sheets.

Here, take a closer look at how each of these services operates.

Key Points

• Debt buyers purchase past-due accounts from lenders.

• Debt collectors work to collect debts for lenders or debt buyers.

• Debt buyers often pay a fraction of the debt’s face value.

• Debt collectors can report to credit bureaus.

• Timely debt repayment helps avoid collection issues.

When and Why Do Companies Sell Your Debt?

A borrower will likely only ever deal with the company they’re borrowing from — so long as they make payments on their debt regularly and on time. However, if the borrower does not make timely payments, the debt may get sold to a third party, known as a debt buyer.

The lender will sell the debt in an effort to lower their liability. There’s no real timetable for when debt may be sold or go into collections — it can depend on the state you live in, the lender’s policies, and the type of debt it is. Debt collectors can then attempt to collect the debt from the debtor. They operate on behalf of the business that owns the debt, and their goal is to get the debtor to pay what they owe.

What Is a Debt Buyer?

A debt buyer is a company that purchases past-due accounts from a business, such as a bank or a credit card company. They typically purchase the debt for a small percentage of what’s actually due to the original lender. The amount a debt buyer pays for debt can vary, but it’s often just cents on the dollar.

For example, a debt buyer may only pay $100 for a $1,000 debt from the original lender. This means that if the new debt buyer actually collects the debt they purchased, they will make a $900 profit. Debt buyers can typically purchase older debt for even lower amounts because it’s less likely to actually get collected.

Debt buyers don’t typically do this as a one-off purchase. Instead, they’re usually in the business of purchasing many delinquent debts at once to increase their odds of turning a profit. This strategy has the potential to be quite lucrative. If, for example, a debt buyer purchases 10 different $1,000 debts at $100 apiece, the buyer needs just one person to pay their debt to break even, and just two out of the 10 people to pay their debts to turn a profit.

Recommended: Common Uses for Personal Loans

What Is a Debt Collector?

Debt collectors are third-party companies that collect debts on behalf of other companies. They can attempt to collect debts on behalf of the original lenders, or they can attempt to collect debts for debt buyers.

Debt-buying companies may also function as debt collection agencies to collect the debts they’ve purchased. But a debt-buying company can also assign debts to another third-party debt collecting company, paying it a portion of the profit they make when the debt is paid.

To get the debt paid, debt collectors will typically attempt to contact the original debtor through letters and phone calls, letting them know what’s owed and attempting to convince them to pay the debt. Collectors will often use the internet to find a person or even go as far as hiring a private investigator. Debt collectors also can look into a person’s other financial information, such as their bank or brokerage accounts, to assess if they’re theoretically able to repay their debts.

However, a debt collector typically cannot seize paychecks. The only way a collector may be able to seize a paycheck or garnish wages is if there is a court order, known as a judgment, requiring the debtor to pay. For this to happen, the debt collector must first take the debtor to court within the debt’s statute of limitations and win the judgment. Still, there could be other negative consequences, such as collectors reporting a debtor to credit agencies, which could affect their credit score for some time to come.

Debt collectors often get a bad reputation for using aggressive tactics. The federal government introduced the Fair Debt Collection Practices Act to protect people from predatory practices. The law dictates certain reasonable limitations under which a debt collector can contact the debtor. If the collection company violates the law, the debtor could bring a lawsuit against it for damages.

Recommended: How to Finance a Wedding

How to Avoid Collections and Pay Off Debt

Paying off all debt on time is the best way to avoid encountering either a debt buyer or a debt collector. But if you’ve found yourself in debt, don’t despair. Rather, take a bit of time to plot out the best method of repayment for your financial situation, which could entail getting into the nitty gritty of your spending or crunching the numbers with a personal loan calculator.

Here are some of the different strategies to pay off debt you might consider:

• Creating a monthly budget: This can help to track spending and identify potential areas to cut back in order to pay off debts faster. After sitting down and looking through your monthly expenditures, you might be surprised how much fat there is to trim. Then, put all of that extra cash toward paying down your debts.

• Using the snowball or avalanche method: The snowball method focuses on paying off your debts in order of smallest to largest balances, while continuing to pay the minimum due on each debt. With the avalanche method, you’d target the debt with the highest interest rate first while continuing to make minimum payments on other debt balances. In both methods, after the first debt is paid off, the amount that was going toward that debt is put toward the second debt on the list, and so on, thus helping to pay down each consecutive balance as fast as possible.

• Consolidating your debts: Another option to try is consolidating debts with a debt consolidation loan, which is one of the types of personal loan. Typically, a debt consolidation loan offers lower interest rates than credit card interest rates, which can make those debts more affordable and easier to pay off.

This is why debt consolidation is among the common uses for personal loans. Plus, with a debt consolidation loan, you’ll just have one monthly payment to stay on top of.

Recommended: Get Your Personal Loan Approved

The Takeaway

A debt buyer vs. collector plays a different role when it comes to debt, but they are both parties you might encounter if you’re way past due on payments. Debt buyers purchase debt from lenders, often for pennies on the dollar. Debt collectors, however, can take a number of steps in an effort to collect owed debt on a company’s behalf, including reporting that debt to the credit bureaus. To avoid encountering either of these, consider ways to manage your debt more effectively.

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.

Want to avoid debt collection? A personal loan with SoFi may help.

🛈 SoFi is not a debt buyer or debt collector. We offer products that may help you manage your debt.

FAQ

Do I have to pay debt if it’s been sold?

Yes, you still have to pay debt if it’s been sold. The difference is that you now need to pay the debt collector vs. the original creditor.

What is the 777 rule for debt collectors?

The 7-in-7 rule is a guideline established by the Consumer Financial Protection Bureau regarding how often a debt collector can contact a debtor in a seven-day period. They cannot call more than seven times in seven days, nor any sooner than seven days after having had a conversation with a debtor.

How much do debt buyers pay for debt?

While the exact figure will vary, data indicates that some debt buyers pay as little as four to five cents on the dollar when buying debt from credit card companies.

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 .

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.

This content is provided for informational and educational purposes only and should not be construed as financial 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.

This article is not intended to be legal advice. Please consult an attorney for advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

SOPL-Q125-022