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If you’re getting divorced, you are likely going through a major upheaval on many fronts, including your financial life. You may wonder (and worry) about how your debt will be managed. For instance, will you wind up responsible for what your soon-to-be former spouse owes?

The answer will depend on when those debts were incurred (i.e., before or after you got married), the nature of the debt, as well as what state you live in. Here’s what you need to know about how debt is split in a divorce.

Community Property vs Common Law Property Rules

How assets and debt are divided in divorce largely depends on whether you live in a community property state or a common law state. These legal frameworks determine whether debts incurred during marriage are considered jointly owned or individually held.

Community Property States

In community property states most debts (and assets) acquired during the marriage are considered jointly owned, regardless of whose name is on the account. That means both spouses are typically equally responsible for all debts incurred during the marriage, even if one spouse did not contribute the debt.

For example, if one spouse racks up $20,000 in credit card debt during the marriage — even if it’s only in their name — both partners may be held equally liable in a community property state. Debts taken on before the marriage or after separation are typically treated as separate liabilities, but timing and documentation are critical.

These rules generally apply unless both spouses agree to a different arrangement or the court finds a compelling reason to divide up debts in a different way.

Community property states include:

•   Arizona

•   California

•   Idaho

•   Louisiana

•   Nevada

•   New Mexico

•   Texas

•   Washington

•   Wisconsin

Alaska, Florida, Kentucky, Tennessee, and South Dakota allow couples to opt into a community property system if they choose.

Common Law States

Most U.S. states follow common law property rules. In these states, debt responsibility is determined by whose name is on the account or who signed for the loan. If a debt is only in your spouse’s name and you didn’t cosign, you’re usually not liable for it.

However, there are some exceptions. Even in common law states, courts can assign debt responsibility based on broader concepts of fairness, especially if the debt benefited both spouses or was used to support the family.


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

End of Debt Accrual

One crucial consideration is when debt accumulation legally stops. In most cases, the date of separation — either physical or legal — acts as the cutoff point for joint debt responsibility. Any debt incurred after this date is typically considered separate, assuming proper documentation is in place.

That said, the rules may vary by state. In some jurisdictions, debts continue to be shared until the divorce is finalized. It’s vital to document your separation and keep clear financial records from that point forward.

Recommended: How to Pay for a Divorce

How Is Debt Split in a Divorce?

How debt is divided in divorce can also vary depending on the type of debt. Here’s how common types of debt are typically handled:

Credit Card Debt

Credit card debt can be particularly tricky, especially if the couple used joint cards or shared authorized access. In community property states, credit card debt accrued during the marriage is generally shared, no matter whose name is on the card.

In common law states, the person whose name is on the account is typically responsible. However, if both spouses benefitted from the purchases — say, for groceries or vacation expenses — the court may still assign partial responsibility to both parties.

To protect yourself, consider paying off joint cards before divorce or freezing them during proceedings to prevent additional charges.

Mortgage Debt

Mortgages are often the largest debt shared by divorcing couples. If both names are on the loan and the deed, then both individuals are legally responsible for the payments — even if you separate or divorce.

There are several ways to handle mortgage debt in a divorce:

•   One spouse refinances the mortgage in their name and buys out the other’s share.

•   The couple sells the home and splits the proceeds (or losses).

•   Both parties agree to continue joint ownership for a set period (e.g., until the children move out), with clear terms for payment responsibility.

Whatever option you choose, you’ll want to make sure it is legally documented in the divorce agreement to avoid future disputes.

Student Loan Debt

Student loans are typically considered separate debt if incurred before marriage. If one of you takes out student loans during marriage and you live in a common law property state, those loans typically stay with the borrower.

If you live in a community property state, student loans taken out during the marriage generally become a shared responsibility. One exception: Federal student loans are generally kept with the spouse who took them out, even if it was after marriage.

If you cosigned your spouse’s student loans at any time — whether they’re federal, private, or refinanced student loans — you are legally liable to repay those loans if your spouse can’t, even after divorce.

Auto Loan Debt

If a car loan is in both names, both parties are generally liable, even if only one person drives the car and that person keeps the car after divorce. Ideally, the person who keeps the car assumes the loan or refinances it in their name.

If the loan is only in one name but the other spouse uses the vehicle, it’s essential to clarify in the divorce decree (the document that finalizes the divorce) who will take responsibility for the car and the loan moving forward.

Medical Debt

In community property states, medical debt incurred during the marriage is typically considered joint debt, even if it only involves one spouse. If you live in a common law state, you are typically not responsible for your spouse’s medical debt unless you co-signed on the debt. However, there are exceptions, such as the medical debt that benefited the family.

If one spouse accrued medical debt before getting married, or if the medical bills came after the divorce, that debt typically stays with that person.

Additional Considerations

Here are some other factors that can impact how debt is split in a divorce.

Prenuptial or Postnuptial Agreements

If you and your spouse signed a prenup or postnup that includes provisions for handling debt, those terms generally take precedence over state law.

These legal agreements can specify who is responsible for certain debts and can significantly simplify divorce proceedings, provided they’re properly drafted and enforceable under state law.

Hiring an Attorney

Dividing debt in a divorce can get complicated quickly. Hiring a qualified divorce attorney can help ensure that your rights are protected and that you fully understand the consequences of your decisions.

An attorney can also help mediate disputes, especially when emotions are running high, and prevent you from agreeing to terms that may haunt you later.

Managing Debt After a Divorce

Once the divorce is finalized, the financial journey isn’t over. Managing debt responsibly in the aftermath is essential for rebuilding credit and regaining financial independence.

Negotiating a Fair Debt Settlement

Ideally, you’ll want to negotiate a debt settlement with your ex-spouse as part of the divorce agreement. This might involve trading one type of asset for another or agreeing to pay off certain debts in exchange for other concessions.

It’s important to be clear about which debts are being assumed by each party and make sure the settlement is reflected in the legal documents.

If you can’t come to an agreement, the court will step in and distribute the assets based on state laws, which may be according to community property rules or the principals of equitable distribution.

Separating Joint Accounts

Failing to separate joint debt accounts after divorce can lead to unexpected consequences. If your name is still on a shared credit card or loan, you’re still legally responsible, regardless of the divorce decree.

It’s a good idea to close or refinance all joint accounts and remove authorized users where necessary. This can help prevent future charges and shields your credit from missed payments made by your ex.

Creating a Post-Divorce Budget

A new life calls for a new budget. Financial planning after divorce generally involves:

•   Recalculating income and expenses

•   Prioritizing debt repayment

•   Building emergency savings

•   Setting new financial goals

It can be helpful to consult a financial advisor during this transition period to help you get back on your feet and avoid future financial pitfalls.


💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

Paying Off Debt With a SoFi Personal Loan

If you’re overwhelmed with multiple high-interest debts after a divorce, consolidating them with a SoFi personal loan could be a smart move. SoFi offers fixed-rate personal loans with flexible terms and no-fee options.

Using a personal loan to pay off credit cards or medical debt can simplify repayment and potentially lower your overall interest rate. This can free up monthly cash flow and help you regain financial control faster.

The Takeaway

Divorce is rarely easy, and debt can make it even more stressful. Understanding how different debts are treated in your state can help you navigate the process more confidently.

Whether it’s dividing credit card balances, negotiating a mortgage transfer, or tackling student loans, it’s a good idea to try to work together to come up with a fair and transparent approach. With the right tools and guidance, you can emerge from divorce financially stable and ready to rebuild your future.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Who is responsible for debt after a divorce?

Responsibility for debt after a divorce depends on state laws. In community property states, debts incurred during the marriage are typically considered jointly owned and equally shared between spouses, regardless of whose name is on the loan or credit card. In common law states, debt during marriage generally belongs to the spouse whose name is on the account or who incurred the obligation.

Can divorce ruin your credit?

Divorce itself doesn’t directly affect your credit score, but how you handle shared debts during and after divorce can.

Missed payments, defaults, or maxed-out joint accounts can have a negative impact on your credit profile if your name is still associated with them. Creditors report payment history regardless of divorce agreements. If your ex fails to pay a joint debt, your credit can also be adversary affected. To protect your scores, separate or close joint accounts and monitor your credit reports throughout and after the divorce process.

What happens to joint credit cards after separation?

Joint credit cards remain legally shared until they are closed or refinanced, even after divorce. This means that both parties are still responsible for any balance, regardless of who made the purchases. Ideally, couples should freeze or close joint accounts and transfer balances to individual accounts. Working with your attorney can help prevent misuse and protect your credit.

Should I pay off shared debt before finalizing a divorce?

It’s generally a wise idea to pay off shared debt before finalizing a divorce. Doing so can simplify division of assets, reduce post-divorce financial entanglements, and protect your credit. When joint debts are left unresolved, it can lead to late payments or defaults, which can negatively impact your credit profile.

If paying off the debt isn’t feasible, try to refinance or transfer it to individual accounts. Discussing debt management in the divorce settlement can help ensure clear financial responsibilities and minimize future disputes.

How can I protect my credit during and after a divorce?

To protect your credit during and after a divorce, start by checking your credit reports and identifying all joint accounts. You might then want to freeze or close joint credit cards, remove your name from authorized user accounts, and monitor payments closely.

It’s also important to work with your attorney to assign debts in the divorce decree. Just remember that creditors don’t honor divorce agreements and will continue to hold you responsible if your name is still attached to a debt.

Post-divorce, you’ll want to establish credit in your own name, pay bills on time, and regularly review your credit reports.

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.

SOPL-Q325-018

Owing money to the IRS can be stressful, especially if you’re not prepared for a tax bill. Whether it’s due to under-withholding, freelance income, or capital gains from selling an asset, you might find yourself facing a tax bill you can’t afford to cover up front. If that happens, you may wonder: Can I get a loan to pay taxes?

The answer is, yes. Taking out a loan, such as a personal loan, to pay taxes is an option. However, it’s important to weigh the pros and cons carefully against other possibilities like payment plans offered by the IRS.

Below, we explore what tax loans are, the available options for paying taxes when you’re short on cash, and the potential advantages and disadvantages of using a loan to cover your tax obligations.

What Is a Tax Loan and How Does it Work?

A tax loan is any form of financing used to pay off a tax debt. This can come in many forms, including personal loans, home equity loans/credit lines, payday loans, or even credit cards. These loans and credit lines are not issued by the IRS, but rather by private lenders, banks, or online financial institutions.

A tax loan allows you to pay your tax bill in full. You then repay the loan over time according to the lender’s terms. This could include fixed monthly payments over many months or years, along with interest and possible fees. Essentially, you’re swapping your debt to the IRS for a different kind of debt, one with a financial institution.

In some cases, the cost of a loan may be lower than the combination of interest and penalties the IRS charges if you don’t pay your taxes on time. Normally, the late-payment penalty is 0.5% of the unpaid taxes for each month the tax remains unpaid (not to exceed 25% of your unpaid taxes). The IRS also charges interest on your unpaid tax bill. The rate can change each quarter but was set to 7% for the third quarter of 2025.

Options to Pay Taxes

Before turning to a loan, it’s a good idea to consider all your options. The best choice for you will depend on your credit profile, financial health, and how quickly you can repay any borrowed funds.

IRS Payment Plans

The IRS offers payment plans, which you can apply for online. These plans allow you to spread the amount you owe into smaller payments without involving a third-party lender. Interest and penalties on your unpaid tax bill continue to accrue while you’re on an IRS payment plan, but the late-payment penalty drops to 0.25% per month.

There is a short-term plan for those who owe less than $100,000 and can pay the balance within 180 days. There is also a long-term plan for those who owe less than $50,000 but need more than 180 days to pay their balance. It’s free to set-up the short-term plan but the long-term plan comes with a set-up fee ($22 if you enroll in direct debts or $69 if you don’t).

Credit Cards

If your tax debt is relatively small and you have room on your credit card, paying the IRS with plastic can be a quick fix. However, this option should be approached with caution.

While the IRS allows tax payments via credit card, it does so through third-party payment processors that charge a convenience fee of around 1.75%. And if you can’t pay the credit card balance off immediately, you’ll be stuck paying high interest rates that can add up quickly.

One exception: If you can qualify for a credit card that offers a 0% introductory rate, using a credit card could be an affordable way to pay your tax bill over time. The key is to pay off your balance before the promotional rate ends (often 15 to 21 months). Otherwise this could be a costly way to get a loan to pay your taxes.

Loved Ones

Borrowing from family or close friends might be a viable option if you’re short on cash and want to avoid high-interest loans. This type of informal loan can offer flexibility in repayment terms, and often, little or no interest. It also doesn’t require a credit check, which can make it an appealing choice for people who may have a limited or poor credit.

However, mixing money with personal relationships can be tricky. If you don’t make agreed-upon payments on time or run into trouble repaying the loan, it could strain or damage relationships.

If you do decide to go this route, it’s important to be clear about expectations from the beginning. You might even want to draw up a simple agreement to outline expectations.

Payday Loans

Payday loans are short-term, high-interest loans intended to cover urgent financial needs until your next paycheck. They are typically easy to get and require little credit history, making them seem attractive for those looking for fast cash who might not qualify for other borrowing options.

However, payday loans come at a steep cost. According to the Consumer Financial Protection Bureau, fees often run around $15 for every $100 borrowed, which equates to an annual percentage rate (APR) of nearly 400%. Repayment periods are also typically short, generally two to four weeks.

Many borrowers fall into a cycle of renewing loans or taking new ones to pay off the previous ones, leading to a dangerous spiral of debt. These should only be considered as an absolute last resort.

Home Equity Loan or Line of Credit

A home equity loan and a home equity line of credit (HELOC) are both ways to borrow money using the equity in your home as collateral. A home equity loan provides a lump sum of money with a fixed interest rate, while a HELOC functions like a credit card, allowing you to borrow, repay, and borrow again against a set credit limit, often with a variable interest rate.

Home equity financing typically comes with lower interest rates than unsecured loans. But if you default on your loan or line of credit, you could potentially lose your home. This type of funding can also take some time to get, as the underwriting process typically requires multiple steps (including a home appraisal).

Personal Loans

A personal loan can be a practical solution for paying off taxes. There are different types of personal loans but typically these loans are unsecured, meaning you don’t need to put up any type of collateral. You borrow a fixed amount and repay it in equal installments over a predetermined term, typically one to seven years.

Interest rates vary widely depending on your credit score, income, and the lender’s policies. For borrowers with excellent credit, rates can be relatively low. However, those with fair or poor credit may face higher rates and fewer options.

Recommended: Personal Loan Calculator

Pros and Cons of Using a Personal Loan to Pay Taxes

Taking out a personal loan to pay taxes can be a smart financial move in some cases, but it’s not for everyone. Here’s a breakdown of the advantages and drawbacks.

Pros

•   Fixed repayment terms: Personal loans come with fixed monthly payments, which can make budgeting easier and help you plan your finances. Term lengths also tend to be longer than what you could get with an IRS payment plan.

•   Lower interest rates (with good credit): For borrowers with strong credit, personal loans typically offer lower rates than credit cards.

•   Quick funding: Many lenders can approve and fund a personal loan within a week; some even faster. That can be helpful if your tax payment deadline is looming.

•   Avoid IRS Penalties: Using a loan to pay your taxes on time can help you avoid late payment penalties and compounding interest from the IRS.

•   Credit Building: Successfully managing and repaying a personal loan can have a positive impact on your credit profile.

Recommended: Paying Tax on Personal Loans

Cons

•   Interest costs: Depending on your credit, personal loans can carry high interest rates that add significantly to your overall repayment amount.

•   Fees: Some personal loans come with origination fees, prepayment penalties, or late fees, which can increase the total cost of borrowing.

•   Could negatively impact credit: Taking out the loan will trigger a hard credit inquiry which can cause a small, temporary drop in your credit scores. Any late or missed payments could have a more damaging effect on your credit profile.

•   Increases your DTI: Since a personal loan adds another monthly debt payment, it directly increases your debt-to-income ratio (DTI) (a metric that compares your monthly debt payments to your gross monthly income). This could make it harder to qualify for other types of financing, such as a mortgage or car loan, in the future.

•   Not a long-term fix: A personal loan is a temporary solution. If your tax issue stems from deeper financial problems, it’s important to address the root cause.

The Takeaway

If you can’t pay your full tax liability by the deadline, it may be possible to get a loan, such as a personal loan or home equity loan, to cover the shortfall. This can help you avoid owing penalties and interest to the IRS, but it’s important to keep in mind that loans generally come with their own costs.

Before you borrow, you’ll want to carefully evaluate your financial situation, shop around for the best loan terms, and compare the total cost of borrowing against using an IRS payment plan. Understanding your options and choosing wisely can help you stay out of trouble with the IRS and protect your long-term financial health.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can I get a loan to pay taxes?

Yes, you can potentially get a loan to pay your taxes. One option is to apply for a personal loan from a bank, credit union, or online lender, and use it to cover your tax debt. If you own a home and have sufficient equity, another option is to take out a home equity loan or line of credit and use the funds to pay your taxes. A 401(k) loan or a credit card (ideally with a low a 0% promotional rate) are other potential options.

Before you borrow money to pay your taxes, however, it’s a good idea to explore an IRS payment plan. While the agency continues to charge interest and penalties on your unpaid balance, the cost could be lower than some borrowing options.

What is a tax loan?

A tax loan is any form of financing used to pay off a tax debt. For example, you can use a personal loan as a tax loan. This type of financing offers a lump sum you can use to pay the IRS or your local tax authority immediately. This helps avoid penalties, interest charges, or tax liens. However, tax loans also come with costs, so it’s important to weigh your options carefully.

How does a tax loan work?

A tax loan often works like a standard personal loan. You apply through a lender (such as a bank, credit union, or online lender) and if approved, you receive a lump sum, which you use to pay your tax bill. You then repay the loan in fixed monthly installments over a set period with interest.

A tax loan can be helpful if you don’t have enough cash to cover your tax bill, but it’s important to consider their potential costs and risks to determine if it’s the best approach for your situation.

Is using a personal loan for taxes better than using a credit card?

Using a personal loan for taxes can be better than using a credit card, depending on the terms. Personal loans often have lower interest rates than credit cards, especially for borrowers with good credit. They also offer fixed repayment terms, which can make budgeting easier. However, if you can qualify for a credit card with a 0% introductory rate and can pay off the balance before the rate goes up, that option might be more cost-effective.

What credit score do you need for a tax loan?

If you’re thinking of getting a personal loan to pay your tax bill, lenders generally prefer borrowers with good or excellent credit scores (mid 600s and above), though requirements vary. Borrowers with higher scores are more likely to qualify for better interest rates and loan terms. If your credit score is lower, you may still qualify through subprime lenders, but you’ll likely face higher rates. Many lenders also consider other factors — such as income, employment history, and debt-to-income ratio — when evaluating your application, not just your credit score.

Can I use a personal loan to pay property taxes?

Yes, you can use a personal loan to pay property taxes. This option can be useful if you’re facing a large, unexpected bill or trying to avoid late fees or a tax lien. A personal loan provides quick funding and fixed monthly payments, allowing you to spread the cost over time. Before going this route, however, it’s a good idea to compare interest rates and loan terms to other options, such as payment plans from your local tax authority.

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.

SOPL-Q325-012

Paying off a loan early could help you save money on interest, but it could cost you a few points off your credit score. Closing loan accounts can affect things like credit utilization, payment history, and credit mix, all of which factor into your score.

Does that mean you shouldn’t pay off a loan early if you have the opportunity to do so? Not at all. But it’s important to consider how your score may be affected if you decide to pay a loan in full ahead of its scheduled payoff date.

What Is a Personal Loan?

A personal loan is a loan that’s designed for personal use. When you get a personal loan, your lender agrees to give you a lump sum of money that you can use for just about anything. Some common uses for a personal loan include:

•   Debt consolidation

•   Credit card refinancing

•   Medical bills

•   Large expenses, such as a wedding or vacation

•   Emergencies

Personal loans are repaid in installments, according to the schedule set by your lender. For example, you might pay $350 a month for 36 months to pay off a personal loan. Each loan payment includes principal and interest, and your lender may also charge fees, such as origination fees.

Can You Pay Off a Personal Loan Early?

Unless your loan agreement specifically states that you must agree to pay every installment as scheduled, then you should be able to pay off the balance early.

Keep in mind that paying off a personal loan before the loan maturity date may trigger a prepayment penalty. This is a premium you pay to your lender for ending the loan agreement ahead of schedule. Lenders charge these penalties to recoup any interest they might miss out on if you pay off your loan sooner rather than later.

If your lender charges a prepayment penalty, they should tell you that up front. At a minimum, any prepayment penalties or other requirements for paying off a loan early should be disclosed in your loan paperwork.

Does Paying Off a Personal Loan Early Hurt Your Credit Score?

Paying off a personal loan early can hurt your credit score, at least temporarily. To understand why, it helps to know a little more about how credit scores are calculated.

As an example, let’s use FICO® Credit Scores, which are the most widely used among major lenders. Here’s how these scores break down:

•   Payment history. Payment history accounts for 35% of your FICO Score. Paying on time builds your score, while late payments can hurt it.

•   Credit utilization. Credit utilization refers to how much of your available credit you’re using at any given time. This factor represents 30% of your FICO Score.

•   Credit age. Your credit age is the overall average length of your credit history. This factor accounts for 15% of your credit score.

•   Credit mix. Credit mix is simply the different types of credit you’re using. It makes up 10% of your FICO Score.

•   Credit inquiries. Inquiries show up on your credit report when you apply for new credit. They make up the last 10% of your FICO Score.

Why does paying off a loan hurt credit? It has to do with some of the factors listed above.

When an account moves from open status to closed, that means you’re no longer racking up points for on-time payments. You’re also affecting your overall credit utilization and credit mix. That combination can mean a dip in your score, though it’s less drastic than what you might see if you were to suddenly stop paying your debts or max out your credit cards.

When does paying off a debt help your credit score? When you have high credit limits but low balances, that’s good for your credit utilization — assuming that you’re not closing credit card accounts after paying them off.

Your score is less likely to suffer a drop after paying off a loan if you have other debts that you’re making on-time payments to and a healthy credit mix. Signing up for free credit score monitoring can help you keep track of score changes over time and the factors that might cause your score to go up or down.

Does It Make Sense to Pay Off a Loan Early?

Paying off a loan early can make sense if you would like to clear the debt and have the cash to do so. Here’s what paying off a loan early might do for you:

•   Eliminate a monthly payment in your budget so you have more cash to direct toward other financial goals.

•   Potentially save money on interest, since you’re not making any additional payments to the lender.

Whether you should pay off a loan early depends on your personal debt repayment plan and strategy. Keep in mind that it’s not always the right solution. For example, say that you plan to take $10,000 out of savings to pay off a personal loan early. If doing so leaves you with nothing for emergencies, then you can find yourself back in debt pretty quickly if you have to charge an unexpected expense to a credit card.

If you’re interested in the fastest ways to pay off debt, there are some options. For example, you can:

•   Use your tax refund or other windfalls to pay off what you owe.

•   Double up on your monthly payments.

•   Make biweekly payments, which adds up to one extra full payment per year.

•   Refinance the debt into a new loan with a lower interest rate.

What matters most when paying off debt is finding a method that works for your budget and situation.

Credit Cards vs Installment Loans

Credit cards and installment loans are very different. A credit card is a revolving credit line. As you pay down your balance, you free up available credit. Installment loans, on the other hand, let you borrow a lump sum. As you pay it off, the balance goes down until it reaches zero.

In terms of how they’re treated for credit scoring purposes, credit cards tend to carry more weight. That’s because credit scores lean heavily on your credit utilization. Does carrying a credit card balance affect credit? Yes, and it can also cost you money if you’re paying a high interest rate.

Installment loans can help you build a positive payment history. They can also enhance your credit mix. Examples of installment loans include personal loans, car loans, federal student loans, private student loans, and mortgage loans.

How much does paying off a car loan help1 credit? What about student loans? The biggest boost you’ll get from paying off installment loans is with your payment history. As long as you’re making your payments on time each month, your score can benefit. That can show lenders that you’re responsible about meeting your debt obligations.

Additional Considerations About Paying Off a Personal Loan Early

If you’re thinking of paying off a personal loan early, it helps to weigh the pros and cons. Credit score aside, here are a few other questions to consider:

•   Do I have enough money to pay the balance in full without draining my cash reserves?

•   Am I planning to apply for new credit after paying the loan off?

•   Will the lender charge a prepayment penalty? And if so, how much will it be?

You can ask these same questions if you’re paying off a different type of installment loan, such as a car loan or a student loan.

It’s also helpful to think about what you’ll do with the money that you’ll be freeing up in your budget. For example, you might decide to park it in a high-yield savings account or invest it to start growing wealth for retirement.

Keep an Eye on Your Credit When Paying Off a Personal Loan Early?

If you’re planning to pay off a personal loan early, it’s a good idea to check your credit scores regularly. While you’re making payments, you can monitor your scores to see what kind of positive impact they’re having. Once you make the last payment, you can go back and see if doing so helped or hurt your score.

You should make sure that the account has been properly marked as closed on your credit reports. Keeping records of all your payments is a good idea as well, in case the lender tries to come back later and say that you still owe.

Should your credit score go down after paying off a loan, the best way to bring it back up again is to make on-time payments to other debts. Paying down credit card balances and limiting how often you apply for new credit can also work in your favor.

The Takeaway

Paying off a personal loan early can save you some money on interest charges and free up cash for other goals. Before paying off a personal loan before maturity, it’s helpful to consider how it might affect your credit score.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Is there a downside to paying off a loan early?

Paying a loan off early can impact your credit score negatively if it affects your credit mix or payment history. Your lender may also charge you a prepayment penalty to recoup lost interest.

Why does credit score go down after paying off loan?

Credit scores can go down after paying off a loan because you’re no longer benefiting from making on-time payments. You may also see a score loss if you no longer have an installment loan showing in your credit mix.

Does it hurt your credit score if you pay early?

Paying early on a loan can hurt your credit score if you’re no longer seeing on-time payments reported to the credit bureau. However, you can recover your score by continuing to pay other bills on time, maintaining a low credit utilization, and limiting how often you apply for new credit.

Photo credit: iStock/vorDa

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If your parents are high earners, you might assume you won’t get any financial aid to help pay for college. But that’s not necessarily the case. The Department of Education doesn’t have an official income cutoff to qualify for federal financial aid. So, even if you think your parents’ income is too high, it’s still worth applying (it’s also free to do so).

Read on to learn how to get financial aid for college when you think your parents make too much money, as well as how to pay for college costs if you don’t qualify for financial aid.

It All Starts With the FAFSA®

The first step to knowing whether or not you qualify for any financial aid is to fill out the Free Application for Federal Student Aid (FAFSA®). Even if you think your parents make too much to qualify for financial aid, it’s a smart idea to fill out and submit this form.

For one reason, there’s no income cutoff for federal student aid, so you may be surprised by what you are able to qualify for. For another, the FAFSA gives you access to non-need-based aid, such as Direct Unsubsidized Loans and institutional merit aid.

Who Determines Aid Amount and Type?

The financial aid office at your chosen college or career school will determine how much financial aid you are eligible to receive. Here’s a look at what goes into the decision.

1. The first factor considered is the cost of attendance (COA), or what it costs a typical student to attend a particular college or university for one academic year. Cost of attendance includes tuition and fees, as well as books, lodging, food, transportation, loan fees, and eligible study-abroad programs.

2. Then the school considers your Student Aid Index, or SAI (formerly called Expected Family Contribution, or EFC). Your SAI is an eligibility index number that results from the information that you provide in your FAFSA.

3. To determine how much need-based aid you can get, the school will subtract your SAI from the COA. Need-based aid includes Pell Grants, Direct Subsidized Loans, and Federal Work-Study.

4. To determine how much non-need-based aid you qualify for, the school takes the COA and subtracts any financial aid you’ve already been awarded. Federal non-need-based aid includes Direct Unsubsidized Loans, Direct PLUS Loans, and TEACH Grants.

One big difference between subsidized and unsubsidized loans is when interest accrual starts. Because subsidized loans are need-based, the government covers any interest that accrues until loan repayment starts (typically six months after graduation). With unsubsidized loans, the interest starts to accrue from day one (though you don’t need to start making loan payments until six months after graduation).

You can estimate your eligibility for federal student aid by using either the Federal Student Aid Estimator or your school’s net price calculator (which you can find using the Department of Education’s search tool).

What Are Rules on Dependency, Divorce?

A student’s dependency status can make a big difference on their SAI. To be considered independent for federal financial aid, a student must be at least 24 years of age, married, on active duty in the U.S. Armed Forces, financially supporting dependent children, an orphan (both parents deceased), a ward of the court, or an emancipated minor.

The rules regarding financial aid and divorce changed for the 2024-25 school year. The new FAFSA rules require the parent who provided the most financial support in the “prior-prior” tax year to complete the FAFSA application instead of the custodial parent. Prior-prior refers to the tax year two years ago from the beginning of the college semester. For the 2025–26 award year, FAFSA would be looking at the 2023 tax year for this determination.

Other Routes to Meeting All Needs

The government isn’t the only path to pay for college. Here are several other options you may want to consider.

Scholarships

The best thing about scholarships? You don’t need to pay them back. The second best thing is that they’re most often based on merit, not need.

So even if your parents make a good living, you may still be eligible. While many are awarded solely on academics, others are given for athletic talent, specific interests, or being a member of a specific group.

There are numerous college scholarships out there, offered by schools, employers, individuals, private companies, nonprofits, communities, religious groups, and professional and social organizations. To suss out scholarship opportunities you might be eligible for, talk to your high school guidance counselor, your college’s financial aid office, and/or check out one of the many online scholarships search tools.

An Appeal of Your SAI

If your financial aid offer is less than you need to be able to afford college, you are within your rights to appeal to the school’s financial aid director.

You might want to be prepared to back up your request with detailed information such as your SAI, the amount you’ll need to successfully attend school, or a change in circumstances that will affect your family’s actual ability to pay, such as a parent’s job loss.

Recommended: How to Write a Financial Aid Appeal Letter

Parent Loans

Parents can apply for a Parent Plus Loan through the Department of Education. These loans are available to parents regardless of income, provided they do not have an adverse credit history. For loans disbursed on or after July 1, 2025, and before July 1, 2026, the interest rate is 8.94%. This is a fixed interest rate for the life of the loan. There is also an origination fee of 4.228%, which is deducted from each loan disbursement.

Some private lenders also offer parent student loans. You can apply for a private parent student loan directly with the lender. Before signing up for a private parent loan, it’s a good idea to shop around to find the lowest student loan interest rate you qualify for. Some lenders have a pre-qualification process that allows you to see a personalized rate before the lender does a hard credit pull.

Both federal and private parent loans can be used to cover any gaps left over after scholarships, grants, and other financial aid have been applied, up to the full cost of attendance.

Private Student Loans

Private student loans are also available to students to help them cover the costs of higher education, and they could be a good Plan B if there’s a gap between the aid you received (including federal student loans) and the cost of attendance.

Private student loans don’t have federal benefits like income-driven repayment plans and forgiveness programs, and interest rates are typically higher than undergraduate federal student loans. However, unlike federal student loans, you can apply for them at any time of the year. Plus, you can typically borrow up the full cost of attendance, which gives you more borrowing power than you get with federal student loans.

Private student loans can have either a fixed or variable interest rate, and rates are determined by the lender. Qualifying for a private student loan is based on the borrower’s creditworthiness rather than need.

Recommended: A Complete Guide to Private Student Loans

The Takeaway

If your parents make too much money to qualify for financial aid, you may have to shift course a little bit, but there are other ways to get help paying for all of the expenses of college. These include merit-based scholarships, non-need-based federal student loans, and private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

Will I get financial aid if my parents make over $100,000?

Financial aid eligibility isn’t solely based on parental income. While a higher income can affect need-based aid, you may still qualify for merit-based scholarships, grants, or other forms of assistance. Completing the FAFSA and exploring options from your school and external sources can help you find available aid.

What salary is too high for financial aid?

There’s no fixed salary threshold for financial aid, but higher incomes can reduce eligibility for need-based assistance. The FAFSA considers various factors, including family size, assets, and expenses. Even with a high income, you might still qualify for some aid or merit-based scholarships. Always apply to explore your options.

At what point does FAFSA stop using parents’ income?

FAFSA typically stops using parents’ income when you are considered an independent student, which can happen if you are 24 years old, married, a graduate student, have dependents, are a veteran, or meet other specific criteria. Always check the latest FAFSA guidelines for the most accurate information.

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., Puerto Rico, U.S. Virgin Islands, or American Samoa, 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 4/22/2025 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.

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Refinancing a personal loan can be a worthwhile process in some situations. It holds the potential to lower your monthly payments and/or the interest paid over the life of the loan.

Personal loans can be used for many purposes, which is part of their appeal. Consolidating credit card debt is a common use of personal loans. And it makes sense, given that personal loans typically have lower interest rates than credit cards (which currently average 24.35%).

Even if you’ve already taken out a personal loan, it can be wise to look at your refinance options for getting terms that better suit your needs.

Why Refinance a Personal Loan?

While there may be a variety of reasons to refinance a personal loan, it mainly comes down to two.

1.    To lower the overall interest rate and total interest paid.

2.    To lower the monthly payment.

These two might seem like the same thing, but they’re not.

When you refinance any type of loan, you are essentially replacing your old loan with a new loan that has a different rate and/or repayment term. If the new loan has a lower annual percentage rate (APR), you can save money on interest. If the APR is the same but the repayment term is longer, you can lower your monthly payments, making them easier to manage, but won’t save any money. (In fact, a longer repayment term generally means paying more in interest over the life of the loan.)

Another reason why you might consider refinancing a personal loan is to consolidate your debts (so you just have one payment) or to add or remove a cosigner.

Possible Advantages of Refinancing a Personal Loan

Here’s a look at some of the benefits of refinancing a personal loan.

Pay Less in Interest

If you are able to qualify for a personal loan with a lower APR, it may be possible to save a significant amount of money over time, provided you don’t extend your loan term. You can also save on interest by shortening your existing loan term, since this allows you to pay off the loan sooner.

Lower Your Monthly Payment

Refinancing to a lower APR and/or extending the length of the loan can lower your monthly payment. A lower monthly bill could help you get back on track, especially if you’ve been struggling to make your monthly payments.

Consolidate Multiple Debts

If you have a personal loan as well as other debts (such as credit card debt), you can use a new debt consolidation loan to combine those debts into one loan and a single monthly payment. If your new loan has a lower APR than the average of your combined debts, you may also be able to save money.

Recommended: Personal Loan Calculator

Possible Disadvantages of Refinancing a Personal Loan

Refinancing a personal loan might not be the right move for everybody. Here are some disadvantages to consider.

You May Pay More in Interest

If you refinance a personal loan using a loan that has a longer repayment term, you could end up paying much more in interest over the life of the loan.

You May Have to Pay an Origination Fee

Many personal loan lenders charge origination fees to cover the cost of processing and closing the loan. This is a one-time fee charged at the time the loan closes and, in some cases, can be as high as 6% of the loan. Since the fee is deducted before the loan is disbursed to you, it reduces the amount of money you actually get.

You Might Get Hit With a Prepayment Penalty

Some lenders charge a fee if you pay off the loan before the agreed-upon term, which is known as a prepayment penalty. If your original lender charges you a prepayment penalty, it could cut into your potential refinancing savings.

Refinancing a Personal Loan

If you are thinking about refinancing a personal loan, here are some steps you’ll want to take.

Check Your Credit Report and Score

To benefit from personal loan refinancing, you typically need to have stronger credit than you had when you got your original personal loan. With a more favorable credit profile, you might qualify for a lower APR on the new personal loan.

You can access your credit report for free from each of the three major credit bureaus — Equifax®, TransUnion®, and Experian® — through Annualcreditreport.com. It’s a good idea to scan your reports for any errors and, if you find one, report it to the appropriate bureau.

You can typically access your credit score for free through your credit card company (it may be listed on your monthly statement or found by logging into your online account).

Shop Around for Loans

Every bank has different parameters for determining who they’ll offer loans to and at what rate, so it’s always worth it to shop around. This could mean looking at traditional banks, credit unions, and online-only lenders.

Many lenders will give you a free quote through a prequalification process. This typically takes only a few minutes and does not result in a hard inquiry, which means it won’t impact your credit score. Prequalifying for a personal loan refinance can help compare rates and terms from different lenders and find the best deal.

Applying for a Loan

Once you’ve decided on a lender who can help you refinance to a new loan, it’s time to formally apply for a personal loan. You’ll likely need to submit several documents, including pay stubs, recent tax returns, and a loan payoff statement from your original lender (which will show how much is still owed).

Paying Off the Old Loan

Once you have your new loan funds, you can pay off your original loan. You’ll want to contact your original lender to find out what the process is and follow their instructions. It’s also a good idea to ask your original lender for documentation showing the loan has been paid off.

Making Payments on the New Loan

Be sure to confirm your first payment due date and minimum payment amount with your new lender and make your first payment on time. You may want to enroll in autopay to ensure you never miss a payment. Some lenders even offer a discount on your rate if you sign up for autopay.

The Takeaway

You can refinance a personal loan, and doing so may allow you to get a more favorable rate and/or more affordable payments. However, you’ll want to factor in any fees (such as origination fee on the new loan and/or a prepayment penalty on the old loan) to make sure the refinance will save you money. Also keep in mind that extending the term of your loan can increase the cost of the loan over time.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can you refinance a personal loan?

Yes, it is possible to refinance a personal loan. Refinancing involves taking out a new loan to pay off the existing personal loan, ideally with more favorable rates and terms. However, whether you can refinance your personal loan will depend on factors such as your creditworthiness, the terms of the original loan, and the policies of the new lender.

Does refinancing a loan hurt your credit?

Refinancing a loan can have both positive and negative impacts on your credit. Initially, the process of refinancing may result in a hard inquiry on your credit report, which can cause a small, temporary decrease in your credit score. However, if you use the refinanced loan to pay off the existing loan and make timely payments on that loan, it can positively impact your credit over time.

Can I refinance a personal loan with another bank?

Yes, it is possible to refinance a personal loan with another bank. Many banks, credit unions, and online lenders offer loan refinancing options. This allows you to transfer your personal loan balance to a new loan with a new lender. However, eligibility criteria, terms, and interest rates will vary by lender. It’s a good idea to shop around, compare offers, and consider factors such as interest rates, fees, and repayment terms before deciding to refinance with another bank.

What are the pros and cons of refinancing a personal loan?

The pros of refinancing a personal loan include the potential to secure a lower interest rate, reduce monthly payments, consolidate multiple debts into a single loan, and switch to a more favorable lender. Potential downsides can include paying an origination fee for the new loan, owing a prepayment fee from your original lender, and extending your loan term, which can increase the total cost of the loan

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.

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