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Probably the last thing on most car buyers’ minds when they walk into a dealership is the thought that they might die before they manage to pay off their loan fully. What happens to a car loan when someone dies is that the lender may demand repayment from a surviving spouse or repossess the car.

Unexpected deaths happen, and that’s why auto loan paperwork may contain a death clause that explains what happens to a financed car when the borrower dies. Below, we outline the potential consequences that can occur if a car loan borrower passes away before repaying the auto loan debt.

What Happens to a Financed Car When Someone Dies?

A car loan is usually a short-term debt. In 2024, the average car loan term is 68 months for a new car and 67 months for a used car, or close to six years, according to Experian data. Many borrowers may not expect to meet their demise during their loan repayment period, but it does happen. As mentioned above, lenders may demand repayment from a surviving spouse or repossess the vehicle if a car loan borrower dies before repaying the debt in full.

What Is the Car Loan Death Clause?

Lenders rely on the obligations borrowers agree to in their loan documents to help keep transactions on course. The car loan death clause is any language in a car financing contract that reinforces your obligation to repay the debt.

A car retail installment sale contract may highlight the merits of obtaining optional credit life insurance. If you buy and maintain life insurance on your car loan, the insurance company may pay off your remaining loan balance if you die unexpectedly.

How the Car Loan Death Clause Works

Alive or dead, when a borrower stops making car loan payments, a lender may decide that the unpaid debt is in default.

And because a car loan is usually a secured loan, with the car serving as collateral, the lender might move to repossess the vehicle to recover its money.

But that isn’t the only remedy a lender can or will use when a borrower dies. As long as timely payments continue, there are several scenarios in which the car could remain with a family member or friend — perhaps by transferring the loan to their name or auto refinancing the remaining balance with a new loan.

Who Could End Up Making the Payments?

Depending on the laws of where you live, several factors can go into deciding who’s responsible for making loan payments after a car owner dies. Here are a few possibilities:

A Co-Borrower or Cosigner

If your name is on a car loan as a co-borrower or cosigner, you can expect the lender to hold you responsible for continuing payments. Liability for the loan falls to you, and you would be expected to pay the principal and any finance charges on the car loan.

That means the lender can take steps to recover the money if you fail to make payments on time. If you want to keep the car — and protect your credit — you may have to do a little legwork to take the deceased’s name off the loan and change automatic payments to a different bank account.

Recommended: Can a Cosigner Become the Primary?

A Surviving Spouse in a Community Property State

In community property states, spouses are jointly responsible for any debts they take on after their marriage. So, even if you aren’t a cosigner or co-borrower, the lender could come to you looking for payment.

There are at least nine community property states, according to the IRS:

•   Arizona

•   California

•   Idaho

•   Louisiana

•   Nevada

•   New Mexico

•   Texas

•   Washington

•   Wisconsin

If you aren’t sure about the status of your spouse’s car loan, you can contact the lender for information.

A Surviving Spouse or Other Beneficiary

A surviving spouse who isn’t in a community property state and whose name isn’t on the car loan isn’t responsible for the loan. So, it may be your choice whether to assume payments if the car goes to you after probate. This is also true for any other beneficiary whose name is not on the loan.

How Does Probate Affect a Financed Car?

Probate is the legal process that may ultimately determine who is responsible for a financed car when the owner dies. Probate is generally the first step in settling an estate’s financial issues. It protects both creditors and beneficiaries. The rules may vary a bit from state to state, but here are some basics:

Assets and Liabilities Are Combined

When a person dies, their assets and liabilities — everything that makes up their net worth — pass on to their “estate.” That might be a home, investments, a car, and other valuables. Or it might be just a car, a small savings account, and some random possessions. You don’t have to be rich to have an estate. In this context, it just means what you own and what you owe.

The court-supervised probate process typically applies only to assets that were solely owned by the deceased at the time of death. If there’s a cosigner or co-borrower on the car loan, remember, the payments would become their responsibility. But if the deceased was the only one named on the loan, the car would likely be a probate asset.

Debts Are Paid and Assets Are Disbursed

The probate court will put an executor or administrator in charge of making sure the estate’s debts are all paid and the assets are disbursed to the appropriate beneficiaries. But working through all of that can take a while, so the executor or administrator may use the estate’s money to pay ongoing bills — including car payments — until the estate is eventually settled.

That doesn’t mean the car will automatically go to an heir at the end of the probate process, however. At some point, the executor might find it necessary to liquidate all or some of the estate’s assets to pay off the deceased’s remaining debts (credit cards, bank loans, etc.) And that could include selling the car — especially if it’s worth substantially more than the remaining loan balance.

On the other hand, if there is enough money left after other debts are paid, the estate might be able to pay off the car loan in full. If that’s the case, a beneficiary may receive the car at the end of the probate process without having to take on any payments. (The car title can’t be transferred until probate is finished.)

Finally, if the car is still available but the estate can’t pay it off, a friend or family member who’s willing to cover the loan balance may be designated as the car’s legal heir. Or, if no one is interested, the estate might just allow the lender to repossess the car. The lender would then sell the car to recover its loss and return any leftover funds to the estate.

Repossession of a Car After Death

It’s unlikely a lender will automatically repossess a car after learning of a borrower’s death. But if the family stops making timely payments — maybe because they can’t afford it or the obligation gets away from them in their grief — the lender may take steps to recover the money it’s owed.

Involuntary Repossession

The lender could decide to repossess the vehicle and put the proceeds toward the outstanding loan balance. And if the sale doesn’t cover the balance, the lender may continue to pursue payment from a co-borrower or cosigner, or a surviving spouse in a community property state.

The lender can’t force the surviving spouse in a non-community property state or other heirs to pay off the remaining debt, but it could choose to file a claim against the estate in probate court.

Voluntary Repossession

Then there’s voluntary repossession of car after death. Of course, you don’t have to wait for the lender to force the issue. If no one wants to take responsibility for the car — by making the payments or selling it to pay off the loan — the family may ask to have the car picked up through voluntary repossession.

What Are Some Car Loan Payment Options?

If you learn you’ve inherited a financed car, you may have a few options to consider:

Credit Insurance

If the car’s owner purchased optional credit insurance when he or she signed for the loan, you may not have to make any more payments, even if your name is on the loan. Credit insurance covers all or some of the remaining balance when the borrower dies.

The Estate Pays Off the Loan

To avoid tension with other beneficiaries, you may want to discuss whether the car loan will be fully repaid along with other debts when the estate is being settled, and how that might affect your overall inheritance.

Refinancing the Loan

If you’re taking over repayment and your name isn’t on the original loan, the lender will likely want you to refinance into a whole new loan. If your credit is a little shaky, it might help to enlist a cosigner with good credit to improve your chances of getting a better interest rate.

Sell the Car to Repay the Loan

Do you even need this car? If you thought you wanted the car, then changed your mind, It may make sense to sell the car to repay the loan. Selling the car may be right for you if the resale value is greater than the outstanding auto loan balance.

Recommended: How to Sell a Car You Still Have a Loan On

How to Assume a Car Loan After the Owner Dies

If your name isn’t on the existing auto loan but you want to legally take possession of a vehicle after the owner’s death, there are a few steps you can follow to make sure things stay on track.

Be Sure the Lender Gets a Copy of the Death Certificate

If the car is part of the deceased’s estate, the executor generally will take care of this step. If that isn’t you, you may want to follow up to be sure the lender knows the car owner died, but payments will continue.

Find Out If Someone Is Making Payments

If loan payments stop, even temporarily, the lender could decide to repossess the car. Check with the loan’s cosigner or co-borrower, the estate’s executor, or anyone else who might be covering the payments to ensure the loan is up to date. Or contact the lender about making payments.

Transfer the Title

If you’ll be taking over responsibility for paying for the car, it’s a good idea to have the car transferred to your name as soon as possible — and the lender may require it. Once you’re sure the car is legally yours, you can contact your state’s Department of Motor Vehicles for information about the documents you’ll need and the fees you’ll have to pay.

Contact Your Insurance Agent

Don’t forget to add the car to your auto insurance policy as soon as possible. Your agent can help you determine what coverage is required, or you can research and shop for a new policy online.

Find the Best Way to Pay for the Car

Unless the owner purchased credit insurance or the estate pays off the car, you’ll likely have to find a way to cover the cost. Even if the lender allows you to take over the car loan, you may want to consider other options.

If the balance owed isn’t too high, you could decide to simply pay off the entire loan amount.
Or you might want to refinance to secure a new loan with a lower interest rate or lower monthly payment. Refinancing a car loan with a 650 credit score is possible.

Recommended: When to Refinance Your Car

The Takeaway

Auto loan debts generally need to be repaid even if the borrower dies with an outstanding balance. Lenders have no obligation to forgive the unpaid debt, and they may have the right to repossess the vehicle. Anyone who inherits a deceased borrower’s car loan debt may have the option of refinancing the loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What happens to a car loan if the borrower dies?

When the owner of a financed car dies, the loan doesn’t disappear. And, unfortunately, deciding who can legally inherit the car or assume the loan payments can sometimes take months or longer. Meanwhile, unless the owner purchased credit insurance, the lender will expect the monthly payments to continue, or it may repossess the vehicle.

Are you responsible for loan payments if you inherit a financed car?

If you expect to inherit a financed car and you hope to keep it, you may want to do some research into the probate process to be sure things go as smoothly as possible. If you think you’ll be making payments, this also may be a good time to look at your refinancing options, so you can be sure you’re getting the best loan possible.

Who pays the car loan if the borrower dies unexpectedly?

The borrower’s estate may pay off the car loan if the borrower dies unexpectedly. An insurance company may pay off the loan if the deceased borrower had active credit insurance coverage on the car loan. A surviving spouse, in some cases, may be responsible for repaying the deceased borrower’s car loan. Any cosigner or co-borrower on the loan may also assume responsibility for repaying the debt.

Photo credit: iStock/nortonrsx

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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 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.

SOALR-Q225-009

Refinancing your auto loan after repossession is possible. If your car gets repossessed, knowing what to expect and what your options are for refinancing can make the situation a little less intimidating.

Losing your vehicle to repossession is not necessarily permanent. Lenders may be willing to negotiate new terms following a repossession.

Learn more about refinancing your car after repossession, including how to get your car back from a repossession, refinancing after a repossession, how a repossession affects your credit, and more.

When Can a Car Repossession Happen?

If you’re unable to pay your monthly loan payment on your car, the bank can repossess it. Now you’re without a vehicle to get to work, and you’re likely at a loss about what to do next.

A car repossession can happen if you default on a secured auto loan. A secured auto loan is a traditional car financing contract in which the lender has a lien or security interest in the vehicle until the loan is paid off. The security interest gives the lender the right to seize or repossess your vehicle if you default on the loan. A default can occur if you fall into delinquency and fail to make required car loan payments.

A number of situations can make it difficult to pay your loan. You might have lost your job and not have the funds to cover your bills. Or maybe you have an upside-down auto loan, meaning you owe more than the vehicle is worth and are struggling to pay it down.

Some lenders may be flexible and provide you with a little leeway if you’re having a temporary financial issue. The key is to communicate with your lender.

Recommended: Refinance Car Loan With Same Lender

How to Get Your Car Back From a Repossession

Whether you can get your car back after being repossessed depends on several factors, including how many months you’ve gone without making a payment on your loan. If it’s been a month or two, your lender may work with you to let you catch up on late payments and get your vehicle back. If it’s been longer, the lender may sell your car at auction to recoup the cost of the loan you didn’t finish paying.

In addition to catching up on past-due payments, you may also have to cover costs associated with the repossession process, which could include towing and vehicle storage.

It’s important to understand that even if your car is seized and sold at auction, you may still be on the hook for paying the balance on the loan. If the auction sells the vehicle for less than you owe, you will still be responsible for paying the difference, including any outstanding principal, interest, and fees. Let’s say you owe $3,000 and the car sells for only $2,000. You would still owe your lender $1,000, even though you no longer have the car.

Can You Refinance a Car Loan After Repossession?

So, can you refinance an auto loan after repossession? Yes, refinancing your car loan after repossession is a possible option to explore.

If you want to refinance after repossession, it might make sense to refinance with the lender you already have a loan with. But realize you’ve got a lot working against you there, since that lender has already seen you miss payments and has had to go to the trouble of repossessing your car. However, your lender might consider giving you a refinance if you refinance over a longer period for a lower monthly payment.

If your original lender refuses, you’re not out of options for refinancing your auto loan after repossession. Check if you qualify with a bank or another auto lender. If you don’t, perhaps because your credit scores dipped from delinquency and repossession, consider adding a cosigner to qualify for an auto loan refinancing at a decent rate.

Recommended: Pros and Cons of Car Refinancing

Watch Out for Predatory Lenders

When you start looking for refinancing options after your car is repossessed, you may come across lenders who seem ready to bend over backward to get you the refinance loan you need. But that comes at a price.

These lenders may say that even if you have bad credit, you can qualify for a car loan. This could be appealing if you do indeed have bad credit, but look out for astronomical interest rates, hidden fees, and other tactics associated with predatory lending. Read the fine print carefully and don’t let a sales rep pressure you into any financing you’re not fully on board with. Ask important questions regarding your possible new loan, including:

•   What’s the monthly payment?

•   For how many months will you have to make payments?

•   What’s the APR on the car loan?

•   Do the finance charges on the car loan use simple or precomputed interest?

•   What’s the total cost of the loan?

•   Are there any prepayment penalties or other fees?

•   Finally, if your gut says something is fishy, just walk away.

Recommended: Refinancing With Bad Credit

How Long Does a Car Repossession Affect Your Credit?

Does refinancing hurt your credit? Yes, refinancing may cause a temporary dip in your credit score if the lender conducts a hard pull inquiry into your credit report, but having your car repossessed can cause greater damage.

A car repossession can affect your credit in the following ways:

•   Repossession can leave a derogatory mark on your credit report for seven years from when you stopped paying your auto loan.

•   Having a repossession recorded in your credit report can make it more difficult to get another loan.

•   You’ll have late or missing payments on your auto loan, which may be reported to credit bureaus.

•   If your car is repossessed, you may have a collection account on your credit report reflecting that.

•   You may also have a court judgment if the collections company is unable to collect the balance you owe.

Is Voluntary Surrender Better Than Involuntary Repossession?

One way to potentially lessen the impact of a car repossession — including the embarrassment of having it towed from your driveway — is through a voluntary surrender.

Some borrowers with delinquent car loans may prefer voluntary surrender over having their car taken at an unsuspecting time through repossession. Voluntary surrender happens when you contact your lender and volunteer to give up the car rather than having it repossessed involuntarily. This shows your willingness to be responsible and can save you the hassle of an involuntary repossession. Nonetheless, voluntary surrenders may appear on your credit report.

What Is a Voluntary Surrender?

Rather than waiting for your car to be taken, you can reach out to your lender to inform them that you are unable to continue paying on the loan. You can then make arrangements to give up the vehicle on your own accord. This is called a voluntary surrender.

A voluntary surrender may lead to the following outcomes:

•   When you reach out, the lender may want to work with you to find a way for you to continue paying the loan.

•   The voluntary surrender may appear on your credit report as a voluntary surrender, which can show other lenders that you were cooperative in trying to work out a solution on your auto loan.

•   Your credit scores may be impacted.

A voluntary surrender is a derogatory event, but some creditors may view it as less egregious than an involuntary repossession. That being said, losing your vehicle to repossession is not necessarily game over. You may be able to get your car back by reinstating your car loan.

Recommended: How to Sell a Car You Still Have a Loan On

The Takeaway

Refinancing an auto loan after a repossession can be challenging, but it’s not impossible. By understanding your credit situation, exploring lender options, and demonstrating financial responsibility, you may be able to secure better terms or even qualify for a new loan down the line.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Can you refinance after your car has been repossessed?

Yes, you can refinance after your car has been repossessed, but it’s difficult. Repossession severely impacts your credit, making it harder to qualify for traditional refinancing. However, some lenders offer options for those with poor credit, especially if you’ve rebuilt your credit and can show financial stability and consistent income.

What does it mean to be upside down on a car loan?

To be upside down on a car loan means you owe more than the current value of the vehicle. It’s also known as being underwater.

Can you get a loan after a repossession?

Depending on your qualifications, you may be able to get a consumer loan after repossession. This includes the possibility of getting another car loan, but the financing may come at a higher interest rate than what you had previously qualified for.

Photo credit: iStock/MCCAIG

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

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 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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOALR-Q225-003

In 2025, student loan debt remains a major obstacle to financial wellness for millions of American workers. While education is often viewed as the gateway to opportunity, the rising costs of higher education have left many employees burdened by debt throughout their careers.

With ongoing legislative changes, program delays, and economic uncertainty, navigating the student debt landscape has become increasingly complex. For HR professionals, this presents both a challenge and opportunity —- the challenge of creating benefits to address employee concerns about student debt, along with the opportunity to build a more engaged, loyal, and financially resilient workforce.

Here’s a look at the latest developments in student lending — and how HR can play a role in supporting and empowering employees burdened by education debt.

Key Challenges Employees May Be Facing

Despite federal efforts to ease the burden of student loans, 2025 has ushered in a new set of uncertainties. Here are some of the most recent changes in federal loan repayment that may be impacting the financial health of your employees.

Resumption of Collection Activities

The Department of Education (ED) resumed collections on defaulted students on May 5, 2025, after a roughly five-year hiatus. The action affects over five million borrowers who are now in default, with an additional four million in late-stage delinquency. Consequently, nearly 10 million borrowers could soon be in default, representing almost 25% of the entire federal student loan portfolio.

The ED has restarted collections through the Treasury Offset Program (TOP), which allows for the offset of income tax refunds and certain federal and state payments. If borrowers continue to miss payments going into the summer, Federal Student Aid will place them in administrative wage garnishment. This means up to 15% of their disposable income can be withheld from their paycheck and sent to their loan holder.

Legal Uncertainty Surrounding Repayment Plans

The Saving on a Valuable Education (SAVE) plan, designed to lower monthly payments and eventually forgive remaining balances, is currently on ice due to a court ruling that blocks its implementation. The roughly eight million borrowers who signed up for SAVE are now in an interest-free forbearance, and the future of the plan remains uncertain. The same court ruling also paused the forgiveness feature of the Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR) Plans.

A final resolution on these programs may come from the Supreme Court or through Congressional action.

Potential Changes to PSLF

The Public Service Loan Forgiveness (PSLF) program, which promises debt forgiveness for nonprofit and government workers after 120 qualifying payments, is facing renewed scrutiny. An executive order signed by President Trump seeks to limit which employees can qualify for loan forgiveness by changing what counts as public service. If these changes are implemented, some nonprofit organizations could lose their eligibility for the PSLF program.

Supporting Employees With Student Debt

HR departments have a unique opportunity to support employees in their financial journeys. While traditional benefits such as health insurance and retirement savings remain important, today’s workforce increasingly values financial wellness programs that address immediate concerns — chief among them, student loan debt.

Helping employees navigate their student debt repayment journey can lead to meaningful organizational benefits, including:

1. Reduced Financial Stress

According to SoFi at Work’s Workplace Financial Well-Being 2024 survey, employees spend nearly 14 hours a week stressing about finances, over half that time (8.2 hours) during working hours. Perhaps not surprisingly, one in three employees say financial issues impact their ability to focus at work, and nearly 25% say the stress reduces their productivity and confidence on the job.

Employer efforts to alleviate financial stress can lead to increased productivity, reduced absences, and improved overall employee well-being. When workers aren’t preoccupied with looming payments or default risks, they can bring more focus and energy to their roles.

Improve Loyalty and Retention

By actively addressing the student debt crisis and offering support, company leaders can foster a culture of support and empathy within the organization. This can create a positive work environment where employees feel valued and supported in their financial journey. Those employees may feel less inclined to look for a different employer, increasing your organization’s retention rates.

Employees may also be more engaged and connected to their work when they feel their employer takes their financial wellness seriously.

Increased Financial Literacy

HR can also play an educational role, helping to demystify the often-confusing world of student loans. By providing clear, accurate information — through webinars, one-on-one counseling, or curated resources — benefits teams can empower employees to make informed decisions about repayment strategies, consolidation, and forgiveness options.

That can be especially valuable for borrowers with loans in default. For example, if they’re considering enrollment in an income-driven repayment (IDR) plan, you may provide access to a student debt consultant who can help them compare the various options and choose a workable repayment plan.

Key Benefits to Consider

As HR teams explore ways to support employees with student debt, a variety of benefit options are emerging as both impactful and feasible.

Direct Student Loan Repayment Assistance

One of the most straightforward ways to assist employees is by contributing directly to their student loan payments. Under current law, employers can offer up to $5,250 annually in tax-free student loan repayment assistance through 2025. This benefit can be structured as a monthly subsidy, annual lump sum, or performance-based incentive.

Direct repayment support not only helps employees chip away at principal faster but also signals a strong commitment from employers. When paired with financial counseling or other resources, this benefit can have a highly positive impact on employee morale and financial health.

401(k) Student Loan Match

An innovative employer benefit gaining traction is matching employees’ student loan payments with contributions to their retirement accounts. Thanks to changes under the SECURE 2.0 Act that went into effect in 2024, employers can make 401(k) matching contributions based on employees’ qualified student loan payments.

This addresses the common dilemma many young workers face: choosing between paying off debt and saving for retirement. By offering both, employers can help workers build long-term financial security without sacrificing immediate obligations. It’s a win-win that encourages both debt reduction and future planning.

Recommended: Why Financial Wellness Is Important in the Workplace

Financial Education and Counseling Services

In addition to monetary support, HR can offer programs that build financial literacy and empower smarter decision-making. Partnering with financial wellness platforms or nonprofit organizations, employers can provide workshops, online tools, and access to certified counselors.

These resources can help employees:

•   Understand repayment options (e.g., income-driven repayment, refinancing, consolidation)

•   Navigate forgiveness programs (e.g., PSLF and forgiveness through IDR plans)

•   Avoid default and wage garnishment

•   Strategize for long-term financial goals alongside debt repayment

The Takeaway

As we navigate the evolving landscape of student debt in 2025, one truth is clear: employers have a powerful role to play in supporting the financial wellness of their teams. For employees burdened by uncertainty, resuming payments, and potential wage garnishments, HR support can be the difference between ongoing stress and a path to stability.

By offering thoughtful benefits — ranging from financial education to direct loan repayment and retirement matching — company leaders can foster a workplace where employees feel valued and supported.

SoFi can help. We’re experts in the student lending space. SoFi at Work offers student loan information, refinancing, and repayment platforms, along with a range of other benefits tools that can help you build a successful and loyal workforce.

Photo credit: iStock/filadendron

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

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

SOAW-Q225-011

Your debt-to-income ratio is a measure of how much you owe tracks against how much you take in. This figure is frequently used by lenders to evaluate how creditworthy an applicant is, or how likely they are to be able to pay their debt back on time. It also helps lenders determine what interest rate to charge borrowers.

A low DTI ratio demonstrates that there is probably sufficient income to pay debts and take on more. Typically, a DTI should be no more than 36% to obtain favorable credit. Here, learn more about what DTI is and how to calculate yours.

First, a Debt-to-Income Ratio Refresher

In case you don’t know how to calculate the percentage or have forgotten, here’s how it works.

DTI = monthly debts / gross monthly income

Say your monthly debt payments are as follows:

•   Auto loan: $400

•   Student loans: $300

•   Credit cards: $300

•   Mortgage payment: $1,300

That’s $2,300 in monthly obligations. Now, say gross monthly income is $7,000.

$2,300 / $7,000 = 0.328

Multiply the result by 100 for a DTI ratio of nearly 33%, meaning 33% of this person’s gross monthly income goes toward debt repayment.

What Is Considered a Good DTI?

The federal Consumer Financial Protection Bureau advises homeowners to consider maintaining a DTI ratio of 36% or less and for renters to consider keeping a DTI ratio of 15% to 20% or less (rent is not included in this ratio).

In general, mortgage lenders like to see a DTI ratio of no more than 36%, though that is not necessarily the maximum.

For instance, DTI limits can change based on whether or not you are considering a qualified or nonqualified mortgage. A qualified mortgage is a home loan with more stable features and without risky features like interest-only payments. Qualified mortgages limit how high your DTI ratio can be.

A nonqualified mortgage loan is not inherently high-risk or subprime. It is simply a loan that doesn’t fit into the complex rules associated with a qualified mortgage.

Nonqualified mortgages can be helpful for borrowers in unusual circumstances, such as having been self-employed for less than two years. A lender may make an exception if you have a high DTI ratio as long as, for example, you have a lot of cash reserves.

In general, borrowers looking for a qualified mortgage can expect lenders to require a DTI of 43% or less.

Under certain criteria, a maximum allowable DTI ratio can be as high as 50%. Fannie Mae’s maximum DTI ratio is 36% for manually underwritten loans, but the affordable-lending promoter will allow a 45% DTI ratio if a borrower meets credit score and reserve requirements, and up to 50% for loans issued through automated underwriting.

In the market for a personal loan? Some lenders may allow a high DTI ratio because a common use of personal loans is credit card debt consolidation. But most lenders will want to be sure that you are gainfully employed and have sufficient income to repay the loan.

Front End vs Back End

Some mortgage lenders like to break a number into front-end and back-end DTI (28/36, for instance). The top number represents the front-end ratio, and the bottom number is the back-end ratio.

A front-end ratio, also known as the housing ratio, takes into account housing costs or potential housing costs.

A back-end ratio is more comprehensive. It includes all current recurring debt payments and housing expenses.

Lenders typically look for a front-end ratio of 28% tops, and a back-end ratio no higher than 36%, though they may accept higher ratios if an applicant’s credit score, savings, and down payment are robust.

How Can I Lower My Debt-to-Income Ratio?

So what do you do if the number you’ve calculated isn’t your ideal? There are two ways to lower your DTI ratio: Increase your income, or decrease your debt.

Working overtime, starting a side hustle, getting a new job, or asking for a raise are all good options to boost income.

Strangely enough, if you choose to tackle your debt by only increasing your payments each month, it can have a negative effect on your DTI ratio. Instead, it can be a good idea to consider ways to reduce your outstanding debt altogether.

The best-known debt reduction plans (or payoff plans) are likely the snowball and avalanche methods, but there’s also the fireball method, which combines both strategies.

If credit card debt is an issue, here’s a tip: Instead of canceling a credit card, it might be better to cut it up or hide it. In the world of credit, established credit in good standing is looked upon more favorably than new. Eliminating a long-standing line of credit can lower your score.

Another way to decrease your debt could be to get a debt consolidation loan or credit card consolidation loan. This is a kind of personal loan, hopefully at a lower interest rate than your credit card offers. If so, it can save you on interest and give you just one simple loan to pay every month.

These personal loans are typically offered with a fixed interest rate and a term of one to seven years.

Recommended: How to Apply for a Personal Loan

The Takeaway

Your debt-to-income ratio matters because it affects your ability to borrow money and the interest rate for doing so. In general, lenders look at a lower DTI ratio (say, 28% to 36% maximum in some situations) as favorable, but sometimes there’s wiggle room. If you are struggling with high-interest debt, such as credit card debt, paying it off can positively impact your DTI. There are methods such as the debt snowball method, the debt avalanche technique, or taking out a personal loan.

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

How do you calculate DTI?

To calculate your debt-to-income ratio, or DTI, divide your total monthly debt payments by your gross monthly income, then multiply that figure by 100 to get the percentage.

What is a good DTI?

What is considered a good DTI can vary along with the type of credit you are trying to secure. In some cases, a figure between 28% and 36% is considered on target, but in others, a ratio of 50% could be acceptable. Talk to your potential lenders to learn more.

What is the 28-36 rule?

The 28/36 rule is a guideline used regarding mortgages to determine how much a borrower can afford to spend on housing and overall debt. The rule says that a borrower should spend no more than 28% of their gross monthly income on housing (mortgage, property taxes, insurance) and a maximum of 36% on all debts (including housing). This is one way lenders may evaluate a prospective borrower’s creditworthiness.

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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Whether you need to pay for an emergency root canal or have unexpected home repairs, sometimes those bills can’t wait for your next paycheck.

If you’ve researched how to access cash quickly, you might wonder if online payday loans are the answer. Lenders that offer payday loans typically promise you things like quick applications, no credit checks, and expedited approvals. They may say you’ll get the cold hard cash you need the very next day. But interest rates can be very high and create debt problems for borrowers. Learn more here so you can make the right choice when you need cash fast.

How Do Payday Loans Work?

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

The catch? Payday loans come at a price — and a high one, at that. They can have interest rates of 400% or even higher, depending on the lender you choose and which state you’re in. (Some states have stronger protective laws, including rate caps.)

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

Recommended: What Are Common Uses for Personal Loans?

How Much Does a Payday Loan Cost?

The short answer: a lot. Here’s a specific example.

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

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

What Is a Direct Payday Loan?

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

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

Why Is it Best To Avoid Payday Lending?

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

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

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

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

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

What Are Some Alternatives to Payday Loans?

In an ideal world, you’d avoid any kind of consumer debt. But sometimes it’s simply unavoidable. There are financially favorable alternatives to consider before you sign up for a risky payday loan.

Paycheck Advance

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

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

Recommended: What to Know About Credit Card Cash Advances

Debt Settlement

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

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

Personal Loans

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

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

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

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

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

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

Recommended: Personal Loan Calculator

The Takeaway

When you need money quickly, payday loans — and their promise of fast money — can be tempting. But you’ll want to proceed with caution. These loans generally come with very high interest rates and associated fees, and you may only have a couple of weeks or so to pay back the money you borrowed. There are less-risky alternatives to consider, including paycheck advance, debt settlement, or a personal loan.

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

What is a disadvantage of a payday loan?

Payday loans generally come with high interest rates and associated fees. What’s more, you typically have to pay back the money you borrowed on your next payday.

Are payday loans a good idea?

Payday loans are usually not the top choice when you need cash quickly. That’s because they often come with high interest rates and tight repayment timelines.

What is the catch to payday lending?

The catch to payday loans is that borrowers are typically charged very high fees and interest rates.

Are payday loans easy or hard to pay back?

With their high interest rates and fees and short repayment timelines, payday loans can be difficult for borrowers to pay back on time.

Can payday loans hurt your credit?

While payday loans are unlikely to build your credit score, they can hurt your credit if you don’t pay back your loan and your lender sends the debt to a debt collector.

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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