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We humans like to take the easy road. We might notice the healthiest options on the menu, then order the fried everything. Or stare down a mountain of bills, then continue the same spending habits.

So how do we snap ourselves out of it? Committing to reducing debt can be kind of like committing to a healthier lifestyle. Because if you think about it, it is a healthier lifestyle.

But just like a diet probably won’t reduce your waistline overnight, a debt management plan isn’t likely to work magic on your finances right off the bat. If you tailor your plan to fit your life, however, it’s possible to see long-lasting changes.

Creating a Debt Management Plan

Laying Out Your Debt

You probably have questions. What is a debt-management plan? Simply put, it’s a way to get control over your debt. Does a debt-management plan work? That answer is up to you.

The first step toward defeating your debt could be to lay it all out on the table, and we mean ALL of it. The average total household debt in America, including credit cards, mortgages, car payments, and everything else, hovered at $101,915 in 2022, according to Experian. For some, that total number could be a real slap in the face. (It’s okay to ugly cry.)

One way to get to your total debt amount is to gather every statement, every bill, and every outstanding balance and input them all in one place, such as a spreadsheet or a spending tracker.

You might be painfully aware of your major debts. But are there others that could be slipping beneath the radar? Potential one-off or occasional debts can include financed household purchases, medical bills, or quarterly insurance payments.

One helpful way to make sure you’re looking at all your debts could be to scroll through your bank statements to look for recurring payments, especially if they’re set up on auto-pay. Another is to compare your list of debts to your credit report.

Categorizing and Conquering

Next, you may want to break it down even more by categorizing and prioritizing your debts. Generally speaking, there are two types of debt: secured and unsecured.

Secured debt includes things like mortgages and car payments that are tied to a physical asset. Unsecured debt isn’t tied to anything tangible, so it can include most credit cards and other types of loans.

Beyond that, you can group your debt by categories, such as high-interest, low- or zero-interest, fixed-rate, variable-rate, or even large balances and small balances.

As you start to list your debts, you could consider common elements such as each creditor’s name, the total balance, your monthly payment, the interest rate, and the expiration date for any promotional interest rates. For an added layer of insight, you could use a credit card interest calculator to understand how much total interest each might incur over time.

It might also be a smart move to prioritize your debt, putting those that could send you tumbling into the bad-credit abyss if you get behind on payments. For homeowners, that could be the mortgage. For commuters, car payments and insurance could be high on the list as well. You could ask yourself which of your debts absolutely must, without fail, be paid on time and in full each month, and put them at the top.

Putting Your Debt in Context

The final piece to your financial puzzle could be to look at your debt in context with the rest of your expenses, such as monthly bills, the grocery budget, gas, and retirement contributions, as well as your monthly take-home income.

Seeing everything together can help give you a solid feel for how much you’re spending (or overspending), and how much you can reasonably start to budget toward debt repayment. And remember that even if it’s only a few dollars to start, it’s still a start.

Picking the Right Debt-Management Plan

Financial gurus have developed a number of methods for getting out of debt, and have even given them fun names that can read like the financial version of A Song of Ice and Fire.

The Snowball, the Avalanche, and the Fireball

The snowball method: This strategy calls for paying the minimum on all your debts, but putting extra toward the smallest balance first. When that’s paid off, you could apply that entire payment to the next-smallest balance on top of the minimum. It’s one way to help get some quick wins and start to check balances off your list.

The avalanche method: This one is similar but focuses on interest rates instead of total balances. With the avalanche, you would pay the minimum on all your other debts but put extra toward the highest interest rate first and work your way down. This could work to save money on interest in the long run.

The fireball: This strategy is a mix of the others, and works for some by separating debt into “good” — which is generally considered to be fixed-payment, low-interest debt that’s on a set repayment schedule — and “bad” — such as credit cards and other unsecured loans. Then, using either the snowball or the avalanche, you could start burning through the “bad” debt first.

One way to narrow your choice is to research the pros and cons of all three methods, then pick the one that fits your style and personality. Or, since we’re talking DIY debt management, you could also pick the parts you like from each one and make it your own.

Once again, it’s kind of like physical fitness: Some people may struggle to lose weight because they haven’t found a diet their body likes. But once they make that connection, they might find it a lot easier to crush their goals.

And speaking of goals, they apply to your debt-management plan, too. You might want to plan a strategy that speaks not only to you, but to your endgame. Are you hoping to save enough to afford an electric car? Will you need to pay for daycare in nine months or so? At the end of the day, you can think about your debt payoff strategy as a way to get you where you want to go, when you want to get there.

The Snowflake Method

Another approach to consider is the “snowflake method,” which works by throwing any additional money that comes your way toward debt, including work bonuses, side-hustle income, or selling things you no longer need or use.

The snowflake’s stricter cousin, the “spending fast,” takes the concept a step further by encouraging users to live as austerely as possible. Instead of eating dinner out, for example, you could cook at home and put aside the money you would’ve spent toward debt payoff. Coffee shop stops? Nope. Make your own and put that $5 toward debt instead.

These two methods could either work on their own or as tactics to complement one of the larger strategies.

Consolidating Your Debt

Paying fees for late payments or overdrafts doesn’t help anything when the goal is reducing debt. If you find it difficult to keep track of what’s due when, combining all your separate payments into one credit card consolidation loan could be a way to focus on one monthly payment.

Consolidating your credit card debt might also include a number of other benefits, but it isn’t a magic cure-all. A loan will not erase your debt, but it might help you get to a fixed monthly payment and reduced interest rates.

It’s important to compare rates and understand how a new loan could pay off in the long run. If your monthly payment is lower because the loan term is longer, for example, it might not be a good strategy, because it means you may be making more interest payments and therefore paying more over the life of the loan.

Keeping Yourself on Track

The best strategy in the world may not lead to progress if you lose track of it after a few months. One way to stay on the right track could be to set up a bill payment calendar to remind you of what’s due when. You could write it down with old-fashioned pen and paper, or use something like SoFi Relay spending tracker for notifications and easy digital payment options.

If willpower is your challenge, you might want to consider enlisting the help of a debt buddy to help get you through the rough spots. It could be a trusted friend or family member who’s been in your shoes and succeeded. You could schedule regular check-ins, and maybe even challenge each other to a debt-payoff duel to spark a little competition.

Another option is to identify your weaknesses and put barriers in place that could save you from yourself. For example, if you tend to make in-app purchases to level up on phone games, you could block them.

Reducing debt is a big deal. And even if it takes years to reach your ultimate goal, be patient with yourself — and be sure to celebrate milestones along the way.

The Takeaway

When you’re creating a debt management plan, it helps to first lay out everything you owe. Next, you may want to categorize and prioritize all of your debts before selecting a debt management plan. Some options include the snowball method, the avalanche method, the fireball method, and the snowflake method. Another strategy is to combine all separate debts into one consolidation loan. While this won’t erase your debt, it could help you get to a fixed monthly payment and, potentially, reduced interest rates.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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

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

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.

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Debts fall into two broad categories: secured debt and unsecured debt. Though both types of debt share some similarities, there is one key difference. Secured debt is backed by collateral, and unsecured debt isn’t.

It’s important for borrowers to understand how secured and unsecured debt work. That’s because the type of debt you choose could impact such things as loan terms and interest rate and whether you can get credit, and can be one tool to help you determine the order in which you’ll repay the debt.

What Is Secured Debt?

Secured debts are backed, or secured, by an asset, such as your house. This asset acts as collateral for the debt, and your lender is what is known as the lien holder. If you default on a secured debt, the lien gives your lender the right to seize the asset and sell it to settle your debt.

Mortgages and auto loans are two common types of secured debt. A mortgage loan is secured by the house, and an auto loan is secured by the vehicle. You may also encounter title loans, which allow you to use the title of your vehicle to secure other loans once you own a car outright.

What Are the Possible Benefits of Secured Loans?

Because lenders can seize an asset to pay off the debt, secured loans are considered less risky for the lender than unsecured loans. “Low risk” for a lender can translate into benefits for borrowers. Secured loans generally offer better financing terms, such as lower interest rates.

Secured loans may also be easier for borrowers to qualify for. For example, secured loans may have less stringent requirements for credit score compared to unsecured loans, which generally rely more on the actual credit and income profile of the customer.

What Are the Stakes?

The stakes for borrowers can be pretty high for secured loans. After all, consider what happens if you stop paying these debts. (Timeframes for secured loan default can vary depending upon the type of secured debt and lender terms.) The bank can seize the secured asset, which might be the house you live in or the car you need to drive your kids to school or yourself to work.

Failing to pay your debt, or even paying it late, can possibly have a negative effect on your credit score and your ability to secure future credit, at least in the shorter term.

What Is Unsecured Debt?

Unsecured debt is not backed up by collateral. Lenders do not generally have the right to seize your assets to pay off unsecured debt. Examples of unsecured debt include credit cards, student loans, and some personal loans.

What Are Some Benefits of Unsecured Loans?

Unsecured loans can be less risky for borrowers because failing to pay them off does not usually result in your lender seizing important assets.

Unsecured loans often offer some flexibility, while secured loans can require that you use the money you borrow for very specific purposes, like buying a house or a car. With the exception of student loans, unsecured debt often allows you to use the money you borrow at your discretion.

You can buy whatever you want on a credit card, and you can use personal loans for almost any personal expense, including home renovations, buying a boat, or even paying off other debts.

What Are the Stakes?

Though unsecured loans are less risky in some ways for borrowers, they are more risky for lenders. As a result, unsecured loans typically carry higher interest rates in comparison.

Even though these loans aren’t backed by an asset, missing payments can still have some pretty serious ramifications. First, as with secured loans, missed payments can negatively impact your credit score. A delinquent or default credit reporting can make it harder to secure additional loans, at least in the near future.

Not only that but if a borrower fails to pay off the unsecured debt, the lender may hire a collections agency to help them recover it. The collections agency may hound the borrower until arrangements to pay are made.

If that doesn’t work, the lender can take the borrower to court and ask to have wages garnished or, in some extreme cases, may even put a lien on an asset until the debt is paid off.

Managing Secured and Unsecured Debt

Knowing whether a loan is secured or unsecured is one tool to help you figure out how to prioritize paying off your debt. If you’ve got some extra cash and want to make additional payments, there are a number of strategies for paying down your debt.

You might consider prioritizing your unsecured debt. The relatively higher interest typically associated with these debts can make them harder to pay off and could end up costing you more money in the long run. In this case, you might consider a budgeting strategy like the avalanche method to tackle your debts, whereby you’d direct extra payments toward your highest-interest rate debt first. (Be sure you have enough money to make at least minimum payments on all your debts before you start making extra payments on any one debt, of course.)

You can also manage your high-interest debt by consolidating it under one personal loan. A personal loan can be used to pay off many other debts, leaving the borrower with only one loan — ideally at a lower interest rate. Shop around at different lenders for the best rate and terms you can find.

Be cautious of personal loans that offer extended repayment terms. These loans lengthen the period of time over which you pay off your loan and may seem attractive through lower monthly payment options. However, choosing a longer term likely means you’ll end up paying more in interest over time.

The Takeaway

Secured debt is backed up by collateral, such as a house. Unsecured debt doesn’t require collateral. The type of debt a borrower chooses may impact things like the cost of a loan and whether they can get credit. It can also help determine the order in which debt is repaid. Since unsecured loans could have higher interest rates or fees, you may decide to consider prioritizing paying down that debt first. A budgeting strategy like the avalanche method may make sense, as it calls for directing extra payments toward highest-interest rate debt first. Consolidating high-interest debt under one personal loan, ideally at a lower interest rate, is another strategy.

If you are thinking about taking out a loan to consolidate your debt, a SoFi unsecured personal loan could be a good option for your unique financial situation. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.

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

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

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Americans are carrying record levels of credit card debt. And, with the average credit card annual percentage rate (APR) for purchases now averaging 24.59%, the interest on debt can be as crushing as the balance alone.

Getting out from under high-interest debt can seem like a daunting prospect. The good news is that there are ways to make the process more manageable and a lot less overwhelming. While it can take some time, using a mix of smart paydown strategies can help you reduce your debt, lower your interest rates, and put you on the road to debt-free living. Here’s a look at some of the best ways to reduce your credit card debt.

Start by Creating A Budget

If eliminating credit card debt is the destination, creating a budget is like the road map that gets you there. While it may sound like a complicated process, it doesn’t have to be. These simple steps will get you started.

1.    Gathering financials. It might be a little painful to comb through bills and account statements, but the more information you have from the start, the easier it will be to set up a realistic budget. Try to collect the last three months of these statements in digital or paper form:

◦   Mortgage/Rent

◦   Utilities (water, gas, heat, internet, cable, HOA, etc)

◦   Pay stubs

◦   Credit card and auto loan statements

◦   Student loans or other miscellaneous recurring loans and bills

◦   Subscription services (Amazon, Netflix, Spotify, etc)

Taking the time to gather these documents can give you a clearer picture of what you’re spending each month. It can also help you suss out easy places to cut back, such as a gym membership you no longer use or a streaming service you rarely watch.

2.    Determining expenses vs. income. Once your finances are all laid out, you can tally up your average monthly income (after taxes) as well as your average monthly spending. Hopefully, the amount you spend each month is less than the amount you bring in each month. You’ll also want to make a list of your usual expenses and divide them into essential and nonessential monthly expenses.

3.    Implementing budgeting guidelines. A budget is simply a plan for how you will spend your money. Once you see how you are currently spending your money, you may realize that your spending doesn’t necessarily line up with your priorities. There are many ways to look at budgeting, but one easy framework is the classic 50/30/20 budget. It doesn’t require complicated spreadsheets or tricky apps to get started. The 50/30/20 method simply stipulates:

•   Half a person’s take-home pay should go towards “essential spending.” This includes housing costs, health insurance, groceries, utilities, minimum payments on debt, and anything else you need to pay each month.

•   One-third of a person’s post-tax pay should be tagged for “discretionary spending.” This is spending you could cut back on if needed, such as meals out, entertaining, clothing, or a gym membership.

•   Finally, 20% of post-tax income should be set aside for saving and debt payoff. The rest of a person’s paycheck is ideally reserved for retirement, emergency savings, and making debt payments beyond the minimum.

The 50/30/20 budgeting method can work well for beginners because of its simplicity and flexibility. Trying to adhere to the percentages can sometimes show budgeters their blind spots, or perhaps highlight areas where they might need to improve. But, it can also be flexible. Depending on the cost of living in your area and your priorities, you may want to play with the percentages.

Recommended: How to Stop Spending Money

Paying More Than The Minimum

When you have multiple credit card accounts racking up charges and interest, it can sometimes feel overwhelming. You might be unsure which, if any, to prioritize for payoff, and end up just paying the minimum due on every card each month.

But, if you just make the minimum payment due you might be surprised to learn how much more you end up paying in interest as the account balance accrues. Paying more than the minimum amount owed each month could lead to saving in the long run since there’s a smaller balance to charge interest on. SoFi’s credit card interest calculator can give you a general idea of how much you could possibly save on interest by calculating different repayment options.

Debt Payoff Strategies

Paying off more than the minimum each month is great, but coming up with a payoff strategy could offer a better outcome in the long run. Employing a method that works for your lifestyle could result in things like building momentum, alleviating stress, possibly making it simpler overall to conquer debt.

There are a number of simple debt-paydown strategies but here are two popular ones to consider.

•   Snowball Like a snowball rolling down a hill, this method starts with the smallest debt balances first, then builds towards the larger balances. You start by listing your debt balances from smallest to largest, without considering interest rate. You then put extra cash toward the smallest bill, while paying the minimum on all of the others. Once that bill is eliminated, you put extra cash toward the next-smallest bill. You keep the pattern going until all debt is gone.

The snowball method sometimes gets a bad rap because focusing on small debt balances first could mean paying more interest in the long run. But this method can actually have a positive psychological effect. Wiping away smaller debts can give you a sense of accomplishment that helps you power through the rest of the debt repayment process.

•   Avalanche If small wins off the bat don’t matter much, then you might turn to the avalanche method. This strategy starts with paying down the biggest interest rate debt first, paying minimums on all other debts. You contribute all free cash to the bill with the highest interest rate until it’s paid down or off. Continue, paying down debt with the next highest interest rate. Keep going until all debt is gone.

This method allows you to save on interest payments over the life of each credit card balance. The downside is that it takes longer to see any “wins.” But, once things start moving, it should have an avalanche effect, with each loan toppling.

Consolidating Multiple Debts

Having multiple bills, due dates, and accounts can lead to confusion over amounts due, resulting in missed payments and late fees. For some, a credit card consolidation loan might help to cut through the confusion by rolling all their revolving debt into one unsecured personal loan.

How can a personal loan possibly help? If you have outstanding amounts owed on multiple cards, you may be able to consolidate all the debt into one personal loan with a single fixed rate payment.

What’s more, unsecured personal loans often come with a fixed interest rate that’s lower than the average credit card rate, which means less interest charges could accrue each month.

Depending on how quickly you pay off a personal loan, you could save money on interest over the life of the loan with a lower fixed APR. Streamlining debt can also lead to more peace of mind, as can having a set term with a final payment date, instead of a revolving debt like a credit card. Rather than having multiple open-ended debts of differing amounts with varied APRs, you end up with one payment a month, with one rate and a payoff date.

Unsecured personal loans aren’t for everyone. While their APRs are generally lower than credit cards, not everyone will qualify for the lowest possible rates. And taking out a personal loan is still taking out additional debt, so it’s important to weigh the ramifications of adding a loan to one’s credit history.

The Takeaway

If you’re struggling with high-interest debt, know you’re not alone. Also know that there are a number of ways you can tackle the problem. A good first step is to look at your current income and expenses, set up a budget, and select a payoff strategy (such as the snowball or avalanche method).

You might also consider consolidating your debt to simplify repayment and, ideally, lower your interest rate. If you’re curious about this option, SoFi can help. With a low fixed interest rate on loan amounts from $5K to $100K, a SoFi personal loan for debt consolidation could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

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When you’re worried about money and feel your options are limited, debt can feel like a pair of handcuffs. And if it feels like you can’t do what you want to do — which is to pay it all off and get yourself free — there’s the temptation to do nothing. The right debt reduction plan, however, can help you start paying down your balances, stay on track with your budget, and work towards your future financial goals. Here are some options to get you started.

Tips to Build a Debt Reduction Plan

Prioritizing Expenses

A good first step is to look at everything you have coming into your bank account each month (income) and everything that is going out (spending). You can do this with pen and paper, or by leveraging an all-in-one budgeting app, such as SoFi..

Once you have a list of all of your monthly expenses, you can divide them into essential and nonessential expenses. Looking over your nonessential expenses, you may find easy places to cut back (such as streaming services you rarely watch or a membership to a gym you hardly ever use) to free up more funds for debt repayment. You may also need to cut back in other areas, such as meals out, clothing. and other discretionary purchases, at least temporarily.

A budgeting framework you might try is the 50-30-20 rule, which recommends putting 50% of your money toward needs (including minimum debt payments), 30% toward wants, and 20% toward savings and paying more than the minimum on debt payments.

Next, you can come up with a debt repayment strategy. Here are four popular approaches to knocking down debt. The debt avalanche method is probably best suited to those who are analytical, disciplined, and want to pay off their debt in the most efficient manner based solely on the math.

The debt snowball method takes human behavior into consideration and focuses on maintaining motivation as a person pays off their debt.

The debt fireball method is a hybrid approach that combines aspects of the snowball and avalanche methods. Here’s a closer look at each strategy.

Debt Avalanche

The avalanche method puts the focus on interest rates rather than the balance that’s owed on each bill.

1.    The first step is collecting all debt statements and determining the interest rate being charged on each debt.

2.    Next, you’ll want to list all of those debts in order of interest rate, so the debt with highest interest is on top and the debt with the lowest interest rate is at the bottom of the list.

3.    Now, you’ll want to focus on paying more than the minimum monthly payment on the debt that is first on the list, while continuing to make the minimum payments on all the others.

4.    When the first debt is paid off, you can move on to paying more than the minimum on the second debt on your list. By eliminating debts based on interest rate, you can save money on interest.

Debt Snowball

The debt snowball method can be effective in getting a handle on debt by getting rid of debts on your list more quickly than the avalanche method. However, it can cost a bit more.

1.    You’ll start by collecting debt statements and making a list of those debts, but instead of listing them in order of interest rate, organize them in order of size, with the smallest balance on top and the largest balance at the bottom of the list.

2.    Next, you’ll want to put extra money towards the debt at the top of the list, while continuing to pay the minimum on all of the other debts.

3.    Once you wipe away the first debt, you can start putting extra money towards the second debt on the list and, when that is one wiped out, move on to the third, and so on. This method provides early success and, as a result, can motivate you to keep going until you’ve wiped out all of your debts.

Debt Fireball

This strategy is a hybrid approach of the snowball and avalanche methods. It separates debt into two categories and can be helpful when blazing through costly “bad debt” quickly.

1.    You’ll want to start by categorizing all debt either “good” or “bad” debt. “Good” debt is debt that has the potential to increase your net worth, such as student loans, business loans, or mortgages. “Bad” debt, on the other hand, is normally considered to be debt incurred for a depreciating asset, like car loans and credit card debt. These debts also tend to have the highest interest rates.

2.    Next, you can list bad debts from smallest to largest based on their outstanding balances.

3.    Now, you’ll want to make the minimum monthly payment on all outstanding debts — on time, every month — then funnel any excess funds to the smallest of the bad debts. When that balance is paid in full, you can go on to the next-smallest on the bad-debt. This helps to keep the fireball momentum until all the bad debt is repaid.

4.    Once the bad debt is paid off, you can simply keep paying off good debt on the normal schedule. In addition, you may want to apply everything that was being paid toward the bad debt towards a financial goal, such as saving for a house, paying off a mortgage, starting a business, or saving for retirement.

Using Personal Loans for Debt Reduction

Another debt payoff strategy you may want to consider is refinancing your debt. This involves taking out a personal loan, ideally with a lower rate than you are currently paying on your “bad” debts, and using it to pay off your balances.

Personal loans used for debt consolidation can help pull everything together for those who find it easier to keep up with just one monthly payment. A bonus is that because the interest rates for personal loans are typically lower than credit card interest rates, you can end up saving money.

Here’s a look at the process.

1.    You’ll first want to gather all of your high-interest debt statements and total up the debts to be paid.

2.    A good next step is to research your personal loan options, comparing rates, terms, and qualification requirements from different lenders, including traditional banks, online lenders, and credit unions. You may be able to “prequalify” for a personal loan for debt consolidation to get an idea of what rate you are likely to qualify for. This only requires a soft credit check and won’t impact your score.

3.    Once you’ve found a lender you want to work with, you can apply for the debt consolidation loan. Once approved, you can use the loan to pay off your high-interest debts. Moving forward, you only make payments on the new loan.

The Takeaway

Having a debt reduction plan in place is key to getting rid of those financial handcuffs and being able to look forward to a successful financial future. To get started, you’ll want to assess where you currently stand, find ways to free up funds to put towards debt repayment, and choose a debt payoff method, such as the avalanche or snowball approach.

Another option is to get a debt consolidation loan. This can help simplify repayment and also help you save money on interest. If you’re curious about your options, SoFi could help. With a lower fixed interest rate on loan amounts from $5K to $100K, a SoFi debt consolidation loan could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.

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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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There may be times in your life when your car breaks or you get a surprise medical bill in the mail or you finally move forward with a home remodeling project. If you need help covering those costs, you might decide to take out a personal loan. But is money from the loan considered income and therefore subject to taxes?

The good news is, a personal loan is usually not considered income, though there are some exceptions that could impact borrowers during tax season. Let’s take a closer look.

Does a Personal Loan Count as Income?

If you take out a personal loan, you may treat the funds the same as you would your paycheck. But as far as the IRS is concerned, any kind of formal loan from a bank or lender with terms that require repayment is considered a debt and is therefore typically not considered income. This distinction is important because it means you may not have to pay taxes on money you receive from a personal loan.

However, there may be tax implications on informal loans from friends and family. Before you enter into any agreement with a loved one, it’s a smart move to consult with an accountant.

Recommended: How to Pay Less Taxes: 9 Simple Steps

When Is a Personal Loan Considered Income?

While personal loans are generally not considered income and therefore taxable, there are exceptions that borrowers should know about.

If you take out a personal loan and then some or all of the loan debt is forgiven, the amount forgiven could be considered income. It might seem odd for canceled debt to be considered income, but think about it like this: Let’s say you made an extra $5,000 from work and used it to pay off your personal loan. That $5,000 would be considered income, and your loan would be paid off.

However, if you made no extra money but your $5,000 loan was canceled, then you would be in the same financial position in the end. So the IRS considers that forgiven loan debt taxable income.

Once a formal debt is forgiven or canceled, you should receive a Form 1099-C from the lender. According to the IRS, the amount of the canceled debt is taxable and must be reported on your tax return for the year.

There are some exceptions, such as certain qualifying student loan cancellations or personal loans canceled as part of bankruptcy hearings. And that’s where professional tax guidance might come in handy. Another thing to know is that the interest on personal loans is generally not tax-deductible.

What Exactly Is a Personal Loan?

As you’re exploring your options, it helps to understand what a personal loan is and how it works. A personal loan is one of many types of loans offered by banks, credit unions, and online lenders like SoFi. Personal loans typically range from $1,000 to $100,000, depending on the lender. There are both secured and unsecured personal loans. A secured personal loan means there is some sort of collateral to back the loan.

With an unsecured loan, there is no collateral. Generally, personal loans are unsecured. The terms of the loan—including things like interest rates, origination fees, and repayment schedules—are typically based on an applicant’s financial history, income, debt, and credit score. Because these types of loans aren’t tied to an asset, their interest rates can be higher than secured personal loans but are usually lower than credit cards or payday loans.

Exact eligibility requirements will vary by lender. The loans are then typically paid back with interest in monthly payments over a set schedule; typical repayment terms are extended over anywhere from 12 to 60 months.

Unlike a business loan or a home loan, an unsecured personal loan can be spent on a range of personal expenses, from home renovations to medical bills to consolidating credit card debt.

Applying for a Personal Loan

Over the past 12 months, 68% of Americans applied for a personal loan, according to a 2023 Forbes Advisor survey. And the average personal loan amount is $8,018.

If you’re thinking about a personal loan, consider starting with this checklist:

•   Determine how much money you need.

•   Explore all your financial options.

•   Research various loans and lenders.

•   Choose the type of loan you want.

•   Compare interest rates.

If you decide a personal loan is right for you, the application process is relatively straightforward. You may be asked to submit paperwork, like a photo ID, proof of address, and proof of employment or income. Many lenders offer applicants the option to see if they pre-qualify for a loan, which can give them an idea of the rates and terms available to them.

If you’re planning to use a personal loan to pay off existing debt, you could also use SoFi’s personal loan calculator to compare payments and rates to see if an unsecured personal loan could potentially help you save money.

Recommended: Preapproval vs. Prequalify: What’s the Difference?

The Takeaway

A personal loan can provide borrowers with funds for a variety of purposes. Generally speaking, the money isn’t taxable and considered as income. However, there are some exceptions. For instance, if you take out a personal loan, and some or all of the balance is forgiven, the canceled debt could be considered income. There are both secured and unsecured personal loans; typically, personal loans are unsecured.

If you are thinking about taking out a loan to cover an unexpected or large expense, a SoFi unsecured personal loan could be a good option for your unique financial situation. SoFi personal loans offer competitive, fixed rates and a variety of terms. Checking your rate won’t affect your credit score, and it takes just one minute.

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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.

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