SoFi

If you recently got a bonus or just sold off the antique nutcracker collection you inherited from your Uncle Leo, you might consider putting that extra cash toward paying off your loans or getting ahead on your mortgage. After all, one frequently given nugget of financial wisdom is to use unexpected windfalls to pay down your debt. But what happens when paying down your loans comes with a prepayment penalty?

Loan prepayment penalties are fees lenders might include in their terms to ensure you pay a certain amount of interest on your loan before paying it off. It might sound crazy, but making extra payments or paying your loan off early can actually cost you more because of loan prepayment penalties.

The best way to avoid prepayment fees, of course, is to choose a personal loan or mortgage loan without prepayment penalties. If you’re stuck with a prepayment penalty on your loan, however, all is not lost. There are ways to avoid paying loan prepayment penalties. Here’s what you need to know in order to avoid prepayment penalty fees:

What is a loan prepayment penalty?

A loan prepayment penalty is an extra fee that allows lenders to charge you a fee for paying off the loan before the end of the term. The term of your loan is the repayment time period that you and your lender agreed on when you applied for the loan.

Personal Loan Prepayment Penalties

For example, if you take out a $6,000 personal loan to turn your guest room into a pet portrait studio and agree to pay your lender back $150 per month for five years, the term of that loan is five years. Although your loan term says it can’t take you more than five years to pay it off, some lenders also require that you don’t pay it off in less than five years.

The lender makes money off the monthly interest you pay on your loan, and if you pay off your loan early, the lender doesn’t make as much money. Loan prepayment penalties allow the lender to recoup the money they lose when you pay your loan off early.

Mortgage Loan Prepayment Penalties

When it comes to mortgages, things get a little trickier. For loans that originated after 2014, there are restrictions on when a lender can use prepayment penalties, which has made the penalties less common on mortgages. If you took out a mortgage before 2014, however, your mortgage may be subject to loan prepayment penalties. If you’re not sure if your mortgage has a prepayment penalty, check your origination paperwork or call your lender.

How much are loan prepayment penalties?

The cost of the prepayment penalty can vary widely depending on whether you took out a small personal loan or a substantial mortgage, and how your lender calculates the penalty. Lenders have different ways to determine how much of a prepayment penalty to charge. It behooves you to figure out exactly what your prepayment fee will be, because it can help you determine whether the penalty will outweigh the benefits of paying your loan off early. Here’s how the penalty fee might be calculated:

1. Interest Costs. If your loan charges a prepayment penalty based on interest, the lender is basing the fee on the interest you would have paid over the total term. To take our example from above, if you have a $6,000 loan with a five-year term, and want to pay the loan off in full after only four years, the lender may try to charge you 12 months’ worth of interest as a penalty.

2. Percentage of balance. Some lenders use a percentage of the amount left on your loan to determine your penalty fee. This is a common way to calculate prepayment penalty fees on mortgages. For example, if you buy a house for $500,000 and want to pay off the remaining balance six months after purchase, your lender might require that you pay a percentage of your remaining balance as a penalty.

3. Flat fee. Some lenders also simply have a flat fee as a prepayment penalty. This means that no matter how early you pay your loan back, you’ll have to pay a previously-agreed-to penalty fee.

How can you avoid prepayment penalties?

Trying to avoid prepayment penalties can seem like an exercise in futility, but it is possible. The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If that is not possible, you still have options.

First, you can stick to the loan terms you agreed to. It might feel like you’re letting the lender win by making monthly payments for the full term of your loan, but it ensures you avoid penalty fees.

You can also take a look at your loan origination paperwork to see if it allows for a partial payoff without penalty. If it does, you might be able to prepay on a portion of your loan each year, which allows you to get out of debt sooner without requiring you to pay a penalty fee. For example, some mortgages allow larger payments of up to 20% of the purchase price once a year—without charging a prepayment penalty. This means that while you might not be able to pay off the full mortgage, you could pay up to 20% of the purchase price each year without triggering a penalty.

Finally, some lenders shift their prepayment penalty terms over the life of your loan. This means that as you get closer to the end of your original loan term, you might face less harsh penalty fees, or no fees at all. If that’s the case, it might make sense to sit on Uncle Leo’s nutcracker fortune for a year or two until the prepayment penalties no longer apply.

If you’re looking for a loan or mortgage, remember that there are lenders like SoFi that don’t impose prepayment penalties. With no prepayment penalties, you can use an unexpected cash windfall to pay down your debt fast without worrying about fees.

SoFi Mortgages not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com for details.
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You might be the kind of person who relishes spending money on exciting purchases, but can’t stand paying for boring things, like $8 shipping or a $25 oil change. And while it’s fair to be stingy sometimes, it doesn’t make sense to stress out about the inevitable costs of living while ignoring the far more important kind of spend: how much of your money goes toward accruing interest on debt.

The average American family has approximately $16,000 in credit card debt , and even more if you’re counting other types of consumer debt. If they’re paying the average credit card interest rate of 16.4% APR, they’re shelling out thousands of dollars per year on interest charges alone. That’s worth putting some thought and action toward. If you have credit card debt, use our Credit Card Interest Calculator to see how much interest you are paying.

With interest rates running into double digits, it’s no wonder people are seeking out ways to lessen interest payments. That’s where a debt consolidation loan comes in. Here’s how to determine if it is the right choice for you.

What are debt consolidation loans?

A debt consolidation loan is another name for a personal loan that you use to pay off other sources of debt, such as credit card debt. You’re basically just taking out a new loan out from a bank, credit union, or other non-bank lender and then using that money to pay off existing debt.

This is not the same as debt or credit relief, where a credit counselor helps you reduce interest rates or eliminate debt altogether. Credit relief programs can help you consolidate your debt, but they aren’t getting you a new loan—it’s only consolidation.

With a personal loan—also called a debt consolidation loan—you can merge multiple payments into one streamlined payment and potentially lower the combined interest rate. To put it in perspective, the average credit card interest rate is 16% APR.

When should you take out a personal loan for debt consolidation?

Most people considering a personal loan—also called a debt consolidation loan—feel overwhelmed by having multiple debt payments every month. A personal loan can lighten this load for two reasons. For one, you can lower the interest you pay on your debt, which means you could potentially save money on paying interest over time.

For two, it can also make it possible to opt for a shorter term, which could mean paying off your credit card debt years ahead of schedule. If it’s possible to get lower interest than you have on your current debt, or a shorter term on your debt to pay it off faster, a personal loan could be worth looking into.

On the other hand, you’ll also want to be careful about fees that might come with your new loan, separate from the interest rate you’ll pay. For example, some online lenders charge a fee just to take out a personal loan, and some don’t, so you’ll want to do your research.

How are personal loans used for debt consolidation?

Generally, people seeking debt consolidation loans have multiple sources of debt and want to accomplish two things: First, lower their interest rate—and thereby pay less each month—and reduce the amount they have to pay over the life of their loan. Second, they are trying to merge multiple loans into one, making it easier to keep track of monthly payments.

With a lower rate of interest, you are able to lower your monthly payment, shoring up money for other expenses or financial goals. You can also opt for a shorter repayment term, which shortens your payback period and gets you out of debt faster.

Who is eligible for a personal loan for debt consolidation?

If you have one or more sources of debt where the interest rate is higher than 10%, it’s worth exploring a personal loan. While there’s no guarantee that you’ll find a lower interest rate, you can’t know unless you get quotes from a few lenders. (And these days, it’s a pretty painless process. If it proves difficult, find yourself a different lender.)

Those with the best credit scores will typically qualify for the best rates on their new personal loans, but don’t let an average or even poor score keep you from requesting quotes. This is especially true if you have more than $10,000 in credit card debt and those cards charge exorbitant interest rates, which most of them do.

Also know that your credit score isn’t the only data point that’ll be considered in determining whether you qualify for a loan and at what rate. Potential lenders typically also consider employment history and salary, and other financial information they deem important in determining loan-worthiness.

A personal loan isn’t for everyone. If you’re doing it only for convenience and there isn’t a legitimate financial motive, it’s probably not worth it. Instead, focus that energy on paying back the money you owe as efficiently as possible.

While personal loans can be a great tool to reduce interest payments, it doesn’t reduce the actual debt you owe. If you’re looking to get out of debt so you can focus on other financial goals, but the interest rates on your debt are making it nearly impossible, a personal loan could be exactly what you need.

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

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Graduating from college and starting your career is a time filled with questions and excitement. On the one hand, everything is new and getting to check all the “firsts” (first solo apartment, first salaried job, first absolutely terrible post-grad roommate) off your list is incredibly rewarding. On the other hand, some of those first financial questions can be just a bit overwhelming, especially when it comes to student loans.

Understanding your student loans, whether they are private or federal, and how much you need to pay to make a dent is all new territory and brings on even more questions. But know that you’re not alone. The latest numbers suggest over 44 million people in the country have a total of $1.4 trillion in student loan debt.

As you start managing your post-grad budget, you might realize that student loan payments are a large portion of your monthly bills. If that’s the case, it’s a good idea to start learning about student loan refinancing. Can it get you a lower interest rate? How does refinancing differ from student loan consolidation? And will any of this save you money?

The most important answer, first: Yes, student loan consolidation and refinancing can save you money. However, they are both different, and you’ll need to figure out which option is a better fit for you. Now let’s get into the nitty-gritty.

What is federal student loan refinancing?

If you graduated with student loans, you likely have a combination of private and federal student loans, which are loans funded by the federal government. Direct subsidized loans or Direct PLUS loans are both examples of federal student loans.

Interest rates on federal student loans are fixed and set by the government, so you can’t refinance at a lower rate and keep it as a federal loan. However, you can refinance your federal student loans into private loans with a new—ideally, lower—interest rate.

When you refinance into a private loan, you lose some of the benefits that come with a federal loan, which is worth keeping in mind. However, the new loan (and the new interest rate) could translate to a lower interest rate and paying off loans sooner.

What is the difference between federal student loan refinancing and student loan consolidation?

Student loan consolidation and student loan refinancing are not the same thing, but it’s easy to confuse the two. In both cases, you’re essentially signing new loan terms that replace your old student loans.

Consolidation takes your student loans and bundles them together. This allows you to work with the provider of your choice and qualify for new repayment options. Consolidation, however, does not get you a lower interest rate. Refinancing, on the other hand, takes your old loans and finances them at new interest rates with a private lender.

You can consolidate federal loans into a federal Direct Consolidation Loan at no cost. This keeps your loans federal and can give you a longer repayment timeframe, and simplifies the repayment process to help you not miss payments. But it doesn’t necessarily save you money. Generally, the new interest rate on your federal direct consolidation loan is the weighted average of your original loans’ interest rates. For some people, even if it doesn’t save them money, the streamlining of loans is worthwhile.

What are the benefits to federal student loans?

There are a number of benefits to federal loans that aren’t always available for private loans. For example, you may be eligible for the Public Service Student Loan Forgiveness program if you’re working in public service and have made 120 loan payments.

You may also have access to certain income-based repayment plans or protections on your loans if you default or miss payments. However, as with all things, there are pros and cons. Loan forgiveness is great if you qualify, but double-check the requirements before thinking you can just write off all that debt. And income-based repayment plans can be a life-saver if you’re in between jobs or just getting started, but it may mean you pay more over the life of your loans.

Should I refinance my federal student loans?

It depends on how much you might save with a lower interest rate from a student loan refinance, versus how likely you are to use the benefits that come with having federal student loans.

First, you can use the SoFi student loan calculator to figure out how much you might save with a lower interest rate. In general, borrowers often refinance federal graduate student loans and PLUS loans, since those have historically offered less competitive rates.

Next, ask yourself: Are you going to use the programs or benefits that come with federal student loans? These include income-based repayment plans , as well as loan forgiveness for teachers, doctors, or even lawyers in public service. If that’s you, great, but if it’s not, that’s OK too. (There is also some concern Public Service Loan Forgiveness programs could disappear .

There are some downsides to income-driven student loan repayment plans, too. You can end up paying more in interest or get hit with a higher tax bill after your loan is forgiven. However, depending on your financial situation, that flexible repayment plan could be a saving grace. It depends on how much you have in federal student loans and how confident you are about your repayment options.

The last thing you’ll want to consider before you opt to refinance your student loans is the terms of your new student loan. Weigh all the costs and benefits, and figure out what makes sense for you. We know you can do it. After all, you’re a college graduate.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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It’s the classic financial dilemma: you’ve got a home improvement project you’d like to start or maybe you have some unexpected medical bills, but you don’t want to dip into your savings to cover the expenses.

If you have good credit, a personal loan could be the answer. But there’s a lot to consider, especially if you’re paying off student loans while also trying to build a solid nest egg. Here’s a five-point plan to help you out:

1. Decide if a Personal Loan is Really the Ticket

In theory, a personal loan can be used for anything; in practice, though, it’s more suited to some uses than others. For example, major purchases that won’t offer a financial return, such as jewelry, a wedding or a European vacation, are not great uses for a personal loan.

When you take out a loan, your monthly payments will include interest. So avoid paying that interest by saving up for these types of purchases instead.

If you need to cover a smaller expense, like a new TV or espresso machine, using a credit card makes more sense than turning to a personal loan. Even though the interest rate on a credit card is typically higher than on a personal loan, you can pay off less expensive items off over a short period of time, accruing less interest in the long run—or even no interest. Remember, when you use a credit card vs a personal loan, you aren’t charged interest until 30 days after your purchase.

For larger expenses that double as investments in your financial or physical health, or in your career and home, a personal loan is a great solution. Use it to:

Consolidate Credit Card Debt

Average credit card interest rates range from around 13% to 23%, but personal loan rates can be much lower. Using a low-interest personal loan for credit card debt consolidation could save you thousands.

Make a Home Improvement

A personal loan is a great option for a home improvement project that’s just out-of-reach of your budget. And it could pay for itself down the road if you sell your home.

If you aren’t sure how much your renovation project will cost use our Home Improvement Cost Calculator to find out.

Pay for Large or Unexpected Medical Bills

Using a personal loan to pay health expenses is a smart alternative when the monthly payments attached are more manageable than the payments demanded by a doctor or hospital.

Pay for Moving Expenses to Advance Your Career

Expenses attached to career success are great investments. Moving to take a better job, for example, could be key to increasing your earning potential.

Once you know that a personal loan is for you, it’s time to be uber-responsible and do some pre-application homework. Take these steps:

Determine Exactly How Much you Need to Borrow

Your high credit score is valuable, and not something you want to damage. A solid loan strategy will help you maintain it. So, plan on borrowing only as much as you need, and know exactly what you can afford to pay monthly, so there’s no risk of overextending yourself.

2. Choose the Type of Loan you Want

There are two types of personal loans—secured and unsecured. A secured loan requires you to put up assets, such as property or stocks, as collateral, and it comes with a lower interest rate because it presents a lower risk to the lender.

But there’s a serious downside if you fail to make your monthly payments: You could lose the assets you’ve put on the line. An unsecured loan, on the other hand, is granted based on your credit history rather than on your assets.

3. Research Lenders and Ask the Right Questions

Choosing the right lender can save you thousands in interest payments and fees. So take a close look at your options to determine the lender and loan terms that best suit your needs. Once you’ve narrowed your choices down, ask lenders these key questions:

Can I Borrow the Exact Amount I Need?

Many lenders only offer loan amounts up to $40,000. But SoFi offers loans up to $100,000, so there’s a good chance you’ll get the amount you require.

What’s the Best Interest Rate you Can Offer me, and Can I Sign up for Automatic Payments?

Interest rates on personal loans can be over 30%. SoFi’s rates are some of the lowest—from just 5.95% fixed APR. Plus, if you sign up for Autopay, SoFi discounts your rate 0.25%.

What Loan Term Best Suits my Goals?

Personal loan terms can range from six months to 7 years, depending on the lender. SoFi offers 3, 5, and 7-year terms.

Are origination fees or prepayment penalties attached to the loan? Some lenders charge an origination fee of 1% to 6% of the loan just to process your application, and/or a prepayment penalty when you pay off your loan ahead of schedule. SoFi doesn’t do things like that —what you see is what you get.

What if I lose my job and can’t make payments for a few months? Missed payments could lower your credit score, incur late fees, or even involve collections agencies or a lawsuit.

SoFi personal loans include unemployment protection, allowing you to suspend your monthly payments for up to 12 months (though interest will continue to accrue). Plus, you’re eligible to receive job placement assistance in the meantime.

4. Crush Debt Faster

With your questions answered and your loan secured, you’re ready to embark on your project or pay some big bills. As you do, remember to stick to your budget and keep your spending in check. The last thing you want to do is take on more debt.

If you receive a raise or find yourself with a few extra bucks at the end of each month, think about making larger payments and applying the extra amount directly to your loan principal.

Get a year-end bonus? Use it to help pay off your loan months or even years early. Pro-tip: making a one-off payment on the day your auto-pay bill is due ensures that 100% of that payment goes towards paying down the principle of the loan.

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

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Congrats to the Class of 2016! May your lives after graduation be a reflection of everything you’ve worked so hard for – a successful career, stable finances, and much more. And if you’re one of the 40 million people in the U.S. with student loans, may your student loan repayment strategy help you eliminate that debt efficiently, so you can focus on your life’s journey.

Make no mistake – student loan repayment does require a strategy. Right now, it might seem as simple as picking a repayment plan and writing the first check, but the decisions you make today and during the course of the loan can affect how much interest you pay in the long run. A smart repayment strategy ensures that you don’t spend a penny more than is necessary.

Student loans may be a fact of post-grad life, but you can take four steps to put your repayment strategy on the right track:

1. Know Exactly What You Owe

Chances are you haven’t looked at your loan statements since you signed on the dotted line. So spend time getting reacquainted. Find your federal loans on the National Student Loan Data System (NSLDS) website .

If you’ve got private loans, gather your statements or check with your school’s financial aid administrator. Many private loans are also listed on the Clearinghouse Meteor Network . If necessary, pull your credit report ; all of your loans will be listed there.

Once you’ve tracked everything down, make a list of your loans and their important details—the type (e.g., Direct, PLUS, private), the balances, and the interest rate you’re charged for each. This information is key to intelligent planning.

2. Understand the Grace Period

Some student loans offer a grace period of several months (six, usually) after graduation before you’re required to start making payments. This can come in handy if you haven’t yet found employment or you’re taking a break before entering the working world.

Just remember that the interest clock is usually ticking on most unsubsidized and private loans during this timeframe. Those loans begin to accrue interest the moment they’re disbursed, and will continue to do so throughout the repayment period.

At that point, the accrued interest is capitalized and added to a loan’s principal, which means that you end up paying interest on a larger loan balance. Translation: higher interest cost for you.

Bottom line? Use the grace period if you need it, but consider making at least interest-only payments during this timeframe in order to save money long-range.

3. Do the Math

Most lenders will offer you a choice of repayment plans, allowing flexibility around the length of the repayment term (e.g., 10 years vs. 20 years), which impacts your monthly payment amount and total interest cost. While it might be tempting to choose the option with the lowest monthly payments, the long-term repercussions can be costly.

For example, let’s say you have a $100,000 student loan at a fixed 6.8% interest rate. If you pay it off in 10 years, your monthly payments will be $1,150, and the total interest will be $38,096. If you extend the term to 20 years, your monthly payments will go down to $763 but your total interest will spike to $83,201. If you can afford the higher monthly payments, you can save more than $45,000 in interest with the 10-year plan.

Recommended: Explore our student loan help center for tips, resources, and guides to help you navigate your student loan debt.

However, the most important factor is the ability to pay your monthly student loan bill, because missing or making late payments can have a disastrous effect on your credit. If you need to choose a lower payment option initially, do so.

But when you’re able, switch to a more aggressive plan or keep the longer term but pay more than the minimum each month to accelerate loan repayment. The sooner you do, the less interest you’ll pay and the faster you’ll be done with your loans.

4. Consider Refinancing

One of the best ways to save money on interest is by lowering your interest rate, and the only way to do that is through student loan refinancing. Refinancing typically requires the borrower to have a solid income and a track record of capably handling debt.

So if you’ve landed a great job and have a history of managing loans and credit cards responsibly, lowering your interest rate may be a cost-saving option for you.

Using the above loan example, let’s see what happens if you refinance that loan at a lower rate. By refinancing a $100,000, 6.8%, 10-year term loan to 5%, your payments would go down to $1,060, and your total interest would be $27,278. In other words, refinancing would mean lower monthly payments and a total savings of almost $11,000.

But before refinancing federal student loans, remember that fed loans offer benefits like potential loan forgiveness and income-based repayment plans.

These programs don’t transfer to private lenders, so it’s important to know whether they apply to your situation before refinancing. If you don’t benefit from these programs, and saving money is your priority, refinancing federal loans can be a cost-saving option.

When ready, do the math on refinancing your own loans using our student loan calculator.

Keep Your Eyes on the Prize

Arguably the most important aspect of any student loan repayment strategy is to keep a positive, can-do attitude. When starting out, each monthly payment can feel like a drop in an ocean. But stick with it, increase your payments when possible, and soon you’ll build momentum and experience some satisfying results.

While there’s no one-size-fits-all approach to determining the very best strategy, if you take time to understand all of your repayment options, you can create a course of action that works best for your situation, saves you money over the long term, and works toward paying off loans as efficiently as possible. An effective plan will allow you to focus on what’s really important: life after graduation.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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