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A high-risk personal loan can be a source of funding for people who have a low credit score or no credit history and need to access cash. It is considered “high-risk” because the borrower is seen as more likely to default on the loan. For this reason, the interest rate is likely to be significantly higher than what a borrower with a more creditworthy profile would be offered via a conventional personal loan.

Here, learn the details of high-risk personal loans, their pros and cons, and alternatives if you need a quick infusion of cash.

What Are High-Risk Personal Loans?

High-risk personal loans make cash available to those with a poor credit score or without a credit history. Some points to consider:

•   Most personal loans require a credit score of 580 or higher, but if you have a low credit score (typically between 300 and 579) or lack a robust credit history, you may be able to tap into a high-risk personal loan.

•   These loans can give you access to cash, but they often come with higher interest rates, higher fees, strict repayment terms, and limits on the amount of money you can borrow.

•   While some of these are unsecured personal loans, others may be secured. This means you may be required to put up collateral, or an asset, to be approved for the loan. In this situation, if you default on the loan, the lender can seize your asset.

•   Personal loans typically come with fixed interest rates, and you must repay them in fixed monthly installments over a specified period, usually up to seven years. High-risk personal loans may have much shorter terms, however.

It’s worth noting that personal loans don’t usually have any restrictions on their usage. You could use them to pay for a car repair, travel, credit card debt, a new kitchen appliance, and almost any other legal purchase or service.

Recommended: Personal Loan Glossary

Types of High-Risk Loans

Here are some options you might consider for high-risk personal loans.

High-Risk Unsecured Loan

With this loan, you will not need to put up collateral to obtain funding. Typically, the lender will offer you a lump sum of cash; perhaps up to $10,000. While this may supply a quick cash infusion, keep in mind that the “high risk” cuts both ways. The lender is taking a gamble on you, as the odds of you defaulting may be high. But you are also probably securing a loan at a high interest rate and with significant fees and limitations.

High-Risk Secured Loan

In the case of a high-risk secured loan, you will be required to put up a form of collateral (such as real estate or a savings account) to gain access to funding. If a lender offers you this kind of loan, keep in mind that if you default, you could lose your collateral.

Payday Loan

Payday loans are short-term, high-cost loans, usually due on your next payday. Typically they provide a small amount of money, such as $500, that needs to be repaid within two to four weeks, and are offered online or at retail locations of payday lenders.

Here’s how they often work: You write a post-dated check for the amount borrowed plus fees, and the lender debits the funds from your account on the day the loan is due. Or you might grant the lender permission to pull the funds from your bank account electronically. If you can’t pay off the loan on time, it could roll over with more interest and fees accruing.

Note that these loans can involve an annual percentage rate (APR) of up to an eye-watering 400%. For this reason, they are considered a last resort.

Car Title Loan

Not all states offer them, but a car title loan lender lets you borrow between 25% to 50% of your car’s value, typically starting at $100 with 15- to 30-day repayment periods. In exchange, you put your car up for collateral. This means the lender can take possession of your car if you don’t repay the loan. (In one review, the Consumer Financial Protection Bureau found that one in five borrowers of this kind of funding winds up losing their vehicle.)

Lenders who offer car title loans typically have very low or no credit requirements, and you can get funding fairly quickly, even in a day. They also likely come with extremely steep interest rates, up to 300% APR.

Pawn Shop Loan

With a pawn shop loan, you hand over an item as collateral (such as jewelry, a musical instrument, or a computer), and the pawn shop offers a loan based on the item’s appraised value.

The shop may lend 25% to 60% of the resale value of the item, but note that if you fail to repay the loan, the pawn shop can keep and then sell the item. The pawn shop may give you 30 to 60 days to repay the loan.

Here’s the risky part: The APRs are high, around 200%, and vary based on your state.

Recommended: Using a Personal Loan to Pay Off Credit Card Debt

Figuring Out if You’re a High-Risk Borrower

Here are signs that you would be considered a high-risk borrower by lenders:

•   You have a non-existent or thin credit history, meaning you don’t have a proven record of handling debt responsibly

•   You have a low credit score (generally, below 580)

•   You have made repeated late payments on loans or credit cards

•   You have defaulted on a loan in the past

•   You have a high debt-to-income ratio (DTI); typically, this means your debts add up to more than 35% of your income

•   You are unemployed

•   You have declared bankruptcy in the past seven to 10 years

Each lender will have its own guidelines regarding to whom they lend, how much, and at what rate and fees. It’s therefore important to check with your lender about the requirements for their personal loans and their terms.

Why Choose a High-Risk Loan?

If you have poor credit or no credit and want to borrow money, a high-risk loan may offer you the best (or only) option to access a loan, particularly if you have an urgent need for cash. You can often access high-risk loans with a lower credit score or minimal credit history than you would need to qualify for traditional loans.

You might seek this kind of loan vs. dipping into an emergency fund you just started or into a college or retirement fund. It could help you preserve those assets if, say, you need quick cash for a move.

It’s important to consider both the pros and the cons of these personal loans so you make the right choice about whether to pursue this type of funding.

Disadvantages to High-Risk Loans

High-risk loans come with several downsides, including the following:

•   Higher interest rates and fees: High-risk loans typically have higher APRs and fees, meaning that you’ll pay more over the loan term. An example: Some have a 400% APR vs. the average APR of 12.38% for conventional personal loans as of August 2024. Some people can get caught in a debt cycle of taking out high-risk loans continually (particularly in the case of payday loans).

•   Risking collateral: You may have to put up an asset as collateral for your loan. If you fall behind on payments, you may lose the asset because your lender will seize it.

•   Lower amounts: You may not get to borrow as much as you prefer, because many lenders will only pay out small amounts to high-risk borrowers. For instance, some payday loans max out at $500.

How to Qualify for a High-Risk Personal Loan

Here’s how you might qualify for a personal loan as a high-risk borrower. Personal loan lenders will want you to see that you’ll likely be able to cover a new loan payment. Among other factors, lenders may use your credit score, your income, and your DTI to assess your ability to repay a loan. In terms of a target DTI, lenders like to see you keep it below 35% for a standard personal loan. With a high-risk loan, you may qualify with a significantly higher figure.

Next, you’ll gather the documents, including:

•   Your ID

•   Social Security number

•   Pay stubs

•   W-2 forms

•   Federal income tax forms

•   Bank account statements

You can apply online for a high-risk personal loan in just a few minutes once you have your materials ready. Your lender will let you know if you need to submit more documentation. In most cases, you’ll have a loan decision fairly quickly (some lenders advertise approval in minutes). If approved, you’ll likely have funds within one to three business days.

Alternatives to High-Risk Loans

You can also consider alternatives to high-risk loans, including:

•   Payday alternative loans: Credit unions may offer their members short-term loans as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. PALs 1 offer between $200 and $1,000 with a maximum APR of 28%, and one- to six-month repayment terms. PALs II offer up to $2,000, a maximum 28% APR, and one- to 12-month repayment terms.

•   Family or friend loan: Family members or friends may be willing to lend you money. However, ensure that you can repay the loan in a timely manner so you don’t risk damaging the relationship.

•   Get a cosigner: You can approach someone you know who has good credit to become a cosigner on your application to help you qualify for a standard personal loan. Make sure, however, that both parties involved understand that the cosigner is responsible for taking over your monthly payments if you default on repaying the loan. That’s a major commitment on your cosigner’s behalf.

•   Look for “buy now, pay later” offers: These allow you to purchase an item and then pay it off on an installment plan, which may or may not charge interest.

•   Build your credit: Perhaps it seems obvious, but building your credit can play a key role in helping you qualify for more favorable loans in the future. You might work on positively impacting the factors that determine your credit score or meet with a qualified credit counselor to learn strategies.

Recommended: Guide to Personal Loans

The Takeaway

High-risk personal loans can be a source of quick cash for people with a low credit score or a thin credit history. They can be risky for the lender, because there is a fair chance the borrower might default. They can also be risky for the person seeking the money because the interest rate, fees, and other terms may prove very expensive and/or involve potentially losing any collateral that might be put up.

If you are a high-risk borrower, it’s important to fully understand what these loans involve and the downsides if you cannot repay them on time. It may also be wise to review what options exist before you decide to apply for a high-risk personal loan.

If you’re seeking a standard personal loan, see what SoFi offers.

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.

FAQ

What is considered a high-risk loan?

High-risk loans are funds offered to individuals who may have bad or no credit. In exchange for accepting a higher-risk applicant, lenders typically charge higher APRs and fees and/or may require the borrower to put up collateral.

What type of bank offers high-risk loans?

Banks typically don’t offer loans to high-risk borrowers, though it may be worth checking with them before moving on to another type of lender. Those who do offer high-risk personal loans could be online lenders or a retail payday loan provider, for example.

What two types of loan should you avoid?

There are several types of loans you may want to avoid if possible, including car title loans and payday loans. Why? You will pay high interest rates which can trap you in a cycle of debt. Also, with a car title loan, you are using an asset as collateral, which means you risk losing your vehicle if you can’t repay the loan on time.

Photo credit: iStock/Eleganza

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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 .

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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.

SOPL-Q324-008

All federal student loans and most private student loans have simple interest. With simple interest, borrowers pay interest only on the principal of the loan.

Loans with compound interest charge interest on the principal and on unpaid interest. This makes them more expensive than simple interest loans.

It’s important to understand how the interest on your student loans is calculated so that you know what you’re paying over the course of your loan term.

Understanding Simple and Compound Interest

The interest you pay on a student loan is the cost of borrowing the money. Here’s how simple vs. compound interest works.

Simple Interest Explained

Simple interest means you pay interest only on the principal balance. You do not accrue interest on any unpaid interest.

Simple interest is calculated using this formula: Principal x Interest Rate x Loan Term.

Compound Interest Defined

With compound interest, you pay more interest over time. The lender charges interest on your loan balance plus the unpaid interest that accrues.

How much compound interest you’ll pay depends on the number of compounding periods your loan has. The more compounding periods, the more the compound interest amount will be.

For example, if your loan compounds daily, the daily interest rate is applied to the principal along with any unpaid interest up until that point.

Over the life of the loan, compound interest will cost a borrower more.

Recommended: Student Loan Debt Guide

How Student Loan Interest Works

The way student loan interest works depends on the type of loan you have.

Federal Student Loan Interest

Federal student loans, which are backed by the U.S. Department of Education, have fixed interest rates, which means the interest rate never changes. While the interest on these loans begins accruing immediately, how the interest is handled depends on the type of loan you have.

With Federal Direct Subsidized loans, which are awarded based on financial need, borrowers do not pay interest while they are in school, during a six-month grace period after graduation, or during any deferment period. The government covers the interest payments during these times.

Direct Unsubsidized loans, which are not awarded based on financial need, work differently. Borrowers are responsible for paying the interest on these loans at all times. If they don’t pay the interest while they are in school, during the six-month grace period after graduation, or in times of student loan deferment, the interest will accrue and be added to the principal of the loan.

All Federal Direct loans are “daily interest” loans, which means interest adds up each day.

Private Student Loan Interest

Private student loans are offered by private lenders such as banks, credit unions, and online lenders. These loans may have either a fixed or variable interest rate.

The interest rates for private student loans are determined by the lender and are based largely on the borrower’s credit score and income.

Many private loans have simple interest, however, some use compound interest. Before taking out a loan, find what type of interest it has. This is one way to help manage student loan debt.

Check out our private student loan guide to learn more about how the interest works on these student loans.

Capitalization of Interest

When interest capitalizes, the unpaid interest is added to the principal amount of the student loan. This increases your loan’s principal balance, and interest is charged on the new, larger balance.

For instance, capitalization may happen during periods of deferment if you have Direct Unsubsidized loans. In that case, the interest may be added to the principal amount of the loan. This might increase your monthly payment and the overall cost of the loan.

Calculating Interest Costs on Student Loans

To calculate interest costs on student loans, first find out what kind of interest the loan has. In most cases, it will be simple interest. As discussed, all federal student loans and many private student loans have simple interest.

To determine how much the monthly simple interest would be, you first need to find out what the daily interest on the loan is. To calculate that, divide the interest rate by 365 and multiply that number by the principal amount.

For a $10,000 loan with a 6.00% interest rate, the calculation would look like this:

0.06/365 x 10,000 = $1.64

You’re paying $1.64 in daily interest. If your billing cycle is 30 days, multiply 1.64 x 30 = 49. That means you’re paying $49 a month in simple interest.

If the student loan has compound interest, the calculation is more complicated. As mentioned, the amount of compound interest you’ll pay depends on the number of compounding periods your loan has. For example, if your loan compounds daily, the interest rate is applied each day to the principal along with any unpaid interest up until that point.

So if your loan is $10,000 and your daily interest amount is $1.64, the next day, that interest is added to the principal and you’re charged interest on the new, higher amount of $10,001.64. The interest charges will continue to increase this way each day.

A student loan with compound interest can end up costing you more and result in your living with student loan debt over the long term.

Strategies to Minimize Student Loan Interest

Fortunately, there are ways to minimize student loan interest. Here are some steps that can help.

Making Interest-Only Payments

If you have Federal Direct Unsubsidized student loans or private student loans, making interest-only payments while you’re in school could save you money. These payments will help keep the interest from accruing and being added to your principal.

Refinancing for Lower Rates

When you refinance student loans, you take out a new private loan to cover the cost of your current loans. Refinancing may allow you to get a lower interest rate or better loan terms and help you simplify your loan payments. Using a student loan refinancing calculator can help you determine if you could benefit from refinancing.

It’s possible to refinance private and federal student loans. However, it’s important to note that if you refinance federal loans with a private lender you will no longer have access to federal programs and protections like income-driven repayment plans.

Paying Off High-Interest Loans First

Paying off your loans with the highest interest first could help you save you money over the long term because you’re paying off your costliest debt. To do it, make payments on all your loans when they’re due, but put any extra money you have toward the highest-interest loan.

After you pay off that loan, tackle the next-highest interest loan, and so on until your debt is paid off. This is commonly called the debt avalanche method of paying off debt.

Tax Implications of Student Loan Interest

It’s possible to get a tax deduction for the interest you pay on student loans. This is known as the student loan interest deduction and it allows you to potentially deduct up to $2,500, or the amount of interest you paid on your federal or private student loans — whichever amount is less — from your taxable income.

There are income phaseouts to this deduction based on your modified adjusted gross income (MAGI). Your MAGI must be below a certain limit, which typically changes each year, in order to claim the deduction.

The Takeaway

The interest on most student loans is simple interest and not compound interest. All federal student loans have simple interest and many private loans do as well.

Before you take out a student loan, make sure you understand what kind of interest it has and how the interest accrues. Depending on the type of loan it is, you may want to make interest payments while you’re in school to help manage your debt.

Refinancing your student loans may also be worth considering if you can qualify for a lower interest rate or better terms. You can shop around with different lenders for the best rates and terms for your situation.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Do federal student loans have simple or compound interest?

Federal student loans typically have simple interest, which is interest calculated only on the amount of money you borrowed (the loan principal). Many private student loans use simple interest as well, but some private student loans do use compound interest, in which interest is charged on your loan balance and on the unpaid interest that accrues.

Which type of interest is more expensive for borrowers?

Compound interest is more expensive than simple interest is for borrowers. That’s because compound interest is calculated on the accumulated interest as well as on your original principal. With compound interest, you end up paying more over time.

Can interest be deferred on student loans?

When you defer Direct subsidized federal student loans, the interest is deferred. However, interest continues to accrue on unsubsidized federal student loans during a deferment, and the unpaid interest will be capitalized and added to your loan principal when the deferment ends.

Photo credit: iStock/Rockaa

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSLR-Q324-002

Administrative forbearance for student loans occurs when your payments are paused or reduced by your lender or loan servicer, often due to account management or technical issues. This means you’ll get a break from federal student loan payments and often from interest accrual as well until the forbearance ends. 

Keep reading to explore the ins and outs of administrative forbearance, how it can impact your financial future, and ways to manage your student loan debt.

Defining Administrative Forbearance

Administrative forbearance is when your federal student loan payments are temporarily paused or reduced by your lender. This relief can be given due to system glitches, billing errors, or even natural disasters. For example:

•   To tackle multiple issues with federal student loan servicing and repayment during the pandemic, the Biden administration opted for administrative forbearance. This paused payments for federal student loan borrowers and dropped their rates to 0% interest on student loans during the forbearance period. 

•   In late October 2023, the Department of Education (DOE) found that 2.5 million MOHELA borrowers received their billing statements late or with incorrect amounts, causing many to fall behind on their loan payments. To help, the DOE put these borrowers into administrative forbearance and withheld over $7.2 million from MOHELA, giving borrowers a chance to get back on track and keep their loans in good standing.

Administrative forbearance is usually applied automatically, so you don’t need to go through an approval process as with other types of forbearance. However, in some cases, you may need to contact your lender to opt in. 

Other Types of Student Loan Forbearance

Administrative forbearance isn’t the only type of relief available. Other types of student loan forbearance include:

•   General Forbearance: Also known as discretionary forbearance, this is when your loan servicer decides if you qualify for a break from payments when you can’t afford them. It’s available for Direct Loans, Federal Family Education Loan (FFEL) Program loans, and Perkins Loans, and lasts up to 12 months at a time. If you’re still having trouble after that, you can request another forbearance period.

•   Mandatory Forbearance: If you meet certain criteria, your loan servicer has to grant you forbearance on Direct, FFEL, and Perkins Loans. Specifically, this applies if you’re in a medical or dental residency, your loan payments are 20% or more of your income, or you’re completing qualifying teaching or military service. The forbearance lasts up to 12 months at a time and can be extended if you still qualify.

Keep in mind, forbearance is typically offered for federal student loans. If you have private loans (say, from a student loan refinance), your options will depend on your lender.

When Is Administrative Forbearance Granted?

Administrative forbearance is typically granted in situations like these:

•   You were given a deferment, but your lender later found out you weren’t eligible. 

•   There was a period in which payments were overdue before your deferment started.

•   There’s a gap between when you should start repaying and when your lender schedules your first payment.

•   Your loan is sold or transferred, and you’re less than 60 days behind on payments.

•   Your loan servicer needs time to determine if you qualify for a discharge, such as for bankruptcy or school closure.

•   There’s a delinquency period left after a deferment or mandatory forbearance before the next payment is due.

•   You’ve been affected by a natural disaster. 

Advantages and Disadvantages of Administrative Forbearance

Administrative forbearance offers both benefits and drawbacks. Here’s what you need to know.

Benefits of Temporary Relief

•   Administrative forbearance, while not under the borrower’s control, can provide unexpected financial relief when it occurs. 

•   Interest does not usually accrue during the period of administrative forbearance.

•   Typically, you will get credit toward income-driven repayment (IDR) forgiveness and Public Service Loan Forgiveness (PSLF) for months that your loan spends in administrative forbearance.

Downsides of Administrative Forbearance

•   During administrative forbearance, there is the possibility that your loan servicer might have interest accrue during the forbearance period or part of it. For instance, when the Covid student loan pause ended in August 2023, Nelnet advised borrowers that interest would accrue in the month of September (which was considered a month of administrative forbearance). Payments began to be due again in October. Though rare, this kind of scenario of interest accrual during forbearance could mean you owe more money.

•   In certain situations, there is no impact on loan forgiveness programs. That is, time spent in administrative forbearance may not count toward loan forgiveness. This is the case with income-driven repayment (IDR) and Public Service Loan Forgiveness (PSLF) during the SAVE plan’s pause (more on that below). In this situation, the time it takes to qualify for forgiveness could be extended. 

Recommended: Understanding Capitalized Interest on Student Loans

Applying for Forbearance

When a loan servicer grants administrative forbearance, it’s usually an automatic process. This means that if you’re eligible, your servicer will notify you of the forbearance, and your loan payments will be paused without your needing to do anything.

However, if you want to qualify for general or mandatory forbearance, you’ll usually need to contact your loan servicer and submit a request.

Required Documentation

To apply for general or mandatory forbearance, you’ll need to provide specific documentation. This can include proof of income, employment status, or financial hardship. In some cases, your loan servicer may request additional information. 

Notification and Approval Timeline

Once you’ve submitted your request for forbearance, your loan servicer will review your application and notify you of their decision, typically within seven to 10 days. If approved, you’ll receive information on the start date of your forbearance period.

It’s important to continue making payments until you receive a notification of forbearance approval with a start date. Failure to do so may result in loan default, which can impact your credit.

Duration and Renewal Process

Forbearance periods usually last up to 12 months at a time. If you need to pause your payments after the initial forbearance period ends, you can apply to extend forbearance. Make sure to contact your loan servicer before your current forbearance period expires to discuss your options and submit any necessary paperwork for renewal.

Alternatives to Forbearance

If student loan forbearance isn’t an option, there are a few other ways to ease the burden of your student loan debt if you’re facing financial challenges.

Income-Driven Repayment Plans

With an income-driven repayment plan, your student loan payments are tailored to your income and family size. In some cases, you might pay as little as $0 per month. Your monthly payments are usually calculated based on a percentage of your income.

To qualify, you must submit an application. Then every year after approval, you’ll need to update your income and family size, a process known as recertifying your IDR plan. Once your IDR plan term ends, usually after 20 to 25 years, any remaining student loan balance is typically forgiven. 

The DOE offers one active plan and one that is paused due to legal review:

•   Income-Based Repayment (IBR) Plan: Depending on when you borrowed your loan, this plan requires borrowers to pay between 10% and 15% of their discretionary income, with loan terms usually lasting 20 to 25 years.

•   Saving on a Valuable Education (SAVE) Plan (formerly REPAYE Plan): The SAVE plan was designed to set payments at 5% of income for undergraduate-only borrowers and between 5% and 10% for those with any graduate loans. Loan forgiveness was intended to kick in after 20 years for undergraduate loans and 25 years for graduate or professional loans. However, at this time, the plan has been paused while the Supreme Court considers lawsuits regarding the program. 

Deferment Options

Lenders automatically defer student loans while you’re enrolled in school and for six months after graduation. You may also request deferral for the reasons below. (A couple of points to keep in mind: Interest will likely accrue during a deferment period, and you may not make progress toward forgiveness while in deferment.)

Here are other types of deferment vs. forbearance you may qualify for:

•   Cancer treatment deferment

•   Economic hardship deferment

•   Graduate fellowship deferment

•   Military service and post-active duty student deferment

•   Parent PLUS borrower deferment

•   Rehabilitation training deferment

•   Unemployment deferment

Loan Consolidation or Refinancing

If you’re dealing with multiple federal student loans, you can combine them into a single Federal Direct Consolidation Loan. Just keep in mind, this typically won’t lower your interest rate — the new rate is a weighted average of your current rates, rounded up a bit.

Another option is to consider refinancing student loans, which might include federal and private student loans. This means you take out a new private loan to pay off all your existing student loans, rolling them into one payment. 

You can use a student loan refinance calculator to evaluate how this might help you save. You could potentially get a lower interest rate or a longer repayment period, making your payments more manageable. An important heads-up, however: If you choose to refinance your federal loans, you’ll lose access to federal benefits and protections. Also, if you extend your loan term, you may pay more interest over the life of the loan, increasing your overall borrowing costs.

The Takeaway

Administrative forbearance on student loans is an automatic pause that loan servicers place on your payments for various reasons, like if they made a mistake with your billing or a natural disaster has occurred. They might or might not stop interest accrual during this time. If you’re having trouble managing your student debt, you might want to consider student loan deferment, income-driven repayment, or refinancing to better manage your payments. 

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Does administrative forbearance affect credit scores?

Your credit score usually won’t be affected when your loan is in administrative forbearance as long as you follow the agreement’s terms.

Can administrative forbearance be applied retroactively?

Yes, loan servicers can retroactively apply administrative forbearance to federal student loans. This can help cover past due amounts before you start a new repayment plan. It’s also useful if there are administrative or technical issues, like receiving incorrect or late billing statements, that prevent you from making payments.

What happens after administrative forbearance ends?

Once administrative forbearance ends, your payments will usually resume, and interest will begin to accrue again if it had been paused. It’s important to be prepared for these payments to ensure you stay on track with your loan repayment schedule as stated in your loan agreement. 

Photo credit: iStock/PeopleImages

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSLR-Q324-009

There are different ways to refinance student loans, including refinancing part of your loans. Partial refinancing means you could choose to refinance some of your loans but not all of them. Or you could decide to refinance a portion of just one student loan.

But first, you need to determine if refinancing your student loans makes sense for you. Here’s how refinancing works, including partial refinancing.

What Is Student Loan Refinancing?

With student loan refinancing, you take out a new private loan to cover the cost of your current loans. Refinancing may allow you to get a lower interest rate or better loan terms. Borrowers who qualify for a lower interest rate may consider refinancing student loans to save money.

It’s possible to refinance both private and federal student loans, but be aware that if you refinance federal loans with a private lender, you are no longer eligible for federal programs and protections like income-driven repayment.

Benefits of Refinancing Student Loans

Student loan refinancing can be beneficial for some borrowers. For instance, you might be able to lower your monthly loan payment if you qualify for a lower interest rate, or you may be able to change the length of your repayment term.

Refinancing might also help simplify your loan payments. By refinancing multiple loans into one new loan, you’d have just one loan payment to make instead of several.

This student loan refinancing guide spells out the potential benefits and drawbacks.

Reasons to Refinance Part of Your Student Loans

A borrower might choose to refinance part of their student loans if it makes repayment easier or more affordable. Some popular reasons to refinance include:

Lower Interest Rate

If you qualify for a student loan with a lower interest rate, you could save money by paying less in interest over the life of the loan. Shop around for the best student loan refinancing rates.

Simplify Multiple Loan Payments

If you have several student loans with different lenders, it may be difficult to keep track of all the payments and due dates. Combining loans with a partial refinance can streamline the process and make payment easier to manage.

Change Repayment Terms

With student loan refinancing, you may be able to lower your monthly payments by extending your loan term. Essentially, you are stretching out the loan over a longer period of time, which could ease the stress on your budget each month.

However, there is a trade-off. Lowering your monthly loan payments will increase the total amount you’ll pay over time because you’ll be accumulating interest on the loan over a longer period. Be sure to take that into consideration as you’re thinking about refinancing.

Qualifying to Refinance Part of Your Loans

If you decide to refinance part of your student loans there are eligibility criteria you’ll need to meet.

Credit Score and Income Requirements

When you apply for student loan refinancing, a lender will base the interest rate they offer you in part on your credit score and income. Typically, the higher your credit score, the better your chances of getting a lower interest rate.

To be approved for student loan refinancing, many lenders require you to have a credit score in the mid-600s or higher. And to get a lower interest rate, you’ll typically need a credit score in the upper-700s — or you may have to enlist a cosigner for refinancing. The cosigner agrees to repay the loan in the event you can’t.

Before applying to partially refinance, check your credit report to make sure it doesn’t have any errors. If it does, correct them before you apply. If your credit score is low, it may be beneficial to work on building your credit before you refinance. For instance, you could pay down other debt you owe (like credit card debt) and make on-time bill payments.

Lenders will also ask for proof of your income, such as pay stubs, to ensure that you can repay the loan. In addition, they’ll look at your debt-to-income (DTI) ratio, which is the amount of monthly debt you have compared to your monthly income. Aim for a DTI of 36% or lower.

Loan Types and Eligibility

The type of student loans you currently have are another important factor in refinancing. Borrowers with federal student loans may not want to refinance if they believe they’ll need access to federal programs and protections like income-driven repayment plans.

However, for borrowers with private student loans who think they may be able to qualify for a lower interest rate or more favorable terms, refinancing could make sense.

Student Loan Refinancing Process

Refinancing is fairly straightforward. You’ll do some comparison shopping to choose your lender and then submit your application.

Compare Lenders and Rates

In order to get the best rates, shop around with several different lenders and then prequalify for refinancing. During prequalification, the lender does what’s called a soft credit check. This won’t impact your credit score, but it will give you a better sense of the interest rate you might qualify for.

Apply for Refinancing

Once you’ve decided on a lender, you can fill out an application on their website. In general, you’ll be asked for:

•   Information about your student loan debt

•   Government-issued photo identification

•   Proof of employment

•   Proof of where you live

•   Recent pay stub

•   Loan statement from your current lender or loan servicer

If you are refinancing part of your student loans, indicate on the application which loans you want to refinance.

Managing Old and New Loans

With partial student loan refinancing, you’ll have a mix of new and old loans to stay on top of. Consider setting up automatic payments for each of them to ensure that all the payments are made on time. Just log into your accounts online and change your payment settings to autopay. That way you won’t have to worry about forgetting or missing a payment.

Potential Drawbacks of Partial Refinancing

Along with the potential benefits, partial refinancing also has some drawbacks. Consider each of these factors carefully before you decide whether to move ahead.

•   Lose access to federal loan benefits: When you swap your federal loans for a private loan with refinancing, you’ll no longer be able to take advantage of federal benefits and protections, such as Public Service Loan Forgiveness, deferment, and forbearance. If you think you might need any of these things, refinancing may not be the best option for you.

•   No guarantee of better rate or terms: If you don’t have good credit or a steady income, you may not qualify for refinancing. And even if you do qualify, you might not get a favorable rate. A student loan calculator can help you figure out if partial refinancing makes sense for you.

•   Won’t achieve full student loan consolidation: Refinancing all your student loans into one, known as consolidation, can make them easier to manage. But with partial refinancing, you’ll still be juggling different lenders, due dates, and payments. You can use autopay to simplify the process, but it’s worth considering this downside.

The Takeaway

Refinancing your student loans isn’t an all or nothing endeavor. Partially refinancing your loans is possible. It could be beneficial if you have both private loans and federal loans and want to keep your access to federal programs, and also get a lower interest rate. In that case, you could refinance your private loans and leave your federal loans as they are.

Just be sure to weigh the pros and cons of refinancing. If you decide to go ahead with the process, shop around for the best rates and terms.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Can you refinance federal and private student loans together?

Yes, you can refinance federal and private student loans together. You can combine private and federal loans by refinancing them with a private lender.

And if you’re partially refinancing your student loans — for instance, maybe you’re refinancing one federal loan and two private loans, and leaving your other federal loans as is — you can typically indicate on the application which loans you want to refinance. But if you have any questions, check with the lender.

Is it better to refinance all or part of your student loans?

Whether you should refinance all or part of your student loans depends on your specific situation and the type of loans you have. You may want to refinance your private loans if you can qualify for a better rate and terms. And you might want to hang onto your federal loans in case you need the federal programs and protections they provide access to. Consider all the possibilities before you make your final decision.

How soon can you refinance student loans after graduation?

You can typically refinance student loans as soon as you graduate from school. However, you might want to consider refinancing right before the end of the six-month grace period, when you don’t have to make any student loan payments. That way you can take advantage of the six months of no payments before your new refinancing loan rates and terms kick in.

Photo credit: iStock/Srdjanns74

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Whether you’re making home repairs, planning a bucket-list trip, or consolidating debt, getting a $4,000 personal loan can be a flexible solution. As long as you meet the lender’s criteria, the process of applying for a loan is generally straightforward. However, before you apply, it’s a good idea to understand how personal loans work, where to find one, and what they offer.

Read on to learn about the pros and cons of a personal loan for $4,000 and the qualifications you’ll need to meet to get one.

How to Get a $4,000 Personal Loan

Knowing how to apply for a $4,000 personal loan can make the process a lot easier. Here are some steps to help you get the loan that’s right for you.

Check Your Credit

When you apply for a personal loan, lenders will check your creditworthiness, so you’ll want to review your credit report first. You can get a free copy from the three main consumer credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com®.

After you receive your credit reports, read them over closely and report any inaccuracies. Errors could impact your loan terms and chance of getting approved.

Shop Around

Interest rates and terms vary by lender, so shop around and compare your options. Many lenders will let you prequalify first, which gives you a sneak peek at potential interest rates, terms, and fees before you submit your final application. Comparing at least a few different offers can help you find the one that suits your needs and budget.

Apply for the Loan

Once you’ve selected the loan you want, it’s time to apply. Once you send in your application, the lender will do a hard credit check to see how creditworthy you are. You may also be asked to provide certain documents, including:

•   Identification

•   Proof of income

•   Proof of residence

After your application and required documents are in, the waiting game begins. Some lenders may swiftly approve your application and get you the funds in a lump sum — minus any origination fees — in a few hours or days. But if you have a more complicated loan application, you could be waiting a week or more for a decision.

Pros of a $4,000 Personal Loan

There are several benefits to taking out a personal loan. These include:

•   Flexibility. You can use the funds for just about any purpose.

•   Lower interest rates. Personal loan interest rates are often lower than credit card rates.

•   Bad credit eligibility. You may still qualify for a $4,000 loan even with bad credit.

•   Fast approval. Certain lenders offer fast approval, with funds available to you in a matter of hours or days.

Cons of a $4,000 Personal Loan

While personal loans have plenty of selling points, they also come with some drawbacks. Here are ones to keep in mind:

•   High fees. Personal loans can come with fees, such as origination fees ranging from 1% to 8% of the total loan amount.

•   Prepayment penalties. Some lenders charge penalties if you pay off your loan early.

•   Increased debt: A personal loan can add to your debt load, especially if you spend the funds on big-ticket items instead of consolidating high-interest debt.

•   Negative credit impact: When you apply for a personal loan, the lender will perform a hard inquiry. This can cause your credit score to drop slightly, though the dip is temporary.

Recommended: Fee or No Fee? How to Figure Out Which Loan Option Is Right for You

Can You Get a $4,000 Personal Loan With Bad Credit?

As we mentioned, even if you have poor credit or no credit history at all, you might still be able to qualify for a $4,000 loan. If your FICO® Score is lower than 580, it’s considered poor and you’re generally seen as a high-risk borrower.

While there’s no set credit score you need for a personal loan, many lenders prefer that borrowers have a credit score above 580. You can still qualify if you have a lower score, but the terms may not be as favorable. You could be offered loans with higher interest rates and additional fees. And you may be required to put up collateral, such as a car or your home, in order to secure the loan.

How to Compare $4,000 Personal Loans

Personal loans are offered through online lenders, traditional banks, and credit unions. Just like you shop around for the best deal on a big purchase, it’s smart to compare lenders’ rates and terms before you apply.

Here are a few things you’ll want to consider as you review your options.

Fees and Penalties

Some $4,000 personal loans come with fees, while others don’t. Lenders also have different ways of applying these fees. For example, some lenders may include fees in the loan amount, increasing your total debt. Others deduct fees from the loan proceeds, reducing the amount you receive. Be sure to crunch the numbers because they can increase your borrowing costs.

Prequalification

When you apply for a loan, the lender often looks at your credit to help determine the rates and terms you qualify for. This requires a hard inquiry, which can temporarily lower your credit score by up to 10 points. If you prequalify with multiple lenders, you can compare different offers without harming your credit. You might also want to use a personal loan calculator to get a better idea of what your monthly loan payments may be.

Flexibility

What if you face financial difficulties and struggle to pay back the loan? Or if you miss a payment and incur a late fee? Some lenders offer financial protection programs for borrowers, which can give you peace of mind when choosing a $4,000 personal loan.

The Takeaway

A $4,000 personal loan can be a quick way to get money for almost any need. You can get these loans from banks, credit unions, and online lenders. Requirements vary by lender, and each might offer different interest rates and terms. However, having a good credit score typically gets you a better rate.

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.

FAQ

How much would monthly payments be on a $4,000 loan?

The amount you’d pay each month for a $4,000 loan depends on the interest rate and loan term. For example, if you had a three-year loan at 12.00% APR, your monthly payment would be around $133. However, with a two-year term at the same rate, the monthly payment would be closer to $188.

What is the interest rate on a $4,000 loan?

According to data from Forbes Advisor, personal loan interest rates can vary widely, though they’re typically between 7.00% and 36.00%. Rates for a three-year loan are generally between 12.00% and 15.00%. But keep in mind that the rate you qualify for depends on your credit score and loan terms.

What credit score do you need for a $4,000 loan?

In order to qualify for a $4,000 personal loan, most lenders typically prefer a credit score above 580. However, borrowers with lower scores may also qualify for a loan depending on the lender’s criteria.

Photo credit: iStock/PeopleImages

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.

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.

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.

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