Coming up with enough cash for a down payment to buy a house is often the biggest hurdle for prospective homebuyers. To avoid paying for mortgage insurance, you typically need to put down 20% of the purchase price. These days that can be a hefty sum: The average home sales price in the second quarter of 2024 was around $500,000, which means a typical buyer will need to accumulate at least $50,000 to purchase a home.
If you don’t have that kind of cash sitting around, using a personal loan might sound like a great solution. Unfortunately, many mortgage lenders do not permit you to do this. Even if you can find one who does, it may not be a good idea. Here’s what you need to know about using a personal loan for a down payment.
Why Can’t I Use a Personal Loan as a Down Payment?
As part of the mortgage application process, a lender will want to verify the sources for your down payment. Being able to provide documentation that you have enough money in savings to cover your down payment (and then some) gives the lender confidence in your strength as a borrower and your ability to repay the loan.
If you fund a down payment through a personal loan, however, a lender may see it as a sign of potential financial instability, which raises their risk. As a result, some types of mortgages — including conventional mortgages and FHA mortgages — forbid the use of personal loans as a down payment for a home.
Why Is It Bad to Use a Personal Loan for a Down Payment on a House?
Even if you are able to find a mortgage lender who allows you to use a personal loan for a down payment, doing so can have several negative consequences. Here are the primary reasons why it’s considered a bad idea.
• It can increase your DTI: Having a personal loan on your credit reports impacts your debt-to-income (DTI) ratio — how much of your monthly income goes to repaying debts. A higher DTI ratio can make it more challenging to qualify for a mortgage or reduce the amount for which you can qualify.
• It might increase your interest rate. Taking out a personal loan to cover a down payment signals to a mortgage lender that you’re financially stretched and may not be able to afford homeownership. This makes you a greater risk. To protect themselves, a lender may offer you a higher rate than a borrower using savings for their down payment.
• Higher monthly payments: Personal loans typically have shorter terms and higher interest rates than mortgages. Using a personal loan for a down payment means additional debt on top of a mortgage, which could be difficult to manage and lead to financial strain.
• Greater risk of default. If your budget is stretched due to multiple debts, you could potentially fall behind on your personal loan, mortgage payments, or both. If that happens, you risk defaulting on your debt, damaging your credit, and in a worst-case scenario, losing your home.
What Are Alternatives to a Personal Loan for a Down Payment?
Instead of using money from a personal loan for a down payment on a house, here are other ways to fund this milestone purchase.
Savings
If you’re not in a rush, you may want to push back your home purchase and ramp up your savings. To ensure consistency with your savings, consider setting up an automated transfer from checking to a dedicated savings account for a set day each month. You might also want to put any windfalls — like a tax refund, work bonus, or cash gift — toward your down payment fund to get to your goal faster.
Many mortgage lenders allow down payment funds to come from gifts provided by family members. If you have relatives who are willing and able to assist, this can be a viable option. Since a lender may ask you to substantiate any large deposits into your bank account, it’s a good idea to ask the giver to provide a letter to your lender detailing the amount and confirming that it is a gift and not a loan.
Down Payment Assistance Programs
Various local, state, and federal programs offer down payment assistance to eligible homebuyers. These programs can provide grants, low-interest loans, or forgivable loans to help cover your down payment and closing costs. They’re typically geared toward first-time homeowners who are low- to middle-income. The Department of Housing and Urban Development (HUD) allows you to search local home-buying programs by state on the HUD website.
Look Into Loans That Require a Smaller Down Payment
There are some types of mortgages that do not require a large down payment. FHA loans (which are insured by the Federal Housing Administration), for example, allow eligible borrowers to put down as little as 3.5%. USDA loans (targeted to certain suburban and rural homebuyers) and VA loans (designed for U.S. service members and their surviving spouses) don’t require any down payment.
Some retirement accounts, like a 401(k) or IRA, allow you to take out a loan or make a withdrawal for a home purchase. While this option can provide the necessary funds, it’s essential to understand the implications, such as potential taxes, penalties, and the impact on your retirement savings. It’s a good idea to consult with a financial advisor to determine if this could be a good option for your situation.
Taking out a personal loan might seem like a good way to get the funds for a down payment on a home. The problem is that many mortgage lenders won’t permit you to use a personal loan for down payment and, if they do, may charge you a higher interest rate or lower your loan amount, as they will view you as a risky borrower.
Personal loans are generally better left for other purposes, such as covering emergency expenses, consolidating credit card debt, or making home repairs or improvements (once you become a homeowner). If you are considering getting a personal loan, be sure to shop around to find the right offer. Personal loans from SoFi, for instance, offer competitive fixed interest rates.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Can you use a personal loan for closing costs?
It may be possible to use a personal loan to cover closing costs when buying a home. These costs, which may include appraisal fees, title insurance, and attorney fees, can add up quickly. Just keep in mind that some mortgage lenders may not approve a borrower for a mortgage if they have recently taken out a personal loan, as it shows you may not be in a strong financial position to take on other new debt.
Do banks check what you spend your loan on?
Banks typically do not check or monitor what you spend the funds from a personal loan on. Once the loan is approved and the funds are transferred to your bank account, it is up to you to use the money as agreed upon in the loan agreement.
Keep in mind, however, that misusing the funds from a personal loan can have financial and legal consequences. If you use the loan money for something other than what was outlined in the loan agreement, you are technically in violation of the terms of the loan. This could potentially lead to penalties, legal action, or damage to your credit score.
What happens if you don’t use all of your personal loan?
If you don’t use all of your personal loan, you’re still responsible for repaying the full amount borrowed, along with interest. If your lender doesn’t charge a prepayment penalty, you might consider using the excess funds to pay off your loan ahead of schedule — this can reduce the total amount of interest you’ll pay for the loan.
Photo credit: iStock/whitebalance.oatt
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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
External Websites: 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.
When you purchase a home, you must pay closing costs, which are the fees the lender charges to recoup loan processing costs. These can add up to a hefty sum, typically 3% to 6% of your mortgage amount.
Typically, you can take out a personal loan to cover those closing costs and help you across the finish line of a property purchase. You can often tap other funding sources as well. Take a closer look at the pros and cons of using a personal loan for closing costs, plus the alternatives, so you can decide what’s best for your needs.
What Are Closing Costs?
Closing costs are processing fees that you pay to your lender, either as the buyer or seller in a real estate transaction:
• Buyers: Buyers typically pay between 3% and 6% of the total loan amount in closing costs. Buyers must pay this amount out of pocket, so it’s important for them to have a plan for how they’ll access the money before they get to the closing table.
• Sellers: If sellers contribute to closing costs (say, to negotiate a home sale), those fees usually get taken out from the sale proceeds.
Here’s an example: If you plan to buy a home with a $300,000 loan, as the buyer, you’ll need to bring between $9,000 and $18,000 to the closing table. If you were the seller, you’d see that amount taken out of the costs you’d pocket from the sale.
Fees Associated with Closing Costs
Closing cost fees may include:
• Application fee: Lenders sometimes charge a one-time fee for borrowers to submit a loan application.
• Credit report fee: A credit report or credit check fee covers the cost to dig into your credit report, which shows your credit history. Your lender uses the information it uncovers to decide whether to approve your loan and how much they’ll lend you.
• Origination fee: You pay this fee to the lender to process the loan application.
• Appraisal fee: A fee paid to a professional to appraise the home based on an evaluation to determine its fair market value.
• Title search: A title search looks into public records to determine who actually owns the property and who has liens on the property (for example, an unpaid contractor’s lien for work done on the home).
• Title insurance: Title insurance protects you from financial loss and legal expenses in case the home has a bad title.
• Underwriting fee: Underwriting is the process of reviewing your finances to determine the risk of offering you a mortgage, and the fees cover this process.
• Property survey fee: Property survey fees cover the cost of checking the boundaries and easements of a property. This process shows exactly where the property’s perimeter is and what the property includes.
• Attorney fee: You will probably need to hire a lawyer to review the terms in your purchase contract and handle your closing.
• Discount points: Discount points are a way to balance your upfront costs and your monthly payment. If you use points to pay more upfront, you’ll likely have a lower interest rate, meaning that you could pay less monthly and over your loan term.
• Homeowners insurance premiums: Homeowners insurance provides financial protection if your home undergoes a disaster or accident. You must typically show your lender that you have paid homeowners insurance.
• Mortgage insurance: If you have a down payment of less than 20%, you will often have to pay mortgage insurance, a fee per month that protects your lender if you were to default. You’ll also have to pay a version of mortgage insurance on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. You may have to pay these insurance fees with your closing costs in addition to your monthly payments, particularly for the FHA and USDA loans.
• Property tax: Homeowners pay property tax to state, county, and local authorities for schools, roads, and other municipal services. You may have to pay a portion of your property tax at closing.
• Homeowners association (HOA) fees: If you plan to move to a neighborhood that has an HOA, or an organization that makes and enforces rules for a neighborhood, you may owe HOA fees at closing. The seller may pay these on a prorated basis.
• Per-diem interest: Per-diem interest refers to the interest a lender charges for the days between a closing date and the first day of your billing period.
• Transfer tax: State or local governments often charge real estate transfer taxes, meaning that they charge when properties transfer ownership.
• Recording fee: State and local governments charge recording fees to legally record your deed, mortgage, and other home loan documents.
Note that this isn’t an exhaustive list of closing costs — you may be on the hook for other fees as well.
Can You Use a Personal Loan for Closing Costs?
First, it’s important to understand how a personal loan works. It is usually funded by a bank, credit union, or online lender. You can typically use the money however you want — there aren’t as many restrictions on personal loans compared to, say, student loans. After you receive a personal loan, you pay it back with regular, fixed payments (with interest) over a specified term.
As mentioned above, you can use the cash as you see fit. So, yes, you can use a personal loan for closing costs. However, you can’t use it for a down payment, and you must tell your lender that you’ll go this route and borrow to pay the closing costs. The lender will include it in your debt-to-income (DTI) ratio, which is the amount of debt you have relative to your income.
Applying for a personal loan can involve prequalifying with several lenders and comparing them, gathering required documents (ID, proof of address and income, Social Security number, and education history), filling out the loan application, and receiving your funds after approval. You may be able to get a personal loan in one to three days.
As you shop around for funds, you’ll likely want to consider what credit score you need for a personal loan at a given interest rate. Also consider the length of the loan term; this can typically range from one to seven years.
Pros of Taking Out a Personal Loan for Closing Costs
Here are some of the key benefits of taking out a personal loan for closing costs.
• Collateral not required: Personal loans are often unsecured loans, meaning that you don’t have to put an asset up in order to receive the loan. Therefore, if you fail to repay the loan, your lender will not claim the asset to repay your debts.
• Quick approval: It usually doesn’t take long to get a personal loan once you’ve been approved. After you submit your application and materials, it might take just a day to get the personal loan, though it could take longer.
• Flexible repayment options: You can tap into flexible repayment plans, including no prepayment penalty, meaning that the lender won’t penalize you for paying off the loan early.
Cons of Taking Out a Personal Loan for Closing Costs
Next, consider the downsides of using a personal loan to cover closing costs.
• DTI increase: Lenders will look at your overall debt under a microscope, so taking on a personal loan may factor into your overall debt. It may signal to the lender that you aren’t in a good financial position since an additional loan could raise your DTI ratio. It might keep you from being approved for a mortgage or could result in a higher mortgage interest rate.
• Additional loan payment: You might find it tricky to repay a personal loan in addition to a mortgage payment. Consider whether you can comfortably make both payments every month.
• High interest rates: There is the potential for high interest rates if you have poor credit. This can make it more challenging to afford a personal loan.
You may have options vs. getting a personal loan for closing costs. Consider how else you might handle those fees.
• Roll them into your mortgage: You may be able to add your closing costs to your mortgage, but this means you’ll increase the principal balance of your loan. This will increase both the principal and the interest you’ll pay over your loan term and also translates to higher monthly payments.
• Ask for a waiver: Your lender may be willing to waive certain fees. For example, they may reduce certain processing fees. There’s no guarantee, but it can be worth asking. That might help you out with your final closing cost amount.
• Ask the seller to pay: As mentioned previously, sellers may pay for some of the closing costs if they’re eager to ensure that the property sale doesn’t fall through.
• Tap into assistance programs: Many state and local governments offer down payment and closing cost assistance programs for moderate- to low-income home buyers. Look into your state’s housing finance agency, your city or county website, the U.S. Department of Housing and Urban Development (HUD), or check with your lender to learn more about your options.
• Use gift money: Do you have a generous grandparent or parent who wants to help you cover your closing costs? Your state may have rules and regulations attached with gift money (especially ensuring that it’s an actual gift). Check with your lender to learn more.
The Takeaway
You can typically use a personal loan to pay for closing costs, the fees that can cost 3% to 6% of your home loan amount when you purchase a property. While this can be a convenient source of funding that is typically unsecured (meaning no collateral is required), it can raise your DTI and add to your monthly financial burden. It’s wise to carefully consider all the pros and cons, as well as alternative funding sources, when deciding whether to use a personal loan for closing costs.
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’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Is it smart to finance closing costs?
Whether it’s smart to finance closing costs depends on your personal situation. For example, for some people who can handle the additional monthly payment, it may be a convenient move. On the other hand, getting a personal loan may increase your DTI, so your mortgage lender might charge you a higher interest rate or deny you the loan altogether.
Can I put closing costs on a credit card?
While you’ll usually use a cashier’s check, certified check, or wire transfer to pay for closing costs, you can put some closing costs on a credit card, such as attorney, appraisal, and survey fees. Check with your lender to learn more about which fees you can put on a credit card. (Also note that using your credit card in this way can raise your credit utilization rate and potentially lower your credit score.)
What is not an acceptable source of funds for closing?
Closing costs are typically paid by a cashier’s or certified check or by wire transfer. Funds for these could be acquired by such sources as a government program or a personal loan. Less frequently, credit cards, debit cards, and personal checks may be accepted for some closing costs.
Photo credit: iStock/jacoblund
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.
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 .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
A payday loan is a high-cost, short-term loan that gives you a quick infusion of cash to tide you over until your next paycheck. If you’ve taken out several payday loans, you may wonder about your repayment options. Consolidating them, or taking out a single new loan to pay off the multiple high-interest ones, can be an option. For some people, it can be a path out of the debt cycle.
It’s important to understand how this process can work and its pros and cons.
Understanding Payday Loan Consolidation
Before you learn about payday loan consolidation, a brief note about these loans: They are typically used by people in urban areas who earn less than $40,000 per year. They can offer cash when needed for individuals who are falling behind on rent, utilities, or car payments.
Payday loan consolidation means combining multiple existing payday loans under one new personal loan. In short, payday loan debt consolidation bands your loans together and allows you to repay them, typically at a lower interest rate and/or with a longer repayment period, usually one to seven years. In short, they can be a great alternative to repaying individual payday loans. While payday loans are usually very short-term, if you do the math, their annual percentage rate (APR) can be a shocking 391% or higher.
To get a payday loan consolidation loan, you can take the following steps:
1. Add up your payday loan balance, including fees.
2. Compare debt consolidation interest rates and loan terms, as well as personal loan requirements.
3. Apply for the loan that best suits your needs. Banks, credit unions, and online lenders may offer personal loans, which are typically unsecured loans, meaning you don’t need to provide collateral.
4. Once you are approved for a personal loan, you receive a lump sum payment to pay off your payday lenders. Or your lender may pay off your payday loans directly.
5. Make monthly payments on the personal loan until you pay it off completely. Setting up automatic payments so you don’t miss a payment can be a smart move.
Here are the benefits of consolidating online payday loans and other forms of fast cash lending.
• New interest rate: Consolidating your payday loans means you can get a new, lower interest rate, well below than the triple-digit APRs that payday loans typically carry.
• Convenience: When you consolidate to a personal loan, you receive a regular monthly payment, which helps with a more predictable repayment schedule. You no longer need to juggle or worry about multiple payments.
• Lower fees: You may get charged an origination fee (between 1% and 10% of the loan amount) with a personal loan, but these charges are typically much less than the cost of carrying payday loans.
• Credit building: You might be able to build your credit score as you make regular, on-time monthly payments on your new personal loan. This can benefit you in the long run because it could give you opportunities to qualify for other loans at more favorable rates in the future.
Options for Payday Loan Consolidation
There are several options for payday loan consolidation, including debt consolidation loans, credit counseling services, and debt management plans.
Debt Consolidation Loans
You might want to consider a debt consolidation loan through a bank, a credit union, or an online lender. A debt consolidation loan is a type of loan that allows you to pool many of your loan payments into a single loan payment, making it easier for you to keep track of your payments. You might also find that these financial institutions offer significantly lower interest rates than payday loans. This can result in lower monthly costs, which can be very helpful for those who are living paycheck to paycheck.
Check for the interest rate on your new loan and the length of time you’ll repay your debt consolidation loan to ensure you get a comprehensive understanding of how much you’ll pay.
Credit Counseling Services
Credit counseling services are nonprofit organizations that help you manage your debts. They may offer educational materials and advice after reviewing your situation in a consultation, educate you about money management, help you develop a budget, and understand your credit report and scores.
Debt Management Plans
Credit counseling agencies and certified financial planners (CFPs) can help you develop a debt management plan. They will walk through your financial situation and discuss several options, including how to handle unsecured debts like credit cards and personal loans. Agencies may take management of your debts and contact creditors to find out if they can:
• Lower interest rates
• Lower monthly payments
• Stop late fees
They will let all your creditors know that they have taken over your accounts, which means your payments go to the agency instead of to your creditors.
A CFP can help you budget and explore options for restructuring and consolidating your debt.
Of course, you’ll pay fees for these professional services, so check with the agency or CFP how much you’ll pay. Be cautious about this decision, and check the reputation of an agency or financial professional carefully.
Qualifying for Payday Loan Consolidation
You can qualify for payday loan consolidation by meeting credit and income verification requirements and by understanding the fees and interest rates, repayment terms, and schedules.
Credit Requirements and Income Verification
Here are the usual requirements: You must be 18 or older and have a valid ID, such as a driver’s license or passport, to get a consolidation loan. You must also prove your income through a pay stub or other document and that you have an active bank or credit union account.
Fees and Interest Rates
Payday debt consolidation loans also come with fees and interest. As of August 2024, interest rates range from about 8.00% to 36.00%, depending on your creditworthiness, with an average of 12.36%. Origination fees are typically 1% to 10% of the loan amount.
Repayment Terms and Schedules
Along with a lower interest rate, you can also expect a longer repayment period with a payday consolidation loan compared to a standard payday loan. The term typically ranges from one to seven years with monthly payments.
Develop a Debt Repayment Strategy
Once you receive the money for the payday loan consolidation, you can pay off each payday lender (or the lender of your consolidation loan may do so for you). Then focus on paying off your personal loan. It’s vital to keep up on your personal loan payments, because missed payments can negatively affect your credit score.
Consider setting up automatic payments to avoid making missed payments, which also results in late fees. You might even get a discount (possibly between 0.25% and 0.50%) to set up automatic payments.
Create a Budget and Cutting Expenses
Creating a budget can help ensure you won’t need another payday loan. Use a budget app or try a method like the 50/30/20 budget rule to keep track of your expenses and to determine where you can cut back, whether it’s eating out, purchasing shoes or clothes, a gym membership you never use, or other items you don’t really need.
Doing this can help you make your payday loan consolidation payments and meet all your other debt obligations. Staying on top of your finances in this way can be a path to paying off debt quickly.
Prioritizing Debt Payments
Consider prioritizing debt repayment for your personal loan for consolidation and also on other loans that you owe. Taking care of all types of debt you owe can set you up for financial success. Tackling all types of debts can help you succeed over time, so keep track of what you owe on the following:
Many experts recommend building an emergency fund that contains three to six months’ worth of basic expenses, to help protect against incurring future debts. An emergency fund can cover unexpected expenses or financial emergencies, such as a big car repair bill or a job loss situation. You might put the money for an emergency fund into a high-yield savings account to earn a competitive interest rate.
If you have an emergency in the future, you can dip into your emergency savings instead of taking out a payday loan.
Avoid Payday Loan Debt in the Future
Payday loans are risky, and if you need money, they should be your last resort. So, what are your alternatives? Here are some options.
Understand the Risks of Payday Loans
Payday loans may seem innocuous because you can get a quick infusion of cash without a credit check as long as you repay the loan balance on your next payday. Payday loans are small loans (usually $500 or less) that you must repay within 10 to 14 days of receiving the money. No biggie, right?
It’s true that you’ll get funds in your bank account quickly — usually within one business day. But the risks of payday loans occur when the lender assesses fees. Payday lenders don’t charge traditional interest rates — they usually charge a flat fee, between $10 and $30 for every $100 borrowed.
For example, a $500 loan could incur $150 in fees after the 10- to 14-day period. Some have interest rates of a whopping 600%.
Explore Alternative Financing Options
To avoid those kinds of interest rates, alternatives to payday loans include:
• Personal loans: Standard personal loans can offer funds at a significantly lower interest rate, if you qualify. Bad-credit personal loans can be obtained by those who have a low credit score, and these loans do not require collateral. Unfortunately, these come with higher interest rates, but they’re not as high as payday loans.
• Payday alternative loans: Payday alternative loans come from credit unions as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. Credit unions offer $200 and $1,000 PALs I with a maximum 28.00% APR, with one- to six-month repayment terms. Credit unions offer PALs up to $2,000 and a maximum 28.00% APR, with one- to 12-month repayment terms.
• Home equity line of credit (HELOC): A HELOC is a type of loan where you borrow against your home’s equity. Your home serves as collateral, which means the bank could seize your home if you don’t repay your loan. You can think of a HELOC as similar to a credit card. After your lender approves the amount you can borrow, you have a certain amount of time to withdraw up to the limit within the draw period. When the draw period ends (say, after 10 years), you’ll enter a repayment period, such as 10 or 20 years. HELOCs typically have much lower interest rates than payday loans.
• Friend and family loans: Consider asking family and friends for a loan, but remember that not repaying a loan to family or friends can have lasting effects on your relationship.
• Credit card cash advance: Cash advances are short-term loans that allow you to access money from the financial institution that backs your credit card. You can borrow money against your line of credit, though it’s important to check the fees and APR. A credit card cash advance is usually an expensive option.
• Employer paycheck advances: Your employer may offer paycheck or payroll advances up to a limit, typically $1,000. You pay the loan back to your employer through future earned wages. Learn more about the repayment terms and details about the payment advance before you go that route.
• Peer-to-peer loans:Peer-to-peer loans take a crowdfunding approach to borrowing money. Money comes from individual private investors instead of institutions, typically in the form of unsecured personal loans, but note that due to the nature of these loans, the government doesn’t provide insurance for them.
• Second job or side hustle: A side hustle or second job can bring in more cash, if you have the time and resources to devote to it. This income stream could help you avoid taking out a payday loan.
Improving Financial Literacy
One of the best ways to improve your understanding and management of your money is to learn as much as you can about it. Developing financial literacy can help you make informed decisions about how to save money for emergencies, avoid debt, spend and budget wisely, and more. This, in turn, can help you sidestep payday loans.
The Takeaway
If you’ve taken out payday loans, you may wonder if consolidating payday loans makes sense. Taking out a single personal loan can help you replace multiple high-interest loans with a single, lower-interest one. This can allow you to reduce the amount of interest you’ll pay over time and take better control of your finances. Other types of loans may also be available to help you avoid payday loans. Educate yourself about all of your options so you can choose the best path forward.
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’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Can I consolidate payday loans with bad credit?
You may be able to get a payday consolidation loan with bad credit, but the interest rate may be higher than what you’d find with a higher credit score. Check with lenders to see whether you qualify for payday loan consolidation and at what interest rate.
What happens if I miss payments on a consolidated loan?
When you opt for a payday loan consolidation, your responsibility is to repay your loans. If you miss payments on a loan consolidation, you will likely incur late fees and could face a negative impact on your credit score. Keep making on-time, regular payments so your credit score doesn’t take a dip.
How long does payday loan consolidation take?
You can typically receive a personal loan fairly quickly, and the repayment term is usually between one and seven years.
Photo credit: iStock/tsingha25
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.
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 .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
External Websites: 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.
Zombie debt is old, settled, or long-forgotten debt that has suddenly come back to life and is now threatening to wreak havoc on your finances. These debts are often purchased on the cheap by third party debt collection agencies, who then try to collect on them by scaring or tricking unsuspecting consumers into paying up.
While zombie debt can, indeed, be scary, you don’t necessarily have to pay anything to make it go away. In many cases, zombie debt has already been settled or is too “old” to be collectible. It’s also possible the debt doesn’t even belong to you but has your name attached due to an error or identity theft. Here’s what to do if a collector is hounding you for an old or unfamiliar debt.
Zombie Debt Definition
Zombie debt is generally defined as debt that is more than three years old that has either been settled, forgotten about, or belonged to someone else. While a debt collector is allowed to contact you about this debt, they are not allowed to harass you.
If a zombie debt collector contacts you about a debt that has expired or already been paid or settled, you do not need to pay it, and they cannot take you to court to collect the money.
Types of Zombie Debts
Zombie debts often fall into the following categories:
Settled Debts
If you’ve filed Chapter 7 bankruptcy, some of your debts might have been discharged, which means you’re no longer on the hook for paying them back. If a debt is settled, you should have a written agreement that makes it clear you’re no longer legally liable for the debt.
Debt that a scammer racked up under your name (by stealing your identity) can come back to haunt you as zombie debt, even though it doesn’t really belong to you. It’s also possible for a collection agency to mistakenly think a certain debt is yours and be going after you due to an error.
Time-Barred Debt
In many states, there is a statute of limitations on debt (with the exception of federal student loans). This means that, after a certain time frame, a collector can no longer take legal action to collect the debt. The exact time limit will depend on a number of factors, including the state law that’s noted in your credit agreement and the type of debt it is (such as credit card debt, a car loan, a personal loan, etc.) but it’s typically three to six years.
Depending on the state, the statute of limitations period may begin once the first required payment is missed, or it might start from the point when the most recent payment was made, even if that payment was made during collection.
It’s important to note that even if a debt is past its statute of limitations, making any type of payment or acknowledging you owe an old debt can restart the clock.
Debt That’s Fallen Off Your Credit Reports
Negative items on your credit report, such as a late payment or a debt in collection, can stay there for up to seven years. After that, the debt falls off your reports. If, however, you make (or agree to make) a payment on an expired debt, the debt collection agency can report the debt to the credit bureaus, resetting the seven-year clock.
How Does Zombie Debt Work?
Zombie debt is typically older debt. Generally, the original creditor has given up and sold the debt to a third party collection agency. These agencies often buy up zombie debts in bulk for pennies on the dollar. Even if the debt is past the statute of limitations and they cannot legally collect, they will often still try in the hopes that some consumers will pay out of fear. It’s essentially a numbers game — even if just a few people pay something, the business model can be profitable.
Some tactics that these collectors will use include:
• Telling you that if you make a partial payment, they will leave you alone
• Calling themselves a “litigation firm”
• Threatening to take you to court if you don’t pay
• Harassing you with excessive calls and verbal abuse
If you’re on the receiving end of a zombie debt collection, you’ll want to be careful. There is no upside in paying anything on a debt that is past the statute of limitations. In fact, doing so can restart the clock and make it possible for a collector to sue you for the debt and put it back on your credit report.
If a debt collector contacts you about a debt you don’t remember or thought was settled long ago, here are some steps to take.
• Verify it’s a legitimate debt. By law, a collector has to give you details about the debt, either when they first communicate with you or within five days of the first contact. These details must include the name of the creditor you owe it to and how much money you owe (written out to include interest, fees, payments, and credits). If they don’t, you’ll want to request a debt validation letter. It’s also a good idea to get a free copy of your credit report at AnnualCreditReport.com to see if the debt is listed there.
• Follow up on suspected identity theft. If you believe that your zombie debt is a result of identity theft, you’ll find tips and sample letters to help you dispute it at IdentityTheft.gov.
• Know your rights. No matter where you live or the form of debt, you have rights. Under the Fair Debt Collection Practices Act (FDCPA), zombie debt collectors are allowed to reach out to you, but they are not allowed to do the following:
◦ Contact you before 8 a.m. or after 9 p.m. without your consent
◦ Reach out to you at work if you’ve requested they stop
◦ Contact you via text or email, or DM you on social media if you’ve asked them to stop
◦ Call more than seven times within a seven-day period
• Don’t ignore lawsuits. If a debt collector files a lawsuit against you to collect a zombie debt, it’s important that you respond to the lawsuit, either personally or through your lawyer, by the date specified in the court papers to preserve your rights.
• Don’t accidentally reset the clock. If you make — or even agree to make — a payment on a time-barred debt, the statute of limitations clock may reset. If that happens, the collector can then sue you for the full debt amount, plus interest and fees. Also be wary of collectors that ask if you want to enroll in a “Fresh Start Program,” as this can also reset the clock on the debt.
• Dispute the debt if it’s not legitimate. If the debt is not something you legitimately owe (say, it has already been settled, is time-barred, or is not yours), you’ll want to send a dispute letter explaining why you do not owe the debt, ideally via certified mail. The Consumer Financial Protection Bureau offers sample letters that you can use as a guide.
• Negotiate if you do owe. If the debt in collection is legitimate and you do need to pay it, consider negotiating with the collector for a reduced amount. If they agree, be sure to get the new terms in writing (in case the debt comes back to haunt you — yet again — in the future).
Protecting Yourself from Zombie Debt
To prevent any of your current debts from becoming zombie debts, you’ll want to be sure to make all of your payments on time and in full and keep records of your payment history. If you have multiple high-interest debts and are finding it difficult to keep up with payments, you might consider getting a debt consolidation loan, ideally at a lower interest rate.
Other debt payoff strategies include getting a no-interest balance transfer card, paying off the most expensive debts first (known as the avalanche payoff method), and negotiating interest rates and payment terms with your lender.
The Takeaway
Zombie debt can rise from the grave to haunt you, but you don’t have to head for the hills or hide in fear. When you know your rights, you can protect yourself against old or expired debt that collectors are trying to cash in on.
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FAQs
Can you ignore zombie debts?
Ignoring zombie debts, which are old debts that have resurfaced, is generally not a good idea. While these debts may be past the statute of limitations, debt collectors can still attempt to collect them. Ignoring their attempts can lead to persistent harassment and, if the debt is legitimate, potential legal action.
A better route is to ask for a verification letter that includes all of the details of the debt. If the debt has timed out or is not actually yours, you can inform the collector in writing and request that they no longer contact you.
How can zombie debt collectors legally contact you?
Zombie debt collectors can legally contact you via phone call, letter, email, and even text messages. However, the Fair Debt Collection Practices Act (FDCPA) regulates these communications, requiring collectors to respect certain boundaries. For example, they cannot contact you early in the morning or late at night and are not allowed to harass you. They must also identify themselves and provide information about the debt.
What is the zombie debt statute of limitations?
The statute of limitations for zombie debts varies by state and type of debt but often ranges from three to six years. This period defines how long a creditor or debt collector has to file a lawsuit to collect a debt. Once the statute of limitations expires, the debt becomes time-barred, meaning the collector can no longer sue you to collect it. That said, the debt still exists, and collectors can still attempt to recover it through other means, such as phone calls or letters. It’s important to verify the specific statute of limitations in your state.
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Saving money can help you to feel more in control of your finances and your life. When you have cash stashed away, you know you are prepared for financial emergencies and can also be working toward your short-term goals (like planning a wedding) or long-term ones, like retirement.
Often, though, saving happens gradually, like a slow drip. But there are people who want to save more aggressively, or there could be a moment in your life that spurs you on to accrue as much money quickly as you can.
If you’re interested in how to aggressively save money, there are smart strategies to help you do just that. Implementing an aggressive savings budget takes a certain amount of commitment, since you may need to make some significant lifestyle changes. That can be worth it, however, if the payoff is watching your money grow faster.
What Is an Aggressive Savings Plan?
An aggressive savings plan is a blueprint for setting aside a sizable amount of your income, typically over a fairly short time period. A 30-year-old who’s hoping to retire by 40, for example, might utilize an aggressive savings plan to save and invest 50% or 60% of their take-home pay over a period of 10 years to reach their goal.
For perspective, the personal savings rate in the U.S. was 3.4%, as of June 2024. That is the percentage of disposable income that citizens are socking away, whether in a savings account or a retirement fund. So the vast majority of people aren’t saving aggressively on a regular basis. Taking an aggressive approach to savings is something you might consider only if you have a specific goal you’re interested in achieving with your money.
Why an Aggressive Savings Plan Can Be Beneficial
Following an aggressive savings budget takes financial discipline, and it may not be right for every person or every financial situation. If you can stick with an aggressive savings plan, however, there are some tangible benefits you might be able to reap.
Here’s why an aggressive savings plan can work in your favor:
• You can set aside money for large or small goals.
• You can avoid debt when you’re focused on saving vs. spending.
• It teaches you how to prioritize needs vs. wants.
Saving aggressively can become a lifestyle if you’re able to accustom yourself to spending less. But even if you only apply an aggressive savings plan for a few months, you might be surprised at just how much money you can set aside.
Whether you follow a turbocharged savings plan for a short or long time, it can definitely improve your financial status and even be a form of financial self-care, since you’re likely avoiding debt and improving your money mindset.
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Tips for Building an Aggressive Savings Plan
There’s no single strategy for how to save aggressively; instead, there are numerous steps you can take to shape your savings plan. If you’d like to stop overspending money and start saving instead, these tips can help you get your finances on the right track.
1. Paying Yourself First
“Pay yourself first” is an often-repeated piece of personal finance advice. It simply means that you should set some of your paychecks aside for saving before doing anything else. The good news is that paying yourself first is relatively easy to do.
Some of the ways you can pay yourself first include:
• Contributing part of your salary to your 401k at work
• Scheduling recurring transfers from checking to savings each payday
• Using direct deposit to route payments directly to savings and bypass checking.
Paying yourself first ensures that money makes it to savings, rather than being spent. If you’ve struggled with sticking to a savings habit, adopting this mentality can make it easier to stay the course.
2. Getting Out of Debt
Debt can be a significant obstacle to saving money. If you’re spending hundreds or even thousands of dollars paying off credit cards, student loans, or other debts each month, you might have very little left to save.
Getting rid of your debt can help to free up more money so you can follow through on an aggressive savings budget. Focusing on debt payoff also requires you to control spending habits, since the goal is to not create any new debts in the process.
If you have high-interest credit card debt, consider balance-transfer offers that charge zero percent for a period of time, giving you breathing room to pay down your balance. Or you might take out a lower interest rate personal loan to consolidate and pay off your debt.
An aggressive savings plan won’t really work if you don’t know exactly where your money is going. Keeping track of your spending is essential for making your plan work.
There are different ways to track spending, including:
• Writing purchases down by hand
• Using a spreadsheet
• Linking bank accounts to an expense tracking or budgeting app.
The method you choose isn’t as important as tracking all of your expenses regularly, including cash spending. Getting into the habit of tracking expenses can make the next step in your aggressive savings plan easier to tackle. You’ll be much more aware of where your money goes and how you might economize.
4. Utilizing a Budgeting Method
A budget is a plan for spending money each month. Making a budget each month is central to how to save aggressively, since you can decide how to allocate the money you’re earning.
In its most basic form, making a budget means adding up expenses and subtracting them from income. When you’re trying to save aggressively, the goal is to make the gap between income and expenses as wide as possible.
There’s no single way to make a budget. For example, you might try zero-based budgeting, the 50/30/20 budget method, or cash envelope budgeting. Experimenting with different types of budgets can help you to decide which method works best for you.
Also consider different tools to help you along. Your financial institution may offer budgeting tools, you can download apps, you might use a journal, or even manage your budget in an Excel spreadsheet.
5. Cutting Down Expenses
How to stop spending money is a common challenge; succeeding at it can help you save aggressively. The key is knowing how to prioritize needs over wants and looking for areas in your spending that you can reduce or eliminate.
For example, you can start by making the obvious cuts and jettison streaming services you don’t use or canceling your gym membership. But you can go a step further and look for more drastic ways to reduce expenses, such as:
• Renting out a room or taking on a roommate
• Getting rid of your car and using public transportation
• Embarking on a no-spend year
• Moving to a cheaper area.
Whether these types of saving tactics will work for you or not can depend on your situation. But allowing yourself to be creative when finding ways to cut expenses can help to bolster your aggressive savings plan.
6. Opening a High-Yield Savings Account
If you’re saving aggressively, it’s important to keep your money in a secure place where it can earn a great interest rate. The higher the rate and annual percentage yield (APY), the more your money can grow.
That’s where high-yield savings accounts come in. High-yield savings accounts can pay an interest rate and APY that’s well above the national average. For example, the typical savings account at a traditional bank pays 0.46%, as of the summer of 2024. But you might find a high-yield account at an online bank that’s paying over 4.00% or more instead.
When looking for a high-yield savings account, consider the APY you can earn. But also pay attention to things like fees, online and mobile banking access, and monthly withdrawal limits. These are important factors when sizing up the best option.
Starting a side hustle can help you to generate additional income that you can add into your aggressive savings budget. According to a recent report, 36% of Americans have at least one side hustle.
There are different types of side hustles you can try, including ones you can do online and ones you can do offline. For example, you might try your hand at freelancing if you want to make money from home or get paid to deliver groceries in your spare time. You could drive an Uber or sell crafts you make on Etsy.
The great thing about side hustles is that you can try different ways to make money to see what works best. Just remember that any earnings from side hustles or temporary work over $400 are taxable.
Grabbing dinner out can be convenient, but it can also derail your plans to save aggressively. If you’re spending $50 a week on takeout food or meals with friends, for instance, that’s $2,600 a year that you’re not saving.
Learning to plan meals and make food at home can cut that expense out of your budget. If you want to share meals with friends, consider inviting them to a potluck dinner at your house instead. That can be a great way to try new foods without having to blow your budget.
9. Saving Money Windfalls
Windfalls are any money that comes your way that you might not have been expecting. So that can include:
• Tax refunds
• Rebates
• Bonuses
• Cash-back rewards
• Financial gifts (i.e., birthday money or wedding money)
• Inheritances.
Some money windfalls may be small and add up to just a few bucks, while others might be hundreds or even thousands of dollars. It may be tempting to spend those amounts (because it feels like free money), but you can make better use of them by adding them to savings instead.
10. Investing Your Money
Investing your money is the best way to grow it through the power of compounding interest. Compounding means your interest earns interest. When you invest money in stocks, exchange-traded funds (ETFs), and other vehicles, you have a chance to earn interest at much higher rates than what you could get with a savings account, which means the compounding factor is enhanced too. (However, do remember there is risk involved; these investments aren’t FDIC-insured.)
The longer you have to invest, the more your money can grow. So if you’re not investing yet, it’s important to get started sooner rather than later. Some of the best ways to start investing include adding money to your 401k, contributing to an Individual Retirement Account (IRA), and opening a taxable brokerage account.
11. Automating Your Finances
Deciding to automate your personal finances can make saving aggressively less time-consuming, since it’s something you don’t have to actively think about. As mentioned above, you can set up automatic transfers from checking to savings each payday. What’s more, you can also automate deposits to your investment accounts and your bill payments.
Automating ensures that bills get paid on time and that the money you’ve earmarked for savings in your budget gets where it needs to go. You can set up automatic deposits and payments through your bank account; it typically takes just a few minutes.
12. Utilizing the 30-Day Rule
The 30-day rule is fairly straightforward: If you’re tempted to spend money on an unplanned purchase, impose a 30-day waiting period. Thirty days is enough time to decide if you really need to buy whatever it is you’re considering and, if you do, to find the money in your budget to pay for it without having to rely on a credit card.
Using the 30-day rule can help you to curb impulse spending, which can be a hurdle to making an aggressive savings plan work. If you decide the item is still something you want to buy, then you can make the purchase guilt-free. But you might find that what seemed like a smart buy at the time is no longer something you need.
13. Living Below Your Means
Living below your means simply means spending less than you earn each month. When you spend less than your income, you have money left over that you can add to your savings goals.
All of these aggressive savings tips outlined here can help you to get into a mindset of living below your means. When you’re focused on cutting down expenses and sticking to a budget, living on less money than you make doesn’t seem like a struggle.
The Takeaway
Saving aggressively can take some getting used to if you’ve never tried it before, but the end result can be well worth the effort. As you find your savings groove, it’s important to have the right banking tools so you can make the most of your money.
Opening the right bank account can make it easier to follow an aggressive savings plan.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.
FAQ
Are there downsides to aggressive savings plans?
Saving money aggressively can mean having to make certain sacrifices in the short-term. For example, you may have to say no to dinner out with friends, vacations, or new clothes. But those temporary sacrifices can pay off if you’re able to reach your savings goal relatively quickly.
How can I save aggressively if I do not make a lot of money?
Starting a side hustle can help you to create more income so that it’s easier to save aggressively. But if that’s not an option, you can still save at an above-average rate by cutting down your expenses as much as possible and using windfalls to grow your savings whenever they come your way.
Can you aggressively save long-term?
Whether you’re able to save aggressively for the long-term can depend on how committed you are to your plan. If you have a clear reason for saving, then you may not need any added motivation to keep going. On the other hand, you may need to take a temporary break from saving as aggressively if you find yourself chafing under a strict spending regime.
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SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
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