SoFi

Being debt-free can be a terrific feeling of freedom. However, many of us don’t know that sensation. As of 2025, Americans carry a record $18 trillion in debt, with most of that reflecting mortgages. High-interest credit card debt rings in at almost $6,500 per person. Paying off the amount that you owe — whether it’s credit card debt, student loans, or something else — can be a considerable challenge.

While each person’s finances are different, there are smart strategies to pay off debt effectively and quickly. That will not only likely reduce your money stress and improve your finances, it can also free up funds to help you achieve some big-picture goals, whether that means funding a wedding or growing your toddler’s college fund.

Here, you’ll learn why it’s important to pay off debt, the best how-tos, and tips for managing debt as you work to shake it off.

Why Is It Important to Pay Off Debt?

Granted, not all debt should necessarily be paid off ASAP. There’s “good debt,” which is typically lower interest and can have a positive impact on your financial status. For example, if you have a mortgage, that is likely low-interest and it is helping you build equity and, by extension, your net worth.

However, there is also “bad debt” of the high interest variety, like credit card debt, which can wind up having a negative effect on your finances and your life. Some examples of why this kind of debt can be problematic:

•  It takes up funds that could otherwise be put towards long-term goals like retirement or short-term goals, such as a vacation fund.

•  It gives you more bills to pay.

•  It can cause you stress.

•  It can have a negative impact on your credit score, which can have further ramifications, such as making it more expensive to open other lines of credit.

•  It means you are subject to the lender’s decisions (such as raising your interest rate).

When you are debt-free, you likely don’t have to deal with those issues any longer. So here are smart debt payoff strategies to help you take control of your money.

1. Create a Budget

A budget can help you understand and create a plan for where your money is going. This is where you can start to figure out how to live within your means to avoid accumulating new or more debt in the future, such as credit card debt.

•  To make your budget, take an inventory of all of your after-tax income. If you have a job, simply look at your net paycheck and multiply the number by how many times you’re paid each month.

•  Next, tally up necessary expenses. These might already include debt payments such as your student loans or a car payment. They can also include rent, utilities, insurance payments, groceries, and so on.

•  Subtract this total from your income and what you have left represents the money available for discretionary spending. If the amount of money you’re spending on discretionary expenses exceeds the amount you have available, you’ll likely need to make some adjustments to how you spend.

•  To pay off debt, focus a portion of the available discretionary income on debt payments. One approach is known as the 20/10 rule, which says that you should put no more than 20% of your annual take-home pay or 10% of your monthly income towards consumer debt.

Recommended: What Is the Difference Between Personal Loan vs Credit Card Debt?

2. Set Realistic Goals

It takes a lot of discipline to get debt-free. Setting measurable and achievable goals can help you stay on track. Think carefully about how much money you actually are able to put toward your debts each month. Include factors like how much spending you can reasonably cut and how much you might be able to add to your income.

Don’t factor in extra income unless you’re sure you’ll be able to come up with it. Once you settle on your monthly amount, you can calculate how many months it will take you to pay your debt off.

For example, say you have $500 dollars per month to help you pay off $10,000 in credit card debt with a 19.99% interest. Using an online credit card payoff calculator, you can determine that it will take you about 25 months to pay off your card. So, a reasonable goal might be two years to get out of debt, which even builds in a little wiggle room if you can’t come up with a full $500 in one of those months.

3. Try a Payoff Method

Once you’ve identified funds you can use to pay down debt, there are a number of strategies you can use to put that money to work towards different debts you’re shouldering.

The Snowball Method

Here’s how the snowball method of debt repayment works:

•  List your debts in order of smallest balance to largest. Look exclusively at the amount you owe, ignoring the interest rate.

•  Make minimum payments on all the debts to avoid penalties. Make all extra payments toward paying off the smallest debt.

•  Once the smallest debt is paid in full, move on to the next largest debt and so on. Use all of the money you were directing toward the previous debt, including minimum and extra payments, to pay off the next smallest. In this way, the amount you’re able to direct toward the larger debts should grow or “snowball.”

One downside to the snowball method is that while targeting your smaller debts first, you may be holding onto your higher interest debts for a longer period of time.

However, you should also theoretically get a psychological boost every time you pay off a debt that helps you build momentum toward paying all of your debts off. And if this extra push can help keep you motivated to continue eliminating debt, the benefits of this strategy might outweigh the extra costs.

The Avalanche Method

The avalanche method takes a slightly different approach:

•  List your debts in order of highest interest rate to lowest. Once again, commit to making minimum payments on all of your debts first.

•  Make any extra payments toward your highest interest rate debt. As you pay each debt off, move on to the next debt with the highest rate. The debt avalanche method minimizes the amount of interest you pay as you work to get debt-free, potentially saving you money in the long-term.

The Fireball Method

This is a hybrid approach to the snowball and avalanche methods:

•  Group your debts by good and bad debt. As noted above, good debts are those that help you build your future net worth, like a mortgage, business loan, or student loan, and typically have lower interest rates. Bad debts have high interest rates and work against your ability to save; think credit card debt. (Btw, credit card debt should always be characterized as bad debt even if you are taking advantage of a 0% interest promotion.)

•  Next, list your bad debts in order from smallest to largest based on balance size. Continue making minimum payments on all debts, but funnel extra cash toward paying off the smallest of the bad debts.

•  Work your way up the list until all your bad debts are paid off. You can pay off your good debts on a regular schedule while investing in your future. Once you’ve blazed through your bad debt, you may even have extra cash to help you accomplish your long-term goals.

Choose the strategy that fits your personality and financial situation to increase the chances for success.

4. Complete a Balance Transfer

A balance transfer allows you to pay off debt from one or more high-interest credit cards (or other high-interest debt) by using a card with a lower interest rate. This strategy has a number of benefits.

•  First, it helps you get organized. Staying on top of one credit card statement might be easier than keeping track of many cards.

•  This strategy also helps you free up the money you were paying toward higher interest rates, which you could use to accelerate your debt payments.

Research what’s available carefully. Some credit cards offer teaser rates as low as 0% for a set period of time, such as six months to a year or even longer. It may make sense to take advantage of one of these deals if you think you can pay down your debt within that time frame.

However, when these teaser rates expire, the card might jump to its regular rate, which could be higher than the rates you were previously paying.

5. Make More Than the Minimum Payment

Credit cards allow you to make minimum payments — small portions of the balance you owe — until your debt is paid off. While this might seem convenient on the surface, this system is stacked in the credit companies’ favor. Making minimum payments can cost more in the long run than making larger payments and paying down debt faster.

That’s because as you make minimum payments, the remaining balance continues to accrue interest. Consider a credit card balance of $5,500 with a 21% interest rate. According to this credit card interest calculator, if you only make minimum payments of $151.25 per month, it will take you 59 months (almost five years!) to pay off your debt of $8,819. And in that time you will have spent $3,319 on interest payments alone.

In an ideal world, you would pay your credit card balance off each month and wouldn’t owe any interest. But, if that’s not possible, consider paying as much as you can to minimize the cost of high interest rates.

6. Find Extra Cash

Finding the cash to pay off your debt can be tough, especially if you’re looking to accelerate your debt payments. The most obvious place to start is by cutting unnecessary expenses.

For example, you might save money on streaming services by dropping some or all of your subscriptions, or give up your gym membership while you’re getting your debt in check. You may also try negotiating lower rates for some necessary expenses such as phone or internet bills, or consider starting a side hustle that can boost your income.

You can also use any money windfalls, such as extra cash from tax returns, bonuses at work, or generous birthday gifts, to help accelerate your debt payments.

7. Avoid Taking on More Debt

While you’re paying off debt, it’s important that you work hard to not add to your debt. If you’re trying to pay off a credit card, you might want to stop using it. You may not want to cancel your credit card, but consider putting it somewhere where it’s not easily accessible. That way you’ll be less tempted to use it for impulse buys.

It can also be helpful to track your spending with a free budget app to help understand where your money is going and how not to increase your debt.

8. Consolidate Debt

Consolidating is another strategy that makes use of lower interest rates to pay off debt.

•  When you take out a loan, it will come with a fixed interest rate and a set term. When you consolidate your debts, you are essentially taking out a new loan to pay off debts, hopefully with a better interest rate or term.

•  A new debt consolidation loan with a lower interest rate can save you money in the long run, especially if you’re carrying a sizable balance. You may also be able to lower your monthly payments to make a budget more manageable on a month to month basis — or you may be able to shorten your terms, which can let you pay off the loan faster. Do keep in mind extending the term of the loan could lead to lower monthly payments but you may end up paying more in interest over time.

•  You may want to consider consolidating if you’ve established your credit history since you took out your loan. That may mean banks are more willing to trust a borrower with a loan and will give them more favorable rates and terms.

•  Also, keep an eye on the prime interest rate set by the Federal Reserve. When the Fed lowers interest rates, banks often follow suit, providing you with a possible chance to find personal loan interest rates that are more favorable.

💡 Quick Tip: Everyone’s talking about capping credit card interest rates. But it’s easy to swap high-interest debt for a lower-interest personal loan. SoFi credit card consolidation loans are so popular because they’re cheaper, safer, and more transparent.

9. Reward Yourself

Paying off debt can be a challenging process. That’s why it’s so important to treat yourself as you reach debt milestones.

Tethering productive behavior to rewards is a process that Wharton business school professor Katherine Milkman calls “temptation bundling.” This process can help you boost your willpower and stick to your goals.

So, choose a reward and tie it to a debt milestone like paying off a credit card, or paying off 10% of your debt. Each of these steps puts you closer to being debt-free, and that’s worth celebrating. When you reach a goal, indulge in a free or budget-friendly reward.

Recommended: Typical Personal Loan Requirements

Debt Payoff Tips

Paying off debt often requires patience and persistence. Here’s some smart advice to address common concerns and help keep you going as you whittle down that debt.

What Are Some Common Mistakes to Avoid When Paying off Debt?

Some common mistakes when paying off debt are hiding from the situation (that is, not looking at how much you owe and creating a plan), taking out high interest payday loans, and, in some cases, taking out a home equity loan. Here’s a closer look at each:

•  It can be a common mistake to not dig in, review the full picture, and make a plan. Some people would rather be in denial and just keep paying a little bit here and there. Knowing your debt and developing a way to pay it off can be the best move.

•  Taking out a payday loan or other high-interest option to make a payment. This can make a tough situation worse by adding more money owed to your situation. A personal loan might be a better option with lower rates.

•  Tapping your home equity. Credit card debt is unsecured; you don’t put up anything as collateral. A home equity loan, however, uses your home as collateral. Yes, a home equity loan can be a helpful option in some situations, but if you use that equity to continue spending at a level your income can’t support, that can mean bigger problems lie ahead. You could wind up losing your home.

How Can I Balance Paying off Debt with Saving for Other Financial Goals?

To manage both debt repayment and saving, it’s important to make sure you keep current on paying what you owe. Next, you might want to create a budget, cut your spending, and automate your finances (which will send some money to savings) to help maintain a good balance. Here’s guidance:

•  Create a budget, keep paying off your debt, and work to create an emergency fund (even saving $20 or $25 a month is a good start).

•  Commit to cutting your spending. Some people like gamifying this: Say, one month, you vow to not eat dinner out; another month, you decide to forgo buying any new clothes.

•  Automate your finances. This can be as simple as setting up a recurring transfer from your checking account to savings just after payday. That whisks some money into savings (a small amount is fine), and you won’t see it sitting in checking, tempting you to spend it.

What Are My Debt Relief Options if I’m Struggling to Make Payments?

Some ways to get help with debt relief can include a balance transfer credit card, a personal loan, a debt management plan, and (if no other options are possible) considering declaring bankruptcy. If you are having a hard time with debt payoff, there are several options:

•  As mentioned above, you might take advantage of zero-percent balance transfer credit card offers.

•  You can contact your creditors and see if they will lower your interest rate or otherwise reduce your burden.

•  You might consider a personal loan (mentioned above) to pay off high-interest debt with a lower-interest loan.

•  You could participate in a debt management plan that consolidates your debt into one payment monthly that is then divvied up among those to whom you owe money. Look for a plan that is backed by a reputable organization such as the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America.

•  You might decide to declare bankruptcy; the most common form is known as Chapter 7 liquidation, and can get rid of credit card debt, medical debt, and unsecured personal loans. Educate yourself carefully to see if you qualify, and be sure you understand the long-term impact it may have on your personal finances.

The Takeaway

Digging yourself out of debt can be a challenging process, but with a well-crafted plan and discipline, it can be achieved. Evaluate your spending habits, determine how you are going to prioritize your debts, and stick to your plan by setting small, measurable goals. One option people consider is consolidating multiple high-interest debts into a one personal loan with one payment. However, note that extending the loan term could lead to lower monthly payments, but you may end up paying more interest in the long run.

Whether or not you agree that credit card interest rates should be capped, one thing is undeniable: Credit cards are keeping people in debt because the math is stacked against you. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. SoFi offers lower fixed rates and same-day funding for qualified applicants. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

Why is it important to have a plan to pay off debt?

It’s important to have a plan to pay off debt so you can be organized and strategic in this effort. Only by knowing the full extent of your debt and your resources can you make a plan. Whether you choose to use a method like the snowball or avalanche technique, take out a personal loan, or try a debt management program, it’s vital to know just where you stand.

What are some strategies for dealing with multiple sources of debt?

If you have multiple sources of debt, you may want to research the snowball, avalanche, and fireball methods of paying down what you owe. These consider such factors as how much you owe and the interest rate you are being charged and can help you prioritize how you repay the debt. These strategies can help focus your efforts and contribute to your success.

How much credit card debt does the average American have?

As of early 2025, the average American is carrying about $6,500 in credit card debt.

---

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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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 .

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

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

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

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

SOPL-Q225-066

Read more

Credit card debt is usually high-interest debt, meaning what you owe can snowball. You might charge some holiday gifts, then need new brakes, and then a friend asks if you can join on a low-cost getaway to Mexico. Next thing you know, you have a sizable balance due. And chipping away with minimum payments isn’t paying it down too well.

So how do you know if your credit card debt is actually too much? Take a closer look at the factors here, plus tips for what to do when your credit card debt veers into “too high” territory.

Managing Monthly Credit Card Payments

Many people believe that as long as they can afford the monthly payments, their level of credit card debt is fine. But faithfully making the minimum monthly payment on your credit card might not be a good indicator of whether you have too much credit card debt.

Generally speaking, it can be helpful to pay off your entire balance each month, but that is not a realistic option for many — and it can be easy to just pay the minimum amount required. This can be problematic: Thanks to compound interest, paying only the minimum amount can actually cause your debt to grow.

For example, say you have $5,000 worth of debt with a 20% interest rate and are paying off $100 a month. At that rate, it would take you 109 months (9-plus years) to pay off the original $5,000 and would cost you an extra $5,840 in interest alone. And, yes, as you may have noticed, the interest amounts to more than the principal in this scenario.

Curious how your credit card payments stack up? Use a credit card interest calculator to see exactly how much you can expect to pay in interest. That can help you see how the numbers stack up and then get a better handle of how your debt could grow in the future.

Recommended: What Is the Difference Between Personal Loan vs Credit Card Debt?

Credit Card Utilization

One helpful way to determine if you’re being smart with your credit cards is to look at your rate of credit card utilization. Credit card utilization is the amount of debt you have compared to the total amount of credit that is available to you.

It can come as a shock to people that using their full line of credit can negatively impact their credit score, but in general, it is commonly recommended to use only 30% of the credit available. Credit reporting agencies use your credit card utilization percentage as an important part of determining your credit score.

What does that look like in practice? If you have a credit card with a $10,000 limit, and you spend $1,000 on a new couch, $900 on new brakes, and $500 on a plane ticket, you’re using $2,400 — or 24% of your available credit. That’s relatively close to that 30% threshold, so you’ll want to consider treading carefully.

If, on the other hand, you made the exact same purchases but you only have access to a $5,000 line of credit, you would be using 48% of your available credit. A credit card utilization rate of 48% has the potential to negatively impact your credit score.

If you’re concerned about your credit score, you may want to keep your credit card usage to below 30% of the total credit line available to you.

💡 Quick Tip: Credit card interest rates average 20%-25%, versus 12% for a personal loan. And with loan repayment terms of 2 to 7 years, you’ll pay down your debt faster. With a SoFi personal loan for credit card debt, who needs credit card rate caps?

Debt-to-Income Ratio

Another important consideration when looking at your credit card debt is your debt-to-income ratio. Your debt-to-income ratio is essentially a measure of how much of your pretax income goes to paying monthly debt, like car payments, student loans, and credit cards.

If your debt-to-income ratio is very high, meaning that a large portion of your monthly income goes to paying off debt, some lenders might be reluctant to lend to you.

This means that you could be charged a higher interest rate on new loans or a mortgage because the lender is worried that you won’t be able to make your monthly payments — if you’re able to get a loan at all.

In general, industry professionals suggest that a debt-to-income ratio at or below 36% is considered good, but of course, that will vary by your specific circumstances.

If your debt-to-income ratio is higher than you hope, that may be one sign that you’re carrying too much credit card debt.

Keeping Credit Card Debt in Check

If you’re worried about the amount of debt you’re carrying on your credit card, there are several ways to take control.

•   First, consider making more than the minimum payment, as noted above. Many people simply stick with minimum payments because they think that is what they should pay. But increasing your monthly payment could help you pay down credit card debt faster.

•   If you’re worried about your credit card utilization rate (and are not carrying a credit card debt balance), you may simply be due for an increase in your line of credit. For example, if you’re still using the same credit card with a $5,000 limit that you got right after college, but now you have a better job and more monthly expenses, you might want to ask your lender for an increase in your credit line in order to improve your credit card utilization rate. Your debt-to-income ratio can also be helped by either increasing your income or decreasing your debt.

•   Since one of the downsides of credit cards is their notoriously high interest rates, you might consider using a personal loan to pay off your credit cards and save you some money on your monthly payments.

•   The benefit of paying off your credit cards with a debt consolidation personal loan is that you may be able to trade a high interest rate for a lower interest rate and secure a more favorable repayment plan. A personal loan allows you to make a static payment every month for a set amount of time instead of paying the minimum amount due on your credit card, which can make you feel like you’ll never get out from under credit card debt.

Bear in mind that once you’ve paid off your credit card balances, it’s important to keep them low. Running those balances back up has the potential of making your credit profile less attractive to lenders due to the increased total debt.

And in the future, keep an eye on your credit limit when you’re making big purchases — it can pay off in the long run.

Recommended: Personal Loan Calculator

The Takeaway

How much credit card debt is too much will depend upon your specific financial situation. Such factors as your debt-to-income ratio and your credit utilization can help determine if your credit card balances are getting too high.

If you have incurred a considerable amount of high-interest debt, you might consider ways to pay that off, including getting a personal loan at a lower interest rate.

Credit cards have an average APR of 20%–25%, and your balance can sit for years with almost no principal reduction. Personal loan interest rates average 12%, with a guaranteed payoff date in 2 to 7 years. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

Is $20,000 in credit card debt too much?

Whether $20,000 in credit card debt is too much will depend on a person’s unique financial situation, but in general, it’s considered a significant balance that can have a detrimental impact on your finances. The longer the balance goes unpaid, the more the interest charges will compound.

How many people have $10,000 in credit card debt?

As of 2025, a survey by Empower revealed that one in four Americans who carry a credit card balance owe more than $10,000.

What is the 2/3/4 rule for credit cards?

The 2-3-4 rule for credit cards means you can get approved for no more than two new cards in 30 days, three new cards in 12 months, and four new cards in 24 months. This can help you manage how many applications you submit and gives lenders a guideline for approvals.

---

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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

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

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

SOPL-Q425-012

Read more

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

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

What Is Secured Debt?

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

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

What Are the Possible Benefits of Secured Loans?

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

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

What Are the Stakes?

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

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

Recommended: What Is the Trump Credit Card Interest Cap?

What Is Unsecured Debt?

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

What Are Some Benefits of Unsecured Loans?

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

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

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

Recommended: Typical Personal Loan Requirements

What Are the Stakes?

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

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

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

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

💡 Quick Tip: Everyone’s talking about capping credit card interest rates. But it’s easy to swap high-interest debt for a lower-interest personal loan. SoFi credit card consolidation loans are so popular because they’re cheaper, safer, and more transparent.

Managing Secured and Unsecured Debt

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

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

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

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

Recommended: How to Apply for a Personal Loan

The Takeaway

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

Credit cards have an average APR of 20%–25%, and your balance can sit for years with almost no principal reduction. Personal loan interest rates average 12%, with a guaranteed payoff date in 2 to 7 years. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

What is an example of an unsecured loan?

An example of an unsecured loan would be an unsecured personal loan. In this case, your financial credentials are evaluated when you apply, but you don’t have to put up an asset as collateral to obtain the loan.

Is it better to get an unsecured or secured loan?

This decision depends on your needs and your situation. A personal loan can be faster to obtain and typically doesn’t require collateral, but the interest rate may be higher than what you would be offered for a secured loan, in which you put up collateral and likely face a longer path to approval.

What’s the difference between a secured and unsecured loan?

With an unsecured loan, you don’t have to put up collateral. With a secured loan, you do, such as using your house as collateral for a home equity loan. Typically, secured loans are seen as lower risk to lenders and therefore have lower interest rates.

---

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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

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

SOPL-Q225-098

Read more

In finance, leverage is the practice of borrowing funds to establish bigger positions. Leverage increases the potential for larger returns. But using leverage also increases the risk of loss.

In general, only qualified investors may use leverage when they invest, which they can typically access via a margin account. Margin is a type of loan from a brokerage. Trading on margin is a type of leverage.

As an investor, it’s critical to understand leverage and the additional risks involved if you plan to day trade or make other types of short-term investments.

What Is Leverage?

In finance, leverage refers to using a small amount of capital to establish bigger positions, using borrowed funds. This is called trading on margin, and it’s a strategy generally available only to qualified investors.

The use of margin is governed by rules from the Financial Industry Regulatory Authority (FINRA). A margin loan must be backed with cash and other securities, a minimum amount of cash must be maintained in the account, and the margin debt must be paid back with interest, whether investing online or through a traditional brokerage.

Trading With Cash vs. Margin

With a cash brokerage account, an investor can only purchase investments they can cover with cash. If an investor has $5,000 in cash, they can buy $5,000 worth of securities.

A margin account, however, allows qualified investors to borrow funds from the brokerage to purchase securities that are worth more than the cash they have on hand.

In the above example, an investor could borrow up to $5,000, which doubles the amount they can invest (depending on any account restrictions), and place a $10,000 trade.

Although leverage is about borrowing capital in an effort to increase returns when investing in stocks and other securities, if the trade moves in the wrong direction, though, you could suffer a loss — and you’d still have to repay the margin loan, plus interest and fees.

How Leverage Works

In leveraged investing, the leverage is debt that qualified investors use as a part of their investing strategy.

Leverage typically works like this: An investor wants to make a large investment, but doesn’t have enough liquid capital to do it. If they qualify, they use the capital they do have in conjunction with margin (borrowed money) to make a leveraged investment.

If they’re successful, the return on their investment is greater than it would’ve been had they only invested their own capital.

In the event that the investor lost money, they would still have to repay the money they’d borrowed, plus interest and fees.

Example of Leverage

Let’s say an investor has $10,000 worth of cash and securities in their account. Generally speaking, and assuming they qualify for margin funds, the investor can borrow up to another $10,000, and place a $20,000 trade, though the brokerage firm could impose stricter limits or other restrictions.

That’s because the Federal Reserve’s Regulation T requires a 50% initial margin deposit, minimum, for trading on margin.

Thus, when using margin to buy stocks or other securities, an investor typically can borrow up to 50% of the value of the trade. The cash and securities are collateral for the loan, and the broker also charges interest on the loan, which adds to the cost — and to the risk of loss. (Margin rules can vary, however, depending on the securities being traded and other factors.)

Pros and Cons of Leverage

On the surface, leverage can sound like a powerful tool for investors — which it can be. But it’s a tool that can cut both ways: Leverage can add to buying power and potentially increase returns, but it can also magnify losses, and put an investor in the hole.

Pros of Leverage	Cons of Leverage
Adds buying power	Increased risks and costs
Potential to earn greater returns	Leveraged losses are magnified
If you qualify, using leverage can be easy	Not all investors qualify for the use of leverage, i.e., margin

Leverage vs Margin

Leverage is a type of debt. And as noted, margin is a type of leverage that can be used to make investment trades. It’s similar to a line of credit for a brokerage account that qualified investors can access.

Leverage can be used by businesses to expand operations or invest in new equipment or to fund an acquisition. Ideally, the use of leverage will generate additional revenue to cover the cost of the debt.

Leverage vs Margin
Leverage	Margin
A loan from a bank for a specific purpose	A loan from a brokerage for investing in financial instruments
Can be used by businesses or individuals	Only qualified investors have access to margin trading
Leverage may be used to expand business operations or achieve other goals	Can be used to increase investment buying power
Borrowed capital generally must be repaid according to the terms of the loan.	Margin loans must be repaid with interest, and fees.

Types of Leverage

So far, we’ve mostly discussed leverage as it relates to the financial markets for investors. But there are other types of leverage, too.

Financial Leverage

Financial leverage is used by businesses and organizations as a way to raise money or access additional capital without having to issue additional shares or sell equity. For instance, if a company wants to expand operations, it can take on debt to finance that expansion.

The main ways that a company may do so is by either issuing bonds or by taking out loans. Much like in the leverage example above, this capital injection gives the company more spending power to do what it needs to do, with the expectation that the profits reaped will outweigh the costs of borrowing in the long run.

Operating Leverage

Operating leverage is an accounting measure used by businesses to get an idea of their fixed versus variable costs. When calculating operating leverage, a company looks at its fixed costs as compared to variable costs to get a sense of how the costs of borrowing are affecting its profitability.

Understanding operating leverage helps to evaluate whether a company’s borrowing is profitable (called the debt-to-equity ratio).

Using Borrowed Money to Invest

While many investors utilize margin, it’s also possible to borrow money from an outside source (not your broker or brokerage) to invest with. This may be appealing to some investors who don’t have high enough account balances to meet the thresholds some brokerages have in place to trade on margin.

If an investor doesn’t meet the margin requirements, looking for an outside loan — a personal loan, a home equity loan, etc.— to meet that threshold may be an appealing option.

But, as mentioned, investors will need to consider the additional costs associated with borrowing funds, such as applicable interest rates. So, before doing so, it may be a good idea to consult a financial professional.

Leverage in Personal Finance

The use of leverage also exists in personal finance — not merely in investing. People often leverage their money to make big purchases like cars or homes with auto loans and mortgages.

A mortgage is a fairly simple example of how an individual may use leverage. They’re using their own money for a down payment to buy a home, and then taking out a loan to pay for the rest. The assumption is that the home will accrue value over time, growing their investment.

Leverage in Professional Trading

Professional traders tend to be more aggressive in trying to boost returns, and as such, many consider leverage an incredibly important and potent tool. While the degree to which professional traders use leverage varies from market to market (the stock market versus the foreign exchange market, for example), in general most pro traders are well-versed in leveraging their trades.

This may allow them to significantly increase returns on a given trade. And professionals are given more leeway with margin than the average investor, so they can potentially borrow significantly more than the typical person to trade. Of course, they also have to stomach the risks of doing so, too — because while it may increase returns on a given trade, there is always the possibility that it will not.

Leveraged Products

There are numerous financial products and instruments that investors can use to gain greater exposure to the market, all without increasing their investments, like leveraged ETFs.

Leveraged ETFs

ETFs, or exchange-traded funds, can have leverage baked into them. ETFs are typically baskets of stocks, bonds, or other assets that mirror a relevant index, such as the S&P 500.

Leveraged ETFs, or LETFs, use derivatives so that investors may potentially double (2x), triple (3x) or short (-1) the daily gains or losses of the index. Financial derivatives are contracts whose prices are reliant on an underlying asset.

Leveraged ETFs are highly risky, owing to their use of derivative products.

Volatility and Leverage Ratio

A leverage ratio measures a company’s debt profile, and gives a snapshot of how much debt a company currently has versus its cash flow. Companies can use leverage to increase profitability by expanding operations, etc., but it’s a gamble because that profitability may not materialize as planned.

Knowing the leverage ratio helps company lenders understand just how much debt they’ve taken on, and can also help investors understand whether a company is a potentially risky investment given its debt obligations.

The leverage ratio formula is: total debt / total equity.

Volatility is another element in the mix, and it can be added into the equation to figure out just how volatile an investment may be. That’s important, given how leverage can significantly amplify risk.

The Takeaway

Leverage can help investors, buyers, corporations and others do more with less cash by using borrowed funds. But there are some important considerations to keep in mind when it comes to leverage. In terms of leveraged investing, it has the potential to magnify gains — but also to magnify losses, and increase total costs.

Utilizing leverage and margin as a part of an investing or trading strategy has its pros and cons, and investors should give the risks serious consideration.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, from 4.75% to 9.50%*

FAQ

What is leverage in simple terms?

In simple terms, the concept of leverage means to use a small amount of force to create a larger outcome. As it relates to finance or investing, this can mean using a small amount of capital to make large or outsized trades or investments.

What is an ordinary example of leverage?

An example of leverage could be a mortgage, or home loan, in which a borrower makes a relatively small down payment and borrows money to purchase a home. They’re making a big financial move with a fraction of the funds necessary to facilitate the transaction, borrowing the remainder.

Why do people want leverage?

Leverage allows investors or traders to make bigger moves or take larger positions in the market with only a relatively small amount of capital. This could lead to larger returns — or larger losses.

---

Photo credit: iStock/StockRocket

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

SOIN-Q425-039

Read more