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Cars are integral to our daily lives: We drive them to and from work and school. We use them to get groceries and go to the doctor. And, when our budget allows, we use them to get out of the house and treat ourselves to an evening of fun.

But what happens when your car breaks down and you don’t have the money saved up to fix it? That’s a reality for more than half of Americans, according to Bankrate’s 2023 Emergency Savings Report, an annual survey done in partnership with the survey and market research firm SSRS. Almost 60% of Americans say they wouldn’t use cash from emergency savings to pay for an unexpected car repair. Instead, they’d turn to credit cards, friends and family, or personal loans.

Using personal loans for car repairs can be a good solution when you don’t have the cash on hand, and it may be more affordable than paying with a high-interest credit card. Below, we’ll explore the pros and cons of using personal loans for car repair as well as some alternative options.

What Personal Loans Are and How They Work

A personal loan is a loan from a financial institution that borrowers can use for a wide range of purposes, from weddings and vacations to debt consolidation and medical costs to home renovations and, yes, car repairs. You’ll repay your personal loan, plus interest, over a set number of months.

As you start to explore your options, it helps to understand how personal loans work and the different types of personal loans available.

Pros and Cons of Personal Loans for Car Repairs

Taking out a personal loan to cover the cost of car repair can be helpful, but are there drawbacks to consider? Let’s review the pros and cons:

Pros

•   Get fast funding to cover repairs: Many personal loans offer same- or next-day funding, which means you can pay for car repairs quickly and get back on the road.

•   Prioritize your family’s safety on the road: Without access to cash, some drivers may be tempted to forego necessary repairs and put themselves, their families, and other drivers in danger by driving with a damaged vehicle. A personal loan allows you to pay for damage now at a potentially lower cost before the issue grows and becomes more expensive to fix.

•   Ensure you can still drive to and from work to generate income: Despite the advent of remote working, many people still rely on their vehicle to get to and from their job. Without it, you’ll need to pay for rideshare or a car rental or depend on the kindness of a coworker to give you a lift. Otherwise, you may need to skip work and miss out on that pay. Repairing your car quickly with a personal loan helps ensure you can get yourself to and from work on time.

•   Avoid high-interest credit card debt to cover repairs: Many Americans reach for their credit card to cover the cost of emergency car repair. According to Bankrate’s 2023 survey, 25% of respondents said they’d swipe their card to pay for repairs. The problem? More than a third of Americans have more credit card debt than emergency savings — and such debt can be hard to overcome when you don’t have funds set aside for unexpected expenses.

Cons

•   Increased debt: The biggest drawback of taking out a personal loan is the increased debt. Sometimes debt is necessary, like taking out a mortgage to buy a home or getting a student loan to pay for college. However, if it’s possible to avoid debt for small expenses like car repair, you typically should. That said, fixed-rate personal loans may be a more manageable form of debt for borrowers than a variable-rate credit card.

•   Upfront fees: Many personal loans come with origination fees at the start, especially for borrowers without great credit. These fees, plus the interest on the loan, mean you’ll end up spending much more for the car repair than you would if you paid out of pocket.

•   Temporary drop in credit score: While many lenders allow you to prequalify for a personal loan without an impact on your credit score, there will be a hard inquiry on your credit report when you officially apply. Such hard inquiries temporarily lower your credit score, but don’t worry: Your score will likely rebound over time, and if you responsibly manage your personal loan, you may even see it grow higher than when you started.

•   Less room in monthly budget: When you take out a personal loan, you’ll have fixed payments for a set number of years. It’s crucial that you make these payments every month and on time. That means you’ll have a little less room in your budget until it’s paid off. If you’re living paycheck to paycheck or struggling to build your emergency savings, this tighter budget can be problematic.

Recommended: What Are Daily Simple Interest Loans?

How to Use a Personal Loan for Auto Repairs

Personal loans are straightforward. Aside from a few restrictions that vary by lender, you can use personal loans for almost anything. You’ll apply and, upon approval, have the funds deposited in your checking account. Then you can take that money and pay the mechanic directly to repair your car.

Applying for a Personal Loan

So how do you get a personal loan for car repairs? First, make sure you meet a lender’s requirements, and then you can go through the application process.

Requirements

These are the typical personal loan requirements you’ll need to meet to get approval:

•   Credit score: Each lender will have its own personal loan credit score requirements. If you have bad credit, don’t sweat it: There are lenders out there with personal loans for poor-credit borrowers. Just expect to pay higher fees and interest.

•   Collateral: Many personal loans are unsecured, meaning you don’t have to put up any collateral. However, if you are struggling with your credit score, you may have an easier time getting approved (and at a lower rate) if you’re willing to put up collateral, such as your car.

•   Proof of income and employment: Lenders want to know that you have a means of repaying the loan. To that end, you may need to prove that you’re employed — and that you make enough to cover the monthly payment.

•   Debt-to-income ratio: Lenders commonly analyze your debt-to-income (DTI) ratio, which compares your monthly debt payments vs. the amount of money you make in a month. The lower the ratio, the more likely you are to be approved.

•   Origination fee: Some personal loans may include an origination fee to be paid up front, often expressed as a percentage of the loan amount (somewhere between 1% and 10%). You may be able to pay this out of pocket, but often lenders roll it into the loan’s total cost or even deduct it from the loan amount you receive.

Recommended: Compare Personal Loan Rates and Terms

Application Process

When you’re ready, you can apply online, over the phone, or in person (it’ll vary by lender). You’ll usually hear back about approval quickly — and may even receive the loan funds on the same day.

Many lenders let you check your personal loan rates and eligibility online before you apply. There’s no hard credit inquiry for this, so it’s a nice way to see if you qualify and compare lenders.

Alternatives to Personal Loans for Auto Repairs

The ideal alternative to getting a personal loan to fix a car is paying with cash from your emergency fund. But if you don’t have an emergency fund — or don’t have enough saved up yet — paying with credit is your main option.

Personal loans are a top option, but there are some alternatives to personal loans for auto repairs:

Credit Cards

Many mechanics will let you pay for auto repair with a credit card. This can be an attractive option if you have a rewards credit card that pays cash back.

The problem is that many borrowers have variable-rate credit cards with high APRs. If you don’t pay off the debt quickly, the interest charges will start to rack up.

Title Loans

Title loans allow you to use your car as collateral to secure funding. It’s a common option for bad-credit borrowers who can’t afford car repair, but be cautious: These loans are short-term, and if you don’t repay yours, the lender will take your vehicle from you.

This is a last-resort loan. For most borrowers, there’s likely a better, safer option.

Payday Loans

Payday loans are convenient for borrowers who need cash now, because there’s usually no credit check or collateral, and you can get the money right away.

The catch? These predatory loans can have high fees and interest rates reaching more than 600%. When it’s time to repay the loan (your next payday), you might find that you can’t afford to repay it — and you’ll have to take out a bigger loan to pay off the first one.

If you’re thinking about a payday loan for car repair, it’s a good idea to reconsider. Payday loans can lead to mounting debt and bankruptcy. And even if you pay yours off, it typically won’t help build your credit score (most lenders don’t report on-time payments to credit bureaus).

Instead, you might want to consider other alternatives, like secured personal loans or even a loan from friends and family.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

Personal loans for car repairs may be a smart option when you don’t have the cash on hand. With a personal loan, you can get fast funding to pay for the repairs within a day or two, and the small available loan amounts mean you don’t have to borrow more than you need. There are some alternatives to personal loans for auto repairs, including credit cards. However, if you’re unable to pay off what you owe quickly, the interest charges will begin to pile up.

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

FAQ

Can personal loans be used for car repairs?

Yes, you can use personal loans for car repairs. In fact, unexpected emergencies such as car repairs are a very common use case for personal loans. You can use personal loans for almost anything.

What sorts of financing can you get for a vehicle repair?

Drivers who can’t afford vehicle repair with their own emergency savings can consider a number of financing options, including personal loans and credit cards.

While title loans and payday loans are alternatives, they’re generally a risky solution that could lead to car repossession, major debt, or even bankruptcy. Similarly, some mechanics may offer their own financing, but Consumer Reports warns that these loans can be predatory, with interest rates up to 189%.

Is getting a personal loan to repair a car a good idea?

If you can’t afford to repair your car out of pocket, a personal loan can be a good idea. Personal loans may have lower rates than a credit card, and making on-time payments on your loan could even help boost your credit score.

And if the alternative is not fixing your car, you’ll either have to drive an unsafe, damaged vehicle or get around without an automobile — which can be inconvenient and lead to lost wages if you miss work.

Photo credit: iStock/demaerre

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 .

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

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When students take a gap year, they typically take a semester or year off between high school and college in order to take advantage of experiential learning. While extraordinary opportunities may be awaiting you, you may struggle to think of ways to pay for the experience.

If that’s the case, there are options that may help you pay for your gap year — beyond funding the costs out of pocket. Continue reading for more information on options you may want to consider should you find yourself in need of help funding your non-classroom experience.

Gap Year, Explained

First of all, what is a gap year and why do people take them?

Students may choose to take a semester or year off with the goal of getting a break from academics and prior to diving into postsecondary education. Students may choose to complete an internship, travel, study on their own, volunteer, or pursue other interests. Some students choose to pursue a gap year with the intention of discovering what it is that they want to major in or the career path they’d like to pursue.

Many students report a developed self- and cultural awareness, increased independence, and confidence after taking a gap year.

Students may choose to apply to colleges and universities during their senior year (and let colleges know of their plans to take a gap year), during their gap year or after they’ve completed their gap year. Waiting until later often gives them the advantage of being able to report on what they’ve learned during their time away from academics.

In some instances, a gap year may also be something for a student to do after college or in-between college and post-graduate study.

Planning Out Your Gap Year

It’s important to plan out your gap year ahead of time so you have a plan for how you’ll spend your time. It can be easy to waste time when you break from a traditional schedule. Having a plan ensures that you’ll have a better chance of achieving your goals — you might even curb expenses as well.

It may be helpful to break your plan down into measurable goals. For example, if you plan to travel, write down where you’d like to be on specific dates so you don’t miss any of your intended milestones. It’s also a good idea to budget for your gap year ahead of time so you know how much it will cost and the amount you’ll need per week or month to live on.

Options for Financing Your Gap Year

You can always finance your gap year with cash you or your parents have saved or with money from a well-meaning grandparent. However, not everyone has cash bankrolling their gap year. Let’s take a look at a few ways you may want to consider financing your gap year.

Gap Year Scholarship or Grant

A private entity may offer you a gap year grant or scholarship. A scholarship is free money that you don’t have to pay back that can come from a wide variety of entities, including clubs, organizations, foundations, charities, businesses, the government and individuals. It’s possible to find scholarships specifically for gap years, particularly for students who want to volunteer, improve certain skills, volunteer, develop a talent, or complete another type of experiential learning.

Grants are also a form of financial aid that doesn’t have to be repaid. Grants may also help you fund your gap year without having to repay the money. However, it’s important to check into the fine print on both college grants and scholarships to ensure that you fit the criteria. (Some scholarships and grants require you to get college credit in order to qualify.)

529 Account or College Savings

If you or your parents have college savings set aside in a brokerage account, savings or checking account, or a certificate of deposit (CD), you may want to use this money to pay for gap year expenses.

A 529 plan is an investment account that offers investment opportunities and tax advantages when used to pay for qualified education expenses. You may take withdrawals from a 529 plan to pay for qualified educational expenses for tuition, room, board, fees, books, equipment for classes, and other supplies at an accredited institution. If you meet these requirements, you won’t pay federal income tax.

However, if you spend the money on an expense that doesn’t qualify as a higher education cost (such as your plane ticket to go overseas). Be careful when using your 529 savings unless you’re attending a specific program through an accredited institution.

Find a Paid Internship or Part-Time Job

Obtaining a paid internship or part-time job can help you float some or all of the expenses of a gap year. For example, if you plan to spend your year volunteering at soup kitchens throughout a major city, a part-time job may help you pay for transportation to get there and also other living expenses. On the other hand, if you intend to use your gap year to gain work experience to discover your career goals, a paid internship may help you take care of all of your living expenses.

Recommended: Jobs to Help Pay for School Expenses

Apply for Financial Aid

Financial aid can refer to a wide range of types of money to pay for credits at college or career school.

Some gap year programs offer college credit, so you may be able to apply for federal financial aid using the Free Application for Federal Student Aid (FAFSA®). The FAFSA can give you access to grants, federal student loans, and other opportunities.

While you may have never had any intention of taking college credit during a gap year (you may feel that it defeats the purpose of a gap year!) but taking a college-credit class or two as part of your experience or doing a credit-based gap year program may help cover some of your costs.

Personal Loans

Taking out a personal loan involves borrowing money from a bank, online lender, or credit union that you repay in fixed installments. Personal loans are not backed by collateral, which also means they are called unsecured loans. (Secured loans, on the other hand, are backed by collateral, such as a house.) Personal loans often carry higher interest rates than some other types of loans. It may be difficult for someone to get a personal loan without a cosigner if they don’t have a long history of building credit.

It’s a good idea to be careful about taking out a personal loan due to these higher interest rates and having to bring a cosigner on board. That cosigner could end up paying for your loan if you default on the loan and ultimately, it could affect both of your credit scores.

Using Private Student Loans to Finance Gap Year

Private student loans are student loans that come from a bank, credit union, or other private lender. You probably cannot use private student loans to finance your time off from school if you plan to backpack across Europe, but if you do take a few classes as part of a gap year program, you may be able to use private loans to cover your costs. Check with lenders about their requirements before you apply and whether or not a particular program will qualify.

The Takeaway

A gap year can help “gappers” explore career goals, develop confidence, volunteer, and more. If you’re thinking carefully about a gap year, you also might be worried about the cost of taking that time off. Consider putting together a list of costs, goals, and plans so you can make sure that your gap year goes off without a hitch. From there, you can start planning how you’ll cover your expenses during your time away from the classroom.

Finally, don’t forget that you can always put together a combination of sources of funding. For example, you can pay for your gap year with a combination of scholarships, money saved, and internship money.

3 Student Loan Tips

1. Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.
2. Even if you don’t think you qualify for financial aid, you should fill out the FAFSA form. Many schools require it for merit-based scholarships, too. You can submit it as early as Oct. 1.
3. It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.

FAQ

How much should I budget for a gap year?

The amount you should budget for a gap year depends on your personal circumstances. It also depends on what you plan to do. Living at home with your parents and volunteering in your community will likely cost less than hopping on a plane and spending a year abroad. No matter what your plan, it’s best to get an estimate of your expenses ahead of time and then use that as a basis for your budget throughout your gap year.

How can I get funding for a gap year?

There are many ways to get funding for a gap year. Depending on your situation and circumstances, you may consider tapping into scholarships, grants, a 529 account, college savings, through a paid internship or part-time job, financial aid, personal loans or private student loans. There’s no single way to fund your gap year, and you may also want to consider a combination of different sources to pay for it.

How long should a gap year be?

A gap year can be any length of time, but they typically last between two weeks and one year.

Photo credit: iStock/Pekic

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

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.

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

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

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If you’re getting a mortgage, one important consideration is the APR, or annual percentage rate, on your loan. This is something different from your interest rate: The home loan APR reveals the overall cost of your mortgage, reflecting both the interest rate and any additional costs that must be factored in.

Knowing the APR on a home loan is a key bit of intel which can influence your overall costs as you move towards homeownership. To help you better understand this concept and how APR is calculated, read on. You’ll likely be better prepared to know which loan offer best suits your needs, today and tomorrow.

What Is APR?

APR stands for annual percentage rate, and it’s used to measure the cost of borrowing money from lenders for various reasons, such as your mortgage loan. While it’s often presented at the same time as your interest rate, it isn’t the same thing.

APR is expressed as a percentage and takes into account not only the interest rate but also many of the costs that are associated with the loan. When it comes to borrowing a mortgage, these costs can include such items as these, among others:

•   Origination fees

•   Application fees

•   Processing fees

•   Discount points.

APR provides a more comprehensive picture of the total cost of the mortgage loan. It gives you an overall view of the fees and costs you would have to pay that are included in the finance charge. If you compare just the interest rate, the additional fees and costs aren’t represented, which could give you an incomplete picture when it comes to determining the actual cost of the loan. That could negatively impact your ability to budget accurately for your home loan costs.

Since not all lenders charge the same fees or interest rates, comparing APRs is usually a better way to compare the total cost of your loan from one lender to another.


💡 Quick Tip: Don’t overpay for your mortgage. Get a competitive rate by shopping around for a home loan.

Why Is APR Important When Taking Out a Mortgage?

Knowing the APR can help consumers be more informed while comparison shopping for loan products. Thanks to the Truth in Lending Act, lenders are required to disclose the APR of their loans, as well as all fees and charges associated with a loan.

The APR should include all finance charge fees, which can make it easier for borrowers to sort through loan comparisons to find the right mortgage.

How Are Interest Rates Calculated?

As we’ve discussed, APR and interest rate aren’t the same, but your interest rate does impact your APR. So, how exactly are interest rates calculated?

Your interest rate is a percentage of your mortgage rate. What that percentage will be depends on what type of mortgage loan you have.

•   With a fixed-rate mortgage, you’ll pay the same interest rate for the entire time you have the loan.

•   With an adjustable rate mortgage, on the other hand, your rate will fluctuate throughout the life of the loan.
Also, keep in mind that any unpaid interest gets added to the mortgage principal. This means you’ll have to pay interest on that interest.

Your lender will determine your specific interest rate based on your financial specifics, such as your credit score, as well as the current economic conditions and market interest rates. Lenders usually use their own unique formula to calculate interest rates, which is why your rate can vary from lender to lender — and why it’s important to shop around for rates.

Recommended: APR vs. Interest Rate: What’s The Difference?

How to Calculate Your APR

When you’re getting a mortgage, you may want to be extra thorough and calculate the APR yourself. There’s a way to make that happen. But be warned, it’s not necessarily a super fun math project, but hey, where there’s a formula, there’s a way, right?

•   To get started, you’ll have to know the approximate monthly Principal and Interest (P&I) payment on your loan. Maybe your lender has already told you what it would be, but if not, you could calculate it with an online mortgage calculator or by hand.

•   You’ll need to have a loan amount, interest rate and a term in years.

•   Once you have the monthly P&I payment calculated, you’ll then be able to calculate the APR, which you can do with an online calculator. Keep in mind that because you don’t know what your applicable APR loan fees will be, it can be wise to use a ballpark estimate. If the loan costs that will impact your APR are 2% of your loan amount and your loan amount is $200,000, your loan costs for calculating the APR will be $4,000.

💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

Why You Need to be Careful When Using APR to Compare Mortgages

When you’re getting a mortgage, you will likely have the APRs for all the mortgage offers you’re considering. Your APR is important to consider because it factors in the expense of additional fees over the life of your mortgage. If you’re applying for a 30-year mortgage, those fees are spread over 30 years.

But do you plan to live in your home for the full 30 years of your mortgage and never refinance your mortgage? If you sell your home after five years, rather than staying for the duration of your 30-year loan, you’ll still have to pay for the loan fees (such as origination fees).

That’s why it’s important to consider and compare APRs when choosing a mortgage. If you plan on living in the home for a limited time, a lender that offers fewer fees might be a better choice than a lender with a low APR but lots of fees. You may want to consult with your financial advisor before making this decision.

When you’re mortgage shopping, especially if you are a first-time homebuyer, you also may want to proceed with caution when comparing the APRs of fixed-rate and adjustable-rate mortgages if you are using an online calculator. The APR on adjustable-rate loans may not be an accurate representation of the cost of the loan since some calculators cannot anticipate the frequency or amounts of the interest rate changes.

Recommended: Tips When Shopping for a Mortgage

The Takeaway

When getting a home loan, your interest rate and APR, or annual percentage rate, are not the same thing. The APR can reflect the overall cost of the loan, including various fees, for instance.

If you’re ready to take the next step in your home-buying journey, the first step is taking stock of your mortgage options. Comparing each loan’s APR is a quick and easy way to see how your offers stack up although it isn’t the only factor to take into account.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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

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If you’re preparing to join the ranks of homeowners, whether you are just starting to daydream about it or are actively scanning listings, it’s important to understand the costs involved. You’ll probably hear a lot of talk about mortgage rates as you enter this realm, and, while your home loan will certainly be a critical expense, it’s just one of the things to budget for.

Here, you’ll learn about all the expenses involved in owning a home, from that mortgage to home maintenance; from homeowners insurance to utilities. Equipped with this intel, you’ll be better prepared for the true cost of having your very own place and making sure you’re ready for your big purchase.

Costs of Purchasing Your Home

When you think of buying a home, you may well be focused on accumulating that bundle of cash known as the down payment. But there are more costs associated with buying your home than simply that expense.

The down payment is probably the largest initial cost you’ll take on, but don’t be blindsided by the additional fees you’ll need to pay. You can find out how much home you can afford with a home affordability calculator or keep reading to learn about the typical costs associated with owning a home.


💡 Quick Tip: Don’t overpay for your mortgage. Get a competitive rate by shopping around for a home loan.

Down Payment

Historically, the magic number for a down payment has been 20% of the home’s value. If you’re thinking that’s impossibly steep, take a deep breath. The median down payment on a conventional loan recently clocked in at about 6% among first-time homebuyers. And conventional home loans can be had with as little as 3% to 5% down.

So 20% may no longer be standard, but, if you put down anything less, you may pay private mortgage insurance (PMI) on top of your monthly mortgage.

PMI can make it possible for many buyers to put down a more affordable down payment while protecting the bank’s investment if you were to default on the loan. The downside of PMI is the additional payments you’ll need to make each month until you are eligible to remove this insurance from your mortgage payment. Typically, PMI is canceled when your principal balance reaches 78% of the home’s original value (meaning the purchase price).

As you think about how much of a down payment to make, it could be tempting to make as large a payment as possible to help minimize your monthly mortgage payment and avoid PMI. Keep in mind that doing so can leave you little wiggle room financially for the additional costs associated with your home down the line. If you make a large down payment, it can help to have money reserved as an emergency fund and for unexpected home repairs.

Closing Costs

Your down payment won’t be the only thing due on closing day. In addition to the down payment, you’ll be expected to cover closing costs. Closing costs typically cover things like:

•  Title insurance

•  Title search fees

•  Appraisal costs

•  Escrow or attorney fees

•  Surveying

•  Lender fees

Closing costs can vary based on factors such as the purchase price of your property, but you can expect to pay an estimated amount somewhere between 3% to 6% of your loan amount in closing costs.

Home Ownership Costs

You may think that being a homeowner involves affording the down payment on a house and the monthly payment of principal and interest on your mortgage, but there’s more to be prepared for. Here are some extra costs you may want to save and budget for.

Mortgage Payment

Your monthly mortgage payment could be just the funds paid to the bank, a combination of principal and interest, or it could be a few different payments rolled into one single bill. Your mortgage payment might include some or all of the following:

•  Principal: This is the repayment of the initial loan you took out to purchase the home. Paying the principal is paying off the remaining balance of what you owe on your home to your lender.

•  Interest: Depending on the terms of your mortgage, the interest could be fixed or variable. You are paying this every month for the privilege of borrowing the funds to buy your home. It’s one of the ways banks make money.

•  Property Tax: If your mortgage has an escrow account, a portion of your mortgage payment may go towards your annual property tax bill. Property tax is paid to your local government and usually goes towards funding public schools, public works, libraries, parks, city government, and maintenance. The amount of property tax you’ll pay is calculated as a percentage of the value of your property. The percentage varies by location. Some homeowners may pay this separately, directly to their town.

•  Insurance: If you’re paying into escrow, you’ll probably pay a portion of your homeowners insurance policy each month instead of a lump sum once a year. You’ll work with your insurance provider to determine the coverage of the policy, but standard home insurance typically provides protection against certain unexpected events, like damage caused by a fire or a break-in. Policy specifics will vary.

•  PMI: If your initial down payment was under 20%, you may be responsible for PMI, as described above. This payment can be anywhere from 0.2% to 2% of your loan amount per year.

💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.

Utilities

Unlike a rental where you may only pay for gas and electricity, when you own a home, you’re on the hook for all utilities, which can include water, gas, heat, electricity, sewer, and trash/recycling. Utilities will vary based on your location, as well as the size of your home, but the national monthly averages are as follows:

•  Electricity: $117.46

•  Water: $45.44

•  Broadband internet: $59.99

•  Gas: $61.69

•  Waste services: $66.20

•  Phone: $114.

These figures vary based on area and activity, but taking steps to save energy on heating and cooling could lower your monthly bills. Depending on where you live, utility providers might offer an option to set a fixed rate for the year, so you’ll pay the same amount each month instead of paying a bill that varies with the change in the seasons (say, soaring in the summer as people switch on the air conditioning).

Improvements & Repairs

Your dream home might just be a few renovation projects away, but remember to factor the cost of those updates into the true cost of owning your home. Not only that, but strategic improvements can greatly increase the resale value of your home.

The cost of home improvement projects vary widely based on what you’re working on. A recent survey by Houzz found that the median cost for a home renovation was $22,000 in 2022.

Maintenance

Home maintenance entails the general upkeep of things like your property’s systems, structures, and appliances.

Upkeep costs can be more predictable than some repairs. One rule of thumb says to budget 1% to 4% of your home’s value for annual maintenance. A variety of these projects might be DIY-ed, but you’ll want to budget in the cost of tools and supplies.

You can’t predict the exact lifespan of your appliances and home systems, but a general idea can make it easier to anticipate future costs. When you buy your home, take note of how old the appliances and other systems are, so you can have a better idea of when you’ll need to replace them.

For example, a refrigerator could last between 10 and 18 years, but you might benefit in terms of energy efficiency by replacing an old power-guzzling appliance sooner. Consider the outside structure of the house as well, such as the roof, siding, and gutters. It may be helpful to get a quote from a contractor for any larger repairs or renovations you plan to complete so you can factor that into the costs of owning a home.

Recommended: The Cost of Buying a Fixer-Upper

The Takeaway

The time and money required to own and maintain a home can be considerable. There are the monthly costs, which can involve mortgage, insurance, property taxes, and utilities, as well as annual maintenance. Plus, sooner or later, you are likely going to have to replace an appliance, repair a roof, or otherwise update your home.

Understanding and estimating the costs of owning a home can be an important step before joining the ranks of homebuyers. It can also impact what size and sort of mortgage you get and from which lender. That’s an important area to wrangle your costs as you think about your overall budget.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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.

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When you’re struggling with debt, a little bit of help can go a long way — and a lot of help can go even further. But shopping around for debt relief assistance can be confusing. What, exactly, are these organizations offering?

Credit counseling organizations are generally non-profits that are dedicated to not only helping their clients get out of debt, but also creating a sustainable way forward with free or low-cost educational tools and resources. In other words, they’re more holistic about your financial situation, and they’re not in it for your money (though some may charge fees, usually relatively low, for their assistance).

Debt relief companies, on the other hand, are for-profit companies that charge you, often steeply, for the service of negotiating and settling your debt with your creditors or with collections agencies. In other words, they’re less about helping you get your money right and more about getting your money.

While both types of organizations can help you find relief from at least some of your debt, their motivations and structures are very different. Let’s take a closer look.

Debt Settlement vs Credit Counseling: What’s the Difference?

As mentioned, debt settlement is usually done by a for-profit debt settlement company that works to negotiate your debts with creditors or collections agencies for a fee. Not all creditors will negotiate with debt settlement companies, but if they will, you may be able to pay a lower overall amount. Keep in mind that it still may not immediately improve your credit score, and in some cases, may even make it worse (which we’ll discuss more in just a moment).

Credit counseling, on the other hand, is usually performed by financial professionals who work at non-profit credit counseling organizations. While they may help you create a debt management plan — potentially even one that might save you money — that’s not all they’re there to help you with.

Even if they don’t negotiate directly with your creditors, credit counselors can help you create or manage a budget, develop a sustainable plan to minimize debt over the long run, and give you access to low- or no-cost resources including workshops and educational materials. While they may assess a fee, it’s usually low, and they may also have options even if you can’t afford to pay them at all.


💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

How Does Debt Settlement Work?

Debt settlement companies are just that: companies charging you for the service of settling debts. However, since not all creditors will even work with debt settlement companies, they may not actually be able to save you any money. If they can, they’ll be charging you for their service. Their fees may be a lot higher than a credit counselor’s would be.

Pros of Debt Settlement

•   Debt settlement might help you save money on very large debts. If a debt settlement company can successfully negotiate with your creditor, you may be able to get out of debt by paying far less than you would otherwise owe, so long as you can pay it as a lump sum.

•   Legally, your money must remain under your control while you’re saving it. The debt settlement company may require you to save up the lump sum in a special account. But even if they do, those funds must remain under your control until they are used by the company to pay off your debt.

Cons of Debt Settlement

•   Debt settlement is expensive. Even if the settlement is expensive, the company will charge you for their services, which eats into the amount you’re saving on your debts. Keep in mind that debt settlement companies are for-profit organizations.

•   Debt settlers aren’t looking at the whole picture. While a credit counselor may be able to help you come up with a sustainable, holistic plan to manage your money going forward, debt settlers are focused only on, well, settling your debt. This means you could wind up in the exact same place in the future, if your financial habits don’t change.

•   Debt settlement services might actually make your credit worse. Some debt settlement companies may tell you to stop paying your debt until they reach an agreement with the creditor, which could be negatively reflected in your credit score and history.

•   Debt settlement doesn’t always work. Because some creditors won’t negotiate with debt settlement companies, using one may not actually save you any money. (Note: According to Federal Trade Commission rules , a debt settlement company can never charge you for their services before they’re successfully rendered. If you encounter a debt settlement firm that’s trying to take your money up front, you shouldn’t work with them.)

What Is Credit Counseling?

Credit counseling is very different from debt settlement: It’s a holistic approach to money management offered by expert financial planners and advisors at a low cost.

While helping you negotiate and potentially lower your debts with creditors is one potential service a credit counselor may offer (though they may also not), their main concern is getting you set up for a successful financial future in the long term.

Pros of Credit Counseling

•   Credit counseling is built to be affordable. While credit counselors may charge a small fee for their services, they’re usually much lower than you’d pay for financial advice in any other context. Plus, no-cost options are often available for those with demonstrated need.

•   Credit counseling can help you build a sustainable financial future — not just settle a debt. By giving you the knowledge and tools you need to create positive financial habits, credit counseling can help you make a lasting change, not just pay off a bill.

•   Credit counseling can give you access to other educational opportunities and materials. Along with one-on-one credit counseling, these non-profit organizations may host community workshops and classes or provide you with free information.

Cons of Credit Counseling

•   Credit counseling requires you to do some of the work. Although credit counselors will assist you along the way, you’re the one who has to create (and stick to) a budget and form positive credit habits.

How Can a Non-Profit Credit Counselor Help You?

By helping you form the long-lasting financial habits that can keep you out of debt or make it easier to follow your monthly budget, working with a credit counselor can change the shape of your financial future.

In short, think of debt settlement agencies as for-profit firefighters: They may be able to help you put out a blazing debt spiral in an emergency, but they’ll charge you for the privilege. Non-profit credit counselors, on the other hand, help you put out the fire and teach you how to keep your financial life flame-free, all for low or no cost.

What Is the Process of Working with a Non-Profit Credit Counselor?

When you sign up to work with a credit counselor, you’ll likely start with an initial consultation session, which may be in person, over the phone, or over a video conferencing service. This initial consultation will likely last about an hour and may include going over your budget and creating a debt management plan.

Depending on your needs, your counselor may recommend follow-up sessions, or may direct you to workshops and resources to help you DIY your own financial education.

What You Should Know About Debt Relief Companies

While both debt settlement companies and credit counseling agencies can help you get out of an immediate debt crisis, rebuilding your credit is always a time-consuming and work-intensive process that takes persistence and patience. A credit counselor can help you tackle that project with support.

Keep in mind that there are ways to tackle a debt spiral yourself, too, such as taking out a personal loan in order to consolidate multiple lines of credit or debts.


💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

The Takeaway

Debt settlement is offered by for-profit companies that may charge steeply for their services — and might not even be able to help. Credit counseling, on the other hand, is a more holistic service offered by non-profit organizations that have your best interests and a firm financial future at heart.

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

FAQ

What is the difference between debt settlement and credit counseling?

Debt settlement is a service offered by for-profit companies who negotiate your debts with creditors and collections agencies for a fee, often a large one. Many creditors won’t work with debt settlement agencies, anyway, so they may not be able to help you in the first place. In addition, under Federal Trade Commission rule, they’re not allowed to charge their fee before their services are successfully rendered.

Is it better to consolidate or settle debt?

While everyone’s financial needs are different, consolidating your debt is a self-directed debt relief strategy that can help you build your credit and positive financial habits that’ll keep you in good standing. Debt settlement agencies are for-profit companies that may charge you steeply for the privilege of helping you negotiate your debt with creditors. They’re unlikely to get you a better deal than you would get by negotiating on your own.

How bad is debt settlement for your credit?

Many factors go into determining someone’s credit history, but debt settlement agencies may advise you to stop paying your bills until their negotiations are over. This can be bad for your credit history, though paying off large amounts of debt, especially debt in collections, can be positive for your credit history. It’s all about creating sustainable habits over the long run.

Photo credit: iStock/Delmaine Donson

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.

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.

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

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

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