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Unpaid student loans can put a heavy yoke on personal finances. For millions of Americans, outstanding student debt means years and years of ongoing payments (averaging hundreds of dollars per month).

It can be hard to balance paying back what’s owed on student loans while meeting immediate expenses (like, paying rent) or pursuing long-term financial goals (like, saving up for a mortgage down payment).

But, the impact of student loan debt on the economy goes deeper than dinging individuals’ wallets, affecting entire job sectors.

Student loans now account for almost 40% of outstanding consumer debt in the U.S., outpacing the amounts owed on motor vehicle loans, for example, by more than $355 billion.

For a wide-angle view of student loan debt and the economy, it’s useful to know just how much money is owed by borrowers across the U.S. on educational debt. In 2023, the cumulative total of student loan debt in the U.S. surpassed $1.7 trillion, according to data from the Federal Reserve.

Understanding How Many Americans Have Student Loans

This educational debt load affects tens of millions of Americans. More than 43 million borrowers have federal student loan debt, with the average balance per individual being $37,338. To obtain a bachelor’s degree, the average student borrower takes out more than $31,000 in student loans.

For those with master’s degrees, student loan debt is even higher. The average master’s degree holder’s student loan debt is $83,651, which is 141% higher than the average student debt balance.

Given these massive numbers, it becomes clearer how the U.S. college student loan debt crisis and the economy are enmeshed in a tangled tango.

Reviewing Effects of Student Loan Debt on the Economy

If the total amount of student loan debt held by Americans sounds staggering, it’s because it is. That total — $1.757 trillion — is more than the GDP of countries such as Australia, Spain, and Mexico.

And, it’s more than double that of Saudi Arabia and Switzerland. It even outpaces the global box office totals of the 20-highest grossing films in history — a list that includes blockbusters like, Avengers: Endgame, Avatar, and Titanic — by more than 50 times!

With these numbers in mind, let’s dive deeper into the drag that this massive amount of educational debt continues to have on the U.S. economy.

Does Student Loan Debt Hamper Spending?

For the average individual paying off a student loan, typical payments amount to $200 to $299 each month. For many — especially those embarking on a career and earning an entry-level salary — this ongoing financial obligation can put a deleterious dent in funds they could otherwise spend elsewhere.

Student loan repayments can place a very real squeeze on the money that individuals have available each month for buying, investing, saving, or starting a business.

More money spent paying back student loans, in practice, means less money in pocket or saved. Consumer-driven economies grow when people (aka consumers) spend their hard-earned money. So, millions of people redirecting income towards loan payments can significantly slow or stifle economic growth. If someone is struggling to pay off their student loans, they’ll have less money to spend on purchases that help fuel the economy, businesses, and the workforce. The more young people there are who struggle to pay off loans, the greater this economic dampening effect that occurs.

During periods that require economic resilience, such as in a recession, reduced spending can be especially nefarious.

Consumer spending can help to stimulate a floundering economy, mitigating or reversing sudden downturns in specific sectors.

When that spending doesn’t happen during a downturn, it can take longer for the economy as a whole to bounce back.

For those with student debt, it can also be harder to weather a financial crisis, compounding the pain of higher unemployment and lower spending.

How Do Student Loans Affect the Housing Market?

With less money to spend, it’s no surprise that people with student loans have fewer funds for big ticket items, such as buying a home or saving for retirement.

And, since home ownership is a major driver of wealth accumulation, delaying when one buys a home can impact an individual’s net worth for decades to come.

How Do Student Loans Stifle Entrepreneurship?

Small businesses contribute to the economy in major ways. In fact, they’re responsible for 1.5 million jobs annually and generate 44% of economic activity in the U.S.

Future business owners may not be able to turn toward traditional means of financing, such as small business loans, when saddled with student loan debt. It can be harder to get approved for financing when your debt-to-income ratio is high due to loans.

And, when an individual with student debt does become an entrepreneur, they’re at risk of falling behind on student loan payments if their incoming income decreases.

Paying Off Student Loans Can Benefit Individuals and the Economy

When examining student loan debt and the economy, it may be helpful for borrowers to research additional ways to pay off existing student loans — both for their own financial well-being and the future growth of the U.S. economy on a whole.

Here are some strategies that could help those with outstanding student debt to pay down their educational loans faster.

Paying More than the Minimum Due

Student loans are generally subject to interest. Interest is a percentage charged by the lender on what’s been borrowed. Practically speaking, student loan interest accrues over time. So, borrowers who are unable to pay off their loan balances quickly typically end up spending more in interest over the entire life of the loan.

In most cases, the longer student loan debt goes unpaid, the more the borrower will owe, as unpaid interest gets added to the base dollar amount that had been borrowed from the lender. This is called compounding, and most student loans compound their interest daily. This can get confusing quickly, so here’s a student loan calculator so you can see exactly how much you’re spending on interest over the life of the loan.

Many lenders allow borrowers the option to submit a “minimum payment.” In the short term, paying a lower amount per month can free up some income or cash. But, paying the minimum does little or nothing to tackle the outstanding loan balance — typically, the borrower is just paying the accruing interest.

Paying more than the minimum can help reduce the length of time it will take to pay off an existing student loan — shrinking the principal balance as well as the amount of interest paid (aka total money spent) during the life of the loan.

While increasing monthly payments may not be manageable for every individual, paying a little extra when the opportunity presents itself can still help borrowers to eliminate student debt faster.

If nothing else, borrowers may want to apply a share of occasional windfalls, such as a work bonus or tax refund, towards outstanding student debt.

Applying for Loan Forgiveness

Under some circumstances, the government will even forgive federal student loans, essentially canceling out the remaining debt. Some teachers and public servants are among the groups that may be eligible for federal student loan forgiveness programs.

It’s worth noting that this Public Service Loan Forgiveness (PSLF) program is not available to all workers (including some in the public sector) and applies only to federal, not privately held, student loans.

Refinancing Student Loans

Refinancing a student loan with a private lender may result in lower interest rates and/or the ability to pay off what’s owed in a shorter amount of time for well-qualified borrowers.

Student loan refinancing replaces an outstanding educational debt (e.g., a student loan or loans) with a new loan. As such, the new loan can have different terms and interest rates.

For some student loan holders, refinancing allows them to reduce their monthly payments or the total interest paid over the life of the loan.

It’s worth remembering, though, that refinancing federal student loans with a private lender means that the borrower will forfeit federal benefits, such as access to income-driven repayment plans or public service forgiveness programs.

Paying Off Student Loans Faster

Student loans have the potential to keep taking a big bite out of the economy. But, unpaid educational debts undoubtedly hurt the borrower even more, creating accruing interest and loan balances that can take years and years to pay off.

Refinancing educational debt with SoFi could potentially save borrowers money. SoFi’s loan refinancing comes with no application fee, a quick and easy online application, and competitive rates.

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

If advice for paying off student loans were as simple as “Just keep paying those monthly payments,” over 43 million borrowers would have no concerns about wiping away more than $1.7 trillion in student loan debt.

But of course, many do stress about it and wonder how they can pay off their college loans. It’s best to first figure out exactly what you owe and what your interest rates are. From there, you can come up with a game plan to get your student loan debt under control.

Tips to Pay off College Loans

1. Set a Budget

Rather than feeling helpless, it’s better to remember that the path to paying off college loans is, at its core, about making a budget and sticking with it.

It’s best to resist the urge to momentarily feel better through retail therapy. If you do happen to slip up with spending or are caught unprepared for a bill, though, realize that living within your means is a challenge for many adults and learning from your mistakes is better than fixating on them.

The important thing is to create a budget you can actually follow. Give yourself enough flexibility that you’ll be able to stick to your goals and spend your money on what you really want to spend it on.

Recommended: Budgeting and Spending App to Get Your Finances Under Control

2. Pay More than the Minimum

There’s more to paying off college loans than paying the lowest amount required every month. A big reason to pay more than the minimum each month is that student loan repayment is structured around amortization, which is where a portion of your fixed monthly payment goes to the costs associated with interest and another portion goes to reducing your loan balance.

With amortization loans, you typically pay more in interest than principal at the beginning and the ratio gradually reverses as you keep paying your loan. Paying more than the minimum monthly payment means you can accelerate the reduction of the total amount you owe rather than covering the interest.

One plan of attack is to consider signing up for automatic payments. You can customize the payment amount to be withdrawn on its own, and there can be a discount for doing so. If you have a Direct Loan, you can get an interest rate reduction for participating in automatic debits. (As a side note, many federal and private student loan servicers offer a discount for enrolling in autopay, so it can’t hurt to ask and get that discount, if it’s available to you.)

One final tip: Try to get in touch with your lender before you make additional payments so you can verify that your extra cash is going toward paying down the loan principal.

3. Refinance Your Student Loans

If it ever reaches a point where making real progress on repaying your loans feels nearly impossible, and income-driven repayment and forgiveness options either don’t apply or aren’t the right fit, then refinancing with a private lender might be a good option.

When you refinance federal and/or private student loans, you’re given a new — ideally, better — interest rate on a single new private loan. A lower rate translates to total interest savings over the life of the loan. Further, you may be able to lower your monthly payments with a longer term or pay your loan off faster (with higher monthly payments) if you decide to shorten your repayment term.

Recommended: Student Loan Refinancing Calculator

Don’t forget: Refinancing federal student loans with a private lender means you’re no longer eligible for federal repayment programs, forbearance, loan forgiveness programs, and other protections and benefits extended to federal student loan borrowers.

4. Apply for Forbearance or Deferment

If you’re struggling with your loan payments, it might be time to grit down, pick up the phone, and call the loan servicer. Quite a few banks and lenders have forbearance and deferment programs, although they are mostly dependent on the customer reaching out and asking for help.

Federal student loans also offer student loan forbearance and deferment options. Forbearance can allow for decreased or delayed payments for a specific period of time, often up to 12 months.

Some lenders may offer to reduce the interest rate being charged on the debt, but there are no federal guidelines for terms for forbearance agreements across all industries (with the exception of federal student loans).

On the surface, this sounds positive, but be forewarned that these options can significantly affect credit history and credit scores. The effects on credit depend on the type of loan and the lender, and whether forbearance or other payment or rate adjustments are available or chosen.

Here’s to Stability

You’ve paid down whatever you’ve managed so far on your college loans, so what are your plans now? Are you happy with your current interest rates? Do you like your lender and/or servicer?

As you get more established with a financial track record and the start of a career, know that refinancing or consolidating can help either pay things down more quickly or help secure terms that fit where you are in life right now — and where you’d like to be in the near future.

If you’re thinking about refinancing, consider SoFi. SoFi offers a fast, easy online application, competitive rates, and no origination fees.

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

If you’re like many Americans, you’ll need to take out a home mortgage to buy a house. A home of your own will likely be one of the biggest purchases you’ll ever make, and the terms and interest rates you end up paying can have big financial consequences.

That’s why it’s important to do what you can to find the best mortgage rates, from having a healthy credit score to comparing lenders to hitting the negotiating table to find the best deal.

Putting Your Financial House in Order

Before you start shopping for a mortgage, take a look at your credit score. A low credit score may be a signal to lenders that lending to you is risky. Those with a lower credit score may find it difficult to get a mortgage — running into limited options — or may be offered loans with higher interest rates.

Generally speaking, the higher your credit score, the easier it will be to get a mortgage. You may be offered better rates, and you may have an easier time negotiating with different types of mortgage lenders. In general, you’ll need a credit score of 580 to qualify for a Federal Housing Administration (FHA) loan with a low down payment. A conventional loan will typically require a credit score of at least 620, but requirements may vary by lender.

Thankfully, an individual’s credit score isn’t set in stone. Those interested in maintaining a good credit score have a few options. First up is requesting your credit report from the three major credit reporting bureaus: TransUnion®, Experian®, and Equifax®. Review each report for errors and contact the appropriate credit bureau if you spot anything that’s incorrect. Credit reports can be ordered from each of the three credit bureaus annually, for free.

Other strategies for building a credit score include paying down credit cards to lower your credit utilization ratio, and making on-time payments for bills and other loans.

Considering a Bigger Down Payment

As a general rule of thumb, lenders may require borrowers to make a 20% down payment when they buy a home. However, many lenders require much smaller down payments, some as low as 3%. And if you qualify for a VA loan, you may not need a down payment at all.

If a borrower makes a down payment smaller than 20%, their lender may require them to purchase private mortgage insurance that will protect the lender in case the borrower fails to make mortgage payments. A larger down payment could potentially help borrowers avoid paying PMI.

As you’re shopping for mortgages, carefully consider how much money you can afford to put down, as a larger down payment can also have an impact on your interest rate.

Typically, a larger down payment translates into a lower interest rate, because taking on a larger stake in a property signals to lenders that you are less risky to loan money to.

Understanding Fixed-Rate vs. Adjustable Rate Mortgages

When shopping for a mortgage, you will typically be offered one of two main financing options: fixed-rate and adjustable-rate mortgages. The difference between the two lies in how you are charged interest, and depending on your situation, each has its own benefits.

Fixed-Rate Mortgage

A fixed-rate mortgage has an interest rate that stays the same throughout the life of the loan, even if there are big shifts in the overall economy. Borrowers might choose these loans for their stability, predictability, and to potentially lock in a low interest rate. Fixed-rate mortgages shield borrowers from rising interest rates that can make borrowing more expensive.

That said, fixed-rate mortgages may carry slightly higher interest rates than the introductory rates offered by adjustable-rate mortgages. Also, if interest rates drop during the lifetime of the loan, borrowers are not able to take advantage of lower rates that would potentially make borrowing cheaper for them.

Adjustable-Rate Mortgage

Interest rates for adjustable-rate mortgages (ARM) can change over time. Typically ARMs have a low initial interest rate. (One popular ARM is the 5/1 adjustable-rate mortgage, which is fixed for the first five years.

However, as the Federal Reserve raises and lowers interest rates, interest rates may fluctuate. That said, there may be caps on how high the interest rate on a given loan can go.

ARMs don’t provide the same stability that their fixed-rate cousins do, but lower introductory interest rates may translate to savings for borrowers.

Once you have a sense of whether a fixed- versus adjustable-rate mortgage is for you, you can narrow your field and start looking at lenders.

Comparing Lenders

When choosing a lender, start your search online, taking a look at a variety of lenders, including brick-and-mortar banks, credit unions, and online banks. The rates you see on lenders’ websites are typically estimates, but this step can help you get the lay of the land and familiarize yourself with what’s out there.

As you shop for mortgage lenders, consider contacting them directly to get a quote. At this point, the lender will generally have you fill out a loan application and will pull your credit information. Many lenders will do a soft credit pull, which won’t impact a potential borrower’s credit score, to provide an initial quote.

Borrowers can also work with a mortgage broker who can help identify lenders and walk them through any transactions. Be aware that mortgage brokers charge a fee for their services.

Recommended: The Mortgage Loan Process in 11 Steps

Taking Additional Costs into Account

When choosing a home mortgage loan, interest rates aren’t the only cost to factor in. Be sure to ask about points and other fees.

Points are fees that you pay to a lender or a broker that are frequently linked to a loan’s interest rate. For the most part, the lower the interest rate, the more points you’ll pay.

The idea of points may feel a little bit abstract, so when talking to a lender, ask them to quote the points as a dollar amount so you’ll know exactly how much you’ll have to pay.

If you plan to live in a house for the long term, say 10 years or more, you may consider paying more points upfront to keep the cost of interest down over the life of the loan.

Home loans may come with a slew of other fees, including loan origination fees, broker fees, and closing costs. You’ll pay some fees at the beginning of the loan process, such as application and appraisal fees, while closing costs come at the end. Lenders and brokers may be able to give you a fee estimate.

When talking with a lender, ask what each fee includes, since there may be more than one item lumped into one fee. And be sure to ask your lender or broker to explain any fee that you don’t understand.

💡 Recommended: How Much House Can I Afford?

Negotiating

Once you’ve gathered a number of loan options, you can choose the best deal among them. There may also be room to negotiate further. When you send in an application, lenders will send you a loan estimate with details about the cost of the mortgage.

At this point, the loan estimate is not an offer, and borrowers have time to negotiate for better terms. Negotiating points may include asking if interest rates can be reduced and if there are other fees that can be lowered or waived.

A strong credit score or the ability to make a bigger down payment could be leverage. It may also help to let the lender know if you do other business with them.

For example, a bank may waive certain fees if you are already a customer of theirs. Also let lenders know if you have other options that offer better rates. Lenders may try to match or beat competitors’ rates to attract you as a customer.

If you negotiate terms that you are happy with, request that they are set down in writing. Lenders may charge a fee for locking in rates, but it may be worth it to eliminate uncertainty as you settle on the right deal.

As you prepare to buy a home, it’s critical to shop around for lenders that offer the best deals, examine the fine print, and then put matters into your own hands, negotiating the details to settle on the deal that’s right for you.

Visit SoFi Home Loans to learn about home loans with competitive rates and as little as 3% down for qualified buyers. SoFi Mortgage Loan officers can guide you through the mortgage process and specialists are standing by to answer your questions.

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 .

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.

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

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The only time you’d need collateral for a personal loan is if it’s a secured personal loan. Unsecured personal loans — which is what most personal loans are — are only secured by a borrower’s promise to repay the funds, rather than collateral.

But if you do opt for a secured personal loan, whether due to potential for larger loan amounts or more competitive terms, you’ll need an item to put up as collateral. Collateral can include a house, car, boat, and so forth — really, whatever a lender is willing to hold. You may also be able to use investment accounts, cash accounts, or certificates of deposit (CDs) as collateral to get the cash you need.

Secured Loans: Personal Loans With Collateral

Requiring collateral for a personal loan is uncommon, but not unheard of, depending on the type of personal loan you get. Generally, secured loans have more competitive interest rates, larger loan amounts, and more favorable terms.

But if a borrower fails to repay their secured loan, they’ll receive a notice letting them know they’re in default and giving them an opportunity to become current on payments. If the borrower doesn’t pay up, that can lead to loss of the collateral.

There’s a wide range of possibilities when it comes to types of collateral that can be used to secure a personal loan. Some common examples of loan collateral include:

•   Real estate: One option for personal loan collateral is your home or other real estate you own, like an investment property. Even if you don’t fully own your home, you may be able to use the equity you do have as collateral. Just make sure you understand the risk involved — you could lose your home if you’re unable to make payments.

•   Vehicle: You can use a vehicle as collateral when purchasing a car or truck, but some lenders allow you to use the equity in a vehicle to get funds. This may be a better choice than, say, a payday loan. However, you risk losing that vehicle if you can’t make the payments.

•   Bank or investment accounts: You might be able to use a CD or other investment account as collateral. Just know that using these accounts as collateral might prevent you from accessing the funds in the accounts, which is a downside to consider.

Beyond these more standard items, other things that could be used as collateral for a secured personal loan include paychecks, savings accounts, paper investments, fine art, jewelry, collectibles, and more.

Potential Advantages of Secured Loans

If you need to borrow a larger sum of cash, then you might find more success if you put up collateral. A borrower whose credit score isn’t as high as might be required for a riskier unsecured personal loan may find it easier to get approved for a personal loan that’s secured.

Plus, you might receive more favorable rates and/or terms, because the lender has the security of knowing they can possess the collateral if the loan is not paid back. As a personal loan calculator can demonstrate, a lower interest rate can add up to savings quickly.

Downsides of Secured Personal Loans

Perhaps the biggest downside of secured personal loans is that if you fail to make your payments, you could lose the asset that’s securing the loan. Given that houses, investment accounts, and vehicles are common examples of personal loan collateral, that could be a big blow.

Another downside of secured vs. unsecured personal loans is that the application process is generally longer and more involved. This is because the lender needs to assess the asset being put up as loan collateral to verify its value.

Unsecured Personal Loans

As mentioned, unsecured personal loans aren’t backed by collateral. Instead, lenders just need a borrower’s signature promising they’ll pay back funds (as well as a review of their credit history and other financial fitness indicators, of course). Because of this, you may hear unsecured personal loans referred to as signature loans, good faith loans, or character loans.

Student loans are a type of unsecured loan, though they have their own unique terms and repayment options. So are most credit cards, although they tend to have higher rates than what’s typical on an unsecured personal loan.

Potential Advantages of Unsecured Loans

You can typically obtain unsecured personal loans on short notice. If the borrower has sufficient income and a good credit score and history (among other factors), rates can be competitive compared to those of secured loans.

And, of course, with an unsecured personal loan, you wouldn’t be tying up any assets or putting them at risk if you struggle with repayment.

Downsides of Unsecured Loans

Because unsecured loans are riskier for the lender, rates are typically higher than those of secured loans. Additionally, amounts available to borrow are usually smaller.

While it’s true that there isn’t an asset a lender can repossess for nonpayment, lenders can still take action on unpaid unsecured personal loans. Lenders can report the account as in default to the credit bureaus, send the account to collections, and take a borrower to court for nonpayment. This can significantly affect a person’s credit for years to come.

Building or Repairing Credit to Avoid Loan Collateral

If your credit score or credit history is preventing you from getting an unsecured loan, it might make sense to take time to build or repair your credit. This won’t happen instantly, so it won’t be the magic solution if you need a loan now. But if you’d prefer not to put up an asset as collateral, it might be a worthwhile step prior to taking out a personal loan.

Some steps you can take to build or repair your credit include:

•   Pay all existing loans on time, and make sure not to miss any.

•   Get your monthly bills, such as your rent payments or utility bills, added to your credit report by a third-party service.

•   Keep your credit utilization (meaning the total percentage of your available credit you’re using) below 30%.

•   Get caught up on any outstanding balances or past-due debts.

•   Limit applications for new accounts.

Making a Choice: Secured or Unsecured

Whether a secured or unsecured personal loan is right for you depends on your specific need, financial situation, and credit history, among other factors, though the common uses for personal loans apply to both.

If you’re looking for higher borrowing limits and potentially lower rates, or if you know you may not have as strong of an application, an unsecured personal loan could make more sense. Just think carefully about what asset you decide to put down as collateral, as you do need collateral for a loan of this type.

But if you have strong credit and don’t need to borrow as much money, an unsecured personal loan might make sense. That way, you won’t have to worry about loan collateral. Just remember that doesn’t mean you’re off the hook if you don’t repay the loan — lenders can report the defaulted loan, put it in collections, and even take you to court.

Unsecured Personal Loans at SoFi

If you think an unsecured personal loan is the right choice for you, consider a personal loan from SoFi. Because it is an unsecured loan, you won’t need to worry about loan collateral. Plus, SoFi personal loans have low rates. And, if you sign up for autopay, you could save even more.

Plus, at SoFi, unsecured personal loans are available in amounts up to $100,000. You could use funds for credit card consolidation, home improvements, relocation assistance, unexpected medical expenses, major personal purchases, and more.

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.

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 .

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While a person could theoretically use a personal loan to invest, it is generally not a great idea. That’s because there are a number of risks associated with using a personal loan for investment. For one, there’s always the risk that you could lose the money you invest, which could make it challenging to repay the loan. And then there’s the fact that taking on debt to invest involves paying interest. Depending on the rate you qualify for, you could end up paying more in interest than you make in returns from investing.

If you’re considering using personal loans to invest, it’s important to understand the potential downsides. Weigh those against any possible gains to see if it actually makes sense for you.

Can You Use Personal Loans to Invest?

Personal loans allow you to borrow a lump sum of money that you can use for virtually any purpose. Some of the most common uses for personal loans include home improvements, debt consolidation, vehicle purchases, medical bills, and emergency expenses. You can also generally use a personal loan for investing, unless the lender specifies otherwise. While personal loans typically allow for flexibility in how the money can be used, lenders have the option to impose restrictions.

So why would someone use personal loans to invest anyway? There are different reasons for doing so. For some, personal loans for investing could make sense if:

•   They don’t have other cash available to invest.

•   Shifts in the market have created a buying opportunity they’d like to capitalize on.

•   Personal loan interest rates are low compared to the return potential for investments.

•   They can afford to make the payments on a personal loan.

When Using a Personal Loan to Invest Might Make Sense

Ultimately, whether you should consider using personal loans for investing may hinge on your investment goals, timeline for investing, and risk tolerance. There are some situations where it could make sense.

1. You Can Qualify for the Lowest Rates, Based on Credit

One of the most important factors that lenders consider when approving personal loan applications is credit. Specifically, your credit scores and credit reports will come under scrutiny. The higher your credit score, the lower your interest rate on a loan is likely to be. If you’re interested in using personal loans for investments then getting the best rate matters.

Why? While you might be earning returns on your investments, you’re paying some of them back to the lender in the form of loan interest. So it makes sense to angle for the lowest rates possible, which are generally offered to those with good to excellent credit.

2. You May Be Able to Pay the Loan Off Early

Being able to pay the loan off ahead of schedule could help you save money on interest charges. Given those potential savings, think about your budget and what you might realistically be able to afford to pay each month to get the loan paid off early.

But be aware that doing so could trigger a prepayment penalty. While SoFi personal loans don’t have any prepayment penalties, for instance, other lenders may charge them. If you get stuck paying a prepayment penalty that could wipe out any interest savings associated with paying the loan off early.

3. You’re Confident About Your Return Potential

Some financial experts might say that personal loans for investing only make sense when the investments are guaranteed to get a return that outpaces what’s paid in interest on the loan. But trying to predict a stock or exchange-traded fund’s future performance is an inexact science and not a recommended practice.

For that reason, it’s important to consider how confident you are about an investment paying off. This is where you may need to do some research to understand what an investment’s risk/reward profile looks like, how well it’s performed in the past, what’s happening with the market currently, and where it might be headed next.

In other words, you’ll want to perform some due diligence before using loans for investments. Looking at both the upsides and the potential investing risks can help with deciding if you should move forward with your personal loan plans.

When You Might Think Twice About Using Personal Loans for Investing

While there may be some upsides to using personal loans for investments, there are some potential drawbacks to weigh as well. Don’t let your dreams of investing success cloud the realities of the risks involved.

1. You Don’t Qualify for the Best Rates

When using personal loans for investing, the math becomes important, since any interest you pay has to be justified by the returns you earn. Even if you’re investing in something that you’re sure is going to result in a sizable gain, you still have to consider how interest will cut into those gains.

If you don’t have great credit then any returns you realize may be overshadowed by the interest you’re paying to the lender. Before applying for a personal loan, it’s helpful to check your credit reports and scores to see where you stand. This can help you gauge what type of interest rates you’re most likely to qualify for if you do decide to go ahead with a loan.

Also know that the total interest cost increases the longer you pay on the loan. If you’re considering a two-year, three-year, or even five-year repayment term, make sure to keep that in mind.

2. You Have a Lower Risk Tolerance

Investments aren’t risk-free, and some are riskier than others. If you’re taking on debt to invest in the market, you have to be reasonably sure that your investment will pay off. In the meantime, you need to be comfortable with the risk that involves.

The stock market moves in cycles, and volatility can affect stock prices from day to day. So it’s good to understand how you typically react to volatility and what level of risk is acceptable to you before taking out a personal loan. If the idea of being stuck with a loan for an investment that doesn’t pan out isn’t something you can stomach, it may not be right for you.

Likewise, you may want to take a pass on a personal loan if you’d be investing in something that you don’t fully understand or haven’t thoroughly researched.

3. Your Income or Expenses Could Change

Taking out a personal loan means you’re committing to repaying that money. While you might be able to afford the payments now, that may not be true if your income or expenses change down the line.

Something investors might not like to think about, but that is a risk, is the possibility that the market doesn’t perform favorably. What happens if there’s a loss on the investment and you have to find other funds to make the personal loan payments? The reality is, even if the investment doesn’t provide the return that’s expected, the lender will still expect payments on that personal loan.

Before applying for a personal loan, ask yourself whether you’d still be able to keep up with the payments if your income were to decrease, your other expenses were to go up, or the investment didn’t see the return you thought it would. If you don’t have an emergency fund in place, for instance, how would you manage the loan payments? Would you have to sell the investment to make a loan payment? Could you borrow money from friends or family?

Thinking about these kinds of contingencies can help you decide if a personal loan for investing is the best way to go.

What to Consider With Personal Loans for Investing

Before taking out a personal loan for investing, there are a few things to keep in mind. For instance, consider factors like:

•   How much you can afford to pay each month toward a personal loan

•   How much you need or want to borrow

•   What the current personal loan interest rates are

•   Which rates you’re most likely to qualify for based on your credit history

•   Any fees a lender may charge, such as origination fees or application fees

•   Whether you’ll be able to repay the loan early and if so, what prepayment penalty might be involved

Beyond credit scores, also consider what else is needed to get approved for a personal loan. For instance, lenders may look at your debt-to-income ratio, employment history, and intended use for the loan proceeds.

Also think about how you want to invest the money. If you’re interested in trading stocks or ETFs, for example, you may want to choose an online brokerage that charges $0 commission fees for those trades. The fewer fees you pay to your brokerage, the more of your investment returns you get to keep.

The Takeaway

Using personal loans for investments carries some definite risks. It’s a strategy to steer clear of if you don’t qualify for the best rate on your loan, you have a lower risk tolerance, or your income or expenses could change down the road. Only in select circumstances could it make sense — though remember there’s no guarantee of any investment returns.

As such, personal loans are likely better left for other purposes, such as covering emergency expenses or making necessary home repairs. If you are considering getting a personal loan, make sure to shop around to find the right offer. Personal loans from SoFi, for instance, offer competitive interest rates.

Photo credit: iStock/jacoblund

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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