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.
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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.
Check out an unsecured personal loan from SoFi today.
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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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.
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.
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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.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Whether you’ve been turned down for a private student loan or you’re applying for the first time, it’s important to understand how a cosigner can impact your loan application.
Having a cosigner on a student loan is a bit like a letter of recommendation to get into college. A cosigner can reassure the bank or lender that you are capable of repaying the loan. A cosigner is not always required for student loans, such as with most federal student loans. Depending on a student’s financial history, employment, and what type of loans they’re applying for, the likelihood of requiring a cosigner will vary.
Read on to learn more about what a cosigner is and when it may make sense to add one to your student loan application. This article will also discuss some of the risks involved with being a cosigner, and some tips on how to ask someone to be a cosigner on a student loan.
What Is a Student Loan Cosigner?
A cosigner is a person who agrees to repay the loan if a borrower defaults or is otherwise unable to pay their debt. Adding a cosigner to a student loan application could help the primary borrower secure a lower interest rate, depending on the cosigner’s financial and credit history.
When a cosigner takes on a student loan with the borrower, they’re assuming equal responsibility to repay the loan. Any negative actions on the loan, such as a late payment or defaulting, could harm the cosigner’s credit.
How to Decide If You Need a Cosigner on a Private Student Loan
Before deciding whether you need a cosigner on a private student loan, you’ll want to fill out the Free Application for Federal Student Aid (FAFSA®). This will determine how much aid you’ll receive, and help you and your family determine how much of a gap you’ll need to fill with other sources of funding.
Once all other options are exhausted, students could look into private student loans and consider a cosigner. When considering a cosigner, there are several factors to evaluate, including the type of loan you’ll be applying for, your credit history, credit score, income, and any history of missed payments. Continue reading for a more in-depth discussion of these factors.
1. What Type of Student Loans Are Being Considered?
The type of loans you’re applying for may affect your need for a cosigner.
Federal Student Loans
For the most part, federal loans do not require a credit check or a cosigner. The federal loan types that do not require a cosigner include:
• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct Consolidation Loans
The exception is a Direct PLUS Loan, which does require a credit check. Borrowers interested in a Direct PLUS Loan may need an “endorser” for the same reasons they may need a cosigner for a private student loan: if their credit history and other financial factors are lacking.
A Direct PLUS Loan can help graduate students and parents of undergraduate students pay for the entire cost of school attendance, minus any other financial aid. Direct PLUS Loans are the only federal student loans that look at an applicant’s credit history, thus the potential need for an endorser.
An endorser is the equivalent of a cosigner — they agree to repay the Direct PLUS Loan if the borrower defaults or is delinquent on payments.
Private Student Loans
If an applicant doesn’t meet the lending requirements on their own, they might need a cosigner to obtain any private student loan. To qualify for a private student loan, you typically have to check more boxes regarding financial history than you would for a federal student loan.
According to a report by MeasureOne, 92% of private undergraduate student loans and nearly 66% of private graduate student loans originated in the 2021-2022 school year had a cosigner. Based on this, it is more likely than not that a student will add a cosigner on their private student loan application.
Both Federal and Private Student Loans
Once a student has a full understanding of the financial aid they qualify for after submitting their FAFSA, they can determine if federal student loans and other federal aid like scholarships and grants will cover the cost of their education or if they need to supplement the amount with a private student loan. While the borrower might not need a cosigner for federal loans, they might require one for private student loans they might take out.
2. Are You an Undergraduate or Graduate Student?
The necessity of a cosigner may vary depending on whether a person is applying for graduate or undergraduate private student loans.
Undergraduate Student
Undergraduates are generally more likely to need a cosigner on their private student loans. That’s because undergraduates typically haven’t established a lengthy credit history. Without an established credit history, there is no track record for lenders to evaluate. In addition, undergrads might not have a steady income, which can also affect whether they are approved for a loan without a cosigner.
Graduate Student
The type of schooling a person is pursuing won’t have an impact on the need for a cosigner. However, a person’s credit history and income will still factor into the decision.
3. How Does Your Credit Score Factor into the Decision?
Most private lenders will look at an applicant’s credit score (among other factors) to determine eligibility. Having a lower credit score may make it more challenging to get a loan without a cosigner.
FICO® Scores (the most common credit scores used by lenders and financial institutions) range between 300 and 850. If a person wants to check their score, many websites offer free credit scores or credit score monitoring (just be sure to read terms and conditions carefully).
It’s possible to get a free credit report annually from AnnualCreditReport.com. It is important to note that this is not the only site where someone can request a free credit report. For example, they can get their credit report directly through the credit bureaus or on other online sites.
Ultimately, it’s up to each individual lender to consider the credit score and other financial factors before approving a loan, and every lender has different criteria.
4. How Long Is Your Credit History?
A person’s credit history gives lenders a sense of their ability to pay on time, or ability to pay off debt in full. The length of a person’s credit history makes up about 15% of their FICO® Score.
Length of credit history is determined by Average Age of Accounts (AAoA). Lenders take the lifespan of a person’s accounts and divide by the number of accounts that person holds. A potential borrower can determine this number by figuring out how long they’ve had each account in their credit history, then dividing by the number of accounts.
The real sweet spot for credit history comes at the seven-year mark. From that point, early negative marks on accounts might have faded away. It shows lenders that a borrower can pay loans and maintain accounts over time.
There are a number of factors at play in lending decisions, but a short credit history could mean that adding a cosigner is beneficial.
5. What Is Your Employment Status?
Lenders want to be sure that you can repay your debts, so they’ll generally also evaluate an applicant’s income.
Employed Full-Time
Generally, if a person is employed full time at a salaried job, it shows lenders they have the capability to repay the loan they’re borrowing. Lending requirements vary based on the lender, but having an established income history may help an applicant avoid needing a cosigner.
Employed Part-Time
While part-time employment can still be beneficial for a loan application, it’s possible that a cosigner might help boost the application. The applicant’s debt-to-income ratio will come into play — that is, how much debt a person owes (credit cards, rent, other bills) divided by the income they earn before taxes and other deductions.
Of course, all lender requirements vary, but significant, consistent income can factor into whether the applicant will still need a cosigner.
Only a Student (Not Employed)
If an applicant is not employed, lenders may be more inclined to approve a loan if there’s a cosigner who is able to show stable income.
6. Have You Ever Declared Bankruptcy?
Lenders can and do consider all aspects of a person’s financial history before granting a loan, bankruptcy included. Declaring bankruptcy negatively affects a person’s credit score, which private lenders pay close attention to with a loan application. A bankruptcy filing can stay on a person’s credit history for a decade.
Bankruptcy filings can affect a credit score in a number of ways, and depending on how long ago it took place, the effects on a person’s score will vary.
7. Have You Defaulted on a Loan?
The terms of each loan are different, but after a period of nonpayment, the loan enters default. Defaulting on a loan stays with a person’s credit history for at least seven years and typically negatively affects their credit score.
If a person has defaulted on a previous loan, they’ll likely need a cosigner on their student loan to potentially bolster their lend-ability.
8. Have You Ever Missed a Payment?
On-time payments each month can help show lenders that a person is a responsible borrower. Missing payments or consistently making late payments can have a negative impact on a person’s credit score. Payment history accounts for approximately 35% of an individual’s FICO® Score.
Consistently missing payments that have affected a person’s FICO® Score might cause a potential lender to require a cosigner. It could also cause concern for a potential cosigner, so students might want to keep that in mind.
A solid history of on-time payments shows a lender that a person is a responsible candidate for a loan and might not need a cosigner.
Choosing a Cosigner
As stated near the beginning of this post, the majority of private student loan borrowers have a cosigner. But not all cosigners are built the same, and choosing the right person to cosign a loan could be as important as the terms of the loan itself.
A cosigner should not only have a strong financial history, but also a strong relationship with the applicant. A cosigner might be a parent or blood relation, but they don’t have to be. A cosigner ideally has a stable financial history and a relationship to the applicant where they feel comfortable discussing money.
Asking Someone to Be a Cosigner
There’s a common misconception that cosigning on a loan is as easy as signing a contract, but it actually means more than that. When a person asks someone to be their cosigner, they shouldn’t shy away from discussing the challenging topic.
It may make sense to talk about worst-case scenarios with a cosigner, and make it clear it would be their responsibility to take on the payments if you default. Discuss how you could repay the cosigner in the event that you can’t make payments.
Risks of Cosigning
Beyond the worst-case-scenario discussion, cosigners should know the additional risks they take on when cosigning a student loan:
• Credit score. Cosigning a loan will affect a person’s credit score, since they’re taking on the debt as well. Even if the borrower makes on-time payments and doesn’t default, the cosigner will see a change in their credit score by taking on the additional debt. It could potentially benefit their score.
• Liability. If the borrower defaults on the loan, it becomes the cosigner’s responsibility to pay for it. A lender can come to collect from the cosigner, seizing assets and garnishing paychecks to cover missed payments.
However, the cosigner doesn’t need to stay tied to the loan forever. Private student loans may have a cosigner release policy in place. After a duration of on-time payments and additional paperwork, a lender may release the cosigner from the loan, leaving the borrower on their own.
It might sound easy, but a cosigner release isn’t a guarantee and not all private loans will offer this option. Read the terms of your loan carefully to understand the requirements for cosigner release.
The Takeaway
Like every college application, each loan application is a little different. Certain aspects of a person’s credit history or employment might make them more compelling to a lender. Other elements, like late payments or a limited credit history, might make a person less compelling to lend to.
Adding a cosigner to a private student loan is common and can improve your chance of approval, sometimes even with a lower interest rate than if you applied on your own.
If a student has exhausted all of their federal student loan options, private student loans could be an option worth considering.
SoFi offers private student loans with no origination fees, no late fees, and no insufficient fund fees. Plus, SoFi offers flexible repayment options to help students find the loan that fits their budget.
Learn more about private student loans with SoFi.
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.
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A Minsky moment is an economic term describing a period of optimism that ends with a market crash. It describes the point at which a market boom marked by speculative trading and increasing debt suddenly gives way to a freefall marked by plunging market sentiment, asset values, and economic activity.
It is named for American economist Hyman Minsky, who studied the characteristics of financial crises, and whose “financial instability hypothesis” offered reasons why financial markets were and would be inherently unstable. Minsky died in 1996, and the phrase “Minsky moment” was coined in 1998, when a portfolio manager used it in reference to the 1997 Asian debt crisis, which was widely blamed on currency speculators.
How Does a Minsky Moment Happen?
A Minsky Moment refers to something sudden, though the economist maintained that it doesn’t arise all at once. He identified three stages by which a market builds up to the convoluted speculation and complete instability that finally undoes even the longest bull markets.
1. The Hedge Phase: This often comes in the wake of a market collapse. In this phase, both banks and borrowers are cautious. Banks only lend to borrowers with income to cover the principal of the loan and interest payments; and borrowers are wary of taking on more debt than they’re highly confident they can repay entirely.
2. Speculative Borrowing Phase: As economic conditions improve, debts are repaid and confidence rises. Banks become willing to make loans to borrowers who can afford to pay the interest but not the principal, but the bank and the borrower don’t worry because most of these loans are for assets — stocks, real estate and so on — that are appreciating in value. The banks are also betting that interest rates won’t go up.
3. The Ponzi Phase: The third and final phase leading up to the Minsky Moment is named for the iconic fraudster Charles Ponzi. Ponzi invented a scheme that offers fake investments, and gathers new investors based on the returns earned by the original investors. It pays the first investors from new investments, and so on, until it collapses.
In Minsky’s theory, the Ponzi phase arrives when confident borrowers and lenders graduate to a new level of risk-taking and speculation: when lenders lend to borrowers without enough cash flow to cover the principal payments or the interest payments. They do so in the expectation that the underlying assets will continue rising, allowing the borrower to sell those assets at prices high enough for them to cover their debt.
The longer the growth swing in the market, the more debt investors take on. While those investments are still rising and generating returns, the borrowers can use that money to pay off the debt and the interest payments. But assets eventually go down in value, in any market, even just for a while.
At this point, the investors are relying on the growth of those assets to repay the loans they’ve taken out to buy them. Any interruption of that growth means they can’t repay the debt they’ve taken on. That’s when the lenders call in the loans. And the borrowers have to sell their assets — at any price — to repay the lenders. When there are thousands of investors doing this at the same time, the values of the underlying assets plummet. This is the Minsky moment.
In addition to plunging prices, a Minsky moment is usually accompanied by a steep drop in market-wide liquidity. That lack of liquidity can stop the daily functioning of the economy, and it’s the part of these crises that causes central banks to intervene as a lender of last resort.
The Minsky Moment and the 2008 Subprime Mortgage Crisis
The 2008 subprime mortgage crisis offered a very clear and relatable example of this kind of escalation, as many people borrowed money to buy homes they couldn’t afford. They did so believing that the property value would go up fast enough that they could flip the house to cover their borrowing costs, while earning a tidy profit.
Minsky theorized that a lengthy economic growth cycle tends to generate an outsized increase in market speculation. But that accelerating speculation is often funded by large amounts of debt on the part of both large and small investors. And that tends to increase market instability and the likelihood of sudden, catastrophic collapse.
Accordingly, the 2008 financial crisis was marked by a sudden drop and downward momentum fueled investors selling assets to cover short-term debts. Some of those included margin calls, which are when an investor is forced to sell securities to cover the collateral needed to borrow money from a brokerage.
How to Predict the Next Minsky Moment
While Hyman Minsky provided a framework of the three escalating phases that lead up to a market collapse, there’s no way to tell how long each phase will last. Using its framework can help investors understand where they are in a broader economic cycle, but people will disagree on how much debt is too much, or the point at which speculation threatens the stability of the markets.
Most recently, market-watchers keep an eye on the high rates of corporate debt in trying to detect a coming Minsky moment. And even the International Monetary Fund has sounded warning bells over high debt levels, alongside slowing growth around the planet.
But other authorities have warned of other Minsky moments over the years that haven’t necessarily happened. It calls to mind the old joke: “The stock market has forecast nine of the last five recessions.”
The Takeaway
A Minsky moment is named after an economist who described the way that markets overheat and collapse. And the concept can help investors understand where they are in a market cycle. It’s a somewhat high-level concept, but it can be useful to know what the term references.
There’s also a framework that may help investors predict, or at least keep an eye out for, the next Minsky moment. That said, nobody knows what the future holds, so that’s important to keep in mind.
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Having roommates can be a great way to reduce your monthly living expenses. It can also mean living in a bigger apartment or a nicer area than you could otherwise afford.
But negotiating finances with friends (or strangers) also comes with potential pitfalls, especially if you have roommates who don’t always pay what they owe, when they owe it.
Luckily, whether you already won the roommate lottery or are just trying to make the best of living with someone you barely know, figuring out how to share roommate expenses doesn’t have to be hard.
What follows are tips for splitting expenses with roommates so that everyone feels like things are fair in your household.
Managing Money With Roommates
These 25 strategies can help ensure that monthly expenses get divvied up fairly — and everyone is on the same page from the moment you first move in together.
1. Making Decisions Together
Whether you and a friend are moving in together for the first time or you already live together and you’re bringing in someone new, it can be helpful if you decide as a group how you’re going to handle finances. You might consider having a meeting right away to establish how you’ll be splitting costs.
2. Making a List of What You Both Own
Before moving in together, you and your roommates may want to make a list of what you both already own and can bring to the apartment for communal use. For example, if your roommate has a stand mixer and you have a nice collection of baking pans, that can be a useful combination. If you can contribute a couch, your roommate might be able to find a kitchen table.
3. Figuring Out How You’ll Split Monthly Expenses
Many roommates find that part of sharing a household might mean sharing more than just rent and utility bills. You may want to consider sitting down with your roomies to figure out what monthly expenses beyond rent and utilities will be shared and how you will split up these costs. This may include cable, wifi, and any subscription services like video streaming.
4. Splitting Costs Evenly…
Since it can be difficult to determine who used a certain amount of electricity or watched the most Netflix, it could make sense to simply split costs down the middle (or evenly among roommates). That can save a lot of time and energy and could be the most fair arrangement.
5. …Or Splitting By Percentage of Use
If you or your roommate uses certain utilities or services significantly more than other members of the household, you might want to consider splitting by percentage of use. For instance, perhaps your roommate is a photographer and is always plugging in lights to take photos, and maybe you’re only home four days a week. A percentage is more complicated, but could be more fair.
To streamline bill paying (and make sure no bills end up falling through the cracks), it can be wise to put one person in charge of actually paying the bills. You may want to designate that person from the get-go, and then everyone else can send this person the money before the bills are due every month.
7. Keeping a Written Document of Expenses
Whether you split each cost evenly, or by a percentage of use, it can make sense to write down each person’s share of expenses and what they can roughly expect to pay each month — so no one is blindsided when it comes time to pay the bills.
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8. Figuring Out How to Divide Household Supplies
Once you have the details of the non-negotiable bills nailed down, you may want to next look at how you want to manage the cost of household supplies.
For example, while some roommates don’t mind toting their own roll of toilet paper into the bathroom, many find that it is easier and more economical to split the cost of a bulk package.
9. Deciding Whether to Share Groceries
Even if you have different tastes in food and purchase the most of your groceries separately, you may find that sharing basics, like gallons of milk, coffee, and juice, even bags of rice or quinoa, may be more economical. If you cook meals together, you may want to go in on even more weekly groceries to help save money on food.
10. Keeping Some Purchases Separate
Just because you plan to share a couch doesn’t mean you need to share the bill. While it may seem sensible to split the cost of furnishings and electronics for your rental, you may also want to consider what will happen when your lease is up.
Unless you and your roommates plan on selling everything when the time comes to move out (and splitting the proceeds), paying for things separately can make things simpler in the end.
If you and your roommate have agreed to buy groceries or other items together, you may also want to discuss a monthly budget before you start making household purchases.
You might be fine with generic toilet paper, while your roommate wants to spring for the expensive name-brand stuff. Getting on the same page about how much you’ll spend each month on communal items can help avoid money squabbles later.
💡 Quick Tip: If you’re creating a budget, try the 50/30/20 budget rule. Allocate 50% of your after-tax income to the “needs” of life, like living expenses and debt. Spend 30% on wants, and then save the remaining 20% towards saving for your long-term goals.
12. Finding an Easy Way to Track Expenses
You might give one roommate the responsibility for keeping track of your expenses and how much each roommate owes, as well as logging who paid what and when. They could do this on a spreadsheet or through an app. That way, each person will know exactly how much they owe, as well as what they’ve already paid.
13. Deciding How You Will Pay Each Other
Gone are the days of writing checks or going to the ATM to reimburse roommates for rent and other expenses. With all the peer-to-peer money transfer options now available, you can quickly and easily pay each other without cash.
You may want to sit down with your roommates and decide which app you’re going to utilize, make sure everyone has it downloaded to their phones, and then use it to reimburse each other.
14. Drafting a Roommate Agreement
When you first move in with a roommate, or when another roommate is moving in, you might want to create a roommate agreement that is separate from the rental contract you have with your landlord.
The agreement could spell out all the financials, such as how you will split costs, as well as some basic ground rules, such as parking and having guests over.
15. Setting Consequences for Failure to Pay Your Share
Nobody wants to be the bad guy, but if a roommate isn’t paying their share of expenses, you may want to make sure that there are some consequences.
For instance, you could agree (and even include this in your “roommate agreement”) that if a roommate doesn’t pay the bills on time once, they would take on all the household chores until they can pay, and if they fail to pay a second time, they would need to to leave the rental.
16. Making Late Payers Cover Late Fees
You may want to make it clear that If one roommate is late with their payment and, as a result, triggers a late fee or penalty, then that person would be responsible for paying those additional charges. (You may also want to make this rule clear in your “roommate agreement.”)
It can be a good idea to also discuss who will be responsible for covering the cost of any unexpected expenses, such as damage to your rental.
You might agree (and put in your agreement), for example, that whoever is responsible for any damages must pay for them. That way, if your roommate’s dog chews up the door frame, it would be up to them to pay for the repairs.
18. Splitting the Security Deposit
It often makes sense to have all the roommates contribute to the security deposit. That way, they will all be equally invested in keeping the place nice so that they get their portion of it back upon moving out.
19. Sharing Expenses for Get-Togethers
Get-togethers like BBQs and Super Bowl parties can be great bonding experiences for roommates and their friends. When having one of these events, all the roommates can chip in so that the celebration is fun, as well as affordable.
💡 Quick Tip: When you feel the urge to buy something that isn’t in your budget, try the 30-day rule. Make a note of the item in your calendar for 30 days into the future. When the date rolls around, there’s a good chance the “gotta have it” feeling will have subsided.
20. Having Monthly Meetings
Roommates that don’t communicate effectively can become resentful and end up disliking each other. By having monthly meetings to discuss finances and other issues, everyone has a chance to air their grievances and figure out solutions for problems going forward.
21. Avoiding Passive-Aggressive Notes
It can be tough to live with roommates and deal with all their quirks, especially when it comes to money. But even if someone is late paying a bill or otherwise not doing their fair share, posting notes can end up creating hostility.
You may be able to resolve the situation more effectively by being direct and honest with each other either in a one-on-one or monthly roommate meeting.
22. Not Laying Out Money for Bills Until Everyone Has Given Their Portion
If you are responsible for paying the bills, you may find that it’s easier to pay them with your money and then collect from your roommates later. However, this can put you in a bad position if your roommates take their time in paying you back.
Instead, you might want to set a rule that you will only pay the bills once your roommates have given you their share.
23. Discussing Ways to Save Money
If utility bills or other shared expenses are on the high side, you may want to sit down with your roommates and talk about some ways to cut expenses and save money. You might decide, for example, to invest in energy-saving light bulbs you can turn off using an app or get rid of one or two streaming services.
24. Finding Coupons Together
You can make saving money a group activity with your roommates. Every week, before you go shopping, you can all look for coupons to use at the store on sites like Coupons.com and SmartSource.
25. Choosing Responsible Roommates
When vetting potential roommates, it can be helpful to discuss some of the expense-sharing ideas listed here. If they are open and amenable to sharing expenses equitably, you should have very few issues when it comes to splitting costs.
You may also want to make sure any potential roomies have a steady income, good referrals, and a solid credit score, as this can indicate they tend to be responsible with money.
The Takeaway
While roommates come with many benefits, sharing a space — and expenses — with other people isn’t always easy.
Being open about finances and setting some ground rules from the get-go, however, can help ensure that everyone contributes their fair share and all your bills get paid on time.
Using technology and smart money management resources can also make it easier to track and share expenses with your roommates.
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