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.
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 You can customize the payment amount to be withdrawn on its own, and there can be a discount for doing so.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.
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.
Prequalify for a refinance loan with SoFi today.
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.
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.
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.
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.
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.
Interested in a home mortgage loan? Take the first step and research your rate!
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.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
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.
Awarded Best Online Personal Loan by NerdWallet.
Apply Online, Same Day Funding
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.
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 .
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.
Awarded Best Online Personal Loan by NerdWallet.
Apply Online, Same Day Funding
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.
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.
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 Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.
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.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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.
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.
