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A personal loan is a flexible type of loan issued by a bank, credit union, or online lender that you pay back in regular, fixed payments over a set term.

Personal loans work a little differently than other types of loans. Consumer loans typically specify what the money should be spent on: Mortgages are used to purchase or refinance homes, and student loans are used to pay for an education. But there aren’t as many restrictions on how you can or can’t spend personal loan funds, which allows for more flexibility than other types of loans.

Read on to learn more about how personal loans work, including how much you can borrow, how to apply, and the different types of personal loans.

What Is a Personal Loan?

As mentioned before, a personal loan is a one-time lump sum you borrow from a bank or other financial institution and repay over time, usually with interest. The funds can be used for almost anything.

Loan amounts generally range from $1,000 to $50,000, though some lenders offer personal loans up to $100,000. Repayment terms are usually anywhere from two to seven years.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

How Do Personal Loans Work?

Personal loans are typically unsecured loans (meaning you don’t have to pledge an asset to secure the loan) that provide you with money you then pay back in regular installments over the term of the loan.

How Do You Get the Money?

The first step is applying for a personal loan (more on that below). After loan approval, the lender typically deposits the loan proceeds directly into the borrower’s bank account.

Repaying a Personal Loan

You repay a personal loan in monthly installments that go toward both principal and interest.

Typically, personal loans are amortized. This means the total amount you owe is divided into equal monthly payments over the term of the loan. Even though the total monthly payment remains the same, the amounts being directed to principal and interest will change each month. An amortization schedule can show you exactly how much of your payment is going towards paying down the principal and how much is being paid in interest.

Personal loans with longer terms may offer lower monthly payments, but cost more in interest over the life of the loan. A shorter-term personal loan can have higher monthly payments, but cost less overall in interest.

How Personal Loan Interest Rates Work

The interest rate on a personal loan is determined by the lender and is based on a number of factors, including the applicant’s financial history, income, debt, and credit score. Generally speaking, the better an applicant’s credit score, the better the chance they have to receive a lower interest rate on the loan. The higher the interest rate, the more money the loan will cost over its term.

Personal Loan Uses

Personal loans can be used for just about anything. That said, there are some common reasons people take out different types of personal loans, including:

•   Debt management and consolidation

•   Home improvement expenses

•   Wedding costs

•   Unexpected medical expenses

•   Moving expenses

•   Funeral expenses

•   Family planning

•   Car repairs

•   Vacation

The Personal Loan Application Process

While it’s not as simple as walking into a bank, asking for a loan, and walking out with a check, the application process for personal loans is relatively easy.

Before you apply for a personal loan, you’ll want to consider how much money you want to borrow, how much you can afford to pay each month, how long you want to make payments, and whether or not you want to put up collateral (though less common, some lenders offer secured personal loans). There may be other considerations for specific financial circumstances, which can vary from person to person.

Checking Your Own Credit

Because lenders will be looking closely at your creditworthiness, it’s a good idea to give your financial health a check-up before you begin the application process. You can get a free copy of your credit reports from the three main consumer credit bureaus — Equifax, Experian, and TransUnion — for free at AnnualCreditReport.com.

Once you get your reports, it’s a good idea to review them carefully and report for any errors. Correcting anything that isn’t accurate means your credit report will look as good as possible to lenders.

Comparing Loans

Just like shopping around for the best prices before making a large purchase, comparing lenders’ rates and terms is a smart move before the application process actually begins.

Here are some things to look for when researching lenders:

•   How much do they lend on personal loans? If the amount you need to borrow doesn’t fall within the range offered by the lender, you may need to look elsewhere.

•   Do they charge any fees or penalties? Some lenders charge an origination fee equal to a percentage of the loan amount to process your application. Some personal loans also have a prepayment penalty if you pay off your loan ahead of schedule.

•   How are fees and penalties charged? Some lenders may roll any fees into the loan amount, which increases the total amount you’ll owe. Other lenders may deduct the fee amounts from the loan proceeds, so the amount you receive will be lower than the actual amount of the loan.

•   Can I get prequalified so I’ll know what interest rate they might offer me? Prequalification involves the lender doing a soft pull on your credit report, which will not affect your credit score. This step will give the lender a sneak peek at your financial history so they can give you an estimated interest rate. Going through this process with multiple lenders is one way to compare rates and terms you may qualify for.

•   What if I can’t make my loan payments due to financial hardship? Missed or late payments could result in late fees, affect your credit score, or lead to your account being sent to collections. Some lenders may offer protections for borrowers who have lost their job or are having difficulty making their payments for other reasons.

Applying for a Loan

When you’ve selected a lender, it’s time to submit the actual application. For an unsecured personal loan, lenders typically require:

•   A photo ID

•   Proof of address

•   Proof of income or employment

Each lender has different requirements, though, so it’s important to carefully read and follow the lender’s application instructions. At this stage, the lender will usually do a hard credit check, which can have a small and temporary negative affect on your credit score.

Waiting for Approval

Once you’ve submitted the application and all required documents, it’s time to play the waiting game. Rest easy, though, because some personal loan approvals happen quickly — sometimes in just a day. More complicated applications could take a week or more.

Personal loans can range anywhere from $1,000 to $100,000, depending on the lender. Once you apply and are approved for the loan, you’ll receive the amount of money you were approved for in a lump sum, minus any origination fees that some lenders may charge. You then start paying back that money in installments which are set by the specific terms of your loan.

Types of Personal Loans

There are a variety of different types of personal loans. Factors like how much money you plan to borrow, your credit and financial history, and how much debt you already have will influence which type of personal loan is right for you. Here’s a look at some common personal loan options.

Unsecured vs Secured Personal Loans

An unsecured personal loan is the most common type of personal loan. Unsecured means the loan is not backed by collateral, like a house or car. The approval and interest rate you receive on an unsecured personal loan is mostly based on your creditworthiness.

Secured personal loans require an asset to be pledged to “secure” the loan. Think of a house when it comes to a mortgage loan, or a car when it comes to a car loan. If you fail to repay your loan, the lender can then seize the collateral.

Some banks offer secured personal loans that allow you to borrow against the equity of your car, personal savings, or other assets. Since secured loans are backed by an asset that the lender can seize if you default on the loan, they generally have a lower interest rate than an unsecured personal loan.

Here’s a look at some pros and cons of unsecured and secured personal loans:

	Unsecured Personal Loans	Secured Personal Loans
Advantages	Funds may be disbursed the same day or within a week Interest rates are typically lower compared to credit cards No collateral required	Interest rates are typically lower compared to unsecured personal loans Can be a good way to improve credit if payments are regular and on time Tend to have a longer repayment period
Disadvantages	May need to meet minimum credit score requirements for approval Interest rates may be higher compared to secured personal loans Credit score may be negatively affected if borrower defaults	Collateral is required Lender can seize the collateral if borrower defaults Application and approval process may involves more steps

Fixed-Rate vs Variable-Rate Personal Loans

Most personal loans are typically fixed-rate loans, meaning your rate and monthly payment stay the same (or are fixed) for the life of the loan. Fixed-rate loans can make sense if you’re looking for something with consistent payments each month. A fixed-rate loan is also worth considering if you are concerned about rising interest rates on longer-term personal loans.

As the name suggests, the interest rate on a variable-rate loan can fluctuate over the life of the loan. Interest rates on this type of loan are tied to benchmark rates or indexes. Based on how the benchmark rate or index changes, the interest rate on a variable-rate loan will also change, directly affecting your monthly payment.

Generally, variable-rate loans carry lower annual percentage rates (APRs) and some have limits on how much the interest rate can rise or lower over a specific period, or even over the life of the loan. A variable-rate loan could be a good choice if you are taking out a small amount of money with a short repayment term.

Here are some pros and cons of variable-rate personal loans and fixed-rate personal loans. Choosing between variable vs. fixed rates will come down to personal preference and what you are approved for.

	Variable-Rate Personal Loans	Fixed-Rate Personal Loans
Advantages	Loans often start out with a lower interest rate compared to fixed-rate loans If benchmark rate goes down, interest rate on the loan also goes down Flexible	Monthly payments are consistent Can avoid rising interest rates Easy to understand
Disadvantages	If benchmark rises, the cost of the loan also rises Borrowers have a greater risk of defaulting on loan if the interest rate increases significantly As interest rates change, so will the monthly payment	Won’t be able to take advantage of changes in interest rates Interest rates tend to be higher compared to variable-rate loans May pay more over time if you took out your loan when interest rates were high

Small vs Large Personal Loans

Just as personal loans are taken out for a variety of reasons, the dollar amount borrowed can vary, too.

A small personal loan, which is generally for $3,000 or less, typically has a lower APR than other types of short-term debt, such as payday loans. Many banks and other financial institutions have limits on the minimum amount they’ll lend. Some credit unions may offer alternatives to payday loans in an effort to help their members save money and avoid being stuck in a cycle of debt.

A large personal loan might be used to pay for major expenses such as home repair or remodeling, medical expenses, or an expensive life event, such as a wedding. Some lenders offer personal loans up to $100,000.

It’s important to keep in mind your ability to repay the loan when deciding how much to borrow. Here’s how small and large loans compare:

	Small Personal Loan	Large Personal Loans
Advantages	Can use the money for a wide variety of purposes Interest rates are typically lower compared to credit cards Usually has better terms than payday loans	Can use the money for a wide variety of purposes Greater ability to combine multiple credit card balances into one balance Can be a good way to improve credit if payments are regular and on time
Disadvantages	Can often get a better interest rate with a larger loan No grace period Lenders may limit how much you can borrow	The larger the loan, the more debt you’re taking on Increases your debt-to-income ratio Lenders may limit how much you can borrow

What Personal Loan Lenders Look at in Your Application

When you apply for a loan, the lender typically considers your credit score, debt-to-income (DTI) ratio, and other factors.

Credit Score

A person’s credit score shows lenders what the theoretical likelihood of that person paying back a loan would be. Generally, the lower a person’s credit score, the more of a risk they are assumed to be. Conversely, the higher a person’s credit score, the lower a risk they are assumed to be — and the more likely they are to be approved for lower interest rates and higher loan amounts.

Debt-to-Income Ratio

Your DTI is a percentage that tells lenders how much money you spend on monthly debt payments versus how much money you have coming into your household. You can calculate your DTI by adding up your monthly minimum debt payments and dividing it by your monthly pretax income.

Lenders generally want to see a DTI of 35% to 40% or less but may make exceptions if you have good credit.

Credit History

Lenders will review your credit report for anything that might stand out as a risk for them. If there are a high number of inquiries on your credit report or if there were multiple debt accounts opened in a short time period, that might indicate high risk to a lender. Borrowers who are considered high risk may find it more difficult to get a loan and could pay higher interest rates.

Deciding If a Personal Loan Is Right for You

Not sure whether a personal loan makes sense for your situation? Here are some questions to ask yourself:

•   Do I need the money quickly? If you do, then a personal loan might be a smart move.

•   Can I afford the monthly payments? Before you take on any debt, it’s important to set a realistic plan on how you’ll repay what you owe.

•   Do I already have a high amount of debt? Taking out a personal loan when you have significant debt can put a serious dent in your budget and savings goals. It can also increase your DTI, which lenders look at when reviewing your loan application.

•   Do I have a “bad” credit score? If your credit score isn’t so great — FICO defines “bad” as 579 or below — then you may want to wait on taking out a loan and instead work on your credit.

•   Does a personal loan offer the lowest interest rate of all the options available? It’s a good idea to shop around for the rate and terms that best fit your needs before you apply with a lender.

Recommended: Personal Loan Calculator

Alternatives to Personal Loans

There may be times when you need help covering a big expense, but taking out a personal loan isn’t the best choice. Fortunately, there are alternative funding options. Here are a few you may want to explore:

Credit Cards

Like personal loans, credit cards offer a line of credit that can be used for a wide range of purposes. You may want to consider using a credit card if you have a smaller expense that you can pay off quickly.

Home Equity Line of Credit

If you own your home and have at least 20% equity, you may be able to get a home equity line of credit (HELOC). This option could be a smart move if you need to borrow a large amount of money or plan on having ongoing expenses, like those with a remodeling project.

401(k) Loan

If you have a financial emergency or want to pay off high-interest debt — and no other option is available — then you may want to consider borrowing from your 401(k). Keep in mind that you may face taxes and penalties when you withdraw the money, so be sure you understand how your plan works and what it allows.


💡 Quick Tip: While HELOCs may require an appraisal before you get approved, a SoFi home improvement loan does not. That means you can get approved and funded the same day.^*

The Takeaway

Personal loans can offer flexibility when you’re looking for funds for a variety of uses, and typically have lower interest rates than credit cards. Depending on your financial needs and financial circumstances, there may be a personal loan that fits. Comparing multiple lenders is a good way to make sure you’re getting a personal loan that works for you.

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

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

How do personal loan payments work?

Personal loans are typically repaid in monthly installments. When you take out a personal loan, you agree to repay the borrowed amount plus interest over a set period, usually through equal monthly payments. Each payment consists of a portion that goes towards reducing the principal balance and another portion that covers the interest charges. The loan agreement will specify the amount of each payment, the duration of the loan, and the interest rate.

What are the risks of a personal loan?

Personal loans come with certain risks that borrowers should be aware of. One risk is defaulting on the loan, which can lead to late fees, damage to your credit score, and even legal action from the lender. Another risk is needing to take on additional debt if you borrow more than you can afford to repay. In addition, personal loans may have higher interest rates compared to secured loans like mortgages or auto loans. It’s important to carefully consider your financial situation and ability to repay before taking on a personal loan.

What are the disadvantages of a personal loan?

Personal loans have a few potential disadvantages to consider. One is that they tend to have higher interest rates compared to loans secured by collateral. Personal loans may also have origination fees or other associated costs. Another potential disadvantage is that, should you miss payments or default on the loan, it could have a negative impact on your credit score.

Is a personal loan bad for your credit score?

A personal loan itself is not inherently bad for your credit score. In fact, when managed responsibly, a personal loan can have a positive impact on your credit. Making timely payments and paying off the loan as agreed can demonstrate your ability to handle debt responsibly, which can improve your credit profile. However, if you miss payments or default on the loan, it can have a negative affect on your credit. It’s important to borrow within your means, make payments on time, and consider the impact on your credit score before taking on a personal loan.

Does personal loan money go to your bank account?

Yes, when you are approved for a personal loan, the funds are typically deposited directly into your bank account. This allows you to have immediate access to the loan amount. The specific timeline for receiving the money may vary depending on the lender and the loan application process.

Do you get money right away from a personal loan?

The timing of receiving money from a personal loan can vary depending on the lender and their processes. Typically, you receive the money within five to seven business days of approval, and some lenders even offer same-day funding.

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^* Same-Day Personal Loan Funding: 82% of typical SoFi Personal Loan applications, excluding Direct Pay Personal Loans and Personal Loan refinance, from January 1, 2022 to January 1, 2023 that were signed before 7pm ET on a business day were funded the same day.

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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.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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A credit card can serve as a fantastic financial tool and offer a number of perks, from the opportunity to build your credit to the chance to rake in lucrative rewards. However, using a credit card responsibly is key to reaping those benefits. Otherwise, a credit card is more likely to harm your financial well-being than help it.

Using a credit card responsibly involves sticking to basic rules like making on-time payments and avoiding practices such as spending more with your card than you can afford to pay off. By learning some tips for how to use a credit card responsibly, you’ll be well on your way toward making the most out of this financial tool.

How Do Credit Cards Work?

A credit card is a payment card that offers access to a revolving line of credit. You can tap into this credit line for a variety of purposes, including making purchases, completing balance transfers, and taking out a cash advance. Cardholders can borrow up to their credit limit, which is largely determined based on their creditworthiness and represents the maximum amount they can borrow.

It’s necessary to make at least a minimum payment by the due date each month in order to avoid a late fee. However, to avoid paying interest entirely, cardholders must pay off their balance in full each month; interest accrues on any balance that rolls over from month to month.

Many credit card companies charge compounding interest, which means that not only will you owe interest on any outstanding balance, you’ll also end up paying interest on the interest. That’s because this interest is calculated continually, then added to your balance, and it may be compounded daily. You may be shocked to see how much credit card interest you’ll pay if you only make the minimum payment each month.

Understanding Your Statement

A crucial component of knowing how credit cards work is understanding your monthly credit card statement. Your statement contains a number of important pieces of information about your credit card account, including:

•   Your account information

•   Your account summary, including your payment due date

•   All purchases made with the card

•   Your total credit card balance

•   The minimum payment due

•   When the credit card payment is due

•   Your available credit

•   Interest charges

•   Rewards summary

Many of these details are key to know in order to ensure you’re using a credit card wisely. For instance, knowing your payment due date will ensure you make your payment on time, avoiding any late fees and a ding to your credit score.

Checking on your available credit can help you ensure you’re not using too much of your credit, which can drive up your credit utilization rate and subsequently drag down your score.

10 Tips For Using a Credit Card Responsibly

To make the most of your credit card, here are several credit card rules to keep in mind — as well as some guidance on what credit card behavior to avoid.

1. Avoid Making Too Many Impulse Purchases

To use a credit card responsibly, you want to avoid overspending with it. How many is “too many” purchases depends upon how much your impulse buys cost and how easily they fit into your budget. If you know you can pay off your credit card balances and otherwise meet your monthly expenses and savings and other financial goals, then that’s an entirely different situation from one in which your impulse purchases are too costly to promptly pay off and/or prevent you from meeting other financial responsibilities or goals.

If you enjoy making spontaneous buys, you may consider including this as a line item in your monthly budget and then sticking to it. This could add enjoyment to your life without causing financial problems down the road.

2. Use the Right Credit Card

There are a variety of different types of credit cards, and depending on how you plan to use your credit card, one option may make more sense than another. Some credit cards are there to help you build your credit, while others pay out generous rewards.

Selecting which card is right for you requires a look at your financial habits and current situation. For example, if you know that you often end up needing to carry a balance, then it may make sense to find a card that prioritizes low interest rates. Or, let’s say you’re a frequent vacationer — in that case, you might benefit from a travel rewards card.

3. Take Advantage of Benefits Offered

Interested in another way to use your credit card responsibly? Signing up for eligible rewards programs can help cardholders make the most of their card. Each type of credit card may have slightly different reward programs. See what the full range perks offered by your card are — and if you’re not sure, check the card’s website or ask the credit card company for specifics. For example, you might need help understanding what unlimited cash back really means in terms of how you might benefit.

Once you know what perks are available, you can use them strategically. You may discover that the card(s) you have don’t provide the best benefits for you. For example, maybe your card offers one of its highest rewards rates for gas purchases, but you don’t do much driving. In that case, you might be better served by a rewards card that offers a flat rewards rate or that prioritizes a category in which you’re a frequent spender.

Finally, if you’re earning rewards points, it’s also important to consider the best way to use them. Sometimes it’s possible to get a bigger bang for your buck if, say, you use your rewards points at an approved store rather than opting for cash back.

4. Sign Up for Automatic Payments

To avoid missing payments or making them late, consider signing up for automatic payments or autopay. By enrolling in autopay, you’ll regularly have money transferred from a linked account each month in order to cover the amount due (or at least the minimum payment required).

Another option is to sign up for automatic reminders about payment due dates (by text, for example, or by email). You can do this through the credit card company or via a calendar app.

What’s most important is coming up with a plan that works best for you to ensure you make your payments on time. Otherwise, you could face late fees and adverse effects to your credit score.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

5. Regularly Check Your Statements

Mistakes do happen on credit card statements and, unfortunately, fraudulent activities could impact your account. Check your statement every month to ensure that you made all the charges that appear, and that any payments you’ve made are accurately reflected.

If something is missing, review the statement dates to see if the transaction may have happened right after the statement cut-off date, for instance. If something seems off, contact your credit card company for clarification. In the case of any potentially fraudulent activity, it’s important to report credit card fraud to your credit card company immediately.

6. Pay More Than the Minimum

You’ve just read about how credit card interest works, so you’ll remember that only making the minimum payment doesn’t get you out of paying interest. To avoid credit card interest charges, you’ll need to pay off your monthly statement balance in full.

Understandably, this isn’t always possible, but even then, it still helps to pay as much above the minimum as you can afford to. This will at least cut down on the outstanding balance that accrues interest.

7. Don’t Close Out Old Cards

While it might seem logical to close out an older credit card you’re no longer using, you’ll want to think twice before you cancel a credit card. That’s because doing so can have adverse implications for your credit.

For starters, canceling a credit card will lower your credit utilization rate, which compares your total outstanding balance to your overall available credit limit. Closing out a card will cause you to lose that card’s credit limit, thus lowering the amount of credit you have available.

Closing an old card could also have an impact if the card in question is one of your older accounts. Another factor that contributes to your credit score is the age of your credit. By closing out an old account, you’ll lose that boost in age.

That being said, there are scenarios where it might make sense to close a card, such as if it charges a high annual fee. Just be mindful of the potential effects it will have on your credit before moving forward.

💡 Quick Tip: Aim to keep your credit utilization — the percentage of your total available credit that you’re using at any given time — below 30% (or lower). This could help you to maintain a strong credit score.

8. Maintain a Low Credit Utilization Rate

Another key tip for responsible credit card usage is to avoid maxing out your cards. Instead, aim to keep a lower credit utilization rate — ideally below 30%. The lower you can keep this utilization rate, the better it is for your credit score.

9. Avoid Unnecessary Fees

Another part of using a credit card responsibly is being aware of all of the fees you could face, and then taking steps to steer clear of those costs. Your credit card terms and conditions will spell out all of the fees associated with your card, as well as the card’s APR (or annual percentage rate) and the rules of its rewards program.

Many credit card fees are pretty easy to avoid. For instance, if you’ll incur a fee to send money with a credit card, simply avoid doing that and look for an alternative route. Similarly, you can avoid late payment fees by making on-time payments, and over-the-limit fees by not maxing out your credit card.

10. Avoid Applying for Too Many Cards

As you get into the swing of things with using your credit card, you may feel tempted to keep acquiring new cards, whether to keep on earning rewards or to capitalize on enticing welcome bonuses. But proceed with caution when it comes to applying for credit cards.

Applying for credit cards too frequently can raise a red flag for lenders, as it may suggest that you’re overextending yourself and desperate for funding. Plus, each time you submit an application for a credit card, this will trigger a hard inquiry, which can ding your credit score temporarily. Consider waiting at least six months between credit card applications.

The Takeaway

When used responsibly, credit cards can be helpful for a whole slew of things, from making online purchases to building your credit. The key phrase to keep in mind is “when used responsibly.” To stay on top of your credit cards, tips like signing up for automatic payments, making the most of the rewards programming, and using the right type of credit card for your needs are all important.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

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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.

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

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Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Paying student loans on time can have a positive effect on your credit score and help build a good credit history. On the flip side, when you have a late or missed student loan payment, that can be reflected on your credit report as well. Delinquent payments can lower your credit score and have financial repercussions, such as impacting your ability to qualify for a new credit card, car loan, or mortgage.

If you’re wondering how to remove student loans from a credit report, the answer is that it’s only an option if there’s inaccurate information on the report. Student loans are eventually removed from a credit report, however, after they’re paid off or seven years after they’ve been in default. Here’s what to know about student loans on a credit report, what happens when you default on a loan, and how to remove student loans from a credit report if there’s inaccurate information.

What Is a Credit Report?

Before considering the impact of student loans on your credit report, it’s helpful to review what a credit report is. It’s a statement that includes details about your current and prior credit activity, such as your history of loan payments or the status of your credit card accounts.

These statements are compiled by credit reporting companies who collect financial data about you from a range of sources, such as lenders or credit card companies. Lenders use credit reports to make decisions about whether to offer you a loan or what interest rate they will give you. Other companies use credit reports to make decisions about you as well – for example, when you rent an apartment, secure an insurance policy, or sign up for internet service.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Defaulting on Student Loans

It’s also worth reviewing what happens when a student loan goes into default. One in ten people in the United States has defaulted on a student loan, and 5% of total student loan debt is in default, according to the Education Data Initiative.

The point when a loan is considered to be in default depends on the type of student loan you have. For a loan made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan (FFEL) Program, you’re considered to be in default if you don’t make your scheduled student loan payments for a period of at least 270 days (about nine months).

For a loan made under the Federal Perkins Loan Program, the holder of the loan may declare the loan to be in default if you don’t make any scheduled payment by its due date. The consequences of defaulting on student loans can be severe, including:

•   The entire unpaid balance of your student loans, including interest, could be due in full immediately.

•   The government can garnish your wages by up to 15%, meaning your employer is required to withhold a portion of your pay and send it directly to your loan holder.

•   Your tax return and federal benefits payments may be withheld and applied to cover the costs of your defaulted loan.

•   You could lose eligibility for any further federal student aid.

And you don’t have to default on your student loans to experience the consequences of nonpayment. Even if your payment is only a day late, your loan can be considered delinquent and you can be charged a penalty fee.

Temporary Relief for Borrowers Behind on Payments

The pandemic-era pause on federal student loan payments that was established in March 2020 finally came to an end in the fall of 2023. After more than three years of having this financial responsibility off their plates, federal student loan borrowers must now fit payments back into their budgets. However, in order to protect financially vulnerable borrowers from facing the steep consequences of missing payments during this transition, the Biden Administration established a 12-month “on-ramp” program to help them adjust.

From Oct. 1, 2023, to Sept. 30, 2024, borrowers who don’t pay their federal student loans will be free of the usual repercussions. Specifically, this means that:

•   Loans will not be considered delinquent or in default.

•   Missed payments will not be reported to the credit bureaus.

•   Missed payments will not be referred to debt collection agencies.

•   Unpaid student loan interest will not capitalize (be rolled into the principal balance) once the on-ramp period ends.

However, payments missed during this period will be due once it ends. Additionally, any missed payments will not count toward forgiveness under income-driven repayment or Public Service Loan Forgiveness (PSLF).

How Long Do Student Loans Remain on a Credit Report?

If you are delinquent on your student loans or go into default, that activity is reported to the credit bureaus. It will remain on your credit report for up to seven years from the original delinquency date.

The good news is that the more time that passes since your missed payment, the less impact it has on your credit score.

The exception to this is a Federal Perkins Loan, which is a low-interest federal student loan for undergraduate and graduate students who have exceptional financial need. This type of loan will remain on your credit report until you pay it off in full or consolidate it.

On the other hand, if you made timely payments on your loan and paid it off in full, it may appear on your credit report for up to 10 years as evidence of your positive payment history and can boost your credit score.

How Do I Dispute a Student Loan on My Credit Report?

It’s a good habit to periodically check your credit report. You can request a free report from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion—by visiting annualcreditreport.com. The bureaus are required by law to give you a free report every 12 months. However, through the end of 2023, you may request your report weekly at no cost.

There are three reasons your student loan might have been wrongly placed in default and reported to the credit bureaus by mistake. Here’s how to begin the process to correct these errors:

1. If You Are Still in School

If you believe your loan was wrongly placed in default and you are attending school, contact your school’s registrar and ask for a record of your school attendance. Then call your loan servicer to ask about your record regarding school attendance.

If they have the incorrect information on file, provide your loan servicer with your records and request that your student loans be accurately reported to the credit bureaus.

2. If You Were Approved for Deferment or Forbearance

If you believe your loan was wrongly placed in default, but you were approved for (and were supposed to be in) a deferment or forbearance, there is a chance your loan servicer’s files aren’t up to date. You can contact the loan servicer and ask them to confirm the start and end dates of any deferments or forbearances that were applied to your account.

If the loan servicer doesn’t have the correct dates, provide documentation with the correct information and ask that your student loans be accurately reported to the credit bureaus. Under the Fair Credit Reporting Act, a borrower may appeal the accuracy and validity of the information reported to the credit bureau and reflected on their credit report.

Recommended: Student Loan Deferment vs Forbearance: What’s the Difference?

3. Inaccurate Reporting of Payments

If your loan has been reported as delinquent or in default to the credit bureaus, but you believe your payments are current, you can request a statement from your loan servicer that shows all the payments made on your student loan account, which you can compare against your bank records.

If some of your payments are missing from the statement provided by your loan servicer, you can provide proof of payment and request that your account be accurately reported to the credit reporting agencies.

Recommended: How to Build Credit Over Time

In all three cases, if you believe there is any type of error related to your student loan on your credit report, it’s best practice to also send a written copy of your dispute to the credit bureaus so they are aware that you have reported an error.

Why Your Student Loans Should Stay on Your Credit Report

You generally can’t have negative, but accurate, information removed from your credit report. However, you can dispute the student loans on your credit report if they are being reported incorrectly.

On the bright side, if you’re paying your student loans on time each month, that looks good on your credit report. It shows lenders that you are responsible and likely to pay loans back diligently.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

When You’re Having Problems Paying Your Student Loans

If you’re having difficulty making regular payments on your federal or private student loans, there are steps you can take before the consequences of defaulting kick in.

One option is to apply for student loan deferment, which allows you to reduce or pause your federal student loan payments for up to three years. During this time, interest on subsidized loans does not accrue. Or you could pursue student loan forbearance, which allows you to reduce or pause payments for up to a year if you’re facing a temporary financial hardship.

You can also contact your loan servicer to discuss adjusting your repayment plans.

Additionally, if you’re having trouble paying your student loans on time, you may be able to make your loans more affordable through a federal income-based repayment plan. These plans, including the new Saving on a Valuable Education (SAVE) plan, cap your payments at a small percentage of your discretionary income and extend the repayment term out to 20-25 years. Once the repayment period is up, any remaining balance is forgiven (though you may be subject to income taxes on the canceled amount).

Refinancing your student loans may also be an option—if you extend your term length, you may qualify for a lower monthly payment. Note that while these options provide short-term relief, they generally will result in paying more over the life of the loan.

When you start making your payments by the due date each month, you may see that your student loans can become a more positive part of your credit report. Again, while these options provide short-term relief, they generally will result in paying more over the life of the loan.

The Takeaway

While you generally can’t remove student loans from a credit report unless there are errors, it isn’t a bad thing if you make payments on time. If a loan is delinquent, it will be removed from your credit report after seven years, though you will still be responsible for paying back the loan.

If you’re having trouble making loan payments, there are ways to make repayment easier. Borrowers with federal student loans can look into forgiveness, an income-driven repayment plan, or a change to the loan’s terms.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Is it illegal to remove student loans from a credit report?

There’s no legal way to remove student loans from a credit report unless the information is incorrect. If you think there’s an error on your credit report, you can contact your loan servicer with documentation and ask them to provide accurate information to the credit reporting agencies. It’s also a good idea to send a copy of the dispute to the credit bureaus as well.

How do I get a student loan removed from my credit report?

If you paid your student loan off in full, it may still appear on your credit report for up to 10 years as evidence of your positive payment history. It takes seven years to have a defaulted student loan removed from a credit report. Keep in mind you are still responsible for paying off the defaulted loan and you won’t be able to secure another type of federal loan until you do.

How can I get rid of student loans legally?

If you have federal student loans, options such as federal forgiveness programs or income-driven repayment plans can help decrease the amount of your student loan that you need to pay back. If you have private or federal student loans, refinancing can help lower monthly payments by securing a lower interest rate and/or extending your loan term. If you refinance a federal loan, however, you will no longer have access to federal protections and benefits. And you may pay more interest over the life of the loan if you refinance with an extended term.

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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.

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.

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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Car payments can take a significant bite out of your monthly budget. According to Edmunds, the average monthly car payment in the second quarter of 2023 was $733 for a new vehicle and $569 for a used vehicle.

While knowing the average car payment can be helpful, keep in mind that the actual amount you’ll pay on a car loan will depend on multiple factors, including the loan amount, interest rate, type of car you buy, your credit score, and the length of the loan.

So how do you know if you’re getting (or you got) a good deal? Read on to learn more about average car payments and what to do if you’re paying too much — or more than you can currently afford.

What Is a Good APR on a Car?

Every auto loan has an annual percentage rate (APR), which is the annual cost you’re charged by the lender for borrowing money. A loan’s APR includes the loan’s base interest rate plus any added fees, so it represents the true cost of the loan.

In the second quarter of 2023, the overall average auto loan APR was 7.1% for new cars and 11% for used cars.

The actual APR you receive for an auto loan will be based on several factors, including your income, credit history, and credit score. Typically, your credit score will have the greatest influence over the rate you’ll get, since lenders use it to gauge how likely you are to repay the loan. Generally speaking, the higher your credit score, the lower your car loan APR will be.

For example, the average APR for someone with a credit score between 781 to 850 is 5.18%, whereas the average rate for someone with a credit score between 300 and 500 is 14.08%


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

What to Do if Your Car Payments Are Too High?

If you’re paying more than the average car loan payment, or simply more than you can comfortably afford, here are some ways you may be able to lower your payment.

•   Refinancing When you refinance a car loan, you replace your current loan with a new one and hopefully lower your car payment in the process. You may be able to qualify for a lower APR on a new loan and/or extend your loan term, which can lead to a lower monthly payment. Keep in mind, though, that if you extend your loan term, you may end up paying more in total interest over the life of the loan.

•   Selling or trading in your car If your car is beyond your budget, you might consider selling it and then buying a cheaper car. Trading it in at a dealership can be the simplest option, though you might get a better price with a private sale. Just keep in mind that selling a car that has a loan attached to it can be complicated. You‘ll want to check with your lender to make sure you aren’t breaking any terms of your loan contract.

•   Making extra payments whenever you can Consider putting the occasional windfall (such as a tax refund, bonus at work, or cash gift) toward your loan principal. This will reduce the total amount that you owe, which, in turn, can lower your monthly payments. Before you try this tactic, however, make sure your lender will apply extra payments directly to your loan’s principal and not to interest.

Recommended: Smarter Ways to Get a Car Loan

What if Your Car Payment is Lower Than Average?

If your car payment is lower than the average, that doesn’t necessarily mean you won’t benefit from refinancing. This is especially true. If your credit has improved or rates have dropped since you originally took out your car loan.

You might also be able to lower your monthly car payments if you initially received your loan from the dealer. APRs offered by car dealers tend to be higher than those offered by banks and credit unions. If you took out your initial loan through dealer-arranged financing, refinancing with a different lender could potentially get you a lower rate, and a lower monthly payment.

If your budget is stretched and you really need to lower your payments, refinancing to a longer repayment term can help lower your payments, even if you don’t get a lower interest rate. Just be aware that you’ll pay more in total interest because you are extending the length of the loan.


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

Using a Personal Loan to Refinance an Auto Loan

Many people assume that the only way to refinance an auto loan is with another auto loan. But that’s not necessarily the case. In fact, taking out a personal loan can be an option worth considering, particularly if you have excellent credit and can qualify for low APRs.

Personal loans are available through banks, credit unions, and online lenders and can be used for virtually any use, including debt consolidation, home repairs, and other large purchases. This makes it different from an auto loan, which can only be used to pay for a car.

If your auto loan rate is higher than the rate you can receive on a personal loan, using a personal loan to refinance your auto loan may be a way to lower your car payments.

Another reason you might refinance with an unsecured personal loan is that these loans don’t require that you use your car as collateral. That means if you’re unable to make your payments, you won’t lose your vehicle (though your credit score will likely take a significant hit).

Also, if you plan to sell your car, it can be complicated to sell a car with an auto loan attached. If you use a personal loan to pay off your car, you’ll receive the title from your auto lender, which enables you to sell it more easily.

For a personal loan to make sense for an auto loan refinance, however, you’ll need to qualify for a low rate. Just like you shopped around for an auto loan, it’s a good idea to compare personal loan rates, terms, fees and borrowing limits to ensure you find a lender that will best fit your needs.

As you compare lenders, consider a SoFi Personal Loan. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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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.

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

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Loan sharks get their name from the predatory sharks of the sea, only they set their sights on borrowers in desperate need of money instead of schools of fish. Loan sharks often use threats of violence (and, in some cases, actual violence) to intimidate borrowers into paying back their loans — often at criminally high interest rates.

Loan sharks are illegitimate lenders, and even if you’re in serious and immediate need of cash, there are other options available to you.

Loan Shark Definition

So what is a loan shark? A loan shark is a person who loans money at unlawfully high interest rates and may use intimidation, primarily threats of violence, to ensure borrowers repay their debts. In some cases, a loan shark may be connected to a criminal organization or might at least imply this to intimidate borrowers.

People who borrow from loan sharks often believe they have no other options, and in fact, loan sharks might work hard to create that illusion. By lending without conducting background checks and reviewing credit reports, loan sharks also make it easier for borrowers to get money from them rather than through traditional channels.

Recommended: Guide to Financial Hardship Loans

Are Loan Sharks Illegal?

Loan sharks who use threats of violence or charge unlawfully high interest rates are breaking the law and can face criminal charges.

Though it varies by state, there are laws limiting how much interest a lender can charge on various types of loans. The maximum interest rate is called the usury interest rate — and loan sharks, by definition, charge rates higher than this.

Lenders should be licensed and, when legitimate, offer financial disclosures and have underwriting standards. Illegitimate lenders like loan sharks operate outside these requirements.

How Does a Loan Shark Work?

Loan sharks have access to a large amount of capital to offer loans to borrowers who feel like they have no other options. Rather than running credit checks and calculating a fair interest rate within legal limits based on a person’s financial history, loan sharks offer money with the threat of violence to the borrower — and their family — as an assurance that the debt will be repaid.

While we often think of loan sharks as being seedy individuals in low-lit, smoke-filled back rooms (thanks, Hollywood), in reality, a loan shark could be any individual who uses threats and intimidation to collect a debt. What’s more, any predatory lenders who charge interest rates above the legal limit are also considered loan sharks.

What Can I Do About a Loan Shark Debt?

If you have loan shark debt, the lender has no legal right to your money. They did not follow the law in lending to you, so they cannot use the law (i.e., take you to court) to ensure you pay them back.

However, they may threaten violence if you don’t pay up. And in some cases, they could follow through on that violence.

If you are concerned about your and your family’s safety, you can contact the police. Loan sharks can face both civil action complaints and criminal prosecution.

Loan Sharks vs. Predatory Lenders

A loan shark is a type of predatory lender, but not every predatory lender is a loan shark. It’s the old “all squares are rectangles, but not all rectangles are squares” lesson.

So what is predatory lending? Predatory lending broadly refers to any type of lending practice that misleads consumers to take out loans they can’t afford, often through questionable and aggressive advertising and sales tactics. Those loans are often high in fees and interest.

Unlike loan sharks, some predatory lenders — including actual financial institutions — technically operate within the law. Instead of charging unlawful interest rates, they may pile on fees, build balloon payments into a loan, convince you to purchase unnecessary products or services, or pressure less educated consumers to refinance their homes, even when it’s not in their best interest.

These lenders often intentionally target underbanked demographics and communities where there’s less access to alternative credit access. They can do this with targeted mailers, TV ads, phone calls — you name it.

Common examples of predatory loans include:

•  Payday loans

•  Auto title loans

•  Subprime personal loans

And, of course, loans from loan sharks.

Loan Shark Alternatives

No matter how dire your financial situation is, taking money from a loan shark is generally considered a bad idea. Loan sharks typically operate outside of the law and often use threats of violence to ensure borrowers pay back their loans with very high interest.

If you’re in need of money, consider your alternatives. Here are some to keep in mind:

Friends and Family

Borrowing money from friends and family is never easy, but if it means avoiding a loan shark, it may be worth asking your loved ones for help. Be prepared for them to say no, and always thank them for listening.

Personal Loan

If you can’t borrow the money from a loved one — or aren’t comfortable asking — a personal loan may be your next-best option. Depending on the lender, you can get personal loans for as little as $500 or $1,000 or as much as $100,000 or more.

Personal loan rates and terms vary. You may be more likely to get approved for a better loan if you have a strong credit score. However, if you have poor credit (more common for borrowers seeking out loan sharks), you might be stuck with personal loan lenders who charge high fees and average APRs for smaller loan amounts.

The average personal loan interest rate varies by credit score, but other factors, such as debt-to-income ratio and your employment status, can impact the APR you’re offered.

Recommended: Is There a Minimum Credit Score for Getting a Personal Loan?

Credit Card

If you have access to a credit card with a high enough credit limit — and the person or company you owe accepts credit card payments — it’s better to pay with plastic than a predatory loan.

Sure, credit card APRs can be high, and you might risk slipping deeper into credit card debt. But credit card issuers are bound by strict state usury interest rates that, theoretically, should be lower than the illegal limit set by a loan shark.

Payday Loan

Payday loans are a common last resort for people in a bind and one you may want to think twice about. While these loans often don’t require credit checks and can get you cash fast, they often come with high interest rates and other potential fees that can make them exorbitantly expensive. In fact, payday lenders often earn exceptions from state governments that allow them to charge extremely high annual interest rates (sometimes up to 400%) without breaking the law. (In that way, they’re technically different from loan sharks.)

The Takeaway

Loan sharks take advantage of borrowers who feel they’re at the end of their rope, offering loans with unlawfully high interest rates and often using threats of violence to ensure borrowers pay up. Borrowers looking for a way out may feel like they have nowhere else to turn, but there are options such as personal loans, loans from loved ones, and even credit cards.

Instead of seeking out a loan shark, consider a SoFi personal loan. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.

FAQ

What is a loan shark?

A loan shark is someone who lends money to desperate borrowers at exorbitantly high interest rates, well above the legal limits. Loan sharks don’t run credit checks, which can make them appealing to borrowers with bad credit. In some cases, loan sharks may threaten — or occasionally use — violence to make sure borrowers repay their debts.

Why are loan sharks so bad?

Loan sharks are considered bad because they offer loans at unlawfully high interest rates — sometimes more than 400% — to borrowers who feel like they have no other option. They may also use threats of violence when collecting debt.

What are alternatives to loan sharks?

No matter how much money you need, there are alternatives to loan sharks that are worth exploring. Some options include asking family and friends for help, taking out a personal loan, paying with a credit card, or even taking out a payday loan, though the latter option has its own share of drawbacks.

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Photo credit: iStock/Hammarby Studios
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.

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

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

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