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Your borrowing power refers to how much credit you can get based on your financial history, including your credit history and score. Having strong borrowing power is essential if you ever want to get a mortgage, car loan, personal loan, or any other type of financing. It can also help you qualify for loans and credit cards with more favorable rates and terms. What follows are 10 effective strategies to boost your borrowing power and increase your financial opportunities.

How to Boost Your Borrowing Power

Whether you’re interested in borrowing money to make a major purchase or using a personal loan to consolidate high interest debt, here are some simple ways to increase your borrowing capacity.

1. Check Your Credit Reports

Lenders determine how much they will lend you (and if they will lend to you at all) primarily based on your credit score and history. So a great first step is to get copies of your three credit reports, and read each one over carefully. This allows you to see where you stand, as well as check for any mistakes or inaccuracies (like payments marked late when you paid on time or someone else’s credit activity mixed with yours).

You can request free copies of your credit reports from three major credit bureaus — Equifax, Experian, and TransUnion — through AnnualCreditReport.com . If you find any errors, you’ll want to file a dispute with the appropriate credit agency.

2. Be a Responsible Borrower

To show creditors that you are a safe bet, you’ll want to make sure you pay all of your bills on time. Also try to keep your credit card balances low — this impacts your credit utilization ratio (the percent of available credit you are actually using), which has a significant impact on your credit score. To calculate your credit utilization, add up all of your revolving credit balances and credit limits, divide your total balance from your total limit, and multiply that number by 100 (to get a percentage). Ideally, you want to keep credit utilization below 30%.

3. Show Financial Stability

Stability and consistency in your financial and employment history can bolster your borrowing power. Lenders generally prefer borrowers who maintain a consistent residence and have a steady job and a reliable income source. This showcases your reliability as a borrower and boosts your chances of getting approved for loans with favorable terms.

4. Consider a Co-Borrower

If your individual borrowing power is limited, using a co-borrower (such as a spouse or a family member) can significantly enhance your chances of loan approval. A co-borrower is a joint applicant who shares ownership of the loan and responsibility for payments. (This is in contrast to a cosigner, who is only liable for the loan if the primary borrower fails to make payments.) Depending on the co-borrower’s income, they may be able to help you qualify for a higher loan amount, as well as better rates and terms.

5. Shop Around

Lenders vary in terms of how much they loan out, and to whom, so it’s a good idea to explore multiple lenders, including traditional banks, online lenders, and credit unions, and compare loan options before making a decision. Some lenders will allow you to “prequalify” for a loan, which can give you a good idea of how much of a loan they will offer you and at what rate. This only requires a soft credit check and won’t impact your credit score.

6. Pay Down Existing Debt

Reducing your existing debts can have a positive impact on your credit score. Not only that, it enhances your debt-to-income (DTI) ratio, a key factor considered by lenders. Your DTI ratio measures how much of your monthly gross income goes toward debt payments. This gives lenders insight into your ability to make another monthly payment and how large a payment you could handle.

To calculate your DTI, add together your fixed monthly payments (like mortgage/rent, auto loans, credit cards, and other personal loans), then divide that number by your gross monthly income (the amount you earn before taxes and other deductions). As a rule of thumb, lenders prefer a DTI ratio of 36% and under to approve you for a loan.

7. Increase Your Income

Another way to improve your DTI is to increase your income. Even if you have a large amount of debt, a high enough income can often offset it. As long as you have enough money coming in to handle your current debt and take on a new loan, a lender may not cap how much you are able to borrow.

If you have some time before you need to apply for a loan, you might look into ways to bump up your income, such as taking on a side hustle, asking for a raise, or looking for a new job that pays a higher salary. This could help you qualify for a larger loan amount.

8. Don’t Leave Any Income Out

As mentioned above, your income plays a key role in how much you can borrow. So you want to be sure to include all sources of income, including:

•   Monthly salary

•   Alimony

•   Child support

•   Side-gig income

•   Rental income

•   Investment property income

Including all of your income can lower your DTI ratio, increasing your borrowing power.

9. Consider a Longer Loan Term

Generally, the longer your loan term, the lower your monthly payment. A longer loan term — and lower monthly payment — may allow you to borrow more money with less impact on your DTI ratio, giving you eligibility for a larger loan. However, you’ll want to keep in mind that extending the term of a loan typically means paying more in interest over the life of the loan, increasing your total borrowing cost.

10. Consider Offering Collateral

You may be able to borrow more with a secured vs. an unsecured loan. With a secured loan, you put up something valuable (such as property, a vehicle, or a savings account) as collateral. The lender can take possession of this collateral if you fail to pay back loan funds as agreed. This lowers risk for the lender and, as a result, they may be willing to offer you a larger loan and/or a lower rate. If you’re already offering collateral, offering something of more value might boost the amount you’re approved for.

The Takeaway

If you’re thinking about applying for a loan for a large purchase, to consolidate other debts, start a business, or for any other purpose, it’s a good idea to look into ways to improve your borrowing power. You can start doing this right away by reviewing your credit reports, staying on top of your bills, paying down debt, using only a portion of your credit card limits and, if possible, boosting your income.

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 Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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Whether you’re borrowing money from a lender or depositing money in a savings account, interest rates will play into your financial picture. And understanding exactly how they work is crucial to making the best possible decisions for your money.

Here’s the scoop.

Interest Rate Definition

Interest rate is the cost of borrowing or the payoff of saving. Specifically, it refers to the percentage of interest a lender charges for a loan as well as the percentage of interest earned on an interest-bearing account or security.

Interest rates change frequently, but the average personal loan interest rate is dependent on several factors, including the amount borrowed, credit history, and income, among others. A borrower with an excellent credit score and a dependable income, for instance, will likely be considered low risk and may be offered a lower interest rate. On the flip side, some vehicles like payday loans are considered riskier for lenders and tend to have higher interest rates.

Recommended: What Is a No-Interest Loan? A Personal Loan Guide

How Interest Rates Work

Whether you’re borrowing or saving money, the interest rate is applied to the balance during set periods of time called compounding periods.

For borrowers, this extra charge can add to outstanding debt. For savers, savings interest can be one way to earn money without much effort.

Let’s look at some specific examples.

You might take out a personal loan with an APR of 5.99%. That means you’ll pay an additional 5.99% of the loan balance each year in addition to the principal payments, which is paid to the lender for servicing the loan.

Or, if you hold a high-yield savings account that offers a 1% APY return, you can expect that account to grow by 1% of its balance each year.

Of course, the interest you might earn in a savings account is usually substantially lower than what you might earn on higher-risk investments.

And when it comes to any of the multiple uses of a personal loan, paying interest means you’re paying substantially more than you would if you were able to cover the expense out of pocket.

Fixed vs Variable Interest Rates

Lenders charge fixed or variable interest rates. What’s the difference between the two? Let’s take a look.

As the name suggests, fixed interest rates remain the same throughout a set period of time or the entire term of the loan. Fixed rates can be higher than variable rates. Borrowers who prefer more predictable payments — or are borrowing when interest rates are low — may decide to go with a fixed-rate loan.

Variable interest rates change periodically, depending on changes in the market. This means the amount of your payments will vary. Generally speaking, variable-rate loans can be riskier for consumers, so they tend to have lower initial rates than fixed-rate loans. However, it’s important to note that when interest rates rise, so can the cost of borrowing. When borrowers decide to renegotiate from a variable-rate to a fixed-rate loan, they may face additional fees and a new loan length.

A variable-rate loan may be a good move for borrowers who plan to pay off the loan quickly or can take on the risk.

Types of Interest

While all interest does one of two things — accrue as a result of saving money or in payment to the bank for a loan — it can be calculated and assessed in different ways. Here are a few common types of interest rates explained.

Simple Interest

Simple interest is interest that is calculated, simply, based on the balance of your account or loan. This is unlike compound interest, which is based on the principal balance (the original money you borrowed) as well as interest accrued over time.

Most mortgages and auto loans are calculated using simple interest. That means you won’t pay additional interest on any interest charged on the loan.

For example, let’s say a driver takes out a simple interest loan to pay for a new car. The loan amount is $31,500, and the annual interest rate on the loan is 4%. The term of the loan is five years. The driver will pay $580.12 per month. After five years, when the loan is satisfied, they will have paid a total of $34,807.23.

Compound Interest

Compound interest, on the other hand, means that interest is charged on not only the principal but also whatever interest accrues over the lifetime of that loan.

Say you take out an unsecured personal loan in the amount of $20,000 to pay for home remodeling. The loan is offered to you at an interest rate of 6.99% compounded monthly, and you must also pay an upfront fee of $500 for the loan. You’ll pay it back over the course of five years.

Over the course of those 60 payments, you’ll pay $3,755.78 in interest, not including the $500 extra you paid in fees. Each month, you’ll pay back some of the principal as well as the interest charged to you.

By the time you’re done with your home remodel, you’ll have paid $24,255.78 altogether, and that’s on a personal loan with a fairly low rate. In other words, you’ll have paid 20% more for the project than you would have if you’d funded it out of pocket.

Recommended: Simple Interest vs. Compound Interest

Amortized Interest

Amortizing loans are common in personal finance. If you have a home loan, auto loan, personal loan, or student loan, you likely have an amortizing loan.

Amortization is when a borrower makes monthly (usually equal) payments toward the loan principal and interest. Early payments largely go toward the calculated interest, while payments closer to the end of the loan term go more toward the principal.

The interest on an amortized loan is calculated based on the balance of the loan every time a payment is made. As you make more payments, the amount of interest you owe will decrease.

To see how payments are spread out over the life of the loan, borrowers can consult an amortization schedule. A mortgage calculator also shows amortization over time for a loan.

But here’s a look at a sample calculation:

Let’s say you take out a $200,000 mortgage over 10 years at a 5% fixed interest rate. Your monthly payments will be $2,121.31. Next, divide the interest rate by 12 equal monthly payments. That equals 0.4166% of interest per month. This means that in the first month of your loan, you’ll pay $833.33 toward interest and the remaining $1,287.98 toward your principal.

Now, how about the second month? To calculate what you’ll owe, deduct your monthly payment from the starting balance. (This will give you the “balance after payment” for the chart.) Be sure to add to the chart the $833.33 you paid in interest and the $1,287.98 you paid toward the principal. Repeat the calculation of monthly interest and principal breakdown for the rest of the chart, which includes 12 months of payments.

Precomputed Interest

Loans that calculate interest on a pre-computed basis are less common than loans with either simple or compound interest. They’re also controversial and have been banned in some states. Precomputed interest has been banned nationally since 1992 for loans with terms longer than 61 months.

This method of computing interest is also known as the Rule of 78 and was originally based on a 12-month loan. The name is taken from adding up the numbers of the months in a year (or a 12-month loan), the sum of which is 78.

Interest is calculated ahead — precomputed — for each month and added to each month’s payment, giving more weight to interest in the beginning of the loan and tapering off until the end of the loan term. In the case of a 12-month loan, the first month’s interest would be 12/78 of the total interest, the second month’s interest would be 11/78 of the total interest, and so on.

Here’s an example: Let’s say a borrower takes out a personal loan with a 12-month term that will accrue $5,000 in interest charges. According to the Rule of 78, here’s what the borrower would pay in interest each month:

A loan with precomputed interest has a greater effect on someone who plans to pay off their loan early than one who plans to make regular payments over the entire life of the loan.

APR vs APY

Whether compound or simple, interest rates are generally expressed as APR (Annual Percentage Rate) or APY (Annual Percentage Yield). These figures make it easier for borrowers to see what they can expect to pay or earn in interest over the course of an entire year of the loan or interest-bearing account’s lifetime.

However, APY takes compound interest into account, whereas usually APR does not — but on the other hand, APR takes into account various loan fees and other costs, which APY might skip.

Recommended: APY vs. Interest Rate: What’s the Difference?

How Are Interest Rates Determined?

Lenders use several factors to determine the interest rate on a personal loan, including details about your financial background and about the loan itself. What kind of financial questions can you expect?

When lenders talk about a borrower’s creditworthiness, they’re usually referring to elements of your financial background. This may include:

•   Your credit history

•   Your income and employment

•   How much debt you already have

•   Whether you have a cosigner

The loan terms can also affect the rate. For example, personal loan rates can be affected by:

•   The size of the loan

•   The duration of the loan

Loan term is something borrowers should be thinking about as well. A longer loan term might sound appealing because it makes each monthly payment lower. But it’s important to understand that a longer-term loan may cost you significantly more over time due to interest charges.


💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.

Interest Rates and Discrimination

Generally speaking, the higher your credit score and income level, the easier it is to qualify for loans with better terms and lower interest rates — which, of course, can make it more difficult for people in lower socioeconomic positions to climb their way out.

Discriminatory lending has had a long history in the U.S. Before federal laws protecting against discrimination in lending practice, lenders would regularly base credit decisions on factors such as applicant’s race, color, religion, sex, and other group identifiers rather than their creditworthiness.

The practice of “redlining” was begun in the 1930s as a way to restrict federal funding for neighborhoods deemed risky by federal mortgage lenders. It persisted for decades, and the detrimental effects can still be felt today by residents of minority neighborhoods.

Since residents of redlined neighborhoods were excluded from approval for regular mortgage loans, they were forced to look for other financing options, which were often exploitive. If they could not find any lender willing to loan to them, they continued renting, unable to gain equity in homeownership.

The Takeaway

The interest rate is the cost of borrowing money — it’s a percentage of the total amount of the loan. It can also refer to the rate at which interest is earned on money in a savings account, certificate of deposit, or certain investments. The amount of interest you’ll pay is usually expressed using percentages, which will be listed as either APR (Annual Percentage Rate) or APY (Annual Percentage Yield), depending on which kind of financial product you’re talking about.

Lenders charge fixed or variable interest rates. Fixed interest rates remain unchanged for a set period of time or for the life of the loan, and may be a smart choice for borrowers who want a predictable payment schedule or are taking out a loan when interest rates are low. Variable interest rates can change depending on the market, which means the payment amount will vary. Though potentially riskier, these loans may offer lower initial rates. However, when interest rates rise, so can the cost of borrowing.

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

FAQ

What is the definition of interest rate?

An interest rate is expressed as a percentage and is used to calculate how much interest you would pay on a loan in one year (APR), or how much you would earn on an interest-bearing account in one year (APY).

What is an example of an interest rate?

Simple, compound, or precomputed interest rates are types of interest rates commonly used.

What is the difference between interest and interest rate?

Interest is the money you’re charged when you take out a loan — or earn for leaving your money in a deposit account to grow. Interest rate is the percentage you’re being charged or are earning.

What happens when interest rates are high?

Interest rate increases tend to lead to higher interest rates on personal loans, mortgages, and credit cards. It can also mean costlier financing for borrowers.

Can you adjust the interest rate on a personal loan?

Possibly. One way to lower the interest rate on a personal loan is to refinance it with another lender.

Photo credit: iStock/Remitski

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.

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.

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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Unlike student loans or mortgages, personal loans have a relatively short repayment timeline — typically around two to five years. Still, there may be situations when you want to pay off the remaining balance on a personal loan even faster. Is that possible? The short answer is “yes” and, in many cases, it can be a wise decision.

But if there’s a prepayment penalty, then this loan payoff may be more costly than you’d expect. Learning how a prepayment penalty might affect your payoff amount can be helpful in making the decision whether or not to pay off a personal loan early. And if you’re gathering information about a personal loan early payoff without incurring a prepayment penalty, you do have some options.

How to Manage Your Personal Loans

Securing a personal loan may be top of mind for borrowers, but just as important is figuring out how to repay the debt. Having some basic info on hand — such as your monthly take-home pay, the cost of your essentials and non-essentials, and short- and long-term savings goals — will help.

While there’s no one-size-fits-all strategy to budgeting, here are two popular budgeting methods to consider:

•   50/30/20 budget. With the 50/30/20 budget strategy, your take-home pay falls into three main buckets, according to percentages: 50% to “needs” (housing, utilities, groceries, etc.), 30% to “wants” (take-out meals, entertainment, travel costs, etc.), and 20% to savings (emergency fund; IRA or other retirement contributions; debt repayment and extra loan payments, etc.)

•   Zero-Sum Budget. This type of budget calls for earmarking every dollar you earn for either savings or discretionary spending. First, you assign monthly after-tax income dollars to non-negotiable bills, such as rent and groceries. Then you assign leftover funds to discretionary spending and saving, which could include making extra payments on a personal loan.

Tips to Pay Down Your Personal Loan

Creating a budget is one tool to consider, but here are other loan repayment strategies you may want to explore if you want to pay off the debt faster.

•   Switch to biweekly payments. Ramping up payments from once a month to twice a month could help you reduce the principal amount of a loan — and potentially pay off the debt — faster. It may even decrease how much interest you end up paying over the life of the loan.

•   Make extra payments when possible. Exceeding your minimum loan payments
may help accelerate your loan repayment and potentially minimize the cost of high interest rates.

•   Tap a second source of income. Starting a side hustle is one way to boost your income, and you can put the extra cash toward your debt. You can also use tax returns, work bonuses, even birthday gifts to pay down a personal loan faster.

•   Refinance your loan. When you refinance a loan, you’re essentially replacing your old loan with a new loan that has a different rate and/or repayment term. Depending on the new rate and term, you may be able to save money on interest and/or lower your monthly payments.

•   Round up monthly payments. Over time, rounding up payments to the nearest $50 or $100 could slightly accelerate your payment schedule.

It’s important to note that many personal loans come with early payment fees, which could undo whatever money you would have saved on interest. More on that below.


💡 Quick Tip: Fixed-interest-rate personal loans from SoFi make payments easy to track and give you a target payoff date to work toward.

Can You Pay Off a Personal Loan Early?

It’s unlikely that a lender would refuse an early loan payoff, so yes, you can pay off a personal loan early. What you have to calculate, though, is whether it’s financially advantageous to do so. If a personal loan early payoff triggers a prepayment penalty, it might not make financial sense to do so.

Understand Prepayment Penalties

If and how a prepayment penalty is charged on a personal loan will be stipulated in the loan agreement. Reviewing this document carefully is a good way to find out if the penalty could be charged and how your lender would calculate it.

If you can’t find the information in the loan agreement, ask your lender for the specifics of a prepayment penalty and for them to point out where it is in the loan agreement.

There are a few different ways a lender might calculate a prepayment penalty fee:

•   Interest costs. In this case, the lender would base the fee on the interest you would have paid if you had made regular payments over the total term. So, if you paid your loan off one year early, the penalty might be 12 months’ worth of interest.

•   Percentage of your remaining balance. This is a common way for prepayment penalties to work on mortgages, for example, and you’d be charged a percentage of what you still owe on your loan.

•   Flat fee. Under this scenario, you’d have to pay a predetermined flat fee for your penalty. So, whether you still owed $9,000 on your personal loan or $900, you’d have to pay the same penalty.

It may sound strange that a lender would include this kind of penalty in a loan agreement in the first place. Some lenders may, though, to ensure you’ll pay a certain amount of interest before the loan is paid off. It is an extra fee that, when charged, helps lenders recoup more money from borrowers.

Avoiding Prepayment Penalties

If your loan has a prepayment penalty, it could be in effect for the entire loan term or for a portion of it, depending upon how it’s defined in the loan agreement. However, you have some options.

For starters, you could simply decide not to pay the loan off early. This means you’ll need to continue to make regular payments rather than paying off the personal loan balance sooner. But this will allow you to avoid the prepayment penalty fee.

Or, you could talk to the lender and ask if the prepayment penalty could be waived.

If your prepayment penalty is not applicable throughout the entire term of the loan, you could wait until it expires before paying off your remaining balance.

Another strategy is to calculate the amount of remaining interest owed on your personal loan and compare that to the prepayment penalty. You may find that paying the loan off early, even if you do have to pay the prepayment penalty, would save money over continuing to make regular payments.

Recommended: How to Avoid Paying a Prepayment Penalty

Does Paying Off a Personal Loan Early Affect Your Credit Score?

Personal loans are a type of installment debt. In the calculation of your credit score, your payment history on installment debt is taken into account. If you’ve made regular, on-time payments, your credit score will likely be positively affected while you’re making payments during the loan’s term.

However, once an installment loan is paid off, it’s marked as closed on your credit report — “in good standing” if you made the payments on time — and will eventually be removed from your credit report after about 10 years.

So does paying off a loan early hurt your credit? Short answer, yes. Paying off the personal loan early might cause it to drop off of your credit report earlier than it would have, and it may no longer help your credit score.

If You Pay Off a Personal Loan Early, Do You Pay Less Interest?

Since a personal loan is an installment loan with a fixed end date, if you pay off a personal loan early, you won’t pay less interest. You won’t owe any interest anymore because the loan will be paid in full.

Recommended: Average Personal Loan Interest Rates & What Affects Them

Advantages and Disadvantages of Paying Off a Personal Loan Early

There are definitely some advantages to personal loan early payoff. One obvious benefit is that you could save on interest over the life of the loan.

For example, a $10,000 loan at 8% for 5 years (60 monthly payments) would accrue $2,166.50 in total interest. If you could pay an extra $50 each month, you could pay the loan off 14 months early and save $518.42 in interest.

Not owing that debt anymore can be a psychological comfort, potentially lowering bill-paying stress. If you’re able to make that money available for something else each month — maybe creating an emergency fund or adding to your retirement account — it might even turn into a financial gain.

If you no longer owe the personal loan debt, you’ll essentially be lowering your debt-to-income ratio, which could positively affect your credit score.

That said, if your personal loan agreement includes a prepayment penalty, paying off your personal loan early might not be financially advantageous. Some prepayment penalty clauses are for specific time frames in the loan’s term, e.g., during the first year.

If you pay off the loan during the penalty time frame, it could cost you just as much money as it might if you had just paid regular principal and interest payments over the life of the loan.

You might be thinking of a personal loan early payoff so you can put your money to work somewhere else. But if the interest rate on the personal loan is relatively low, it might make financial sense to put your extra money toward higher-interest debt, or to contribute enough to an employer-sponsored retirement plan so you can get the employer match, if one is offered.

Another thing to consider is whether paying off your personal loan early will hurt your credit. As mentioned above, making regular, on-time payments to an installment loan like a personal loan can have a positive effect on your credit score. But when the loan is paid off, and marked as such on your credit report, it’s not as much help.

What Happens If You Don’t Pay Back a Personal Loan?

Let’s say your personal loan payment is due by the 1st of every month. One month, the 10th arrives and you realize you haven’t paid what you owe. You’ll likely be considered delinquent on the loan. You may also be hit with a late fee, and your credit score could be impacted.

When Is a Loan Considered to Be in Default?

What happens if you stop making payments on a loan altogether? Then you’ll likely be considered in default on the loan. Note that there’s no set amount of time when a loan is considered in default — a borrower may be one payment behind or they may have missed 10 in a row. It depends on the type of loan, the lender, and the loan agreement.

What Happens When You Default on a Personal Loan?

When you default on a personal loan, you’ll likely be charged late fees. But you may face other consequences, such as:

•   Your credit may be damaged. Creditors may report payments that are more than 30 days late to the credit bureaus. The missing payments could end up on your credit reports and stay there for up to seven years. This could cause your credit scores to drop and may pose an issue the next time you apply for new credit.

•   You may need to deal with debt collectors. If you fall far enough behind to be contacted by a debt collector, you may encounter aggressive behavior on the part of the collection agency. However, keep in mind that the Fair Debt Collection Practices Act limits just how far debt collectors can go in trying to recover a debt. If you feel a debt collector has gone too far, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

•   You could be sued. A lender or collection agency may file suit against you if they believe you aren’t going to repay the money you owe on a personal loan. If the judgment goes against you, your wages could be garnished, or the court could place a lien on your property.

•   Your cosigner may be impacted. If you have a cosigner or co-applicant on your personal loan, and you default on that loan, they could be impacted. For example, a debt collector could contact you and your cosigner about making payments. And if your credit score drops because of a default, theirs may drop, too.

If you’re facing a loan default, there are some things you can do now to help yourself. A good first step is to contact the lender, preferably before your next payment is due. Explain your situation to them, and find out if they can offer you any relief measures — for example, temporarily deferring loan payments.

You may also want to reach out to a credit counselor. They can work with you to create a budget that covers the essentials and frees up funds so you can pay down what you owe.

Depending on your situation, it may also be a good move to contact a lawyer. Having legal assistance is especially crucial if you’ve been served with a lawsuit.

Recommended: Better Money Management Tips

Types of Personal Loans

In general, there are two types of personal loans — secured and unsecured. Secured loans are backed by collateral, which is an asset of value owned by the loan applicant, such as a vehicle, real estate, or an investment account.

Unsecured personal loans are backed only by the borrower’s creditworthiness, with no asset attached to the loan. You might hear unsecured personal loans referred to as signature loans, good faith loans, or character loans. Typically, these are installment loans the borrower repays at a certain interest rate over a predetermined period of time.

Personal Loan Uses

Acceptable uses of personal loan funds cover a wide range, including, but not limited to:

•   Consolidation of high-interest debt

•   Medical expenses not covered by health insurance

•   Home renovation or repair projects

•   Wedding expenses

While there are benefits to taking out a personal loan, it might not always be the right financial move for everyone. Personal loans offer a lot of flexibility, but they are still a form of debt, so it’s a good idea to weigh the pros and cons before signing a personal loan agreement.


💡 Quick Tip: With low interest rates compared to credit cards, a personal loan for credit card consolidation can substantially lower your payments.

The Takeaway

If you’re able to pay off your personal loan early, that’s terrific. Doing so could help you save on interest over the life of the loan, provide more of a cushion in your monthly budget, lower your debt-to-income ratio, and alleviate debt-related stress.

However, before you pay off the balance, it’s a smart idea to calculate whether it’s a good financial decision or not. If your personal loan agreement includes a prepayment penalty that could take a bite out of any savings you might see on interest costs. Removing a history of regular payments on a loan too early can have a slight negative impact on your credit. Plus, the extra money might be put to better use in another financial tool.

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

FAQ

Is it good to repay a personal loan early?

Paying off a personal loan early can be a good financial decision, as long as any prepayment penalty charge doesn’t cost more than you might pay in interest.

If I pay off a personal loan early, do I pay less interest?

Paying off a personal loan early doesn’t affect the interest rate you’ve been paying up until that point. It would mean, however, that the total amount of interest you’d pay over the life of the loan would be less than anticipated.

Does paying off a personal loan early hurt your credit?

Because making regular, on-time payments on an installment loan such as a personal loan is a positive record on your credit report, removing that history early can have a slight negative affect on your credit.

What is the smartest way to pay off a loan?

There are a number of ways you can go about paying down debt. Two popular methods include the avalanche method (which focuses on making extra payments toward highest-interest rate debt first) and the snowball method (which calls for paying off the smallest debt first, the moving on the next largest debt, and so on).

Do you save money if you pay off loans early?

Paying off loans early could save borrowers money in interest. However, they may be hit with a prepayment penalty, which could negate those savings.

Are shorter or longer loans better?

It depends on your financial needs and goals. Generally speaking, borrowers with longer-term loans tend to pay more interest. By comparison, borrowers with shorter-term loans typically have lower interest costs but higher monthly payments.

How long can you stretch out a personal loan?

Lenders offer a range of loan term lengths, though generally speaking, most are between two and seven years.

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 .

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.

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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If you have multiple loans or credit cards with high interest rates, you might feel like you are continually paying interest and not making much headway on the principal of the debt. By consolidating those debts into one loan — ideally with a lower interest rate — you may be able to reduce your monthly payments or save on interest. Using a personal loan to consolidate debt can be one way to accomplish this goal.

This guide tells you everything you need to know about how loan consolidation works, what types of loans benefit from consolidation, and when to start the consolidation process.

What Is Loan Consolidation?

Loan consolidation, at its most basic, is the process of combining multiple debts into one. Usually, this means using a new loan or line of credit to pay off your existing debts, consolidating multiple payments into one.

For example, imagine you have the following debt:

•   $5,000 on a private student loan

•   $10,000 in credit card debt on Card A

•   $10,000 in credit card debt on Card B

Your private student loan may have a high interest rate, and your credit card interest rates probably aren’t much better. Each month you’re making three different payments on your various debts. You’re also continuing to rack up interest on each of the debts.

When you took out those loans, maybe you were earning less and living on ramen you bought on credit. But now you have a steady job and a good credit score. Your new financial reality means that you may qualify for a better interest rate or more favorable terms on a new loan.

A personal loan, sometimes called a debt consolidation loan, is one way to help you pay off the $25,000 you currently owe on your private student loan and credit cards in a financially beneficial way.

Using a debt consolidation loan to pay off the three debts effectively condenses those debts into one single debt of $25,000. This avoids the headache of multiple payments with, ideally, a lower interest rate or more favorable repayment terms.

Recommended: Using Credit Cards vs. Personal Loans

What Types of Loan Consolidation Are Available?

There are different types of loan consolidation. Which one is right for you depends on your financial circumstances and needs.

Student Loan Consolidation

If you have more than one federal student loan, the government offers Direct Consolidation Loans for eligible borrowers. This program essentially rolls multiple federal student loans into one. However, because the new interest rate is the weighted average of all your loans combined, it might be slightly higher than your current interest rate.

You may also be able to consolidate your student loans with a personal loan. If you’re in a healthy financial position with a good credit score and a strong income (among other factors), a personal loan might give you more favorable repayment terms, including a lower interest rate or a shorter repayment period.

Consolidating federal student loans may not be right for every borrower. There are some circumstances in which consolidating some types of federal student loans may lead to a loss of benefits tied to those loans. By the way, you don’t have to consolidate all eligible federal loans when applying for a Direct Consolidation Loan.

Credit Card Consolidation Loan

If you’re carrying balances on multiple credit cards with varying interest rates — and those interest rates are fairly high — a credit card consolidation loan is one way to better manage that debt.

Credit card loan consolidation is the process of paying off credit card debt with either a new, lower interest credit card or a personal loan that has better repayment terms or a lower interest rate than the credit cards. Choosing to consolidate with a personal loan instead of another credit card means potential balance transfer fees won’t add to your debt.

General Loan Consolidation

Let’s say you have multiple debts from various lenders: some credit card debt, some private student loan debt, and maybe a personal loan. You may be able to combine these debts into a single payment. In this case, using a personal loan to consolidate those debts would mean you would no longer have to deal with multiple monthly payments to multiple lenders.

Why Consider Loan Consolidation?

There are many reasons to consider loan consolidation, but here are some of the most common:

•   You’re a minimalist. Did you join in the “pandemic purge”? If your home looks less cluttered and you’d like your finances to match, you might be thinking about financial decluttering by consolidating some of your high-interest debt into one personal loan that has a lower interest rate or terms that work better for your budget.

•   Your financial circumstances have improved. Maybe you spent some time living off student loans to finish your degree, and now you’ve started your dream job. You have a steady salary, and you’ve taken control of your finances. Because of your financial growth, you may be able to qualify for lower interest rates than when you first took out your loans. Loan consolidation can reward all that hard work by potentially saving you money on interest payments.

•   Your credit card interest rates are super high. If thinking about the interest rate on your current credit cards makes you want to hide under your desk, consolidating those cards with a personal loan may be just what you’re looking for. High interest rates can add up over the time it takes to pay off your credit card. Using a personal loan to consolidate those cards can potentially reduce your interest rate and help you get your debt paid off more quickly.

Are There Downsides to Loan Consolidation?

Using a personal loan to consolidate debt may not be the right move for everyone. Here are some things to think about if you’re considering this financial step.

Potentially High Interest Rate

Not everyone can qualify for a personal loan that offers a lower interest rate than the credit cards you want to pay off. Using a credit card interest calculator will help you compare rates and see if consolidating credit cards with a personal loan is worth it for your financial situation.

Fees May Apply

Looking for a lender that offers personal loans without fees can help you avoid this potential downside. Keep an eye out for application fees, origination fees, and prepayment penalties.

Recommended: Find Out How a Balance Transfer Credit Card Works

Putting Your Assets at Risk

If you choose a secured personal loan, you pledge a particular asset as collateral, which the lender can seize if you don’t pay the loan according to its terms.

Possibility of Adding to Your Debt

The general idea behind consolidating debt is to be able to pay off your debt faster or at a lower interest rate — and then have no debt. However, continuing to use the credit cards or lines of credit that have zero balances after consolidating them into a personal loan will merely lead to increasing your debt load. If you can get to the root of why you have debt it may make it easier to remain debt free.

The Takeaway

Using a personal loan to consolidate debt can be a financial savvy move — especially if you have the credit history and score to qualify for a low interest rate and favorable loan terms. Consolidating multiple credit cards and loans with a single personal loan can help simplify your finances, lower the interest you pay, and shorten the time until you’re debt free.

If you’re thinking about consolidating credit card or other debt, a SoFi Personal Loan is a strong option to consider. SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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 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.

Medical bills represent a major financial challenge for many families. You can’t always prevent or foresee medical bills, even if you have insurance. By understanding how to check your medical bills for possible errors, you may be able to avoid being overcharged and making unnecessary payments.

How Common Are Medical Billing Errors?

It’s difficult to know what a medical procedure will cost before it’s performed. So, without being sure of the cost, it’s also difficult to know if there is an error on your medical bill. It doesn’t help that the language used on medical bills is not easily understood. It can be hard to spot mistakes when you aren’t clear about what you’re looking for.

The Centers for Medicare and Medicaid Services last year found a 7.46% improper billing rate for Medicare providers last year, which accounted for $31.46 billion in overpayments. And according to a survey conducted by the Kaiser Family Foundation (KFF), 53% of adults who have health care debt — and 43% of all adults — say they’ve received a medical bill they believe contained an error.

With medical bills so complicated and medical errors so prevalent, it’s no wonder that the amount of medical debt in the U.S. is so high. According to KFF, in June 2022 an estimated 17% of Americans had medical debt in collections. Medical debt is the largest source of debt in collections and has increased to $140 billion since 2009.

What Are Some Common Medical Billing Errors?

When medical billing inaccuracies emerge, they can either be purposeful or genuinely accidental. Either way, there are some frequent errors you may want to keep an eye out for.

Was the Bill Sent to Your Insurance Company?

If you have insurance, making sure your provider submitted a timely claim to the insurance company can be a good first step to take. Occasionally, providers may neglect to send the bill to your insurance company at all and charge you for the entire amount.

Your claim could also be denied if the provider didn’t have the right insurance information for you — even if the ID is off by just one digit. You’re already paying an insurance premium, so paying for the entire procedure out-of-pocket could boost your overall medical costs.

Were You Charged for Services You Didn’t Receive?

You may have to ask for an itemized list of all the charges in your bill, but verifying that you are only being billed for services or treatments that you actually received may be wise.

You may also want to confirm that the quantities are also correct — so you’re not being billed for two MRI scans when you only got one. The itemized bill should include prices, so checking that no extra zeros were added by mistake may be a good step in this process.

Was the Wrong Billing Code Used?

If your insurer denies coverage for a procedure or medication, you may be able to identify the correct billing code and request that the provider refile the claim. If you have questions about the codes used, checking with the medical provider and insurer may save you some research time.

One type of billing code error is known as upcoding. This is when the provider bills for a longer session than was provided (for example, being billed for a 60-minute session when you were only seen for 15 minutes). Another common error is known as unbundling, which refers to using codes for each component part of a procedure rather than a single code that covers them all.

Appealing an Insurance Denial

If you find an error during your hospital bill review, you may be able to file an appeal with your insurer if the charge was denied and you were billed for it. Appeal instructions can usually be found on the explanation of benefits received from your insurance company. Documentation to back up your appeal, such as medical records, can often help strengthen your case. The Patient Advocate Foundation offers a detailed guide to the insurance appeal process , including a sample letter.

There is usually a time limit to submit an appeal to an insurer, which can range from just 10 days to 180 days, depending on the insurer. Insurers may provide a decision within 60 days. If you disagree with the decision, you can ask for an independent review — your insurer should provide you with information on how to do this.

If your appeals aren’t successful, you may wish to turn to one of several advocacy groups. For example, the Patient Advocate Foundation offers one-on-one assistance at no charge, and its website also lists organizations that provide help for people with specific conditions. People with Medicare can access free counseling through the State Health Insurance Assistance Program.

If you’re still stuck, hiring a medical billing advocate to represent you may be helpful. These professionals typically charge an hourly rate or take a percentage of the money they save you.


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

What Are Some Options for Paying Off Medical Bills?

Even if you find errors in your medical bills and are able to resolve them, chances are this won’t eliminate what you owe entirely. Here are some ways you can approach paying off medical debt:

Negotiating a Reduced Bill or Payment Plan

Even if your bills don’t include any mistakes, they aren’t necessarily set in stone. If you’re having trouble making a payment, calling your provider’s billing department and explaining your situation may be the best first step to take.

Some may be willing to negotiate your medical bills, possibly lowering your fees if you make the payment in cash or in a lump sum.

You may be able to gain additional leverage by asserting, politely and accurately, that the provider charged an unfair rate, bolstered by research on average prices in your area and what Medicare allows for the service.

Even if you can’t get your payment reduced, you may be able to extend the due date. Many providers and hospitals will work with you to set up an affordable payment plan, sometimes without charging interest.

Budgeting for the Unexpected

Medical bills can pack an unexpected punch to an already tight budget. If you’ve already used some of the strategies listed above to reduce what you owe, it might be necessary to reduce expenses or increase income while you pay medical bills.

Taking a look at current spending is a good place to start. Determine whether there is nonessential spending that could be put toward what is owed.

If there is absolutely no wiggle room at all, you might consider increasing your income by taking on a side hustle or asking for a raise. Once you find a way to include medical payments into your budget, using a spending tracker could be a helpful way to make sure you have the funds available each month.

Using a Credit Card

Paying medical bills with a credit card is certainly an option. It might be a quick and initially easy option, but it might not be the best. Credit cards typically charge high interest rates, which could make your medical debt larger over time. One solution might be to look for a no-interest credit card.

You’ll also want to create a debt reduction plan so that you can pay the balance in full before the promotional period ends.

Taking Out a Personal Loan

A personal loan can be a smart way to pay off medical debt. This type of loan is typically unsecured, meaning you are not putting your home or any other asset on the line.

A personal loan can be used for many purposes, including paying off medical bills, but typically comes with much lower interest rates than credit cards or payday loans.

Note that you can use a personal loan calculator to see how much interest you could save by using a loan to pay off a credit card.


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

The Takeaway

Taking time to review medical bills and making sure there are no errors can save time and money in the long run. Understanding medical bills and the insurance appeals process — if that’s a step you have to take — can be confusing, so getting assistance is sometimes helpful.

Keep in mind that even if you’re able to resolve the medical billing error, you may still owe money. There are different strategies for paying off medical debt. You may decide to try negotiating a reduced bill or setting up a payment plan with your provider. You could try removing nonessential items from your budget so you can pay off your bills. A credit card is another option, as is taking out a personal loan.

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 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.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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