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When taking out a personal loan, one of the key decisions you’ll have to make is what term to select. A loan’s repayment term (i.e., how long you have to pay it off) can significantly impact your monthly payments, the total amount of interest you pay, and how quickly you become debt-free. Understanding how different term lengths affect loan repayment can help you make an informed choice that aligns with your budget and financial goals.

Below, we walk you through how personal loan term lengths work, and the pluses and minuses of going with a shorter- versus a longer-term loan. 

What Does Personal Loan Term Length Mean?

Put simply, the term length of a personal loan is how long you have to pay it off. More specifically, it’s a period of time that starts when you receive the loan funds and ends when your final payment is due. 

Personal loan terms vary depending on the lender and the amount of the loan, but typically range from two to seven years. Lenders will often give you a choice of loan terms. The length you choose will determine your monthly payment amount and the total amount of interest you’ll pay over the life of the loan. It can also impact the interest rate you’ll pay.

How Do Personal Loan Terms Work?

When you take out a personal loan, you’ll receive the full amount of the loan (called the principal) up front. Typically, you need to start paying back the principal, plus interest, in monthly installments within 30 days. These monthly payments will continue throughout the term of the loan. 

Generally, the larger the loan, the longer the term will be. For example, a $500 personal loan will often have a term of one year or less, while a $15,000 loan might have a three- to four-year term. Loans of $30,000 or more can have terms ranging from five to seven years.

Recommended: How Personal Loans Work

Factors to Consider When Choosing a Personal Loan

There are a number of things to consider when taking out a personal loan. These include:

•   Loan amount: It’s important to take out a loan that’s enough to cover your needs but not more than you’ll need, since you’ll be paying interest on these funds. While you can find personal loans as small as $500, many lenders have loan minimums of $1,000 to $2,000.

•   Interest rate: Rates for personal loans can range anywhere from 5.99% to over 29.99%. The rate you’ll pay will depend on the lender, the loan amount, the loan’s term, and your credit score. Generally, you’ll get a lender’s lowest rate if you have a good or excellent credit score and select the shortest available term.

•   Repayment term: The less time you’re in debt, the less time interest has to accrue. Thus, going with a shorter loan term can lower the overall cost of a personal loan. However, it means your monthly payments will be higher. Repayment terms can also impact personal loan rates, with longer terms typically linked to higher rates, since they pose more risk to the lender.

•   Collateral: Personal loans are typically unsecured, which means you don’t have to pledge a valuable asset (collateral) to back up the loan. There are some secured personal loans, however. Since collateral lowers a lender’s risk, secured loans tend to have lower interest rates than unsecured loans. However, should you fall behind on payments, the lender can seize your collateral to recoup their losses.

•   Origination fee: Some lenders charge origination fees to cover the processing costs of the loan. These fees can range from 1.00% and 8.00% of the total loan amount. In some cases, you need to pay this fee in cash at closing; in others, the lender adds it to the amount you’re financing or subtracts it from your loan before it’s dispersed. Some lenders, however, don’t charge origination fees for personal loans.

•   Prepayment penalty. If you pay off your personal loan early, a lender might charge you a prepayment penalty to make up for the loss in interest. But not all lenders charge a prepayment penalty.

Pros of Short Term Loan Length

Here’s a look at some of the advantages of taking out a personal loan with a shorter repayment term.

Faster Debt Repayment

One of the main advantages of a short-term loan is that you can become debt-free more quickly. By committing to higher monthly payments, you reduce the loan balance faster, which can free up your income for other uses sooner.

Lower Total Interest Costs

Because you are paying off the loan more quickly, there is less time for interest to accrue. As a result, shorter-term loans typically result in lower total interest costs, saving you money in the long run.

Potential for Lower Interest Rates

Since shorter terms reduce risk to the lender, you may be able to get a lower interest rate by choosing a shorter loan term. This can further decrease the overall cost of the loan.

Cons of Short Term Loan Length

Short-term personal loans also have some downsides, Here are some to keep in mind.

Larger Monthly Payments

One of the main drawbacks of a short-term loan is that you’ll have higher monthly payments. This might be challenging if your budget is already tight. It also means you’ll have less money to save and invest. 

Less Financial Flexibility

With higher monthly payments, there is less room in your budget for unexpected expenses. This can be problematic if you encounter financial difficulties or need to redirect funds for emergencies.

Smaller Loan Amounts

Short-term personal loans tend to be for smaller amounts and may not be sufficient to cover your expense.

Recommended: How Much of a Personal Loan Can I Get?

Pros of Long Term Loan Length

Here’s a look at some of the advantages of choosing a personal loan with a longer term. 

Smaller Monthly Payments

A longer term spreads the repayment over a more extended period, resulting in lower monthly payments. This can make the loan more manageable, especially if you have a tight budget or your income fluctuates.

Frees Up Funds

Lower monthly payments give you more flexibility in your budget, freeing up funds for other goals, such as saving, investing, or covering other expenses. This can be beneficial if you anticipate future financial needs or want to maintain a comfortable lifestyle while repaying the loan.

Larger Loan Amounts

Longer-term personal loans typically give you access to larger loan amounts. This can work well if you have a big expense, such as consolidating credit card debt, a wedding, or a home renovation.

Cons of Long Term Loan Length

There are also some disadvantages to going with a longer loan term. Here are some to keep in mind.

Higher Costs

While longer terms generally make monthly payments smaller, extending the time you take to repay a loan typically leads to higher overall interest costs.

Extended Debt Duration

A longer loan term means you’ll be in debt for many years. This prolonged commitment could potentially become a drag on your budget or impact your financial planning, such as saving for retirement or other long-term goals.

Recommended: What Happens If You Default on a Personal Loan?

Potential for Higher Interest Rates

Longer terms lead to increased risk for lenders. As a result, they may charge higher interest rates, which can further increase costs.

Choosing the Best Loan Term Length

When deciding on the best term length for a personal loan, you’ll want to factor in your monthly budget, financial goals, and the total cost of the loan. Here are some tips to help you decide on the best term length for a personal loan.

•   Assess your financial situation: You might start by taking a look at your current monthly income, expenses, and savings targets. From there, you can determine how much you can afford to pay each month without compromising your lifestyle or future goals.

•   Compare interest rates: It’s a good idea to shop around for lenders offering the best interest rates for different term lengths. A slightly higher interest rate might be acceptable if it results in more manageable monthly payments.

•   Calculate total costs: There are online calculators that can help you compare the total interest paid for different term lengths. Understanding the long-term cost implications can help you make an informed decision.

•   Consider flexibility: Check if the loan allows for early repayment without penalties. This flexibility can be handy if your financial situation improves and you want to pay off the loan faster.

The Takeaway

The right personal loan term length for you will depend on several factors, including your budget and future goals. Generally, going with a shorter term makes sense if you can afford a higher payment, want to save money on interest, and prefer to get out of debt quickly. However, you might be better off with a longer term if you need a more affordable monthly payment and want more flexibility, since you can typically pay your loan off ahead of schedule (just watch for any prepayment fees). 

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

Can personal loans be 10 years?

Yes, personal loans can have terms up to 10 years, although they are less common. Long-term personal loans typically range from two to seven years, but some lenders offer 10-year terms for specific purposes or higher loan amounts. 

While a 10-year term can provide lower monthly payments, it often results in higher total interest paid over the life of the loan. Before you sign a long-term loan agreement, you’ll want to carefully consider the total cost and your ability to commit to such an extended repayment period.

Is it OK to pay off a personal loan early?

Yes, it’s generally okay to pay off a personal loan early, and can even be beneficial. Paying off your loan ahead of schedule can save you money on interest and free up money for other goals. 

However, it’s important to check your loan agreement for any prepayment penalties. Some lenders charge fees for early repayment to compensate for the lost interest. If there are no penalties or the savings outweigh the fees, early repayment can be a smart financial move.

Do personal loans hurt your credit?

Personal loans can have both positive and negative impacts on your credit. Initially, applying for a loan results in a hard inquiry, which can temporarily lower your credit score. Taking on new debt may also affect your credit utilization ratio.

However, consistently making on-time payments can benefit your credit over time by demonstrating responsible credit behavior. Taking out a personal loan may also diversify your credit mix, which could also positively impact your credit. The key is to manage the loan responsibly and avoid missing payments to maintain or improve your credit profile.

Photo credit: iStock/Pekic

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.

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.

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 .

SOPL-Q324-002

When you purchase a home, you must pay closing costs, which are the fees the lender charges to recoup loan processing costs. These can add up to a hefty sum, typically 3% to 6% of your mortgage amount.

Typically, you can take out a personal loan to cover those closing costs and help you across the finish line of a property purchase. You can often tap other funding sources as well. Take a closer look at the pros and cons of using a personal loan for closing costs, plus the alternatives, so you can decide what’s best for your needs.

What Are Closing Costs?

Closing costs are processing fees that you pay to your lender, either as the buyer or seller in a real estate transaction:

•   Buyers: Buyers typically pay between 3% and 6% of the total loan amount in closing costs. Buyers must pay this amount out of pocket, so it’s important for them to have a plan for how they’ll access the money before they get to the closing table.

•   Sellers: If sellers contribute to closing costs (say, to negotiate a home sale), those fees usually get taken out from the sale proceeds.

Here’s an example: If you plan to buy a home with a $300,000 loan, as the buyer, you’ll need to bring between $9,000 and $18,000 to the closing table. If you were the seller, you’d see that amount taken out of the costs you’d pocket from the sale.

Fees Associated with Closing Costs

Closing cost fees may include:

•   Application fee: Lenders sometimes charge a one-time fee for borrowers to submit a loan application.

•   Credit report fee: A credit report or credit check fee covers the cost to dig into your credit report, which shows your credit history. Your lender uses the information it uncovers to decide whether to approve your loan and how much they’ll lend you.

•   Origination fee: You pay this fee to the lender to process the loan application.

•   Appraisal fee: A fee paid to a professional to appraise the home based on an evaluation to determine its fair market value.

•   Title search: A title search looks into public records to determine who actually owns the property and who has liens on the property (for example, an unpaid contractor’s lien for work done on the home).

•   Title insurance: Title insurance protects you from financial loss and legal expenses in case the home has a bad title.

•   Underwriting fee: Underwriting is the process of reviewing your finances to determine the risk of offering you a mortgage, and the fees cover this process.

•   Property survey fee: Property survey fees cover the cost of checking the boundaries and easements of a property. This process shows exactly where the property’s perimeter is and what the property includes.

•   Attorney fee: You will probably need to hire a lawyer to review the terms in your purchase contract and handle your closing.

•   Discount points: Discount points are a way to balance your upfront costs and your monthly payment. If you use points to pay more upfront, you’ll likely have a lower interest rate, meaning that you could pay less monthly and over your loan term.

•   Homeowners insurance premiums: Homeowners insurance provides financial protection if your home undergoes a disaster or accident. You must typically show your lender that you have paid homeowners insurance.

•   Mortgage insurance: If you have a down payment of less than 20%, you will often have to pay mortgage insurance, a fee per month that protects your lender if you were to default. You’ll also have to pay a version of mortgage insurance on Federal Housing Administration (FHA) and U.S. Department of Agriculture (USDA) loans. You may have to pay these insurance fees with your closing costs in addition to your monthly payments, particularly for the FHA and USDA loans.

•   Property tax: Homeowners pay property tax to state, county, and local authorities for schools, roads, and other municipal services. You may have to pay a portion of your property tax at closing.

•   Homeowners association (HOA) fees: If you plan to move to a neighborhood that has an HOA, or an organization that makes and enforces rules for a neighborhood, you may owe HOA fees at closing. The seller may pay these on a prorated basis.

•   Per-diem interest: Per-diem interest refers to the interest a lender charges for the days between a closing date and the first day of your billing period.

•   Transfer tax: State or local governments often charge real estate transfer taxes, meaning that they charge when properties transfer ownership.

•   Recording fee: State and local governments charge recording fees to legally record your deed, mortgage, and other home loan documents.

Note that this isn’t an exhaustive list of closing costs — you may be on the hook for other fees as well.

Can You Use a Personal Loan for Closing Costs?

First, it’s important to understand how a personal loan works. It is usually funded by a bank, credit union, or online lender. You can typically use the money however you want — there aren’t as many restrictions on personal loans compared to, say, student loans. After you receive a personal loan, you pay it back with regular, fixed payments (with interest) over a specified term.

As mentioned above, you can use the cash as you see fit. So, yes, you can use a personal loan for closing costs. However, you can’t use it for a down payment, and you must tell your lender that you’ll go this route and borrow to pay the closing costs. The lender will include it in your debt-to-income (DTI) ratio, which is the amount of debt you have relative to your income.

Applying for a personal loan can involve prequalifying with several lenders and comparing them, gathering required documents (ID, proof of address and income, Social Security number, and education history), filling out the loan application, and receiving your funds after approval. You may be able to get a personal loan in one to three days.

As you shop around for funds, you’ll likely want to consider what credit score you need for a personal loan at a given interest rate. Also consider the length of the loan term; this can typically range from one to seven years.

Recommended: Guide to Personal Loans

Pros of Taking Out a Personal Loan for Closing Costs

Here are some of the key benefits of taking out a personal loan for closing costs.

•   Collateral not required: Personal loans are often unsecured loans, meaning that you don’t have to put an asset up in order to receive the loan. Therefore, if you fail to repay the loan, your lender will not claim the asset to repay your debts.

•   Quick approval: It usually doesn’t take long to get a personal loan once you’ve been approved. After you submit your application and materials, it might take just a day to get the personal loan, though it could take longer.

•   Flexible repayment options: You can tap into flexible repayment plans, including no prepayment penalty, meaning that the lender won’t penalize you for paying off the loan early.

Cons of Taking Out a Personal Loan for Closing Costs

Next, consider the downsides of using a personal loan to cover closing costs.

•   DTI increase: Lenders will look at your overall debt under a microscope, so taking on a personal loan may factor into your overall debt. It may signal to the lender that you aren’t in a good financial position since an additional loan could raise your DTI ratio. It might keep you from being approved for a mortgage or could result in a higher mortgage interest rate.

•   Additional loan payment: You might find it tricky to repay a personal loan in addition to a mortgage payment. Consider whether you can comfortably make both payments every month.

•   High interest rates: There is the potential for high interest rates if you have poor credit. This can make it more challenging to afford a personal loan.

Recommended: Personal Loan Requirements

Alternatives to a Personal Loan for Closing Costs

You may have options vs. getting a personal loan for closing costs. Consider how else you might handle those fees.

•   Roll them into your mortgage: You may be able to add your closing costs to your mortgage, but this means you’ll increase the principal balance of your loan. This will increase both the principal and the interest you’ll pay over your loan term and also translates to higher monthly payments.

•   Ask for a waiver: Your lender may be willing to waive certain fees. For example, they may reduce certain processing fees. There’s no guarantee, but it can be worth asking. That might help you out with your final closing cost amount.

•   Ask the seller to pay: As mentioned previously, sellers may pay for some of the closing costs if they’re eager to ensure that the property sale doesn’t fall through.

•   Tap into assistance programs: Many state and local governments offer down payment and closing cost assistance programs for moderate- to low-income home buyers. Look into your state’s housing finance agency, your city or county website, the U.S. Department of Housing and Urban Development (HUD), or check with your lender to learn more about your options.

•   Use gift money: Do you have a generous grandparent or parent who wants to help you cover your closing costs? Your state may have rules and regulations attached with gift money (especially ensuring that it’s an actual gift). Check with your lender to learn more.

The Takeaway

You can typically use a personal loan to pay for closing costs, the fees that can cost 3% to 6% of your home loan amount when you purchase a property. While this can be a convenient source of funding that is typically unsecured (meaning no collateral is required), it can raise your DTI and add to your monthly financial burden. It’s wise to carefully consider all the pros and cons, as well as alternative funding sources, when deciding whether to use a personal loan for closing costs.

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 smart to finance closing costs?

Whether it’s smart to finance closing costs depends on your personal situation. For example, for some people who can handle the additional monthly payment, it may be a convenient move. On the other hand, getting a personal loan may increase your DTI, so your mortgage lender might charge you a higher interest rate or deny you the loan altogether.

Can I put closing costs on a credit card?

While you’ll usually use a cashier’s check, certified check, or wire transfer to pay for closing costs, you can put some closing costs on a credit card, such as attorney, appraisal, and survey fees. Check with your lender to learn more about which fees you can put on a credit card. (Also note that using your credit card in this way can raise your credit utilization rate and potentially lower your credit score.)

What is not an acceptable source of funds for closing?

Closing costs are typically paid by a cashier’s or certified check or by wire transfer. Funds for these could be acquired by such sources as a government program or a personal loan. Less frequently, credit cards, debit cards, and personal checks may be accepted for some closing costs.

Photo credit: iStock/jacoblund

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 .

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.

SOPL-Q324-010

A payday loan is a high-cost, short-term loan that gives you a quick infusion of cash to tide you over until your next paycheck. If you’ve taken out several payday loans, you may wonder about your repayment options. Consolidating them, or taking out a single new loan to pay off the multiple high-interest ones, can be an option. For some people, it can be a path out of the debt cycle.

It’s important to understand how this process can work and its pros and cons.

Understanding Payday Loan Consolidation

Before you learn about payday loan consolidation, a brief note about these loans: They are typically used by people in urban areas who earn less than $40,000 per year. They can offer cash when needed for individuals who are falling behind on rent, utilities, or car payments.

Next, take a closer look at payday loans and how debt consolidation works.

Definition and How It Works

Payday loan consolidation means combining multiple existing payday loans under one new personal loan. In short, payday loan debt consolidation bands your loans together and allows you to repay them, typically at a lower interest rate and/or with a longer repayment period, usually one to seven years. In short, they can be a great alternative to repaying individual payday loans. While payday loans are usually very short-term, if you do the math, their annual percentage rate (APR) can be a shocking 391% or higher.

To get a payday loan consolidation loan, you can take the following steps:

1.    Add up your payday loan balance, including fees.

2.    Compare debt consolidation interest rates and loan terms, as well as personal loan requirements.

3.    Apply for the loan that best suits your needs. Banks, credit unions, and online lenders may offer personal loans, which are typically unsecured loans, meaning you don’t need to provide collateral.

4.    Once you are approved for a personal loan, you receive a lump sum payment to pay off your payday lenders. Or your lender may pay off your payday loans directly.

5.    Make monthly payments on the personal loan until you pay it off completely. Setting up automatic payments so you don’t miss a payment can be a smart move.

Recommended: Payday Loan Requirements

Benefits of Consolidating Payday Loans

Here are the benefits of consolidating online payday loans and other forms of fast cash lending.

•   New interest rate: Consolidating your payday loans means you can get a new, lower interest rate, well below than the triple-digit APRs that payday loans typically carry.

•   Convenience: When you consolidate to a personal loan, you receive a regular monthly payment, which helps with a more predictable repayment schedule. You no longer need to juggle or worry about multiple payments.

•   Lower fees: You may get charged an origination fee (between 1% and 10% of the loan amount) with a personal loan, but these charges are typically much less than the cost of carrying payday loans.

•   Credit building: You might be able to build your credit score as you make regular, on-time monthly payments on your new personal loan. This can benefit you in the long run because it could give you opportunities to qualify for other loans at more favorable rates in the future.

Options for Payday Loan Consolidation

There are several options for payday loan consolidation, including debt consolidation loans, credit counseling services, and debt management plans.

Debt Consolidation Loans

You might want to consider a debt consolidation loan through a bank, a credit union, or an online lender. A debt consolidation loan is a type of loan that allows you to pool many of your loan payments into a single loan payment, making it easier for you to keep track of your payments. You might also find that these financial institutions offer significantly lower interest rates than payday loans. This can result in lower monthly costs, which can be very helpful for those who are living paycheck to paycheck.

Check for the interest rate on your new loan and the length of time you’ll repay your debt consolidation loan to ensure you get a comprehensive understanding of how much you’ll pay.

Credit Counseling Services

Credit counseling services are nonprofit organizations that help you manage your debts. They may offer educational materials and advice after reviewing your situation in a consultation, educate you about money management, help you develop a budget, and understand your credit report and scores.

Debt Management Plans

Credit counseling agencies and certified financial planners (CFPs) can help you develop a debt management plan. They will walk through your financial situation and discuss several options, including how to handle unsecured debts like credit cards and personal loans. Agencies may take management of your debts and contact creditors to find out if they can:

•   Lower interest rates

•   Lower monthly payments

•   Stop late fees

They will let all your creditors know that they have taken over your accounts, which means your payments go to the agency instead of to your creditors.

A CFP can help you budget and explore options for restructuring and consolidating your debt.

Of course, you’ll pay fees for these professional services, so check with the agency or CFP how much you’ll pay. Be cautious about this decision, and check the reputation of an agency or financial professional carefully.

Qualifying for Payday Loan Consolidation

You can qualify for payday loan consolidation by meeting credit and income verification requirements and by understanding the fees and interest rates, repayment terms, and schedules.

Credit Requirements and Income Verification

Here are the usual requirements: You must be 18 or older and have a valid ID, such as a driver’s license or passport, to get a consolidation loan. You must also prove your income through a pay stub or other document and that you have an active bank or credit union account.

Fees and Interest Rates

Payday debt consolidation loans also come with fees and interest. As of August 2024, interest rates range from about 8.00% to 36.00%, depending on your creditworthiness, with an average of 12.36%. Origination fees are typically 1% to 10% of the loan amount.

Repayment Terms and Schedules

Along with a lower interest rate, you can also expect a longer repayment period with a payday consolidation loan compared to a standard payday loan. The term typically ranges from one to seven years with monthly payments.

Develop a Debt Repayment Strategy

Once you receive the money for the payday loan consolidation, you can pay off each payday lender (or the lender of your consolidation loan may do so for you). Then focus on paying off your personal loan. It’s vital to keep up on your personal loan payments, because missed payments can negatively affect your credit score.

Consider setting up automatic payments to avoid making missed payments, which also results in late fees. You might even get a discount (possibly between 0.25% and 0.50%) to set up automatic payments.

Create a Budget and Cutting Expenses

Creating a budget can help ensure you won’t need another payday loan. Use a budget app or try a method like the 50/30/20 budget rule to keep track of your expenses and to determine where you can cut back, whether it’s eating out, purchasing shoes or clothes, a gym membership you never use, or other items you don’t really need.

Doing this can help you make your payday loan consolidation payments and meet all your other debt obligations. Staying on top of your finances in this way can be a path to paying off debt quickly.

Prioritizing Debt Payments

Consider prioritizing debt repayment for your personal loan for consolidation and also on other loans that you owe. Taking care of all types of debt you owe can set you up for financial success. Tackling all types of debts can help you succeed over time, so keep track of what you owe on the following:

•   Mortgage

•   Student loans

•   Auto loan

•   Home equity loan

•   Credit-builder loan

Recommended: Debt Payoff Guide

Build an Emergency Fund

Many experts recommend building an emergency fund that contains three to six months’ worth of basic expenses, to help protect against incurring future debts. An emergency fund can cover unexpected expenses or financial emergencies, such as a big car repair bill or a job loss situation. You might put the money for an emergency fund into a high-yield savings account to earn a competitive interest rate.

If you have an emergency in the future, you can dip into your emergency savings instead of taking out a payday loan.

Avoid Payday Loan Debt in the Future

Payday loans are risky, and if you need money, they should be your last resort. So, what are your alternatives? Here are some options.

Understand the Risks of Payday Loans

Payday loans may seem innocuous because you can get a quick infusion of cash without a credit check as long as you repay the loan balance on your next payday. Payday loans are small loans (usually $500 or less) that you must repay within 10 to 14 days of receiving the money. No biggie, right?

It’s true that you’ll get funds in your bank account quickly — usually within one business day. But the risks of payday loans occur when the lender assesses fees. Payday lenders don’t charge traditional interest rates — they usually charge a flat fee, between $10 and $30 for every $100 borrowed.

For example, a $500 loan could incur $150 in fees after the 10- to 14-day period. Some have interest rates of a whopping 600%.

Explore Alternative Financing Options

To avoid those kinds of interest rates, alternatives to payday loans include:

•   Personal loans: Standard personal loans can offer funds at a significantly lower interest rate, if you qualify. Bad-credit personal loans can be obtained by those who have a low credit score, and these loans do not require collateral. Unfortunately, these come with higher interest rates, but they’re not as high as payday loans.

•   Payday alternative loans: Payday alternative loans come from credit unions as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. Credit unions offer $200 and $1,000 PALs I with a maximum 28.00% APR, with one- to six-month repayment terms. Credit unions offer PALs up to $2,000 and a maximum 28.00% APR, with one- to 12-month repayment terms.

•   Home equity line of credit (HELOC): A HELOC is a type of loan where you borrow against your home’s equity. Your home serves as collateral, which means the bank could seize your home if you don’t repay your loan. You can think of a HELOC as similar to a credit card. After your lender approves the amount you can borrow, you have a certain amount of time to withdraw up to the limit within the draw period. When the draw period ends (say, after 10 years), you’ll enter a repayment period, such as 10 or 20 years. HELOCs typically have much lower interest rates than payday loans.

•   Friend and family loans: Consider asking family and friends for a loan, but remember that not repaying a loan to family or friends can have lasting effects on your relationship.

•   Credit card cash advance: Cash advances are short-term loans that allow you to access money from the financial institution that backs your credit card. You can borrow money against your line of credit, though it’s important to check the fees and APR. A credit card cash advance is usually an expensive option.

•   Employer paycheck advances: Your employer may offer paycheck or payroll advances up to a limit, typically $1,000. You pay the loan back to your employer through future earned wages. Learn more about the repayment terms and details about the payment advance before you go that route.

•   Peer-to-peer loans: Peer-to-peer loans take a crowdfunding approach to borrowing money. Money comes from individual private investors instead of institutions, typically in the form of unsecured personal loans, but note that due to the nature of these loans, the government doesn’t provide insurance for them.

•   Second job or side hustle: A side hustle or second job can bring in more cash, if you have the time and resources to devote to it. This income stream could help you avoid taking out a payday loan.

Improving Financial Literacy

One of the best ways to improve your understanding and management of your money is to learn as much as you can about it. Developing financial literacy can help you make informed decisions about how to save money for emergencies, avoid debt, spend and budget wisely, and more. This, in turn, can help you sidestep payday loans.

The Takeaway

If you’ve taken out payday loans, you may wonder if consolidating payday loans makes sense. Taking out a single personal loan can help you replace multiple high-interest loans with a single, lower-interest one. This can allow you to reduce the amount of interest you’ll pay over time and take better control of your finances. Other types of loans may also be available to help you avoid payday loans. Educate yourself about all of your options so you can choose the best path forward.

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

Can I consolidate payday loans with bad credit?

You may be able to get a payday consolidation loan with bad credit, but the interest rate may be higher than what you’d find with a higher credit score. Check with lenders to see whether you qualify for payday loan consolidation and at what interest rate.

What happens if I miss payments on a consolidated loan?

When you opt for a payday loan consolidation, your responsibility is to repay your loans. If you miss payments on a loan consolidation, you will likely incur late fees and could face a negative impact on your credit score. Keep making on-time, regular payments so your credit score doesn’t take a dip.

How long does payday loan consolidation take?

You can typically receive a personal loan fairly quickly, and the repayment term is usually between one and seven years.

Photo credit: iStock/tsingha25

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 .

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.

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.

SOPL-Q324-007

Zombie debt is old, settled, or long-forgotten debt that has suddenly come back to life and is now threatening to wreak havoc on your finances. These debts are often purchased on the cheap by third party debt collection agencies, who then try to collect on them by scaring or tricking unsuspecting consumers into paying up.

While zombie debt can, indeed, be scary, you don’t necessarily have to pay anything to make it go away. In many cases, zombie debt has already been settled or is too “old” to be collectible. It’s also possible the debt doesn’t even belong to you but has your name attached due to an error or identity theft. Here’s what to do if a collector is hounding you for an old or unfamiliar debt.

Zombie Debt Definition

Zombie debt is generally defined as debt that is more than three years old that has either been settled, forgotten about, or belonged to someone else. While a debt collector is allowed to contact you about this debt, they are not allowed to harass you.

If a zombie debt collector contacts you about a debt that has expired or already been paid or settled, you do not need to pay it, and they cannot take you to court to collect the money.

Types of Zombie Debts

Zombie debts often fall into the following categories:

Settled Debts

If you’ve filed Chapter 7 bankruptcy, some of your debts might have been discharged, which means you’re no longer on the hook for paying them back. If a debt is settled, you should have a written agreement that makes it clear you’re no longer legally liable for the debt.

Recommended: Getting Approved for a Personal Loan After Bankruptcy

Debt That Isn’t Yours

Debt that a scammer racked up under your name (by stealing your identity) can come back to haunt you as zombie debt, even though it doesn’t really belong to you. It’s also possible for a collection agency to mistakenly think a certain debt is yours and be going after you due to an error.

Time-Barred Debt

In many states, there is a statute of limitations on debt (with the exception of federal student loans). This means that, after a certain time frame, a collector can no longer take legal action to collect the debt. The exact time limit will depend on a number of factors, including the state law that’s noted in your credit agreement and the type of debt it is (such as credit card debt, a car loan, a personal loan, etc.) but it’s typically three to six years.

Depending on the state, the statute of limitations period may begin once the first required payment is missed, or it might start from the point when the most recent payment was made, even if that payment was made during collection.

It’s important to note that even if a debt is past its statute of limitations, making any type of payment or acknowledging you owe an old debt can restart the clock.

Debt That’s Fallen Off Your Credit Reports

Negative items on your credit report, such as a late payment or a debt in collection, can stay there for up to seven years. After that, the debt falls off your reports. If, however, you make (or agree to make) a payment on an expired debt, the debt collection agency can report the debt to the credit bureaus, resetting the seven-year clock.

How Does Zombie Debt Work?

Zombie debt is typically older debt. Generally, the original creditor has given up and sold the debt to a third party collection agency. These agencies often buy up zombie debts in bulk for pennies on the dollar. Even if the debt is past the statute of limitations and they cannot legally collect, they will often still try in the hopes that some consumers will pay out of fear. It’s essentially a numbers game — even if just a few people pay something, the business model can be profitable.

Some tactics that these collectors will use include:

•   Telling you that if you make a partial payment, they will leave you alone

•   Calling themselves a “litigation firm”

•   Threatening to take you to court if you don’t pay

•   Harassing you with excessive calls and verbal abuse

If you’re on the receiving end of a zombie debt collection, you’ll want to be careful. There is no upside in paying anything on a debt that is past the statute of limitations. In fact, doing so can restart the clock and make it possible for a collector to sue you for the debt and put it back on your credit report.

Recommended: What to Know About Debt Settlement Companies

How to Deal with Zombie Debt Collectors

If a debt collector contacts you about a debt you don’t remember or thought was settled long ago, here are some steps to take.

•   Verify it’s a legitimate debt. By law, a collector has to give you details about the debt, either when they first communicate with you or within five days of the first contact. These details must include the name of the creditor you owe it to and how much money you owe (written out to include interest, fees, payments, and credits). If they don’t, you’ll want to request a debt validation letter. It’s also a good idea to get a free copy of your credit report at AnnualCreditReport.com to see if the debt is listed there.

•   Follow up on suspected identity theft. If you believe that your zombie debt is a result of identity theft, you’ll find tips and sample letters to help you dispute it at IdentityTheft.gov.

•   Know your rights. No matter where you live or the form of debt, you have rights. Under the Fair Debt Collection Practices Act (FDCPA), zombie debt collectors are allowed to reach out to you, but they are not allowed to do the following:

◦   Contact you before 8 a.m. or after 9 p.m. without your consent

◦   Reach out to you at work if you’ve requested they stop

◦   Contact you via text or email, or DM you on social media if you’ve asked them to stop

◦   Call more than seven times within a seven-day period

•   Don’t ignore lawsuits. If a debt collector files a lawsuit against you to collect a zombie debt, it’s important that you respond to the lawsuit, either personally or through your lawyer, by the date specified in the court papers to preserve your rights.

•   Don’t accidentally reset the clock. If you make — or even agree to make — a payment on a time-barred debt, the statute of limitations clock may reset. If that happens, the collector can then sue you for the full debt amount, plus interest and fees. Also be wary of collectors that ask if you want to enroll in a “Fresh Start Program,” as this can also reset the clock on the debt.

•   Dispute the debt if it’s not legitimate. If the debt is not something you legitimately owe (say, it has already been settled, is time-barred, or is not yours), you’ll want to send a dispute letter explaining why you do not owe the debt, ideally via certified mail. The Consumer Financial Protection Bureau offers sample letters that you can use as a guide.

•   Negotiate if you do owe. If the debt in collection is legitimate and you do need to pay it, consider negotiating with the collector for a reduced amount. If they agree, be sure to get the new terms in writing (in case the debt comes back to haunt you — yet again — in the future).

Protecting Yourself from Zombie Debt

To prevent any of your current debts from becoming zombie debts, you’ll want to be sure to make all of your payments on time and in full and keep records of your payment history. If you have multiple high-interest debts and are finding it difficult to keep up with payments, you might consider getting a debt consolidation loan, ideally at a lower interest rate.

Other debt payoff strategies include getting a no-interest balance transfer card, paying off the most expensive debts first (known as the avalanche payoff method), and negotiating interest rates and payment terms with your lender.

The Takeaway

Zombie debt can rise from the grave to haunt you, but you don’t have to head for the hills or hide in fear. When you know your rights, you can protect yourself against old or expired debt that collectors are trying to cash in on.

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.

FAQs

Can you ignore zombie debts?

Ignoring zombie debts, which are old debts that have resurfaced, is generally not a good idea. While these debts may be past the statute of limitations, debt collectors can still attempt to collect them. Ignoring their attempts can lead to persistent harassment and, if the debt is legitimate, potential legal action.

A better route is to ask for a verification letter that includes all of the details of the debt. If the debt has timed out or is not actually yours, you can inform the collector in writing and request that they no longer contact you.

How can zombie debt collectors legally contact you?

Zombie debt collectors can legally contact you via phone call, letter, email, and even text messages. However, the Fair Debt Collection Practices Act (FDCPA) regulates these communications, requiring collectors to respect certain boundaries. For example, they cannot contact you early in the morning or late at night and are not allowed to harass you. They must also identify themselves and provide information about the debt.

What is the zombie debt statute of limitations?

The statute of limitations for zombie debts varies by state and type of debt but often ranges from three to six years. This period defines how long a creditor or debt collector has to file a lawsuit to collect a debt. Once the statute of limitations expires, the debt becomes time-barred, meaning the collector can no longer sue you to collect it. That said, the debt still exists, and collectors can still attempt to recover it through other means, such as phone calls or letters. It’s important to verify the specific statute of limitations in your state.

Photo credit: iStock/skynesher

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.

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.

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.

SOPL-Q324-005

A passbook loan is a loan that allows you to borrow against the money you have in your savings account. In other words, your savings serve as collateral for the loan.

While you will likely have to pay interest when borrowing money in this way (which you wouldn’t have to do if you used your savings directly), a passbook loan can help you build credit if your financial institution reports the activity to the credit bureaus and you manage the loan well. Passbook loans may also be a valuable financial tool if you’re having trouble securing a personal loan or find their interest rates to be higher than you can afford.

Keep reading for all the details about how passbook loans work, plus their pros and cons.

Understanding Passbook Loans

Here, learn more about the definition and history of passbook loans as well as how they usually work.

Definition and Historical Background

Passbook loans (often called share-secured or savings-secured loans) are a way to borrow funds, typically at a lower interest rate, by using your savings as collateral.

Passbooks are physical books that record a bank account holder’s transactions. These passport-sized books originated in the 18th century; bank tellers and postmasters could record account transactions in them. For example, a bank teller could write the date of a transaction, the amount deposited or withdrawn, and the amount of money available to the customer. In the late 20th century, bank statements began to make their appearance and replaced passbooks to a large degree. (For those who want them, however, passbook accounts are still available from some financial institutions and can provide a customer with a classic booklet to track transactions.)

A passbook loan borrows from the name of these old-fashioned books. With passbook loans, you use your savings account, held at the same institution, as collateral for a loan, and you may pay a relatively low interest rate. Putting the money in your account up for collateral, however, means your lender can seize that cash if you default on your loan payments.

How Passbook Loans Work

Here’s how a passbook loan works:

•   First, you’ll have to find a bank or lending institution that offers passbook loans. Most banks don’t offer them, so you might consider checking at a credit union.

•   Once you find a potential lender and establish a savings account or a certificate of deposit (CD) there, the financial institution will usually let you borrow up to 90% to 100% of the money in your savings account. For example, if you have $20,000 in your savings account, you may be able to borrow $18,000 to $20,000. Check with the lender to learn the exact amount.

•   Once you receive the loan from your financial institution, it’s important to note that you can’t access your savings. The financial institution might put a hold on your account, or you might have to hand over your savings passbook until the loan is repaid.

•   As you repay your loan with interest, your lender will usually release the amount you repay from your withheld savings.

•   Your payments may be reported to the national credit bureaus, but check with your lender to be sure. Timely payments can help build your credit score, while making late payments on your passbook loan can damage your score.

Obtaining a Passbook Loan

Next, take a closer look at the usual eligibility and requirements, interest rates, and repayment terms for passbook loans.

Eligibility and Requirements

You’ll need a funded savings account or certificate of deposit to be eligible for a passbook loan, and it’ll typically have to be held at the institution you plan to borrow from. These types of loans are usually easier to get and less risky to the lender because they use collateral to back them (unlike unsecured loans, which don’t require collateral).

Interest Rates and Repayment Terms

It’s important to understand passbook loan interest rates (the amount you repay in addition to the principal), particularly because you’re basically paying interest on your own money.

These loans can offer some of the lowest interest rates of any type of loan, likely because, since they are secured, they pose less risk to your financial institution. For instance, BankFive charges passbook loan rates of 3.00% to 3.50% APR (annual percentage rate) over the interest rate of the savings account used as collateral.

You repay the loan in regular, monthly installments over a specified period, such as three years.

Application Process

You’ll have to fill out an application for a passbook loan. Each bank or credit union has its own application. Simply request the application from your financial institution. Depending on the lender’s requirements, you may be able to complete the application online, in person, over the phone, or via mail.

You may find the paperwork simpler and shorter than what is required for other kinds of loans. That can reflect the fact that you are already a customer of the financial institution and that you are borrowing against your own money.

Advantages and Disadvantages of Passbook Loans

It’s important to consider the pros and cons of passbook loans before you pursue one.

Benefits of Passbook Loans

First, the upsides of passbook loans:

•   Lower interest rates: Passbook loans typically carry a lower interest rate than other types of loans, which means the amount you pay back (principal plus interest) could total less than what you’d pay for other types of loans.

•   Credit building: Passbook loans may help you build credit, provided your lender reports the loan activity to the credit bureaus and you make your payments on time.

•   Few approval requirements: You usually don’t have to meet as many approval requirements to get a passbook loan as you would with other types of loans. That’s because your savings account, typically at the same financial institution, serves as collateral.

Potential Drawbacks and Risks

Now, the downsides of passbook loans:

•   Credit may not improve: Though unlikely, your lender may not report your passbook loan payments to the credit bureaus. In that case, a passbook loan might not help you build your credit, even if you are meticulous about paying it back on time. It’s wise to check this point in advance. (Also, you must manage the debt responsibly to build credit if the lender does report your activity.)

•   Uses your account as collateral: If you fail to make your payments on your passbook loan, your financial institution can take the money from your savings account.

•   Cannot access your money while you borrow: You cannot access your savings account when you borrow money using a passbook loan. This can put you in a tricky situation if you need money immediately.

•   Paying the bank for your own funds: At a basic level, a passbook loan means you’re paying the bank to borrow your own money.

•   Restricted amount: In a best-case scenario, you can only borrow the amount you have in the bank. So if you have $3,000 in your savings account but are hoping to borrow $10,000 via a passbook loan to buy a car, you won’t be able to do so.

Alternatives to Consider

Passbook loans may not be the right fit for your situation, so you might consider these options instead.

•   Personal loans: Personal loans, which generally range between $1,000 to $50,000, are unsecured loans that come from a wide variety of financial institutions, including banks and credit unions. You can use them for any purpose, including home improvements, debt consolidation, and more. Personal loans may cost you more in interest compared to passbook loans, and repayment terms usually range from two to seven years.

However, you typically don’t need collateral for a personal loan, unless it’s a secured personal loan.

Use a personal loan calculator to learn more about how much a personal loan might cost you.

•   Credit-builder loans: If you have little to no credit, a credit-builder loan may help you improve your credit score. These loans, which usually range between $300 and $1,000, involve depositing money into a certificate of deposit (CD) or savings account, which the lender holds as collateral. You don’t receive a lump-sum disbursement upfront, as you do with many loans. Instead, you make fixed monthly payments toward the loan (principal plus interest). Your lender may release some of the borrowed funds when you make a monthly payment, or they might hold the full amount till you make the final payment. Interest and fees are usually deducted from the amount you receive. This activity is reported to credit bureaus and contribute to an uptick in your score.

•   Secured credit cards: You may want to consider a secured credit credit card instead of a passbook loan. A secured credit card is a credit card that requires a security deposit, which becomes your line of credit. If you don’t make your payments on time or default on your loan, your lender can take your deposit. However, using the credit card responsibly can help you build credit because your lender typically reports your payments to the three major credit-reporting agencies — Experian®, Equifax®, and TransUnion®.

Recommended: What Is the Average Interest Rate on a Personal Loan?

Using Passbook Loans for Different Purposes

There are many uses for funds borrowed via a passbook loan, such as:

•   Purchases, such as a new laptop

•   Expenses, like homeowners insurance or summer camp for the kids

•   Debt consolidation, such as paying off your credit card bill

•   Buying a car

•   Home improvement projects

•   Wedding costs

•   Medical or educational expenses

•   Vacations

Ultimately, you can use a passbook loan for whatever you want.

Future of Passbook Loans

Will passbook loans be part of the future financial landscape? Given all the other financial products currently available (such as the personal loans described above), consumers may not want to pay interest to borrow against their own savings.

Decline in Popularity

Passbook loans are not very common, having seen their popularity ebb over the years. Their usefulness is often limited to those who want to build their credit in this particular way or are seeking an especially low interest rate. If you find yourself in that situation, you may want to check with various lenders, especially credit unions, to see what’s available.

On the other hand, market data indicates that personal loans are gaining popularity.

The Takeaway

Passbook loans are a way of borrowing money against your savings, which can be useful for some people looking to build their credit. Ultimately, however, you end up paying a financial institution to borrow your own money with a passbook loan.

If you’re looking to access funds for debt consolidation, home improvement projects, a wedding, or other needs, you might want to consider a personal loan instead.

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

Are passbook loans still available today?

Yes, passbook loans are still available today. Not every lender offers them, so search online for options. You may find that credit unions are more likely to fund these loans.

Can I get a passbook loan without a savings account?

Typically, you need a savings account or a certificate of deposit (CD) account for a passbook loan, typically with the institution you intend to borrow from.

What happens if I default on a passbook loan?

If you default on a passbook loan, your lender could seize your savings (the loan’s collateral) to repay the delinquent balance. Defaulting on your loan can also hurt your credit score.

Photo credit: iStock/Jinda Noipho

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 .

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

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

SOPL-Q324-006