What Happens if a Check Bounces? Tips on What to Do Next

Bounced Check: What Happens if a Check Bounces?

Bounced checks are sometimes referred to as rubber checks because, instead of going through, they “bounce” back to the payer’s bank unpaid. No money is transferred, and the person who was expecting to be paid doesn’t receive their funds. The payer will typically get hit with fees and could also face other negative consequences. The recipient of a bounced check may also get hit with a fee.

Understanding what happens when a check bounces, who gets charged, and how to manage the situation can help you navigate this common financial issue.

Key Points

•   When a check bounces, that means it can’t be processed or paid.

•   Bounced checks can occur due to insufficient funds, errors in writing the check, closed accounts, stop payment orders, old checks, or fraud.

•   Bounced checks can result in fees for both the check writer and the recipient.

•   Bounced checks typically do not directly impact credit scores but can lead to missed and late payments (which may impact credit).

•   There are steps you can take to address a bounced check, whether you wrote it or received it.

What Is a Bounced Check?

A bounced check, also known as a nonsufficient funds (NSF) check, is a check that cannot be processed typically because the payer’s checking account does not have enough funds to cover the payment. When a check is deposited, the recipient’s bank requests the funds from the payer’s bank. If the payer’s account lacks sufficient funds, the payer’s bank returns the check unpaid, causing it to bounce.

Here’s a look at some other reasons why a check might bounce.

•   Account closure: If the account has been closed before the check is deposited, it will bounce.

•   Incorrect information: Errors in writing the check, such as a mismatch between numbers and words for the check amount, can lead to a bounced check. That’s why it’s important to know how to properly fill out a check.

•   Stale date: A check can bounce if it’s not cashed or deposited within six months of the date the check was written.

•   Stop payment order: A stop payment order can be requested by the payer if they want to prevent it from being deposited. This might happen if they believe the check got lost or they no longer wish to pay for a service.

•   Fraudulent activity: Checks written on accounts that do not belong to the payer, or those involved in fraudulent activity, will also bounce.

What Fees Come With Bounced Checks?

Both the payer and the payee can incur fees when a check bounces. Here’s a look at the fees that can result and who gets charged.

Nonsufficient funds (NSF) fee: If you write a check you don’t have sufficient funds to cover, your bank will typically charge an NSF fee. The average NSF fee is around $20.

Merchant fee: If the bounced check was written to a business, that business may also add on some charges. Many states allow merchants to charge customers up to $40 for the work of handling a bad check.

Overdraft fee: In some cases, a bank covers the check amount despite insufficient funds. This is known as an overdraft. The check won’t bounce, but you’ll likely get hit with an overdraft fee, which can run around $27.

Late payment fees: If the bounced check was intended for a bill payment, such as a credit card bill, you may also get hit with a late payment fee from the biller.

Returned check fee: If you’re on the receiving end of a bounced check, your bank may charge you a returned check fee for processing a bounced check. In addition, you might assume the check cleared and end up spending money you don’t actually have. This can result in overdrafting your own account and fees.

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What Happens if My Check Bounces?

You might accidentally end up bouncing a check if you write a check without looking into your account balance first, or if a check you wrote to someone doesn’t get cashed for a few months and you no longer have sufficient funds in your account to cover it.

When your check bounces, you will likely get hit with bank fees. But there are some other negative consequences that can follow as well. Here are some to keep in mind.

Outstanding Debt

When a check bounces, the payee doesn’t receive the promised funds. This means you still have an outstanding bill. For example, if your rent check bounces, the landlord doesn’t receive your payment. This means you have an outstanding debt to your landlord until you can pay the rent.

Potential Harm to Your Banking Reputation

Banks report consumer banking behavior to ChexSystems, an agency that collects and shares information about a person’s banking history with financial institutions. If you have a history of bounced checks (or other problems like unpaid fees and forced account closures), your ChexSystems report will reflect that. A blemished report could make it hard for you to open a new bank account in the future.

Risk of Account Closure

If you bounce enough checks, your bank could freeze or close your account. If you’re having trouble managing your checking account, it’s a good idea to reach out to a bank representative and explain your situation. The bank may be willing to work with you if they see you are actively trying to resolve the problem.

Recommended: 3 Reasons Why You Have a Frozen Bank Account

Legal Consequences

It’s illegal to knowingly write bad checks. If you write checks and you’re aware that you don’t have enough money to cover them, you could be charged with a misdemeanor or even a felony, depending on the amount and quantity of unpaid transactions.

What Should I Do if My Check Bounces?

If you discover that your check has bounced, it’s crucial to act quickly to mitigate the consequences. Here are key steps to follow.

1.    Contact the payee. You’ll want to reach out to the payee as quickly as possible, explain the situation, and express your intention to resolve the issue. This can help maintain goodwill and prevent further actions.

2.    Pay up quickly. Whether you add funds to your account and write a new check or find a different way to make the payment, making good on what you owe can help prevent the bounced check from turning into an outstanding debt. While a bounced check doesn’t get reported to the credit bureaus, if it leads to a missed or late payment, it could potentially impact your credit.

3.    Request a fee waiver. It can be worthwhile to ask your bank if they can waive the NSF fee, especially if it’s your first offense or due to an unexpected situation.

4.    Monitor your account. You’ll want to keep a close eye on your account balance and transactions to avoid future bounced checks.

What Should I Do if I Receive a Bounced Check?

If you receive a bounced check, you’ll want to contact the payer promptly. Inform them that the check has bounced and request immediate payment via an alternative method.

If the payer assures you that funds are now available, you can attempt to redeposit the check. If possible, you might opt to cash the check at the issuer’s bank so that if it bounces again, you won’t get hit with another NSF charge by your bank.

If you’re having trouble getting a response from the check issuer, you might next want to send them a “bad check” demand letter. This is a formal request for payment that you send to the issuer by certified mail. It’s a good idea to include as many details as possible in the letter.

If the payer continues to be unresponsive or unwilling to pay, you may need to take legal action. Typically this involves suing the check issuer for the money owed in small claims court.

Preventing a Check From Bouncing

Preventing bounced checks involves careful financial management and awareness. These safeguards can help.

•   Monitor your account. It’s important to regularly check your account balance and transactions to ensure you have sufficient funds. You can use your bank’s app or a budgeting app to keep track of exactly what’s going in and out of your account.

•   Set up alerts. Many banks offer account alerts via text or email for low balances or large transactions. Utilizing these alerts can automate the process of checking your balance and can help you stay informed.

•   Consider overdraft protection. This service can cover transactions when your account lacks sufficient funds, typically for a fee. Your bank might also allow you link your checking account to your savings account or line of credit at the same bank. When there’s not enough cash in your checking account to cover a transaction, money will automatically be transferred from the linked account. Before you use this option, though, you’ll want to check to see whether your bank charges a fee for the service.

•   Maintain a buffer balance. Though you might prefer to keep most of your cash in a high-yield savings account to benefit from the interest, it’s a good idea to keep a financial buffer in your checking account to cover unexpected expenses and avoid overdrafts.

•   Don’t accept payment by personal check. To avoid receiving a bad check, you may want to request payment by a cashier’s check, certified check, or money order, which come with more guarantees than a personal check.

Recommended: Avoiding Overdraft Fees: Top 10 Practical Tips

The Takeaway

Bounced checks can lead to expensive fees and even make it difficult to open new checking and savings accounts. However, you can avoid them with a little planning and attention to detail. Key measures include keeping a close eye on your account balance, setting up account alerts, and implementing safeguards like overdraft protection and linked accounts. If you’re in the market for a new checking account, you might also want to look for a bank that doesn’t charge overdraft fees.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Who gets charged for a bounced check?

Unfortunately, both the check writer and the recipient often have to pay a fee if a check bounces. The person who wrote the check may have to pay a nonsufficient funds (NSF) fee and potentially a merchant fee. The recipient of the bounced check may be charged a returned check fee.

Can you get in trouble for depositing a check that bounces?

Depositing a bounced check does not typically result in trouble for the depositor, but it can lead to inconvenience and fees. Your bank may charge a returned check fee for the failed deposit. If you repeatedly try to deposit known bad checks or are involved in fraudulent activities, however, you could face legal consequences.

How long does it take for a bad check to bounce?

The time it takes for a check to bounce can vary, but it generally takes a few days to a week. When a check is deposited, the payee’s bank will submit it to the payer’s bank for verification. If the payer’s bank identifies insufficient funds or other issues, the check will be returned unpaid. This process typically takes two to five business days, but it can take longer depending on the banks involved and the specific circumstances.

Do bounced checks affect my credit score?

Bounced checks do not directly impact your credit score, as they are not typically reported to credit bureaus. However, the consequences of a bounced check can indirectly affect your credit. If the bounced check leads to unpaid bills, collections, or legal action, these events can be reported to the consumer credit bureaus and negatively impact your credit.


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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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How to Avoid Using Savings to Pay Off Debt

Paying down debt can be an important financial priority, but should you use your savings in order to do so? While it can be tempting to throw your full efforts into paying off debt, maintaining a healthy savings account for emergencies and saving for retirement are also important financial goals.

Continue reading for more information on why it may not always make sense to use savings to pay off debt and ideas and strategies to help you expedite your debt repayment without sacrificing your savings account.

The Case Against Using Savings to Pay Off Debt

Emptying your savings account to pay off debt could cause you to rely on credit cards to cover necessary expenses, which has the potential to create a cycle of debt. Think of it this way — it can be much harder to get yourself out of debt if you keep using credit cards to cover unexpected costs.

Consider creating a plan to pay off high-interest debt while maintaining or building your emergency fund. This way, you’ll be better prepared to deal with unexpected expenses — like a trip to the emergency room.

How to Start Paying Off Debt Without Dipping Into Your Savings

First off, if you do not have an established emergency fund, consider crafting a budget that will allow you to build one while you simultaneously focus on paying down debt. The exact size of your emergency fund will depend on your personal expenses and income. A general rule of thumb suggests saving between three and six months worth of living expenses in an emergency savings account. Having this available to you can help you avoid taking on additional debt if you encounter unforeseen expenses.

Make a Budget

Now’s a good time to update or make a budget from scratch. Understanding your spending vs. income is essential to help you pay off your debt and avoid going into further debt. You’ll want to review all of your expenses and sources of income and figure out how to allocate your income across debt payments, while still allowing you to save for your future.

Establish a Debt Payoff Strategy

To start, you’ll need to review each of your debts, making note of the amount owed and interest rates. This is important to create a full picture for how much you owe. Next, you’ll need to pick a debt pay-off strategy that will work for you. Here’s a look at some popular debt-reduction plans.

•   The snowball method: With this approach, you list debts from smallest balance to largest — ignoring the interest rates. You then put extra money towards the debt with the smallest balance, while making minimum payments on all the other debts. When that debt is paid off, you move to the next largest debt, and so on until all debts are paid off. With this method, early wins can help keep you motivated to continue tackling your debt.

•   The avalanche method: Here, you’ll list your debts in order of interest rate, from highest to lowest. You then put extra money towards the debt with the highest interest rate, while paying the minimum on the rest. When that debt is paid off, you move on to the debt with the next-highest rate, and so on. This strategy helps minimize the amount of interest you pay, which can help you save money in the long term.

•   The fireball method: With this hybrid strategy, you categorize all debt into either “good” or “bad” debt. “Good” debt is debt that has the potential to increase your net worth, such as student loans, business loans, or mortgages. “Bad” debt is generally high-interest debt incurred for a depreciating asset, like credit card debt and car loans. Next, you’ll list bad debts from smallest to largest based on balance. You then funnel extra money to the smallest of the bad debts, while making minimum payments on the others. When that balance is paid off, you go on to the next-smallest debt on the bad-debt list, and so on. Once all the bad debt is paid off, you can simply keep paying off good debt on the normal schedule. You then put money you were paying on your bad debt towards savings.

Different people may prefer one strategy over another, the key is to select something that works best with your debts, income, and financial personality.

Consider Debt Consolidation

If you have debt with a variety of lenders, one option is to consider consolidating your debt with a personal loan. Instead of making multiple payments across lenders, you’ll instead have just one payment for your personal loan. Consolidating credit card debt is a common use for a personal loan because personal loans typically have lower interest rates than credit cards. Using a personal loan to pay off your credit card balances not only streamlines repayment but can potentially help you save on interest and pay off your debt faster.

Most personal loans are unsecured (no collateral required), which means you’ll qualify for the loan solely based on your creditworthiness. Personal loans for debt consolidation typically have fixed interest rates, so your payments remain the same for the term of the loan. To find the best personal loan for you, it’s a good idea to shop around and review the options available at a few different lenders, including banks, credit unions, and online lenders.

Recommended: How to Use a Personal Loan for Loan Consolidation

How to Reduce Spending to Pay Off Debt Quicker

Reducing your spending can make more room in your budget for debt payments. Making overpayments can help speed up debt payoff, but it can be challenging to amend your spending habits. To lower your spending, you’ll want to take an honest look at your current expenses and spending habits.

You can start by reviewing your credit card and bank statements to see where your money is going. Next, divide your spending into “needs” vs. “wants” and look for places where you can cut back in the “wants” category. For example, you might decide to cook dinner a few more times a week and get less takeout, cancel a streaming service you rarely watch, and/or quit the gym and start working out at home

You may also be able to reduce some of your so-called “fixed” expenses like your cell phone and internet service by shopping around for a more competitive offer or switching to a less expensive plan.

If you’ve already got a tight budget, the alternative is to increase your revenue stream. Consider a side hustle to boost your income and funnel that additional money toward debt payments. You may even be able to find a side gig that allows you to make money from home.

Paying Off Debt the Smart Way

It can be tempting to throw your savings at debt to avoid racking up expensive interest charges. But draining your savings account — or failing to save at all — in favor of debt payoff might not be a smart strategy.

With little or no savings, you’ll be less prepared for any emergency expenses in the future, which could lead to even more debt. Consider building your savings while paying off debt by creating a budget, cutting your expenses or boosting your income, and finding (and sticking to) a debt repayment strategy.

If you have high-interest credit card debt, you might consider using a personal loan to consolidate your debt. If the loan has a lower interest rate than you’re paying on your credit card balances, doing this could potentially help you save money and pay off your debt faster.

With low fixed interest rates on loans of $5K to $100K, a SoFi personal loan for credit card debt can substantially decrease your monthly bills.

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

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


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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Pawnshop Loan: What Is It & How Does It Work?

Pawnshop Loan: What Is It & How Does It Work?

If you’re strapped for cash and have a hard time qualifying for traditional loans, or you live in an underbanked area, you may be considering a pawnshop loan. They appear to be a convenient option for fast cash, but they can also come with significant disadvantages, including high fees.

Before putting your valuables down in pawn, learn more about what pawnshop loans are and how they work.

Key Points

•   A pawnshop loan is a secured loan requiring valuable items as collateral, typically offering 25% to 60% of the item’s resale value.

•   Borrowers can access cash immediately, often without credit checks or income verification, but must pay significant financing fees.

•   While pawnshop loans do not impact credit scores, failing to repay results in permanently losing the pawned item without further penalties.

•   The average pawnshop loan is around $150 with a repayment term of 30 to 60 days, but high fees can make them costly.

•   Alternatives like personal loans offer unsecured options with longer repayment terms and the potential to build credit, making them a better choice for some.

What Is a Pawnshop Loan?

A pawnshop loan is a secured, or collateralized, loan. To borrow the money, you must produce an item of value as collateral – such as a piece of jewelry, a musical instrument, electronics, or an antique – that provides backing for the loan. You and the seller agree to a loan amount and a term. If you don’t pay back the loan (plus fees) within the agreed amount of time, the pawnshop can sell the item to recoup their losses.

Pawnshops will typically offer you 25% to 60% of the resale value of an item. The average size of a pawnshop loan is $150 with a term of around 30 days.

Aside from the need for collateral, there are few other requirements to qualify for a pawnshop loan. You typically don’t need to prove your income or submit to a credit check.

Recommended: No Credit Check Loans Guide

How Do Pawnshop Loans Work?

Pawnshops don’t charge interest on the loans they offer. However, the borrower is responsible for paying financing fees that can make the cost of borrowing higher than other loan options.

Regulations around what pawnshops can charge vary by state, but you could end up paying the equivalent of many times the interest charged by conventional loans.

Say you bring in a $600 guitar to a pawnshop, and they offer you 25% of the resale value, or $150. On top of that, let’s say the pawnshop charges a financing fee of 25% of the loan. That means you’ll owe $37.50 in financing fees, or $187.50 in total.

If you agree to the loan, the pawnbroker will typically give you cash immediately. They’ll also give you a pawn ticket, which acts as a receipt for the item you’ve pawned. Keep that ticket in a safe place. If you lose it, you may not be able to retrieve your item.

You’ll usually have 30 to 60 days to repay your loan and claim your item. According to the National Pawnbrokers Association, 85% of people manage to do this successfully. When a borrower pays off a pawnshop loan, they can retrieve the item they put in pawn. For those who don’t, the pawnshop will keep the item and put it up for sale. There is no other penalty for failing to pay off your loan, but you do lose your item permanently.

Recommended: Can You Get a Loan Without a Bank Account?

The Pros and Cons of Pawnshop Loans

In general, it’s best to seek traditional forms of lending, such as a personal loan from a bank, credit union, or online lender, if you can. These loans tend to be cheaper and can help you build credit. However, if you need cash the same day and you don’t qualify for other loans, you might consider a pawnshop loan. Carefully weigh the pros and cons to help you make your decision.

Pros of a Pawnshop Loan

•   Access to cash quickly. When you agree to a pawnshop loan, you can typically walk out with cash in hand immediately.

•   No qualifications. The ability to provide an object of value is often the only qualification for a pawnshop loan.

•   Failure to pay doesn’t hurt credit. While you will certainly lose the item that you put in pawn if you don’t pay back your loan, there are no other ramifications. Your credit score will not take a hit.

•   Loans aren’t sent to collections. If you don’t pay back your loan, no collections agency will hound you until you pay.

Recommended: How Do Collection Agencies Work?

Cons of a Pawnshop Loan

•   High fees. The financing fees associated with pawnshop loans can be much more expensive than traditional methods of obtaining credit, including credit cards and personal loans. Consider that the average annual percentage rate (APR) on a personal loan is currently 12.21%, whereas pawnshop financing fees, when converted into an APR, can be 200% or more.

•   Loans are relatively small. The average size of a pawnshop loan is just $150. If you need money to cover a more costly expense, you may end up scrambling for cash elsewhere.

•   You won’t build credit. Pawnshop loans are not reported to the credit reporting bureaus, so paying them off on time doesn’t benefit your credit.

•   You may lose your item. If you can’t come up with the money by the due date, you’ll lose the item you put in pawn. (Same if you lose your pawn ticket.)

Pros and Cons at a Glance

Pros

Cons

Quick access to cash. Monthly interest rates can be as high as 20% to 25% and contribute significantly to the cost of the loan.
No qualification requirements, such as credit check or proof of income. Pawnshop loans aren’t reported to the credit reporting bureaus, so they won’t help you build credit.
Failure to pay doesn’t hurt your credit. If you fail to pay back your loan on time, or you lose your pawn ticket, you can’t reclaim your item.
Loans can’t be sent to collections. Loans are relatively small, just $150 on average.

What Is a Pawnshop Title Loan?

A pawnshop title loan is a loan in which you use the title of your car as collateral for your loan. You can typically continue driving your vehicle over the course of the loan agreement. However, as with other pawnshop loans, if you fail to repay your loan on time, the pawnbroker can seize your car.

Typical Requirements to Get a Loan Through a Pawnshop

There are typically few requirements to get a pawnshop loan, since the loan is collateralized by the item you put in pawn and the pawnbroker holds on to that item over the course of the loan. However, pawnbrokers do want to avoid dealing in stolen goods, so they may require that you show some proof of ownership, such as a receipt.

Alternative Loan Options

There are a number of benefits of personal loans that make them a good alternative to pawnshop loans. Personal loans are usually unsecured, meaning there is usually no collateral required for a personal loan. Lenders will typically run a credit check, and borrowers with good credit scores usually qualify for the best terms and interest rates. That said, some lenders offer personal loans for people with bad credit.

If you qualify for a personal loan, the loan amount will be given to you in a lump sum, which you then typically repay (plus interest) in monthly installments over the term of the loan, often two to seven years. The money can be used for virtually any purpose.

Personal loans payments are reported to the credit reporting bureaus, and on-time payments can help you build a positive credit profile.

The Takeaway

If you only need a small amount of money, you don’t qualify for other credit, or if you’re looking for a loan without a bank account, you may consider a pawnshop loan. Just beware that they are potentially costly alternatives to other forms of credit.

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


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

FAQ

How is a loan obtained through a pawnshop?

To borrow money from a pawnshop you must present an item of value that can act as collateral for the loan. The pawnbroker may then provide a loan based on the value of that item.

What happens if you don’t pay back your pawnshop loan?

If you fail to pay back your pawnshop loan on time, you won’t be able to reclaim the item you put up as collateral for the loan. The pawnshop will sell it to recoup their losses.

What’s the most a pawnshop loan will pay?

On average, a pawnshop will loan you about 25% to 60% of an item’s resale value. The average pawnshop loan is $150 and is repaid in about 30 days.


Photo credit: iStock/miriam-doerr
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 .

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What to Know Before Accepting Unsubsidized Student Loans

What to Know Before Accepting Unsubsidized Student Loans

When financial aid like scholarships and grants comes up short, federal student loans can help bridge the gap.

Unsubsidized Direct Loans may be offered to undergraduate and graduate students in a financial aid package.

Subsidized Direct Loans may be offered to undergrads only, and have benefits in terms of who pays the interest during certain periods.

When a college sends an aid offer, the student must indicate which financial aid to accept. Here, we’re looking at Unsubsidized Direct Student Loans and how they can help you pay for college.

What Is an Unsubsidized Student Loan?

The Department of Education provides Federal Direct Unsubsidized Student Loans as one of four options under the William D. Ford Federal Direct Loan Program. (Direct Subsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans are the other types.)

Unsubsidized loans provide undergraduate and graduate-level students with a fixed-rate financing option to help fund their college education.

Unlike Direct Subsidized Loans, unsubsidized student loans are not based on financial need. This means that any student may receive unsubsidized loan funding, as long as it meets the Department of Education’s general eligibility requirements.

How Do Unsubsidized Student Loans Work?

If you’re eligible for Direct Unsubsidized Student Loans, the amount you’re offered for the academic year is determined by your school, based on its cost of attendance minus other financial aid you’ve received (such as scholarships, grants, work-study, and subsidized loans).

You will need to complete entrance counseling to ensure you understand the terms and your obligation to repay the loan. Then you’ll sign a master promissory note stating that you agree to the loan terms.

The government will send the loan funds directly to your school. Your institution will then apply the money toward any unpaid charges on your school account, including tuition, fees, room, and board.

Any remaining money will then be sent to you. For example, if you were approved for $3,800 in unsubsidized loans but only $3,000 was applied to your education costs, the school will send the remaining $800 to you.

The Education Department’s Federal Student Aid office recommends accepting grants and scholarships first, then work-study, then loans. And it advises accepting a subsidized loan before an unsubsidized loan, and an unsubsidized loan before a PLUS loan.

A Matter of Interest

As soon as any student loan is disbursed, it starts accruing interest. For federal student loans and most private student loans, you can defer payments until after your grace period, which is the first six months of leaving school or dropping below half-time status.

Here’s the kicker: With a subsidized student loan, the government pays the interest while you’re in school and during your grace period and any hardship deferment.

With an unsubsidized federal student loan or private student loan, unpaid interest that accrues will be added into your loan’s principal balance when you start repayment.

Pros and Cons of Unsubsidized Student Loans

Although unsubsidized student loans offer many benefits, there are also some downsides to know.

Unsubsidized Loan Pros

Unsubsidized Loan Cons

Eligibility is not based on financial need Interest accrues upon disbursement
Available to undergraduate and graduate students You’re responsible for all interest charges
Can help cover educational expenses up to an annual limit Graduate students pay a higher rate
No credit check or cosigner required Interest capitalizes if payments are deferred
Can choose to defer repayment
Multiple payment plans are available

Applying for Unsubsidized Student Loans

Applying for federal financial aid starts with the FAFSA® — the Free Application for Federal Student Aid. Students seeking aid complete the FAFSA each year.

Where to Apply

Applying for the FAFSA can be done at studentaid.gov, or you can print out a paper FAFSA and mail it.

Based on the information you included in your FAFSA, each school that you listed will determine your financial aid offer, including whether you’re eligible for an unsubsidized loan.

Typical Application Requirements

You must have an enrollment status of at least half-time to be eligible for a Direct Loan. You must also be enrolled in a degree- or certificate-granting program at a school that participates in the Direct Loan Program.

The Department of Education has general requirements to be eligible for federal aid. Applicants must:

•   Be a U.S. citizen or eligible noncitizen

•   Have a Social Security number

•   Prove that they qualify for a college education

•   Maintain satisfactory academic progress

•   Sign a certification statement

In the certification statement, you’ll need to confirm that you aren’t currently in default on a federal student loan and don’t owe money on a federal grant, and affirm that you’ll only use aid funds toward educational costs.

How Long Will You Have to Wait?

After submitting your FAFSA, it can take the Department of Education three to five days to process your application. If you submitted your FAFSA by mail, processing can take up to 10 days.

Once you’ve told your school which financial aid you want to accept, loan disbursement timelines vary. Generally, first-time borrowers have up to a 30-day waiting period before they receive their funds. Other borrowers may receive funding up to 10 days before the start of the semester.

How Much Can You Borrow?

There are annual limits to how much in combined subsidized and unsubsidized loans you can borrow. These limits are defined based on the year you are in school and whether you’re a dependent or independent student.

Here’s an overview of combined subsidized and unsubsidized loan limits per year for undergraduate students:

Undergraduate Year

Dependent

Independent

First-year student $5,500 $9,500
Second-year student $6,500 $10,500
Third year and beyond $7,500 $12,500

Graduate students are automatically considered independent and have an annual limit of $20,500 for unsubsidized loans (they cannot receive subsidized loans).

There are also student loan maximum lifetime amounts.

Subsidized vs Unsubsidized Student Loans

Another type of loan available through the Direct Loan Program is a subsidized loan. Here’s a quick comparison of subsidized vs. unsubsidized loans.

Subsidized Loans

Unsubsidized Loans

For undergraduate students For undergraduate and graduate students
Borrowers aren’t responsible for interest that accrues during in-school deferment and grace period Borrowers are responsible for interest that accrues at all times
Borrowers must demonstrate financial need Financial need isn’t a requirement
Annual loan limits are typically lower Annual loan limits are generally higher

Alternatives to Unsubsidized Student Loans

Unsubsidized student loans are just one type of financial support students can consider for their education. Here are some alternatives.

Subsidized Loans

Direct Subsidized Loans are fixed-rate loans available to undergraduate students. As discussed, borrowers are only responsible for the interest charges that accrue while the loan is actively in repayment.

Scholarships and Grants

In addition to accessing potential scholarships, grants, and loans through the FAFSA, students can seek financial aid from other entities.

Scholarships and grants for college may be found through your state or city. Businesses, nonprofits, community groups, and professional associations often sponsor scholarships or grants, too. The opportunities may be based on need or merit.

Private Student Loans

Private lenders like banks, credit unions, and other financial institutions offer private student loans. Some schools and states also have their own student loan programs.

Private student loan lenders require borrowers, or cosigners, to meet certain credit thresholds, and some offer fixed or variable interest rates. Many lenders offer pre-qualification without a hard credit inquiry.

Private student loans can be a convenient financing option for students who are either ineligible for federal aid or have maxed out their federal student loan options. One need-to-know: Private student loans are not eligible for federal programs like Public Service Loan Forgiveness and income-driven repayment.

SoFi Private Student Loan Rates

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What are unsubsidized loan eligibility requirements?

To be eligible for a Direct Unsubsidized Loan, undergraduate and graduate students must be enrolled at least half-time at a qualifying school. They must also meet the basic eligibility requirements for federal aid, including being a U.S. citizen or eligible noncitizen, having a Social Security number, and completing the FAFSA.

How long does it take to receive a Direct Unsubsidized Loan?

Loan disbursement for first-time borrowers can take up to 30 days after the first day of enrollment. For others, disbursement takes place within 10 days before classes start.

What is the maximum amount of unsubsidized loans you can borrow?

Dependent students can borrow a maximum of $5,500 and $6,500 per year during their first and second academic years, respectively. Students in their third year of school and beyond can borrow an annual maximum of $7,500. The aggregate loan limit for dependent students is $31,000 in combined subsidized and unsubsidized loans.

Graduate or professional students may receive up to $20,500 per year in unsubsidized loans. Their aggregate loan limit is $138,500 (which includes all federal student loans received for undergraduate study).


Photo credit: iStock/LPETTET

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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


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

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

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A Guide to Credit Card Grace Periods

A Guide to Credit Card Grace Periods

Your credit card’s grace period is the length of time that starts at the end of your billing cycle and ends when your payment is due. During this period, you may not have to pay interest on your balance — as long as you pay it off in full by your payment due date.

While a lot of credit cards have a grace period, not all of them do. Here’s a look at how grace periods on credit cards work and how you can take full advantage of them.

What Is the Grace Period on a Credit Card?

Credit cards allow you to borrow money over the course of a one-month billing cycle, during which you may not need to pay interest. The end of your credit card billing cycle is also called your statement date. That’s when your monthly credit card statement is sent to you in the mail or becomes available online. Credit card payments are due on the payment due date, about three weeks later. The time in between these dates is what’s known as the grace period.

During this time, you won’t be charged any interest on the purchases that you made during the billing cycle. However, because of how credit card payments work, you must pay off your credit card balance in full by your payment due date in order to avoid interest payments. At the very least, you must make your minimum payment, and you’ll then owe interest on whatever balance you carry into the next month.

Recommended: What Is a Charge Card?

How Credit Card Billing Cycles and Grace Periods Work

Grace periods on credit cards are different from the grace period for other loan products. For example, the grace period for a mortgage lasts about 15 days. If your payment is due on the first of the month, you’d have until mid-month to make your payment before it’s considered late and you’re charged potential late fees.

This is not how credit card grace periods work. The grace period for revolving credit — which is what a credit card is — comes before the payment due date. As such, credit card grace periods don’t protect you from late fees. Rather, they give you a period of time in which you can avoid interest payments.

If you miss the date when credit card payments are due, your payment is considered late. Late payments may trigger penalties, and they can have a negative effect on your credit score if they’re reported to the credit reporting bureaus.

Limits on Credit Card Grace Periods

Credit card companies are not required to offer their customers a grace period. However, many of them choose to do so.

Federal law requires credit card companies to send you a bill within 21 days of the payment due date, meaning you’ll get at least three weeks’ notice of how much you owe for your previous billing cycle (after the credit card closing date). However, the amount of time you’ll have for your grace period will vary by lender.

Credit card grace periods typically only apply to purchases. That means if you’ve used your credit card for a cash advance, for example, you’ll have to start paying interest on the date of the cash advance transaction.

Recommended: Tips for Using a Credit Card Responsibly

How Long Is the Typical Grace Period for a Credit Card?

Typically, grace periods last at least 21 days and up to 25 days.

You can find out how long your grace period is by checking your cardholder agreement. The length of your grace period should be listed alongside fees and your annual percentage rate (APR). You can also call your credit card company and ask them directly.

You may also have a longer grace period for special promotions. Those can be as long as 55 days.

What Types of Transactions Are Eligible for Credit Card Grace Periods?

As mentioned above, generally only purchase transactions are eligible for the credit card grace period. Cash advances — which allow you to borrow a certain amount of money against your line of credit — typically are not eligible. They will start accruing interest the day you make the transaction.

Similarly, if you transfer a balance from one credit card to another, you’ll start to accrue interest on that balance immediately. The only exception is if you have a balance transfer credit card with a 0% introductory rate for a period of time. If you pay off the balance during that period, you won’t owe interest. However, interest will accrue on whatever remains of your balance at the end of that period.

Taking Maximum Advantage of Your Credit Card’s Grace Period

If you pay off your credit card bill in full each month, you’ll avoid accruing credit card interest. Even carrying a small balance will disrupt your grace periods. If you do, you’ll owe interest on the remaining amount, and all of the new purchases that you make in the next billing cycle will accrue interest immediately as well.

To take full advantage of your credit card’s grace period, plan your purchases accordingly to ensure you’re able to pay your bills in full and on time. For example, if you’re going to make a large purchase, you may want to do so close to the first day of your billing cycle. That way, you’ll have the full cycle (about four weeks), plus your grace period (about three weeks), to pay off your purchase without owing any interest.

Can You Lose Your Credit Card’s Grace Period?

It is possible to lose your credit card grace period if you don’t make on-time payments in full each month by the payment due date. If you lose your grace period, you’ll be charged interest on the remaining portion of your balance. In the new billing cycle, you’ll also owe interest on any new purchases on the day the transaction takes place. This can lead to you falling into a debt cycle, which isn’t easy to get out of. (It’s wise to educate yourself on what happens to credit card debt when you die, too.)

Luckily, issuers usually restore grace periods once you’ve paid your outstanding balance and are back to making full on-time payments for a month or two.

The Takeaway

Your credit card grace period is an important tool that can save you money on interest if you pay off your balance in full each month. If you don’t pay your balance in full each month, you could lose this privilege temporarily. As such, you’d end up owing interest on your previous remaining balance and any new purchases.

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

FAQ

What is the grace period for credit card payments after the due date?

Credit card grace periods occur before the payment due date. Payments made after that date are considered late. After the due date, cardholders will owe interest on their balance. Further, they may lose their grace period until they can pay their balance off in full for one or two months.

What happens if you are one day late on a credit card payment?

Being one day late on a credit card payment can still trigger late fees, interest, and potentially the loss of your grace period. Late payments may also be reported to the credit reporting bureaus, which can have a negative impact on your credit score.

What is the typical grace period for a credit card?

Federal law requires that credit card companies provide your bill at least 21 days before your next payment due date. The length of the grace period can vary depending on the credit card issuer, though they typically last 21 to 25 days.


Photo credit: iStock/Moyo Studio

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

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

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