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Setting financial goals is one of the most important steps you can take toward building a secure and stress-free future. Without clear goals, it’s easy to spend impulsively, fall into debt, or miss out on opportunities to build wealth. Whether you’re saving for a vacation, trying to get ahead of debt, or preparing for retirement, a well-structured financial plan can help you stay focused and motivated.

What follows is an essential guide to financial goals — from understanding their importance to setting achievable milestones and adjusting your plan when life changes.

What Are Financial Goals and Why Are They Important?

Financial goals are specific money-related targets you set to guide your financial decisions. They give you direction and help you align your daily spending habits with long-term priorities. Instead of letting money just come and go from month to month, you create a roadmap that leads you toward stability, independence, and growth.

Goals are also important because they provide:

•   Clarity: They help you understand what you’re working toward.

•   Motivation: Defined goals encourage you to save instead of overspend.

•   Control: They prevent financial stress by giving you a sense of purpose.

•   A way to track progress: Goals let you measure how far you’ve come.

Without goals, money has a tendency to slip through the cracks. With them, you can make strategic decisions that improve your financial health step by step.

💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

Types of Financial Goals: Short-, Mid-, and Long-Term

Financial goals depend on timeframes and priorities. Generally, they fall into three categories — short-, mid- and long-term goals.

Examples of Short-Term Financial Goals (1-3 Years)

Short-term goals are immediate priorities. They include the things you want to buy or do within the next few months or years, and help build momentum for bigger challenges. Examples include:

•   Building an emergency fund

•   Paying off a credit card balance

•   Saving for a vacation or holiday gifts

•   Creating a monthly budget and sticking to it

•   Setting aside money for a new laptop or phone

Examples of Mid-Term Financial Goals (3-10 Years)

Mid-term goals take more time and planning and act as a bridge between short-term wins and long-term security.

They often involve saving or investing for significant life milestones and might include:

•   Paying off significant debt (such as student loans)

•   Saving for a wedding or dream vacation

•   Saving for a down payment on a house

•   Funding a large-scale renovation

•   Growing an investment portfolio

Examples of Long-Term Financial Goals (10+ Years)

Long-term goals shape your financial future and often require consistent commitment. These goals can seem intimidating, but breaking them into smaller steps makes them achievable. Common long-term goals include:

•   Saving for retirement through 401(k)s, IRAs, or pensions

•   Paying off a mortgage completely

•   Funding your children’s college education

•   Achieving financial independence or early retirement

•   Building generational wealth through investments

Recommended: Savings Goals by Age

How to Set Financial Goals in 5 Steps

Now that you understand the different types of goals, here’s how to set them effectively:

Step 1: Understand Your Current Financial Health

Before setting goals, it’s important to have a clear picture of where you currently stand. You can do this by gathering the last several months of financial statements and then using them to determine:

•   Your average monthly income

•   Your average monthly spending

•   Current debt balances

•   Status of your emergency savings and retirement accounts

This assessment forms the foundation for realistic goal setting.

Step 2: Define What You Want to Achieve

Once you have a snapshot of your overall financial situation, it’s worth spending some time reflecting on your money goals: what is really important to you.

While there are many things people commonly save for, like a down payment on a house or retirement fund, your financial goals might not be the same as your sibling’s or your coworker’s.

Think about what you would like to accomplish in the next few years, in five or so years, as well as decades from now, and simply jot them down. Keep in mind that these goals aren’t set in stone — they can and likely will change over time.

Step 3: Make Your Goals S.M.A.R.T.

A vague goal like “save money” is hard to stick to. Instead, consider using the S.M.A.R.T. framework:

•   S for Specific: Be clear  about what you want to achieve, such as exactly what you want to save or how much you’ll need to pay off a debt.

•   M for Measurable: Assign real numbers to your goals. Measurable goals allow you to track your progress and monitor your success.

•   A for Achievable: Setting unrealistic expectations can lead to frustration and disappointment. Ensure your goals are realistic for your income and expenses.

•   R for Relevant: Make sure your goals align with your overall financial plan and your life priorities.

•   T for Time-based: Set a deadline (e.g., within 10 months) for each goal.

SMART goals help keep you accountable and focused.

Step 4: Create a Budget That Includes Your Goals

Your budget is the tool that makes your goals achievable. And thanks to Step 1, you already know your average monthly income and expenses. The next step is to decide if your current spending aligns with your goals, or if you need to rejigger your spending to free up more funds for saving.

There are many different types of budgets, but one popular framework is the 50/30/20 rule. This divides your take-home income into three categories:

•   50% for needs (housing, food, utilities)

•   30% for wants (entertainment, travel)

•   20% for savings and debt repayment

“Thinking about where to put your 20% savings each month can help you reach your goals,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “High-yield savings accounts, money market accounts, certificates of deposit, and cash management accounts are all vehicles that may pay more interest than a traditional savings account, helping your savings grow.”

Step 5: Track Your Progress and Stay Flexible

Once you’ve set some goals and established a budget, it’s a good idea to track your spending for a few months to make sure you are sticking to the plan.

You can track your spending with plain old pen and paper or a computer spreadsheet, but a simpler option is to put a budgeting app on your phone. Your bank may even offer a free tool that automatically tracks and categorizes your spending in real time.

If you find that your budget isn’t realistic, or your financial situation changes at some point, you may need to make some adjustments to your budget. That’s why it’s important to check in with your money regularly.

Common Financial Goal Examples

Here are some six popular financial goals you might include on your list:

1. Build an Emergency Fund

Whether you’re easily covering your monthly expenses or grabbing change from the bottom of your bag to buy a coffee, many people are living paycheck to paycheck. But what if that paycheck disappeared or if you had a large, unexpected expense? Enter the emergency fund.

Having an emergency fund can help you comfortably manage an unexpected medical bill, major car or home repair, or a sudden loss of income with having to run up high-interest debt.

A general rule of thumb is to have three to six months’ worth of living expenses set aside for emergencies. While that can be a sizable sum, keep in mind that you don’t have to build your back-up fund overnight. You might first set a short-term goal of saving a small cushion of $1,000, then build from there.

Recommended: Emergency Fund Calculator

2. Pay Down High-Interest Debt

High-interest credit card debt can feel like a treadmill: Despite constant effort, you never seem to get any closer to the finish line. By prioritizing repayment, however, you can make real progress. This will free up cash flow you can then redirect towards savings and investments.

Two popular payoff approaches are the debt avalanche (paying off the highest-interset debt first) and the debt snowball (paying off the smallest balance first to build momentum). Whichever you choose, the key is to consistently make extra payments and avoid new debt along the way.

3. Start Saving for Retirement

Most of us know we should be saving for retirement, but making it happen can be challenging when there are so many competing places to put our money. The good news is that even small contributions to a retirement account can grow to significant savings over time. This is largely due to the magic of compounding returns — when the returns you earn start earning returns on their own.

One rule of thumb is to save at least 15% of your pre-tax income each year, including any employer match. If that’s not feasible right now, try to contribute at least up to any employer match (otherwise you’re leaving free money on the table).

4. Save for a Down Payment on a House

For many people, owning a home is a major milestone and a symbol of financial stability. But buying a home often requires a significant down payment, typically ranging from 3% to 20% of the purchase price. Saving for this can feel overwhelming, but breaking it into smaller milestones makes the goal achievable.

Consider opening a dedicated high-yield savings account for your down payment fund so it remains separate from everyday spending. Or, if your bank offers savings vaults, you might create a sub-savings account within your main one earmarked for your down payment. Then automate contributions to this account or vault so it grows over time.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

5. Invest for the First Time

Investing allows your money to work for you, building wealth beyond what traditional savings accounts can provide. While investing might seem intimidating at first, starting small is often the best approach. Low-cost options like index funds, exchange-traded funds (EFTs), or robo-advisors make it easier than ever to get started without needing extensive financial knowledge. As your income grows, you can increase contributions and diversify your portfolio.

6. Pay Off Student Loans

Student loans are a reality for millions of people, and paying them off can take years. Carrying this debt affects your ability to save, invest, and even qualify for other financial opportunities like a mortgage. That’s why making a structured repayment plan is so important.

Start by reviewing your repayment options — federal loans may offer an income-driven repayment plan or refinancing opportunities. Making extra payments towards the principal when possible can reduce the overall interest you pay and shorten the repayment timeline.

Financial Goal Examples for Students

Students often juggle limited income with rising expenses, making financial goals essential. Here are some practical ones to consider:

•  Creating and sticking to a monthly budget

•  Building a small emergency fund (even $500 helps)

•  Paying off credit card balances in full each month

•  Saving for textbooks or tuition payments

•  Beginning to invest through a low-cost brokerage app

•  Applying for scholarships or part-time jobs to reduce student loan reliance

Setting goals early can help students avoid financial pitfalls and build healthy habits for adulthood.

How to Adjust Your Financial Goals if Your Circumstances Change

Life rarely goes exactly as planned. You might face job loss, medical expenses, or unexpected windfalls like a bonus or inheritance. When your circumstances shift, it’s important to:

•  Reevaluate your priorities: Decide which goals still matter most.

•  Adjust timelines: You may be able to shorten a deadline or you might need to extend one or more of your timelines.

•  Reallocate resources: If money is tight or your priorities change, you may want to shift money from one goal to another.

•  Stay flexible: Remember, goals are not fixed — they evolve with your life.

The Takeaway

Setting financial goals isn’t about perfection — it’s about progress. By understanding your current financial health, defining clear objectives, and using the SMART framework, you can create a roadmap toward stability and success.

Whether you’re saving for your first emergency fund, tackling debt, or planning for retirement, goals can give you the motivation and direction you need to take control of your financial future. The key is consistency. Start small, stay flexible, and remember that every step forward brings you closer to your near- and long-term aspirations.

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 3.60% APY on SoFi Checking and Savings.

FAQ

Is it wise to invest your emergency fund?

Generally, it’s not wise to invest your emergency fund in risky assets like stocks or mutual funds. An emergency fund should remain easily accessible and safe, since its purpose is to cover unexpected expenses or a sudden loss of income. Keeping it in a high-yield savings account or money market account balances safety with some interest growth. Once your emergency fund is secure, you can focus on investing other money for long-term goals.

What is the most important financial goal?

For many people, the most important financial goal is to build a strong foundation of financial security. This typically means creating a healthy emergency fund and paying down high-interest debt. Without stability, it’s difficult to make progress toward other goals like saving for retirement, buying a home, or investing.

Once your essential safety net is in place, you can prioritize goals that align with your lifestyle and values, such as long-term wealth building, financial independence, or providing for your family’s future.

How many financial goals should you have at once?

It’s often best to focus on a manageable number of goals (such as two or three) at one time. Trying to juggle too many can spread your money and attention too thin, making it harder to make meaningful progress. A practical approach is to prioritize one short-term goal (like building an emergency fund), one medium-term goal (such as saving for a car or vacation), and one long-term goal (like retirement savings). This balance helps you stay focused while still moving forward in multiple areas.

What is a good financial goal for a beginner?

A great financial goal for beginners is starting an emergency fund. Even saving a small amount, such as $500, can provide a cushion against unexpected expenses and reduce the need to rely on credit cards or loans. Once that’s established, beginners can aim to save three to six months of living expenses. Other beginner-friendly goals include paying off small debts, creating a realistic budget, or setting up automatic savings. These goals build confidence and establish strong money habits for future success.

How can I set financial goals with a partner or family?

Setting financial goals with a partner or family starts with open communication about values, priorities, and long-term dreams. Begin by discussing shared goals, such as buying a home, paying off debt, or saving for children’s education. Next, agree on a budget and assign responsibilities for managing finances to ensure accountability. Regular check-ins help you stay on track, celebrate progress, and adjust goals as life circumstances change.

What tools can help me track my financial goals?

Several tools can make tracking financial goals easier and more organized. Budgeting apps like YNAB, GoodBudget, or PocketGuard allow you to set savings targets and monitor spending. Spreadsheets are another customizable option for tracking progress. Many banks also offer built-in goal-tracking features through their mobile apps.

For long-term goals, investment platforms often provide dashboards showing growth toward retirement or wealth-building objectives. The key is choosing a tool you’ll use consistently, helping you stay motivated and accountable.

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Even the most money-savvy person may have some false beliefs about money. Maybe you were raised with misconceptions about finances, such as investing is only for the very rich, or were given off-target advice from well-intentioned friends (telling you to always aim to buy a house vs. renting), for instance.

Incorrect beliefs about money can have a negative impact on how you manage your finances, potentially hindering your path to achieving your goals.

Why Debunking Money Myths Is Key to Financial Success

Being realistic about money can help you set reasonable financial goals and reach them in the short- and long-term. Whether you are feeling financially secure or are looking to better manage your finances, practicing healthy financial habits will serve you well in the long run.

That’s why debunking money myths is important. If you believe, for instance, that carrying lots of credit card debt is “normal,” you may not eliminate that monthly balance that’s dragging down your budget.

Here are some common misconceptions about money to avoid if you want to be financially fit.

10 Common Misconceptions About Money

Here, learn about popular money misconceptions and why it may be time to bust some financial myths.

1. You Need a Lot of Money to Start Investing

You do not need to be rich in order to invest: You can start investing with just a few dollars. The average stock market return is about 10% a year, as measured by the S&P 500 index. The S&P 500 Index return does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns. Investing has risks, and you’ll want to be comfortable with that notion and find investments that suit your risk tolerance.

Whatever you decide to do, investigate fees before you begin investing so you are prepared for any costs you will need to cover.

2. Budgeting Is Too Restrictive and Complicated

Regardless of how little or how much money you have, a budget is helpful for organizing your finances. If you feel budgeting is too restrictive and/or complicated, you probably just haven’t found the right budgeting method yet.

Making a budget could help you achieve financial stability. You need to budget so you can keep track of your spending, your debt, and your savings for future goals.

There are various techniques and tools (spreadsheets, journals, apps) for budgeting. One strategy is the 50/30/20 budget rule, in which 50% of your post-tax money goes towards necessary expenses (housing, food, utilities, and the like), 30% goes towards wants, and 20% is used for saving.

3. All Debt Is Bad Debt

According to Debt.org, 90% of American households have some kind of consumer debt. But keep in mind, not all debt is created equal. Some debt is considered good debt. Think about a mortgage: Once you’ve saved for a down payment, this financial product is typically a fairly low-interest loan that may help build your credit history (if managed responsibly) and also allows you to accrue equity in the home.

Bad debt, on the other hand, is high-interest debt, such as credit card debt, where interest rates are high and you aren’t building equity. Just because a lot of people may have this kind of debt doesn’t mean you should. It can snowball and keep you spending a chunk of money monthly that could otherwise be saved or invested.

4. A High Salary Automatically Makes You Wealthy

A common money misconception is that earning a high salary makes you wealthy. That is not necessarily true. People who earn a lot of money can spend a lot of it too. The key to building wealth is saving and investing your money so it can potentially grow over time. Even if you simply stash money in a high-yield savings account, compounding interest can help grow your wealth.

To look at it from another angle, say one person earns $50,000 a year, lives within their means, and saves and invests wisely. Then there’s a person who earns $500,000 but they own multiple houses, spend freely on luxuries, and haven’t yet gotten their act together in terms of saving and investing. The person who has the lower salary might actually be the wealthier of the two.

5. Buying a Home Is Always Better Than Renting

Buying a home is the quintessential American dream, but it’s not necessarily the right move for everyone. Whether to rent or buy ultimately depends on your personal situation and your aspirations.

You may have heard that renting is a waste of money, but it can provide flexibility for those who are not ready to buy a home or not interested in doing so. For instance, perhaps your work requires you to relocate often, or you only want to buy a house when your baby is older and you can pick the right school district. Maybe you’d rather pay off debt vs. save for a down payment. Or you just might not want the major expense of a mortgage, taxes, and home maintenance in your life. Whatever your situation may be, it’s important not to feel pressured into buying unless it’s the right move for you.

6. You Should Avoid Credit Cards to Stay Out of Debt

Using credit cards as a form of payment doesn’t mean you’ll go into debt. Spending more than you can afford to pay off what you owe, however, may put you on that path. If you use a credit card wisely and typically pay off the debt every month, this can be a factor that helps you build credit. It also keeps you from paying high credit card interest, which averages 24.35% as of July 2025.

However, if you are a person who tends to spend impulsively and not pay your credit card bill on time, this could negatively affect your credit score. This is why it’s important to manage your purchases and pay your credit card bills on time.

7. Saving for Retirement Can Wait Until You’re Older

This can be a dangerous myth to believe. If you are young and are investing for your retirement, you have time on your side. Your invested money can grow over time thanks to compounding returns. Here’s an example: If a 25-year-old invests $200 a month and earns a 6% return, they’ll have $393,700 by age 65. But if that same person starts saving at age 35, that same money at the same rate nets them $201,100, or about half of what they’d have if they started sooner.

It may feel as if retirement is a long way away, but the sooner you begin funding it, the more you are likely to have. If your employer offers a 401(k) plan, take advantage of contributing to it. If this isn’t offered at your place of work, you can open an individual retirement account (IRA) or a Roth IRA.

8. Talking About Money Is Taboo

Talking about money issues may seem like taboo, but it shouldn’t be. It can be healthy to talk about money troubles to close family and friends, because they may have ideas about how to approach a solution. Perhaps they experienced a similar issue in the past and can offer advice on how they handled it.

If you find it uncomfortable to talk to family or friends about your money concerns, you might want to consider speaking to a professional. For instance, there are non-profit credit counseling organizations, like the National Foundation for Credit Counseling that could help you if you are burdened with debt and feel overwhelmed.

9. More Money Will Solve All Your Problems

Yes, money can help take care of bills, but the old adage, “More money, more problems” may well be true, too. The secret to being financially secure is not about how much money you make, it’s about how well you manage it.

For instance, say you take a new job that pays twice your current salary. If you turn around and buy a pricier home and car and book some luxury vacations, you might be in more debt and experience more stress than before. The way to prevent this is by not living beyond your means.

Healthy budgeting and saving habits (such as automating your savings) are what can help solve problems.

10. Financial Planning Is Only for the Rich

Financial planning isn’t only for those who have hefty savings accounts, net worth, or investment portfolios. Although it may not be taught in school, financial literacy is important for all, and setting money goals can help you achieve your dreams. Too many people just open a checking account and then ignore their money.

You might be more comfortable working with a financial professional, but you don’t need one to manage your money. It’s totally your choice. You might also see what tools and services your bank offers, and investigate third-party options.

Budgeting and Saving Myths Debunked

There are several myths about budgeting and saving that are worth debunking. For instance, many people believe living on a budget is hard, complicated, time-consuming, and all about deprivation.

Not true! The right budget can help you stay on track financially and achieve your goals. What’s important is to experiment with different budgets to find one that suits your needs. You might use technology, such as a savings calculator to help you along.

Also, it’s a financial myth that you need a lot of money to save effectively. Regardless of your income and expenses, budgeting well can allow you to start saving regularly. Small amounts of money can really add up over time.

Recommended: Savings Goal Calculator

Investing and Retirement Myths Debunked

Here’s what is a common misconception about finances: that you need a lot of money to invest. Anyone can invest well, even starting with a small amount, and robo-advisors can help automate the process for you. On the topic of investing, it’s also a misconception that you don’t have to think about retirement until later. You’re actually likely to save more effectively when you start early (again, even with small amounts) than if you put more money in for a shorter period of time.

Another myth is that you don’t need to save for retirement because you can live off Social Security payments. However, many people find that those payments are not enough when they reach retirement age, especially with rising healthcare costs.

Debt and Credit Card Myths Debunked

A debt myth is that all debt is bad. Some kinds of debt, such as mortgages, charge relatively low interest and allow you to build wealth. However, when it comes to credit cards, there are some myths to conquer. For example, some people may believe that they should only pay the minimum amount on their monthly bill. This amount is the bare minimum, and paying just that can wind up locking you into a debt trap, without building up funds in your bank account because you’re struggling to pay off your debt.

Mindset and Lifestyle Myths Debunked

A mindset and lifestyle myth about money to debunk is that making more money means you’re wealthy. It might be true, but if you allow your spending to rise with every raise at work or money windfall, you could wind up less wealthy than you were before.

This is considered lifestyle creep. An example is when you get a new job and earn more, you go out and, say, lease a luxury car rather than putting the extra money into savings or investing. You live more lavishly, but you could be shortchanging your future.

How to Develop a Health Money Mindset

To develop a healthy money mindset, it’s helpful to devote some time and energy to learning how to manage your money well. That could mean reading up on finances, listening to podcasts, or taking an online course.

Goal setting is important, too. By establishing your short-, medium, and long-term goals, you can begin working toward achieving them. Budgeting well and talking with trusted friends and relatives for advice can help you get on the right track. Automating your savings so money seamlessly gets transferred into a savings account can be a smart move, too. You might also work with a financial planner or a financial therapist to help you in your money journey.

The Takeaway

Myths about money can stand in the way of your making the most of your finances. By avoiding these misconceptions, you’ll be better able to take control of your cash, budget, save, and invest wisely. These moves can not only help you achieve your goals, they can enhance your peace of mind, too.

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 3.60% APY on SoFi Checking and Savings.

FAQ

What is the biggest misconception people have about money?

There are many negative beliefs about money. Some include believing only rich people should invest their funds and that a person doesn’t need to think about retirement saving when they are young. These misconceptions can keep people from reaching their financial goals.

Is it true that you need money to make money?

While having money can help you make money, it’s not a requirement. By budgeting well and saving regularly (even small amounts), you can work toward generating wealth. A person who makes $50,000 could be wealthier than one who makes a multiple of that if they manage their money more wisely.

Why is it so hard to talk about personal finances?

It can be hard to talk about personal finances because many people are raised with the belief that one should never discuss money. It’s a myth about money that it’s a taboo topic. Unfortunately, this secrecy leads people not to share information that could help one another manage money better. Also, typically financial management skills aren’t taught in school, so many people clam up about the topic since they feel ignorant about it.

What’s a simple first step to fix my money mindset?

Often, the simple first step to fix your money mindset is to think about and recognize your attitudes. Do online research about money management and talk to friends whose money management you respect. Look at the interest rates on your credit card and student loans, try budgeting apps, and take other small steps that begin to put you in the driver’s seat financially rather than believing prevailing wisdom.

Maybe you think that there’s no point saving for retirement until you’re older or that investing is only for the rich. By being honest about your beliefs and then working to educate yourself and take steps toward financial management, you can fix your money mindset.

Is carrying a small credit card balance good for my score?

If you’ve wondered about what are some common money misconceptions, this is one! Carrying a balance doesn’t build your credit score. Among the habits that help maintain and build your credit score are always paying your card on time and keeping your credit utilization ratio (your balance vs. your credit limit) as low as possible. Under 30%, if not under 10%, is considered a good level.

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SOBNK-Q325-104

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If you’re looking for a tool you can use to borrow money when you need it, you may be wondering which is the best choice: a personal line of credit, a personal loan, or a home equity line of credit (HELOC).

In this guide we’ll compare these three types of loans. The two credit lines both function similarly to a credit card but typically have a lower interest rate and a higher credit limit, while a personal loan can provide you with a lump sum of cash that you pay back over a set term. We’ll also cover some of the pros and cons of using a HELOC vs. a personal line of credit vs. a personal loan.

What Is a Personal Loan?

A personal loan is a highly flexible way to borrow a lump sum of money for virtually any reason – from paying medical bills to financing a wedding. You may be able to borrow anywhere from $1,000 to potentially as much as $100,000, typically at a fixed rate, and pay it back in regular monthly installments over a preset period of two to seven or even 10 years. These loans are usually unsecured debt, which means you don’t have to use collateral to qualify. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.

You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.

Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.

What Is a Personal Line of Credit?

A personal line of credit, sometimes shortened to PLOC, is a revolving credit account that allows you to borrow money as you need it, up to a preset limit.

Instead of borrowing a lump sum and making fixed monthly payments on that amount, as you would with a traditional installment loan, a personal line of credit allows you to draw funds as needed during a predetermined draw period. You’re required to make payments based only on your outstanding balance during the draw period.

In that way, a PLOC works like a credit card. Generally, you can pay as much as you want each month toward your balance, as long as you make at least the minimum payment due. The money you repay is added back to your credit limit, so it’s available for you to use again.

You can use a personal line of credit for just about anything you like as long you stay within your limit, which could range up to $50,000, and possibly more.

Like a personal loan, a PLOC is typically unsecured, so you don’t need collateral. The lender will base decisions about the amount you can borrow and the interest rate you’ll pay on your personal creditworthiness. The interest rates are generally variable.

Can a Personal Loan or a Personal Line of Credit Be Used to Buy a House?

If you could qualify for a high enough credit limit — or if the property you want to buy is being sold at an extremely low price — you might be able to purchase a house with a personal line of credit or a personal loan. But it may not be the best tool available.

A traditional mortgage, secured by the home that’s being purchased, may have lower overall costs than a personal loan or personal line of credit. There are several different types of mortgage loans to choose from.

If you’re looking at a personal loan vs. a personal line of credit or mortgage, it’s also important to realize that a personal loan is usually for a much shorter term than a mortgage, which is typically 30 years, or most PLOCs. And since personal loans, like PLOCs, are unsecured, they typically carry much higher interest rates than traditional mortgages.

A variable rate, which is typical of personal lines of credit, might not be the best option for a large purchase that could take a long time to pay off. Your payments could go lower, but they also could go higher. If interest rates increase, your loan could become unaffordable. With a traditional mortgage, you would have the option of a fixed rate or a variable one.

Another consideration: If you use all or most of your PLOC to make a major purchase like a home, it could have a negative impact on your credit score and future borrowing ability. The amount of revolving credit you’re using vs. how much you have available — your credit utilization ratio — is an important factor that affects your credit score. The rule of thumb is typically to aim for less than 30%.

What Is a HELOC?

A HELOC is a revolving line of credit that is secured by the borrower’s home. It, too, usually has a variable interest rate.

Lenders typically will allow you to use a HELOC to borrow a large percentage of your home’s current value minus the amount you owe. That’s your home equity.

A lender also may review your credit score, credit history, employment history, and debt-to-income ratio (monthly debts / gross monthly income = DTI) when determining your borrowing limit and interest rate.

Recommended: Learn More About How HELOCs Work

Personal Line of Credit vs HELOC Compared

If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.

Personal Loan vs HELOC Compared

If you’re looking at a HELOC vs. a personal loan, you’ll find many ways in which the two are different, but also some ways they’re alike.

Similarities

Here are some shared aspects of a personal loan vs. a home equity line of credit.

•   The money that you borrow can be used for virtually any purpose you choose.

•   Easy access to your money. A personal loan gives you the money in a lump sum and a HELOC allows you to draw funds at will (up to a set limit) during the draw period.

•   You must pay interest on your loan, and rates are typically lower than they would be for credit cards, for instance.

•   There are defined periods during which your loan and interest must be repaid in regular installments.

•   Lenders may charge a variety of fees, including late or prepayment fees on either. Be sure you know about potential fees before closing.

Differences

There are also many points of difference to take into account when you’re considering a HELOC vs. a personal loan.

•   HELOCs are secured by your house, which serves as collateral. Personal pans are typically unsecured. This means that your interest rate is likely to be higher with a personal loan.

•   HELOCs are revolving lines of credit and work like credit cards – you use what you need when you need it. A personal loan generally comes as a lump sum.

•   Personal loans typically have fixed interest rates, meaning that your monthly payments will always be the same for the length of the loan. HELOCs typically have adjustable rates, meaning that your payments can change with the market as well as with how much you withdraw.

•   Personal loans generally have terms of 10 years at most. HELOCs often have a 10-year draw period followed by a 20-year repayment period, for a total of 30 years.

•   Lender requirements vary, but you’ll generally need a FICO® score of at least 610 for a personal loan, while for a HELOC, it may be 680. Higher scores are likely to result in better interest rates and possibly higher loan limits.

•   Since your home is collateral for a HELOC, you may need to pay for an appraisal to establish how much your home is worth. Depending on your lender, you may also need to pay other closing costs.

Personal Loan vs. Home Equity Line of Credit
	Personal Loan	HELOC
Flexible borrowing and repayment	✓	✓
Convenient access to funds	✓	✓
Annual or monthly maintenance fee	Not typically	Varies by lender
Typically a variable interest rate		✓
Secured with collateral		✓
Approval based on creditworthiness	✓	✓
Favorable interest rates	✓*	✓*
*Rates for secured loans are usually lower than for unsecured loans. Rates for personal loans are generally lower than credit card rates.

Personal Line of Credit vs HELOC Compared

If you’re comparing a personal line of credit with a HELOC, you’ll find many similarities. But there are important differences to keep in mind as well.

Similarities

Here are some ways in which a personal line of credit and a HELOC are alike:

•   Both are revolving credit accounts. Money can be borrowed, repaid, and borrowed again, up to the credit limit.

•   Both have a draw period and a repayment period. The draw period is typically 10 years, with monthly minimum payments required. The repayment period may be up to 20 years after the draw period ends.

•   Access to funds is convenient. Withdrawals can be made by check or debit card, depending on how the lender sets up the loan.

•   Lenders may charge monthly fees, transaction fees, or late or prepayment fees on either. It’s important to understand potential fees before closing.

•   Both typically have variable interest rates, which can affect the overall cost of the line of credit over time. (Each occasionally comes with a fixed rate. The starting rate of a fixed-rate HELOC is usually higher. The draw period of a fixed-rate personal line of credit could be relatively short.)

•   For both, you’ll usually need a FICO® score of 680. Your credit score also affects the interest rate you’re offered and credit limit.

Differences

The biggest difference when you’re looking at a personal line of credit vs. a home equity line of credit is that a HELOC is secured. That can affect the borrower in a few ways, including:

•   In exchange for the risk that HELOC borrowers take (they could lose their home if they were to default on payments), they generally qualify for lower interest rates. HELOC borrowers also may qualify for a higher credit limit.

•   With a HELOC, the lender may require a home appraisal, which might slow down the approval process and be an added expense. HELOCs also typically come with other closing costs, but some lenders will reduce or waive them if you keep the loan open for a certain period — usually three years.

•   A borrower assumes the risk of losing their home if they default on a HELOC. A personal line of credit does not come with a risk of that significance.

Personal Line of Credit vs. Home Equity Line of Credit
	Personal LOC	HELOC
Flexible borrowing and repayment	✓	✓
Convenient access to funds	✓	✓
Annual or monthly maintenance fee	Varies by lender	Varies by lender
Typically a variable interest rate	✓	✓
Secured with collateral		✓
Approval based on creditworthiness	✓	✓
Favorable interest rates	✓*	✓*
*Rates for secured loans are usually lower than for unsecured loans. Rates for personal loans are generally lower than credit card rates.

Recommended: Credit Cards vs. Personal Loans

Pros and Cons of HELOCs

A HELOC and personal line of credit share many of the same pros and cons. An advantage of borrowing with a HELOC, however, is that because it’s secured, the interest rate may be more favorable than that of a personal line of credit or a personal loan.

A HELOC may offer a tax benefit if you itemize, spend the funds on buying, building or significantly improving your home, and can take the mortgage interest deduction. But there are potential downsides, too.

Pros and Cons of Personal Loans

A personal loan can be a good choice when you need a lump sum of money – say, for a major purchase or bathroom remodel – especially if it’s not an extremely large amount. You’re likely to get a better interest rate than you would on a credit card, and a shorter repayment term than you’d have for a PLOC or HELOC. But there’s a lot to consider.

Pros and Cons of Personal Lines of Credit

Because you draw just the amount of money you need at any one time, a personal line of credit can be a good way to pay for home renovations, ongoing medical or dental treatments, or other expenses that might be spread out over time.

You pay interest only on the funds you’ve drawn, not the entire line of credit that’s available, which can keep monthly costs down. As you make payments, the line of credit is replenished, so you can borrow repeatedly during the draw period. And you don’t have to come up with collateral.

But there are other factors to be wary of. Here’s a summary.

Alternatives to Lines of Credit

As you consider the pros and cons of a HELOC vs. a personal LOC or personal loan, you may also wish to evaluate some alternative borrowing strategies, including:

Personal Loan

As you’re thinking about a personal loan vs. a personal line of credit, the big difference is that, with a personal loan, a borrower receives a lump sum and makes fixed monthly payments, with interest, until the loan is repaid.

Most personal loans are unsecured, and most come with a fixed interest rate. The rate and other terms are determined by the borrower’s credit score, income, debt level, and other factors.

You’ll owe interest from day one on the full amount that you borrow. But if you’re using the loan to make a large purchase, consolidate debt, or pay off one big bill, it may make sense to borrow a specific amount and budget around the predictable monthly payments.

Personal loan rates and fees can vary significantly by lender and borrower. You can use a loan comparison site to check multiple lenders’ rates and terms, or you can go to individual websites to find a match for your goals.

Auto Loan

If you’re thinking about buying a car with a personal loan, you may want to consider an auto loan, an installment loan that’s secured by the car being purchased. Qualification may be easier than for an unsecured personal loan or personal line of credit.

Most auto loans have a fixed interest rate that’s based on the applicant’s creditworthiness, the loan amount, and the type of vehicle that’s being purchased.

Down the road, if you think you can get a better interest rate, you can look into car refinancing.

Beware no credit check loans. Car title loans have very short repayment periods and sky-high interest rates.

Mortgage

A mortgage is an installment loan that is secured by the real estate you’re purchasing or refinancing. You’ll likely need a down payment, and borrowers typically pay closing costs of 2% to 5% of the loan amount.

A mortgage may have a fixed or adjustable interest rate. An adjustable-rate mortgage typically starts with a lower interest rate than its fixed-rate counterpart. The most common repayment period, or mortgage term, is 30 years.

Your ability to qualify for the mortgage you want may depend on your creditworthiness, the down payment, and the value of the home.

Credit Cards

A credit card is a revolving line of credit that may be used for day-to-day purchases like groceries, gas, or online shopping. You likely have more than one already. Gen X and baby boomers have an average of about four credit cards per person, Experian® has found, and even Gen Z, the youngest generation, averages two cards per person.

Convenience can be one of the best and worst things about using credit cards. You can use them almost anywhere to pay for almost anything. But it can be easy to accrue debt you can’t repay.

Because most credit cards are unsecured, interest rates can be higher than for other types of borrowing. Making late payments or using a high percentage of your credit limit can hurt your credit score. And making just the minimum payment can cost you in interest and credit score.

If you manage your cards wisely, however, credit card rewards can add up. And you may be able to qualify for a low- or no-interest introductory offer.

Credit card issuers typically base a consumer’s interest rate and credit limit on their credit score, income, and other financial factors.

Student Loans

Federal student loans typically offer lower interest rates and more borrower protections than private student loans or other lending options.

But if your federal financial aid package doesn’t cover all of your education costs, it could be worth comparing what private lenders offer.

Home Equity Loans

If you’re a homeowner with equity in your house and you’re not comfortable with the adjustable payments of a HELOC, you might want to consider a home equity loan. These lump sum loans typically have fixed interest rates, meaning that you’ll know in advance what your payments will be every month and can plan accordingly. And since they’re secured with your home, interest rates are typically lower than they’d be for unsecured loans. Just remember that, as with a HELOC, your home is at risk if you can’t make your payments.

The Takeaway

A HELOC, a personal loan, or a personal line of credit can be useful for a borrower in need of funds. Each kind of loan has different advantages and drawbacks, so it’s important to consider each carefully in light of your financial situation so you can assess what would work best for your needs.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

What is better, a home equity line of credit or a personal line of credit?

If you qualify for both, a HELOC will almost always come with a lower interest rate. However, it does put your home at risk if you can’t make your payments.

Can I use a HELOC for personal use?

Yes. HELOC withdrawals can be used for almost anything, but the line of credit is best suited for ongoing expenses like home renovations, medical bills, or college expenses. Some people secure a HELOC as a safety net during uncertain times.

How many years do you have to pay off a HELOC?

Most HELOCs have a “draw period” of 10 years, followed by a repayment period, which may be up to 20 years.

What happens if you don’t use your home equity line of credit?

Having a HELOC you don’t use could help your credit score by improving your credit utilization ratio.

How high of a credit score is needed for a line of credit?

Personal lines of credit are usually reserved for borrowers with a credit score of 680 or higher. A credit score of at least 680 is typically needed for HELOC approval, but requirements can vary among lenders. Some may be more lenient if an applicant has a good debt-to-income ratio or accepts a lower loan limit.

Does a HELOC increase your mortgage payments?

The HELOC is a separate loan from your mortgage. The two payments are not made together.

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^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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

SOHL-Q325-023

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If a debt goes unpaid for long enough, it can eventually end up with a collection agency. That’s when the aggressive phone calls and letters usually start. Hearing from a debt collector can feel stressful, overwhelming, and even scary. However, it doesn’t have to be. Understanding how debt collection agencies work — and what your rights are — can help you navigate a difficult situation with more confidence and less panic.

Below, we break down what collection agencies actually do, how they’re different from debt buyers, what steps you should take if you’re contacted, and how this process can affect your credit.

How Does Debt Collection Work?

Debt collection is the process of pursuing payment on overdue debts. Having a “debt in collections” means the original creditor (such as a credit card company, an auto lender, or a utility) has sent the debt to a third-party person or agency to collect it.

Typically, a debt doesn’t go to collections if you miss one payment. If nonpayment goes on for a while (typically 90 to 180 days), however, the original creditor may decide to give up trying to collect from you and write the debt off as a loss. This process is known as a charge-off. At that point, they will usually do one of two things: assign the debt to a third-party debt collection agency or sell it to a debt buyer.

Once the debt is transferred or sold, the collection process intensifies. You may start receiving letters, phone calls, or emails from the debt collector. Their goal is to recover as much of the debt as possible, either in full, through a payment plan, or via a negotiated settlement.

💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

What Is a Debt Collector?

A debt collector is any individual or company whose primary job is to recover money owed on delinquent accounts. They might be part of a collection agency, a law firm specializing in collections, or an in-house department of the original creditor.

Under the Fair Debt Collection Practices Act, debt settlement companies are required to follow strict guidelines when contacting consumers. They are prohibited from using abusive, deceptive, or unfair practices. For example, they can’t call before 8 a.m. or after 9 p.m., harass you, or misrepresent themselves.

What Do Collection Agencies Do?

Collection agencies work on behalf of creditors to recover unpaid debts. Generally the way they make money is by receiving a percentage — usually between 25% and 50% — of the amount they recover. Commissions tend to be on the higher end of that range for older debts, since they are more difficult to collect.

Collection agencies can — and do — use a variety of tactics to recover funds, including:

•  Calling you at home or work

•  Sending letters, text, or emails

•  Contacting you through social media

•  Showing up at your front door

•  Contacting your friends and family to confirm your contact information (they can’t do this more than once, however, or reveal why they need the information)

•  Take you to court to recover a past-due debt

When dealing with collections, it’s important to keep in mind that there is a statute of limitations on debt. Collectors generally have between three to six years to file a lawsuit over old debts (the timeline varies by where you live and type of debt). The clock starts when your debt was first recorded delinquent. After the statute of limitations ends, a collection agency cannot legally sue you for the debt. They can, however, still hound you for the money.

How Is This Different from a Debt Buyer?

A debt buyer doesn’t work for the creditor like a debt collection agency does. They buy debts that have been charged off by creditors, sometimes buying a collection of old debts from a single creditor. How much these collectors pay for debt varies but it can be as little as a few cents on the dollar.

Because debt collectors own the debt, they generally have more freedom to negotiate than collection agencies that are merely collecting on someone else’s behalf. Also because they often pay so little for debt, any recovery can represent a profit.

Like debt collection agencies, debt buyers sometimes use aggressive tactics to collect a debt. However, they are subject to the same state and federal laws designed to protect borrowers from harassment.

Recommended: Credit Card Debt Collection: What Is It and How Does It Work?

How to Deal With a Debt in Collections

Finding out that a debt is in collections can be alarming. However, taking deliberate, informed steps can help protect your finances and your rights.

Verify the Debt

Before paying anything, it’s important to always verify the debt. Debt collectors are required by law to send you a debt validation notice within five days of contacting you. This notice should include:

•  The debt collector’s name and address

•  The name of the creditor

•  The amount owed

•  What to do if you don’t think it’s your debt

•  Your debt collection rights

If you’re unsure about the validity of the debt or the amount, send a written request for verification within 30 days. This forces the agency to provide documentation proving the debt is legitimate. If the debt is not valid, you can dispute it with the collector.

Negotiate a Payment Plan or Settlement

If the debt is legitimate, consider negotiating. Many collectors are willing to accept a lump-sum settlement for less than the full balance, especially if they purchased the debt cheaply. Alternatively, you might be able to arrange a payment plan that fits your budget.

When negotiating, be sure to consider your financial situation and avoid agreeing to any terms you can’t realistically meet. Once you sign off on a payment plan or make a payment on old debt, it restarts the clock on the statute of limitations.

Get Agreements in Writing

Before sending any money to a collection agency, make sure you have a written agreement that outlines the terms. This document should specify the amount to be paid, the payment schedule, and whether the agency will report the account as “paid in full” or “settled” to credit bureaus.

Getting agreements in writing protects you from future disputes and ensures you have proof of compliance.

How Does a Debt in Collections Affect Your Credit?

Missed payments on a debt already negatively impact your credit profile. When a debt goes into collections, the situation typically worsens.

When the original creditor decides to stop trying to collect on your debt and closes your account, the charge-off goes on your credit report. Once the debt goes to collections and the debt collector sends you a notice, the collector will create a new collection account, which also lands on your credit report.

Both the charge-off and the collection account are negative entries, and can cause an immediate drop in your credit scores of 50 to 100 points, possibly more.

While paying the debt collector will not remove the collection account from your credit report, it’s generally a good idea to do so. For one reason, some newer credit scoring models ignore collection accounts with a zero balance. Potential lenders also tend to view paid-off collection accounts more favorably when they check your credit report as part of a credit application. On top of that, you’ll no longer be harassed by the debt collection company.

Alternatives to Debt Collection Agencies

You can avoid having debt land in collections by taking steps to manage and pay down existing debt. Here are some strategies to consider.

Consumer Credit Counseling Services

Nonprofit credit counseling agencies offer free or low-cost services to help you gain better control of your finances. You can often get counseling, budgeting advice, and credit education from a certified counselor free of charge.

For an added fee, a counselor can also set up a debt management plan. This means they will negotiate with creditors on your behalf to lower your interest rates and fees and establish a payment plan that works for you. They then consolidate your payments into one monthly amount. You make a single payment to the counseling agency, which distributes the funds to your creditors.

Debt Settlement

If you’re more than 90 days past due on a debt and suffering financial hardship, you might consider debt settlement, also known as debt relief. This is a strategy where you negotiate with your creditors to lower your debt in return for one lump sum payment. You can try this yourself or hire a debt settlement company, though the latter often charges high fees and may not guarantee success.

Just keep in mind that settling a debt can negatively affect your credit file, since settled accounts stay on your credit report for up to seven years. However, for those overwhelmed by debt, it may be preferable to ongoing collections or bankruptcy.

Debt Consolidation

Debt consolidation involves combining multiple debts — typically high-interest debts like credit card balances — into a single loan or credit account. The main goal with this debt payoff strategy is to simplify repayment and potentially lower the interest rate or monthly payments. Some common ways to consolidate debt include:

•   Debt consolidation loans: These are essentially personal loans that are used to pay off other debts and rates tend to be lower than credit cards.

•   Balance transfer credit cards: These are credit cards that let you move balances from others cards; some offer a 0% introductory rate.

•   Home equity loans or lines of credit: This involves borrowing against your home equity to pay off debts.

Before you consolidate debt, it’s important to look closely at rates and any added fees to make sure the move will be cost effective.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Bankruptcy as a Last Resort

Personal bankruptcy is a legal process designed to provide relief for people facing severe financial difficulties who are unable to repay their debts. There are two main types for individuals:

•   Chapter 7: This allows you to discharge most types of unsecured debt, such as credit card balances and medical bills, but you must first liquidate non-exempt assets to repay as much of the debt as possible.

•   Chapter 13: This allows you to restructure your debt under a new repayment plan that usually spans three to five years.

Keep in mind that bankruptcy has serious long-term credit consequences. It stays on your credit report for seven to 10 years (seven for Chapter 13 and 10 for Chapter 7), making future borrowing more difficult.

The Takeaway

If you’ve gotten a phone call or letter from a debt collector, it’s important to understand how debt collection agencies work and how to handle debt in collections. Ignoring a collector won’t make the debt go away. Instead, it’s better to gather as much information as possible to make informed decisions.

If you’re struggling with multiple high-interest debts, keep in mind that there are options available to help regain control of your finances.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

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

FAQ

What rights do you have when dealing with a collection agency?

When dealing with a collection agency, you have rights under the Fair Debt Collection Practices Act. Collectors must treat you fairly and cannot harass, threaten, or lie to you. They must identify themselves, provide proof of the debt if requested, and cannot contact you at inconvenient times (such as before 8 a.m. or after 9 p.m.). You also have the right to request all communication in writing and to dispute the debt within 30 days of first contact.

Can a debt collector sue you or garnish wages?

Yes, a debt collector can sue you for unpaid debt. If they win the lawsuit, they may obtain a court judgment allowing wage garnishment. However, collectors must notify you and give you a chance to respond. State and federal laws also limit how much a creditor can garnish from your wages. Always respond to legal notices promptly, and consider speaking with an attorney or credit counselor if you’re being sued over a debt.

How do you remove a collection from your credit report?

To remove a collection from your credit report, start by checking if it’s accurate. If it’s incorrect or too old (over seven years), you can dispute it with the credit bureau. For valid collections you’ve paid, you might request a “goodwill deletion” after you’ve paid it. This involves calling or writing to the collection agency and asking to have the account deleted as a gesture of goodwill. They don’t have to comply, but they might.

Does paying off collections improve your credit score?

It might. Some credit scoring models consider accounts in collections, even if they are paid. However, newer FICO and VantageScore models ignore paid collections, which means paying them off can be beneficial. Regardless, settling or paying off collections looks better to lenders and can help you qualify for credit in the future. It also prevents further action, like lawsuits. Always ask for a written confirmation of payment or settlement.

What’s the difference between a debt collector and a debt buyer?

A debt collector is a company hired by a creditor to collect money on their behalf. They don’t own the debt but earn a fee or commission for collecting payment. A debt buyer, on the other hand, purchases delinquent debts from original creditors, often for pennies on the dollar, and then owns the debt outright. Your rights remain the same under both.

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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.

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 .

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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