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Debt is a slippery slope. You can be doing just fine when an unexpected bill starts a slide. Maybe you use a credit card or three to keep up for a while. But one setback — like major car repairs — throws you off balance again, and eventually debt begins to swallow you up.

But there’s good news. First, you’re not alone. Second, millions of people like you have dug themselves out of debt using the Debt Avalanche Method. This debt reduction strategy focuses your efforts on the debts with the highest interest rates. Keep reading to learn the advantages and disadvantages of this strategy, as well as some proven alternatives for paying off debt.

Understanding the Debt Avalanche Method

The Avalanche Method is all about the interest rate. Essentially, you’ll make the minimum payments toward all of your debts but put anything extra you can (bonuses, tax refunds, that $20 your grandma stuck in your pocket) toward paying off the high-interest debt at the top of the list. When it’s paid off, move on to the debt with the second-highest interest rate and so on.

Fans of the Debt Avalanche Method laud its efficiency. The most expensive debt is ditched first, which can be a big money saver. And the amount of time it takes to get out of debt overall is cut too, because less interest accumulates every month.

Debt Avalanche Method vs. Other Payoff Strategies

The Avalanche is for rational thinkers. But when it comes to money — and life in general — humans tend to follow their gut. That’s why some people prefer the Avalanche’s more emotionally available cousin, the Snowball Method.

With the Snowball Method, the steps are much the same, but you start your list with the smallest balance and work your way toward the largest, disregarding the interest rate. The idea is that those first targets can be knocked down quickly, creating a sense of accomplishment that helps keep you on task until it becomes a habit.

There are pros and cons to each method. If you use the Avalanche, it may take longer to move from one debt to the next. Also, this method assumes paying off debt as quickly as possible is always the right thing to do. But there are other factors to consider, like your credit score. That said, if you have a larger balance with higher interest rates, you could save money over time.

If you plan to pay off debt with the Snowball Method, you’re more likely to experience quick wins, which could help you stay motivated. But you probably won’t save as much on overall interest as you would with the Avalanche.

If you have multiple high-interest balances, you may want to consider a debt consolidation loan. These personal loans roll several debts into a single loan, which ideally has a lower interest rate. This approach can be a smart move if you’re able to stay on top of monthly payments and have a strong credit score.

Implementing the Debt Avalanche Method

Interested in trying the Debt Avalanche Method? It helps to get your finances organized first.

First, make a budget. Find ways to trim the fat from anything you can — dinners out, streaming services — so you’ll have more cash to pay toward that smothering debt. If you need help, here’s a guide to the 70-20-10 rule of budgeting.

Then make a list of all your debts. Start with the loan or credit card that has the highest interest rate, and work your way down to the one with the lowest interest rate. Continue to make the minimum payments on all your debts, but put anything you can (bonuses, tax refunds, that $20 your grandma stuck in your pocket) toward paying off the high-interest debt at the top of the list.

When the first debt on your list is paid off, cross it off and move to the next debt on your list. Roll whatever payment you were making on the first debt into the second debt, adding it on to the minimum payment. When that debt is paid off, do the same with the third on the list. As you continue paying off outstanding debt, you should have more and more money to put toward the next target balance. Keep going until you’ve plowed through each debt on your list and can declare yourself debt-free.

Depending on how much you owe, it could take some time before you’re able to move from one debt to another. Adopting sound financial habits, like tracking spending and using a budget app, can help you stick to your payoff plan.

Is the Debt Avalanche Method Right for You?

Using the Avalanche Method to pay off debt isn’t necessarily a good fit for everyone. The method is great for disciplined, analytical thinkers who get excited by the knowledge that they’re playing the long game. To make this approach a success, it helps to be the type of person who is self-disciplined, self-motivated, self-aware, and capable of celebrating self-made milestones.

Alternative debt payoff strategies, like the Snowball Method or a personal loan, may make more sense for your lifestyle, financial situation, and personal preferences.

Here are some questions to ask yourself as you weigh your options:

•   What are my short- and long-term financial goals?

•   Do I have high-interest debt?

•   Do I need a series of quick wins to stay motivated?

Maximize the Benefits of the Debt Avalanche Method

Before you begin tackling debt with the Avalanche Method, consider some strategies to get the maximum benefits:

•  Accelerate debt repayment. Paying off your balance doesn’t just relieve stress — it can also save on interest. Kick in more than the minimum payment each month. And if your lender and budget allow, make extra payments.

•  Build an emergency fund. While whittling down debt is the priority, it’s also a good idea to sock away money into an emergency fund. Determine a target amount — a good rule of thumb is to have enough to cover three to six months of expenses. Then open a high-yield savings account and add to it regularly.

•  Seek the help of a professional. Looking for personalized guidance? Consider meeting with a financial advisor, who can examine your current finances, discuss your financial goals, and help you create a plan to achieve them.

The Takeaway

Using the Debt Avalanche Method is a great way to pay off debt for disciplined, logical personalities who want to maximize their savings on interest. The Avalanche works by paying down the highest-interest debt first, regardless of balance, while making minimum payments only on other debts. It’s not for everyone, though, especially if your highest-interest debt is also your biggest balance.

If quick wins help you stay motivated, consider paying off debt with the Snowball Method. Instead of focusing on interest rate, borrowers prioritize the lowest balance first. A debt consolidation loan is another potential avenue to explore, as you can roll multiple high-interest debts into a single loan with (hopefully) a better interest rate.

The key to any debt payoff strategy is to know yourself and choose the method that best fits your preferences and financial goals.

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

FAQ

How long does it take to pay off debt using the Avalanche Method?

While the Avalanche Method tends to whittle down debt faster than making minimum payments each month, the time it takes for you to pay off your balance will depend on the amount you owe, your interest rate, and how much extra you’re able to pay each month.

Can the Debt Avalanche Method be used for all types of debt?

The Avalanche isn’t suited for every type of debt. Consider using it to pay off credit cards, personal loans, student loans, and car loans. Don’t include your mortgage, as financial experts consider this “good” debt. One day, you may decide to put extra money toward paying down your mortgage principal, but for now, focus on your other debts.

What should I do if I have multiple debts with
similar interest rates?

When faced with paying down multiple debts with similar interest rates, the Snowball Method may be your best approach. It involves paying off your lowest balance first, while making minimum payments on your other debts. If the interest rates are high, you may want to explore a debt consolidation loan. That’s where you take out one loan or line of credit (ideally with a lower interest rate) and use it to pay off other debts.

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.

SOPL-Q424-059

If you have high-interest credit card debt and are ready to put together a plan to pay it back, you might be considering one of two popular methods: credit card refinancing vs. debt consolidation.

Both involve paying off your debt with another credit card or loan, ideally at a lower interest rate. Still, the two methods are not the same, and both options require careful consideration. Below, we’ll discuss the pros and cons of each debt payback method, so you can make an informed decision.

What Is Credit Card Refinancing?

Credit card refinancing is the process of moving your credit card balance(s) from one card or lender to another with a lower interest rate. The main purpose of refinancing is to reduce the amount of interest you’re paying with a lower rate while you pay off the balance.

A common way to accomplish this is to pay off your existing credit cards with a brand-new balance transfer credit card. This type of card offers a low or 0% interest rate for a promotional period that may last from a few months to 18 months or more.

Recommended: The Risks of Payday Loans

Benefits of Credit Card Refinancing

We’ve discussed the goal of credit card refinancing — to lower your interest rate — and how to accomplish it. Now let’s explore some of the benefits (and drawbacks) of refinancing.

Pros of Refinancing

•  You may qualify for a promotional 0% APR during your card’s introductory period. If you can pay down your debt during this time, you could potentially get out of debt faster.

•  Depending on the interest rate you’re offered, you could save money in interest charges.

•  Bill paying may be easier if you decide to refinance multiple credit cards into one new credit card.

•  If monthly payments are reasonable, it may be easier to consistently pay them on time. This can help build your credit score.

Cons of Refinancing

•  The introductory 0% interest period is short-term, and after it ends, the interest rate can skyrocket to as high as 25%.

•  There may be a balance transfer fee of 3%-5%, which can add to your debt.

•  0% interest balance transfer cards often require a good or excellent credit score to qualify.

•  Your credit score may temporarily dip a few points when you apply for a new credit card or loan. That’s because the lender will likely run a hard credit check.

Recommended: Loans With No Credit Check

Who Should Consider Credit Card Refinancing?

Credit card refinancing isn’t right for everyone. That said, a balance transfer to a 0% APR card could be a good move if you have a smaller debt to manage or are carrying multiple high-interest debts. Plus, transferring multiple balances into one card can streamline bills.
Refinancing may make sense if you’re looking for better terms on your credit card debt, qualify for a 0% APR, and can pay off the balance before the promotional period ends.
So, as you’re weighing your options, you’ll want to consider a number of factors, including:

•  Your credit score and credit history

•  How much debt you have

•  Your personal finances

What Is Credit Card Debt Consolidation?

Credit card consolidation refers to the process of paying off multiple credit cards or other types of debt with a single loan, referred to as a debt consolidation loan. The main purpose of consolidation is to simplify bills by combining multiple credit card payments into one fixed loan payment.

A borrower may also pay less in interest, but the difference may not be as great as with refinancing. An applicant’s credit score and other financial data points will determine their personal loan interest rate.

There are pros and cons to paying off multiple credit cards with a single short-term loan. Let’s take a look:

Pros of Debt Consolidation

•  You can pay off multiple debts with one loan, which can take the guesswork out of bill paying.

•  The structured nature of a personal loan means you can make equal payments toward the debt at a fixed rate until it is completely eliminated.

•  With most personal loans, you can opt for a fixed interest rate, which ensures payments won’t change over time. (Variable interest rate loans are available, but their lower initial rate can go up as market rates rise.)

Cons of Debt Consolidation

•  The terms of a loan will almost always be based on your credit history and holistic financial picture. That means that not every borrower will qualify for a low interest rate or get approved for a personal loan at all.

•  You may need to pay fees, including personal loan origination fees.

•  You’ll likely need to have good credit in order to qualify for the best interest rate.

Credit Card Refinancing vs Debt Consolidation

To recap, the difference between debt consolidation and credit card refinance is first a matter of goals.

With credit card refinancing — as with other forms of debt refinancing — the aim is to save money by lowering your interest rate. Debt consolidation may or may not save you money on interest, but will certainly simplify bills by replacing multiple credit card obligations with a single monthly payment and a structured payback schedule.

The other difference is that credit card refinancing typically utilizes a balance transfer credit card that has a 0% or low interest rate for a short time. This limits the amount you can transfer to what you can comfortably pay off in a year or so. Debt consolidation utilizes a personal loan, which allows for higher balances to be paid off over a longer payback period.

Which strategy is right for you? That depends on a number of factors, including the amount of debt you have, your current interest rates, and whether you’re able to stick to a structured repayment schedule.

The Takeaway

Credit card refinancing is when a borrower pays off their credit card(s) by moving the balance to another card with a lower interest rate. A popular way to do this is with 0% interest balance transfer credit cards. However, borrowers typically need a high credit score to qualify for these cards. Debt consolidation, on the other hand, is when a borrower simplifies multiple debts by paying them off with a personal loan. Personal loans with a fixed low interest rate and a structured payback schedule are a smart option for consolidating debts.

If you have a relatively small balance that can be paid off in a year or so, refinancing with a balance transfer credit card may be right for you. If you have a larger balance or need more time to fully pay it off, personal loans are available.

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

FAQ

Which is better: credit card refinancing or debt consolidation?

There are advantages and drawbacks to both strategies. Credit card refinancing can help you lower your interest rate, which can save you money. Debt consolidation might save you money on interest, but it will definitely simplify bill paying by replacing multiple cards with one monthly bill.

Is refinancing a credit card worth it?

Refinancing a credit card may be worth the effort because it can lower your interest rate, potentially save you money, and make payments more manageable.

Is refinancing the same as consolidation?

Though refinancing and consolidation can both help you manage your debt, they serve different purposes. Refinancing involves moving credit card debt from one card or lender to another, ideally with a lower interest rate. Paying less in interest while you pay off your debt is the main goal of refinancing. When you consolidate, you settle multiple debts with one loan. Simplifying bills into one fixed loan payment is the main reason to consider this strategy.

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

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

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

SOPL-Q424-056

Figuring out how to prepare for a recession — or any crisis — can be difficult. When facing a potential recession, financial decisions take on a new weight. After all, financial policy may change during a recession, which can leave consumers with questions. For example, if the Federal Reserve lowers interest rates, should you borrow money during a recession?

While lower recession interest rates might sound appealing, there are lots of things to consider before borrowing money during a recession.

Understanding Recessions

A recession is a period of time when economic activity significantly declines. In the U.S., the National Bureau of Economic Research defines a recession as more than a few months of significant decline across different sectors of the economy. We see this decline in changes to the gross domestic product, unemployment rates, and incomes.

In essence, a recession is a period of time when spending drops. As a result, businesses ramp down production, lay off staff, and/or close altogether, which in turn causes a continued decrease in spending.

There are many possible causes of the recession. Usually, recessions are caused by a wide variety of factors — including economic, geopolitical, and even psychological — all coinciding to create the conditions for a recession.

For example, a recession could be caused by a major disruption in oil access due to global conflict, or by the bursting of a financial bubble created by artificially depressed interest rates on home loans during a financial boom (as was partially the case with the 2008 financial crisis in the U.S.). A recession also could be caused in part by something like a pandemic, which could create supply chain disruptions, force businesses into failure, and change spending habits.

As for how psychology plays a role in recessions, financial actors might be more likely to invest in a new business or home renovation during boom years when the market seems infallible. But when an economic downturn or recession starts, gloomy economic forecasts could make people more likely to put off big purchases or financial plans out of fear. In aggregate, these psychological decisions may help control the market.

In the case of a recession, for example, many people choosing not to spend out of fear could cause a further contraction of the market, and consequently further a recession.

Financial Policy During a Recession

Economic policy might temporarily change in an effort to keep the market relatively stable amid the destabilization a recession can bring. The Federal Reserve, which controls monetary policy in the U.S., often takes steps to curb unemployment and stabilize prices during a recession.

The Federal Reserve’s first line of defense when it comes to managing a recession is often to lower interest rates. The Fed accomplishes this by lowering the interest rates for banks lending to other banks. That lowered rate then ripples throughout the rest of the financial system, culminating in reduced interest rates for businesses and individuals.

Lowering the interest rate could help to stem a recession by decreasing costs for businesses and allowing consumers to take advantage of low interest rates to buy things using credit. The increase in business and purchasing might in turn help offset a recession.

The Federal Reserve also may take other monetary policy actions in an attempt to curb a recession, like quantitative easing. Quantitative easing, also known as QE, is when the Federal Reserve creates new money and then uses that money to purchase assets like government bonds in order to stimulate the economy.

The manufacturing of new money under QE may help to fight deflation because the increase in available money lowers the value of the dollar. Additionally, QE can push interest rates down because federal purchasing of securities lowers the risks to lending institutions. Lower risks can translate to lower rates.

Recommended: Federal Reserve Interest Rates, Explained

Downsides to Borrowing Money During a Recession

How do you prepare for a recession? It might seem smart to borrow during this time, thanks to those sweet recession interest rates. But there are other considerations that are important when deciding whether borrowing during a recession is the right move. Keep in mind the following potential downsides:

•   There’s a heightened risk of borrowing during a recession thanks to other difficult financial conditions. Disruptive financial conditions like furloughs or layoffs could make it more difficult to make monthly payments on loans. After all, regular monthly expenses don’t go away during a recession, so borrowers could be in a tough position if they take on a new loan and then are unable to make payments after losing a job. Missed payments could negatively impact a borrower’s credit score and their ability to borrow in the future.

•   It may be harder to find a bank willing to lend during a recession. Lower interest rates may mean that a bank or lending institution isn’t able to make as much money from loans. This may make lending institutions more hesitant.

•   Lenders could be reluctant to lend to borrowers who may be unable to pay due to changes in the economy. Most forms of borrowing require borrowers to meet certain personal loan requirements in order to take out a loan. If a borrower’s financial situation is more unstable due to a recession, lenders may be less willing to lend.

When to Consider Borrowing During a Recession

Of course, there are still situations where borrowing during a recession might make sense. If you’re hit with unexpected expenses or have the opportunity to buy quality stocks for a lower price, for instance, it could make sense to have extra funds available.

Another scenario where it might be a good idea is if you’re consolidating other debts with a consolidation loan.

If you already have debt, perhaps from credit cards or personal loans, you may be able to consolidate your debt into a new loan with a lower interest rate, thanks to the changes in the Fed’s interest rates. Consolidation is a type of borrowing that doesn’t necessarily increase the total amount of money you owe. Rather, it’s the process by which a borrower takes out a new loan — with hopefully better interest rates and repayment terms — in order to pay off the prior debts.

Why trade out one type of debt for another? Credit cards, for example, often have high interest rates. So if a borrower has multiple credit card debts with high interest rates, they may be able to refinance credit card debt with a consolidation loan with a lower interest rate. Trading in higher interest rates loans for a consolidation loan with potentially better terms could save borrowers money over the life of the loan. It also streamlines bill paying.
When considering consolidation, borrowers may want to focus on consolidating only high-interest loans or comparing the interest rates between their current debts and a potential consolidation loan.

Note that interest rates on consolidation loans can be either fixed or variable. A fixed rate means a borrower may be able to lock in a lower interest rate during a recession. With a variable interest rate, the loan’s interest rate could go up as rates rise following a recession.

Additionally, just like many other types of loans, consolidation loans require that borrowers meet certain requirements. Available interest rates may depend on factors like credit score, income, and creditworthiness.

Recommended: How to Apply for a Personal Loan

The Takeaway

It can be challenging to navigate any economic downturn, and it’s natural to wonder how to prep for a recession. Deciding whether to borrow, including taking out a personal loan, is a decision that depends on your specific circumstances. There are downsides to consider, such as the general economic uncertainty that can increase risk and heightened risk-aversion from lenders. But if you have high-interest debt, or can secure a lower rate by consolidating, then taking out a consolidation loan during a recession could make sense. It’s a good idea to weigh the risks and benefits carefully and seek out professional advice before making a decision.

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

FAQ

Is it good to have money in the bank during a recession?

The general consensus is that banks are a safe place to keep your cash during a recession. If your account is insured by the Federal Deposit Insurance Corporation (FDIC), then individual deposits up to $250,000 are protected. Banks also protect funds against theft or loss.

Is it better to have cash in a recession?

It’s a good idea to have some of your money in cash during a recession. That’s because if you’re laid off from your job or an emergency arises, it can be helpful to have a cushion of readily accessible money.

Should I withdraw all my money during a recession?

If you’re thinking about how to prepare for the recession, it can be tempting to want to take out all of your money from a bank. But there’s good reason to reconsider. Many banks are FDIC insured, which means deposits up to $250,000 are protected.

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.

SOPL-Q424-054

There are at least 11 different types of personal loans out there, but one you may not have heard of yet is the share secured loan.

An accessible option for those who might not qualify for a traditional unsecured personal loan, a share secured loan uses the funds in your interest-bearing savings account as collateral — which means you can pay for a big expense without wiping out your entire savings.

Here are the basics about share secured loans — how they work, the benefits, allowed uses, requirements, and more.

What Is a Share Secured Loan?

A share secured loan, which may also be known as a savings-secured loan, cash-secured loan, or a passbook loan, is a type of personal loan.

However, unlike many other types of personal loans, these loans are — as their name implies — secured: The bank or other lending institution uses the money in your savings account, Certificate of Deposit (CD), or money market account as collateral to lower their risk level when offering the loan. This can make qualification less onerous for the applicant.

In addition to making it easier to qualify for a loan, share secured loans also allow you to fund an expensive purchase or cost without depleting your savings. They can also help you build credit, which is particularly important if your existing credit history or credit score could use some work.

Of course, like all other loans, share secured loans do come with costs and limitations of their own, and it’s worth thinking carefully before going into any kind of debt.

Recommended: What Is a Certificate of Deposit?

How Does a Share Secured Loan Work?

In order to take out a share secured loan, you must first have money saved in an interest-bearing savings account. Your savings account balance will be used as collateral. Money invested in the stock market cannot be used as collateral for this kind of loan, since it isn’t FDIC- or NCUA-insured and is at some amount of risk.

Banks that offer share secured loans will cap the loan at some percentage of the amount of money you have in your account, usually between about 80% to 100% of those funds. They may also list a loan minimum.

When you apply for the loan, the money in your savings account will be put on hold and made inaccessible to you, and the loan funds will be issued to you as a check or directly deposited into your checking account.

You’ll then be responsible for paying the loan back in fixed monthly installments over a term that may last as long as 15 years, and which will include an interest rate of about 1% to 3% more than your savings account earns. For example, if you secured the loan with a money market account that earns 2.00% APY, your loan interest rate might be 3.00% to 5.00%. Typically, share secured loans come with lower APRs than unsecured loans, since they’re less risky for lenders.

Once the loan is paid off, you’ll regain access to the funds in your savings account, which will still have been earning interest the entire time.

Benefits of a Share Secured Loan

It may seem a bit strange to borrow money you already have, which is pretty much how a share secured loan works. But there are certain benefits to this approach if you need to pay down an expensive bill or fund a costly project up front.

Cost

Of the different types of personal loans that are available, share secured loans have some of the lowest interest rates — precisely because the bank has your money as collateral if you don’t repay the loan.

Still, even if the loan interest rate is only a few percentage points over the amount of money you earn in interest on your savings account, you’ll pay more than you would if you were able to use cash to fund your expense.

Eligibility Requirements

One of the biggest benefits to share secured loans is their relatively lenient eligibility requirements. Since they are secured, lenders consider them less risky.

If your credit score is on the low end of the range, you may not qualify for other types of personal loans, and if you do qualify, their interest rates may be high (as in the case of a payday loan or pawnshop loan). A cash-secured loan offers an accessible and relatively inexpensive alternative.

Flexible Repayment Options

With a share secured loan, you can often choose a repayment term that suits your needs and financial plans. Many lenders offer terms within the 36- to 60-month range.

Credit Building

Finally, one of the most important benefits of share secured loans is their power to help you improve or build your credit, which can help you qualify for other types of loans in the future. Credit building and credit improvement are two of the best reasons to seriously consider a share secured loan to fund an expense you might otherwise be able to pay for in cash.

Are Share Secured Loans a Bad Idea?

There are some risks to using your existing funds as collateral to go into debt. Namely, if you fail to pay back the loan, the lender can seize the funds in your savings account — and you’ll still be responsible for repaying the loan, which can have a negative effect on your credit score.

Additionally, even a low-cost loan isn’t free, and depending on the loan amount and its term, you may end up spending a significant amount of cash on interest over time.

That said, there are times when a share secured loan may make sense:

•   You’re a first-time borrower. A share secured loan offers you access to credit without requiring you to have a lengthy credit history.

•   Your credit is poor. By making consistent payments on the loan, you can rebuild and repair your credit.

•   You need help paying for an emergency expense. A share secured loan helps you cover unexpected bills without depleting your savings.

Common Uses of a Share Secured Loan

Share secured loans are used for a wide variety of reasons and share many of the common uses of a personal loan.

For example, a borrower might use a share secured loan to cover an unexpected medical bill or car repair payment. Share secured loans can also be used to cover moving expenses, home improvement costs, or even debt consolidation to pay off other forms of high-interest loans, like credit cards, which could help you get back on track financially.

Who Is a Share Secured Loan Best For?

While it’s important to consider all your options before going into any form of debt, a share secured loan might be an attractive choice for borrowers who already have a substantial amount of cash in savings but might not have the liquidity to pay for a large expense comfortably.

Additionally, if you have a poor or fair credit score, a share secured loan may help you qualify for the funding you need while also building up your credit score over time.

Qualifying for a Share Secured Loan

The good news about qualifying for a share secured loan is that so long as you have the money in your account saved up, this financial product is very accessible. Many share secured loans are available for borrowers with poor credit or even no credit history — though it’s always a good idea to shop around and compare rates and terms available from different lenders.

Share Secure Loans: Alternative Loan Options

While share secured loans can be a good option for certain borrowers, there are other alternatives worth considering as well:

•   A secured credit card works in a similar way to a share secured loan. You’ll only be able to use as much cash as you put on the card, and it can help you build credit.

•   If you don’t have substantial savings built up quite yet, a credit-builder loan might work for your needs, though it’s likely to come at a higher interest rate since there’s no collateral involved.

•   A guarantor loan, on which someone cosigns with you and agrees to repay the debt if you default, may make it possible for you to qualify for better terms than you otherwise would with poor to fair credit.

Other Types of Secured Loans

Share secured loans are far from the only type of secured loans out there. Any loan that involves some form of collateral is considered a secured loan. Some of the most common forms of debt fall into this category, such as:

•   Mortgages, which utilize the home and property as collateral.

•   Auto loans, which utilize the vehicle as collateral.

•   Secured credit cards, as mentioned above, which require cash collateral.

Recommended: Using Collateral on a Personal Loan

The Takeaway: Is a Personal Loan Right for You?

Share secured loans are a secured type of personal loan that can be used for a wide variety of expenses. Share secured loans are available for low-credit borrowers, so long as they have substantial cash savings — but there are other options available, too.

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

FAQ

Are share secured loans a bad idea?

Share secured loans are not an inherently bad idea, but they can cost the borrower more in interest than if they had paid cash for the purchase.

Why would someone take out a share secured loan?

The reasons people take out a share secured loan are much the same as reasons for taking out a personal loan: medical expenses, moving costs, home repairs and improvements, and more.

How do share secured loans work?

The borrower uses funds in their interest-bearing savings account as collateral to secure the share secured loan. If they fail to repay the loan, the lender can seize the savings account as repayment on the loan.

Photo credit: iStock/Julia_Sudnitskaya

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While adopting a frugal lifestyle is a choice for some people, it may be a necessity for others. For example, you might be trying to figure out how to live on $1,000 a month if you’re in school, if you’re working part-time, or if you lost your job and are trying to find a new one.

Getting by on $1,000 a month may not be easy, but it is possible to live well even on a small amount of money. Try these tactics.

What Does Living on $1,000 a Month Look Like?

If your income is limited to $1,000 a month, you might be wondering exactly how far it will go. Breaking it down hourly, weekly, and by paycheck can give you some perspective on how much money you’ll actually have to work with.

An income of $1,000 a month is….

•   $230.77 as a weekly salary

•   $46.15 daily

•   $6.15 an hour, assuming you work 37.5 hours a week full-time

•   $11.54 an hour, assuming you work 20 hours a week part-time.

The numbers above assume that you’re talking about net income, which means the money you bring in after taxes and other deductions.

By comparison, the real median household income in the United States was $80,610 in 2023, according to Census Bureau data. That works out to $6,717.50 in monthly pretax income, but note that it’s for a household, not an individual.

Is It Possible to Live Off of $1,000 a Month?

Living off $1,000 a month is possible, and it’s a reality for many individuals and families. Again, you might be living on a low income because you’re in school. So your monthly budget might look something like this:

•   Food: $250

•   Gas: $100

•   School supplies/equipment: $50

•   Rent: $400 (assuming you’re sharing with roommates)

•   Utilities: $100

•   Miscellaneous: $100

As you may notice, there isn’t room in this budget for debt repayment coming out of your checking account, nor is there money to set aside as savings.

In addition to students living on a frugal budget, this kind of scenario may apply to older people on a fixed income. Retirees may choose to cut their expenses to the bone once they stop working. In addition to students living on a frugal budget, this kind of scenario may apply to older people on a fixed income. Retirees may choose to cut their expenses to the bone once they stop working. And in some cases, money may be tight because you’re getting through a financial hardship (such as job loss or illness impacting one’s ability to be employed), and income is lower than normal.

Can you live well on just $1,000 a month? That’s subjective, as the answer can depend on how responsibly you use the money that you have as well as what the cost of living is in your area. Being frugal and flexible are essential to making life on a smaller income work.

How to Live on $1,000 a Month

Figuring out how to live on $1,000 a month, either by choice or when money is tight, requires some creativity and planning. Whether your low-income lifestyle is temporary or you’re making a more permanent shift to financial minimalism, these tips can help you stretch your dollars farther.

1. Assess Your Situation

You can’t really learn how to manage your money better if you don’t know where you’re starting from. So the first step is creating your personal financial inventory to understand:

•   Exactly how much income you have

•   Where that money is coming from

•   What you’re spending each month

•   How much you have in savings

•   How much debt you have.

It also helps to consider why you might need to know how to live on $1,000 a month. For example, if you’re knee-deep in debt because you’ve been living beyond your means, that can be a strong incentive to curb spending and live on less.

(Also check to see if bank fees are eating away at your funds. You might consider switching to a low- or no-fee account, which are often offered by online banks, if you are getting hit with charges.)

2. Separate Needs From Wants

Needs are things you spend money on because you need them to maintain a basic standard of living. For example, needs include:

•   Housing

•   Utilities

•   Food

•   Health care

Wants are all the extras that you might spend money on. So that may include dining out, hobbies, or entertainment. If you’re trying to live on $1,000 a month, needs should likely take priority over wants. One good budget plan can be the 50/30/20 rule, which allocates 50% of one’s take-home pay to needs, 30% to wants, and 20% to savings.

Here’s a hard truth, however: When working with $1,000 per month, you may have to get rid of most (or all) of the wants to make your spending plan work. As you make your budget, focus on the needs first and if you have money left over, then you can add one or two small extras back in.

For an idea of how your income could be broken up into needs and wants, use the 50/30/20 calculator below.

3. Lower Your Housing Costs

Housing might be your biggest expense, and, if you want to make a $1,000 a month budget work, getting that cost down can help. Some of the ways you might be able to reduce housing costs include:

•   Taking on one or more roommates

•   Moving back in with your parents

•   Renting out a room

•   Refinancing into a new mortgage

•   Selling your home and moving into something smaller or less expensive.

Are these options ideal? Not necessarily. Living with parents, roommates, or strangers who are renting out part of your home can mean sacrificing some of your privacy. Refinancing a mortgage or downsizing can be time-consuming and stressful.

But if you’re trying to get your budget to $1,000 or less, these are all legitimate ways to slash your housing expenses.

4. Get Rid of Your Car

Cars can be expensive to own and maintain. A car payment could easily run several hundred dollars per month. Even if you own your car outright, putting gas in it, buying tires, and paying for regular maintenance could still make a sizable dent in your income.

If you have the means to do so, selling your car could free up money in your budget. And you could use the money you collect from the sale to pad your savings account, pay down some debt, or simply get ahead on monthly bills.

If you do sell your vehicle, use an online resource like Kelley Blue Book to check your car’s potential resale value before setting a price.

5. Eat at Home

After housing, food can easily be a budget-buster, especially if you’re eating out rather than preparing meals at home. The good news is that there’s a simple way to cut your food costs: Ditch the takeout and restaurant meals.

Planning meals around low-cost, healthy ingredients can help you to spend less on food and still eat well. You can also save on food costs by:

•   Using coupons

•   Shopping sales and clearance sections

•   Downloading cash back apps that reward you with cash for grocery purchases

•   Relying on pantry staples that you can make into multiple meals

•   Trying Meatless Mondays (which means eating vegetarian on Mondays; meat tends to be a pricey buy)

•   Repurposing leftovers as much as possible.

You could also save money on food if you’re able to make things like bread, pizza dough, or pasta yourself using basic ingredients. When shopping at your local grocery stores, take time to compare prices online before heading out. And consider whether you can get in-season vegetables and fruits for less at a local farmer’s market.

6. Negotiate Your Bills

Some of your bills might be more or less unchanging from month to month. But others may give you some wiggle room to negotiate and bring costs down.

For example, if you’re keeping your car, you don’t have to keep the same car insurance if it’s costing you a lot of money. You can shop around and compare rates with different companies, or ask your current provider about discounts. You could also raise your deductible, which can lower your monthly premium, but keep in mind that you’ll need to have cash on hand to pay it if you need to file a claim.

Other bills you might be able to negotiate or reduce include:

•   Internet

•   Cable TV (bonus points if you can get rid of it altogether)

•   Cell phone

•   Subscription services (or better yet, cancel them for extra savings)

•   Credit card interest.

Also, if you are hit with a major doctor’s bill, know that it can be possible to negotiate medical bills. It’s definitely worth talking with your provider’s office about this.

There are also services that will handle bill negotiation for you. While those can save you time, you might pay a fee to use them so consider how much that’s worth to you.

7. Learn to Barter and Trade

Bartering is something of a lost art, but reviving it could be a great idea if you’re trying to live on $1,000 a month. For example, say you need to cut the grass, but there’s no room in your budget to buy a new lawn mower to replace your broken one. You could barter the use of your neighbor’s mower in exchange for a few hours of raking leaves at their place.

Or, say that you have kids who have outgrown their clothes. Instead of resigning yourself to using a credit card to buy new outfits for school, you could set up a clothes swap with other parents in your neighborhood. You can clean out clutter and get things you need, without having to spend any money.

8. Get Rid of Debt

Debt can be one of the biggest obstacles to making a $1,000 a month income work. If you have debt, whether it’s credit cards, student loans, or a car loan, it’s important to have a plan for paying it down.

When you only have $1,000 a month to work with, you may only be able to pay a little to your debts at a time. But you might be able to make each penny count more by making debts less expensive.

For instance, you might try a 0% APR credit-card balance transfer to save on interest charges. Or if you have loans from getting your diploma that have a high interest rate, you may consider the benefits of refinancing your student loans to reduce your rate and lower your monthly payment.

If you’re really struggling with how to pay off debt on a low income, you may want to talk to a nonprofit credit counselor. A credit counselor can review your situation and help you come up with a budget and plan for paying off debt that fits your situation. One option is the National Foundation for Credit Counseling, or
NFCC.

9. Adopt a No-Spend Attitude

When you want or need to know how to live on $1,000 a month, the fastest way to get overspending in check is to do a no-spend challenge. How this works: You commit yourself to not spending any money on nonessentials for a set time period.

A no-spend challenge can last a day, a weekend, a week, a month, or even a year. The time frame doesn’t matter as much as being all-in with the idea of not spending money on things you don’t need. And you might be surprised at how much money you’re able to save by avoiding wasteful spending.

10. Find Free or Low-Cost Ways to Have Fun

Living on $1,000 a month might mean you don’t have much room in your budget for fun. But you can still enjoy life without having to spend money.

Some of the ways you can do that include:

•   Checking out free events in your community, like festivals or fairs

•   Adopting hobbies that are low or no-cost, like walking or bike-riding

•   Checking out books, DVDs, and CDs from your local library

•   Volunteering

•   Visiting local spots that offer free admission days, like museums or aquariums.

Those are all ways to spend an enjoyable afternoon without costing yourself any money. And if you do want to do something that requires a little spending, you can use a site like Groupon to check for coupons or special deals to save some cash. Or try Meetup to see if any free or low-cost events of interest are brewing in your area.

11. Grow Your Income

If you try living on $1,000 a month and find that it just isn’t enough, the next thing you can do is see if you can figure out how to bring in more money. Fortunately, there are plenty of ways to do that.

Here are some ideas for making more money to supplement your income:

•   Increase your hours if you’re working an hourly job

•   Take on a part-time job in addition to your full-time job

•   Start an online low-cost side hustle, like freelancing or Pinterest management

•   Consider an offline side hustle, like walking dogs or shopping with Instacart

•   Sell things around the house you don’t need for cash

•   Check for unclaimed money online

•   Sell unwanted gift cards for cash.

The great thing about making more money is that you can try multiple things to see what works and what doesn’t. And you can also use found money, like bonuses, rebates, or refund checks deposited into the bank to help cover bills or shore up your savings.

The Takeaway

Making your budget work when you have $1,000 in monthly income is possible, though it might take some serious work. Drastically reducing expenses can be a great place to start, and bringing in more income can of course help, too.

Changing banks is one more money-saving tip to know.

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.

FAQ

Where can you live on $1,000 a month?

The best places to live on $1,000 a month are ones that have an exceptionally low cost of living. In the United States, that may mean living in a rural area or a smaller city. When searching for the cheapest places to live, consider what you’ll pay for housing, utilities, transportation, and food, which are among the non-negotiable “musts” in your budget.

How can I live on very little income?

The secret to living on a very little income is being careful with how you spend your money and minimizing or avoiding debt as much as possible. Keeping a budget, cutting out unnecessary expenses, and using cash only to pay can make it easier to live on a smaller income.

What is the lowest amount of money you can live on?

The lowest amount of money you can live on is the amount that allows you to cover all of your basic needs, including housing, utilities, and food. For some people, that might be 25% of their income; for others, it might be 75%; it really depends on your specific situation (household size, debt, etc.) and the cost of living. Residing in a less expensive area can make it easier to live on less of the money you make.

Photo credit: iStock/David Commins

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