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A financial hardship letter explains an unforeseen circumstance that has made you unable to make regular payments on a loan and requests a modification to help you get back on track.
No matter how well you prepare, many Americans will encounter times of financial hardship due to circumstances outside of their control. Events such as company layoffs, natural disasters, and divorce can throw a wrench in our finances, making us unable to pay our financial obligations.
Instead of falling behind on payments during difficult times, take a proactive approach to your finances. Sending a financial hardship letter to your creditor can help you salvage your credit score while you get back on your feet.
Read on to discover what these letters are, situations that warrant them, and how to write your own.
Table of Contents:
What Is a Hardship Letter?
A financial hardship letter is a correspondence you send to a creditor that explains why your current financial situation prevents you from making debt payments. After providing details about your hardship, such as the cause and timeline, request that the creditor provide a mutually beneficial solution.
Depending on your specific circumstances, you could suggest to your lender that they assist you by:
Suspending your monthly payments for the time being
Decreasing your payment amount
Lowering your interest rate
Pardoning overdue payments
Waiving penalties for late payments
Adjusting the terms of your loan
Resolving your debt for an amount less than you owe
For example, if you were recently injured due to an accident, you could ask the creditor to temporarily pause your payments until you recover.
What Is Considered Financial Hardship?
Since everyone’s situation is different, you may be wondering what qualifies as financial hardship. A financial hardship is any scenario beyond your control that makes you unable to pay for your living expenses.
Examples of financial hardships include, but are not limited to, the following:
Employment layoff
Pay cut
Home foreclosure
Decreased number of working hours
Job relocation
Natural disaster
Emergency event
Divorce or separation
Military deployment or transfer
Death of a spouse or family member
Incarceration
Serious injury or illness
As you can see, the examples above are out of your control. On the other hand, circumstances that creditors are not likely to deem as a financial hardship include:
Poor money management or overspending
Routine expenses
Voluntary employment shift
Purchase of a home
Decrease in property value
Payment of college tuition
Investment losses
How to Write a Hardship Letter
When writing your financial hardship letter, address it to the loss mitigation department of your lender. Include your contact information and loan number so they can identify your account. Write your letter clearly and concisely, following the instructions provided below.
1. Explain Your Hardship
Be honest with your creditor about the circumstances surrounding your hardship, but keep your explanation concise. Aim to keep your explanation under one page.
While you should include relevant details such as what caused the hardship and when it started, don’t include unnecessary information. For example, you might inform the creditor that you’re going through a divorce and the legal fees are causing financial strain, but you don’t need to go into the cause of the divorce.
Remember to be truthful—don’t exaggerate your circumstances or include inaccurate information.
2. Provide Documentation to Back Up Your Claim
Provide up-to-date and relevant documentation as evidence for the statements you make in the letter to bolster your claim. Documents the lender may want to review include:
Bank statements
Pay stubs
Tax returns
Medical bills
Employee termination letter
Divorce certificate
Military orders
Proof of incarceration
3. List Steps You’ve Taken to Alleviate Your Financial Burden
Let the creditor know the actions you’ve already taken to help improve your financial situation and pay your debt. Steps you might take include limiting expenses, selling personal items, or working a side gig to make extra income. This provides the lender with additional context and shows that you’re taking personal responsibility for your financial situation.
4. Clearly State Your Request
The purpose of writing a hardship letter is to request help from the creditor during your difficult time. Make sure to clearly state exactly the action they can take to assist you and how it will help you. Provide your proposed solution or a couple of suggestions the lender might consider.
5. State Your Commitment to Paying Your Debt
Conclude your letter with a statement expressing to the lender that you’re committed to paying your debt and finding a solution that works for both of you. Sign your name to the end to formally close the letter.
Financial Hardship Letter Template + Sample
Below is a hardship letter sample and template to help you get started. When using the template, make sure to enter your own information where there is bolded text.
Harry Jones, Loss Mitigation Department of Georgia Bank
444 Peach Lane
Atlanta, GA 30033
Re: Account #10122467894231
DearHarry Jones:
I am writing this letter to request assistance with my personal loan during a time of financial hardship.
Approximately two weeks ago, I was let go from my job due to company-wide layoffs. As a result, I have been unable to continue making regular payments on my loan. I have included my termination letterthat proves the validity of my hardship.
While I have taken steps to increase my income during this time, such as babysitting and selling old clothes, I am still not able to make full payments.
I fully intend to pay off my loan and am requesting your help to get me back on track. I would like to discuss possible solutions such as temporarily pausing payments, lowering my interest rate, or any other option that might be available to me. I expect my hardship to be resolved in approximately three to six months, after which I can resume my regular payments.
I want to reiterate my intention to fulfill my financial obligation. If you have any questions or would like to discuss a solution, please contact me at (912) 333-3333oremail me at [email protected].
Thank you for taking the time to review my request, and I hope we can come to a mutually beneficial agreement. Your support during this time of financial hardship is greatly appreciated.
Sincerely,
Mary Smith
How to Get Through Financial Hardship
In addition to writing a hardship letter, here are some other tips to help you get through times difficult times and continue to reach your financial goals:
Create a budget: Use a monthly budget template to write down your monthly income, expenses, and debt to paint a full picture of your current financial situation.
Consider debt consolidation: If you have many different debts, debt consolidation can simplify your finances and help you pay your balance quicker and at a lower interest rate.
Limit unnecessary expenses: During difficult times, it’s important to only spend money on the essentials. Consider canceling subscriptions, reducing electricity use, and eating at home to save money.
Start a side hustle: Having multiple income streams can help mitigate financial burdens. Examples of side hustles include pet sitting, driving for a ride-share company, online tutoring, and joining a focus group.
Build an emergency fund: Aim to save three to six months’ worth of expenses as a cushion in case of a personal emergency or unexpected expense.
Writing a financial hardship letter can help you maintain a good credit score during a crisis. While navigating your situation, it’s important to continue monitoring your credit. To make this easier during times of stress, check your free credit report card to see what’s happening with your credit at a glance.
A recent Forbes article reported that the average American has $65,100 in their savings account, but averages are skewed by outliers. A better representation of how much money Americans have in their savings account is the midpoint value, also known as the median. The median savings amount for American households is only $5,300.
Setting financial goals is one of the best ways to improve your financial health and have a secure financial future. If you’re closer to the median savings amount or have far less in your savings account, it may be time to start setting financial goals.
We’re here to provide you with a five-step plan to set financial goals that can help you increase your savings, plan for your retirement, and provide you with some extra funds to treat yourself.
Key takeaways:
Financial goals are personal and professional goals designed to improve your financial well-being.
Financial goals can be short-term, medium-term, or long-term goals.
Financial goals can help you build wealth, but it’s also important to set aside money to treat yourself every now and then.
What Are Financial Goals?
Financial goals can vary depending on who you ask, but essentially, they’re personal and professional goals you set to improve your financial well-being. Good financial goals will allow you to work toward a life with less stress about your finances. These goals also allow you to spend money on the things you enjoy without feeling guilty.
5 Steps for Creating Financial Goals
Getting your financial goals in order can seem overwhelming, which is why it’s a good idea to map it out and have some structure. Below, we provide five steps to help you design financial goals that work for you. These steps allow you to focus on what matters most while also keeping you motivated to stay on the right track.
1. Discover What Inspires Your Financial Goals
Financial goals can take some time, so it’s helpful to find something that will help keep you motivated throughout the process. To start, make a list of what you want to achieve and details for why these items are important to you. For example, you may include:
“I want to save enough money to have my dream wedding.”
“I want to build an emergency fund to afford to pay my bills should I lose my job.”
“I want to start a retirement fund so I can enjoy my retirement by finally traveling the world.”
“I want to pay off all of my debt so I can experience less stress and spend without feeling guilty.”
Reminding yourself of your goals and what inspires you are actions that psychologists recommend while pursuing what matters most to you. While vision boards may seem like pseudoscience, Tchiki Davis, Ph.D., explains, “Initial research suggests [vision boards] can help us more easily reach our goals. This may be due to how vision boards help us gain self-awareness and self-reflect on what is important to us.”
2. Make a Plan for Your Situation
The second step is to make a plan that’s specific to you because everyone’s financial situation is different. Take a look at where you currently are with finances to start making a plan. This will allow you to create a plan that will allow you to reach your short-term financial goals and ones that may take a little longer.
The following are some financial goal examples, along with an idea of how to prioritize them.
Create a Budget
Learning how to create a budget and then implementing it is a great short-term financial goal. A budget is how you give your financial goals a strong foundation. Your budget will help you monitor how much you’re spending and decrease the likelihood of overspending. It will also let you know if you have extra money to spend on other things.
Plan for Retirement
Planning for your retirement is a long-term financial goal, but you get the most value out of it by starting sooner rather than later. Experts at Vanguard recommend that you start investing in your retirement funds in your 20s if possible. When you start investing earlier, your money has more time to compound, giving you more retirement funds. If you start your retirement later, don’t worry. By putting a little more into your retirement, you may have the ability to catch up for lost time.
Start an Emergency Fund
Unfortunately, we don’t know when an emergency will happen, so a good financial goal is to start an emergency fund. Many financial planners recommend[1] saving at least three to six months’ living expenses. This can take some time, but it can provide peace of mind should an emergency arise. As part of your budget, you can save a set amount every month to get closer to your emergency fund goal.
Some expenses to consider:
Rent or mortgage
Utility bills
Groceries
Car payments
Credit card and other debt payments
Pay Off Debts
Having debt can restrict your ability to achieve your financial goals. Your personal situation should determine how you prioritize this within your budget and other goals. When you get out of debt or decrease it significantly, you can save money on interest fees and improve your credit. This will free up additional funds and help you pursue more of your financial goals.
Begin Investing
Investing outside of your retirement fund is one way to generate passive income or have more money for your other financial goals. Your investments will ideally grow over time. If you invest in dividend stocks, these pay out money each quarter based on company profits. You can also continue investing and holding onto your investments to sell later for additional funds.
Get a Higher-Paying Job
Finding a higher-paying job is one financial goal many people may overlook. When you make more money, you have more resources to achieve your short- and long-term financial goals. It’s something to consider if your current job doesn’t allow you to budget properly, save for retirement, pay off your debts, or pursue your other goals.
Before searching for a new job, it’s also helpful to consider how happy you are at your current job. One benefit of financial goals is that they can help decrease stress and increase happiness. Leaving a job that makes you happy may counteract the benefits of making more money.
3. Map Out S.M.A.R.T. Financial Goals
It’s easy to get off track with your financial goals, so it’s helpful to organize your individual goals to improve your chances of success. A popular strategy for creating and managing goals of all types is to make S.M.A.R.T. goals. S.M.A.R.T. stands for:
Specific
Measurable
Achievable
Relevant
Time-bound
If your goals are vague and unrealistic with no time frame, they will be much harder to achieve. Using the S.M.A.R.T. goal strategy helps you make a plan relevant to what you want to accomplish within a realistic amount of time.
Let’s say you want an emergency fund with $5,000. An example of turning this into a S.M.A.R.T. goal would be, “By next year, I’ll have an emergency fund of $5,000 by saving $416.66 each month.”
If these numbers are unachievable for your financial situation, that’s OK. Make adjustments and see what works for your financial situation and your budget.
4. Keep Track of Your Goals
Keeping track of your financial goals can help you stay on the right track while also keeping you motivated. The S.M.A.R.T. model includes measuring your progress, and this is where the motivation comes from. Whether it’s paying down your debts, adding to your emergency fund, or saving for retirement, seeing the progress can inspire you to continue.
5. Don’t Overshoot Your Financial Goals
People commonly overshoot their financial goals and leave no room for spending on themselves. Treating yourself as you pursue your financial goals is important because it can feel like a chore. Sometimes, it’s also difficult to maintain motivation as you pursue your long-term goals. Part of setting financial goals is having extra spending money to do something fun occasionally.
Maybe you want to save money for a big purchase like a relaxing vacation or new furniture. Be sure to include these as you create your goals. When creating your monthly budget, you can also create space for extra spending money to make sure you take the time to enjoy yourself each month.
Improving Your Credit Is a Financial Goal Priority
If you don’t have a good credit score, it can be difficult to achieve your other financial goals. Lower credit leads to additional interest fees, higher deposits, and potentially more debt. Making your credit a priority will improve your ability to pursue all your other financial goals.
Credit.com has a variety of credit tools and services to assist you while you work on your financial goals. You can start by getting your free credit report card to see where your credit stands. We also offer our ExtraCredit® service, which includes credit monitoring, rent and utility reporting, and more.
Owning your own home is typically a foundation of the American Dream, and many people are saving for a down payment right this minute. But when you are already paying rent, it can be a challenge to save for a down payment on a house, especially if you live in an area with a high cost of living or are dealing with the impact of inflation.
But that doesn’t mean it can’t be done. You can save up for your home purchase by following some wise financial advice and simplifying the process of socking away your cash.
If buying a home is a priority for you, read on. You’ll learn how to grow your down payment savings while still paying rent.
5 Tips to Save for a Home While You’re Still Renting
Rent can take a big bite out of your take-home pay, but it doesn’t rule out saving for a down payment on a house. Here’s some smart budgeting advice to help you set aside money for your future homeownership.
💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.
1. Pay Down Your Debt First
In order to save for a house, it’s wise to figure out a plan to pay down your existing debt. This will free up more money for you to save for that down payment. Also, when you do apply for a mortgage, you will likely have a lower debt-to-income ratio, or DTI ratio. Reducing you DTI ratio can help your application get approved.
Student loan debt is a common kind of debt to have; the average American right now has $37,338 in loans. If you’re a full-time employee, reach out to your company’s HR department to learn more about student debt repayment assistance. A recent survey by the Employee Benefit Research Institute found that 17% of companies in the U.S. currently have this type of assistance, so it’s worth a try.
Gain home-buying insights with the latest housing market trends.
As a more drastic measure, you could always think about going into a profession that offers partial or total student loan forgiveness (such as teaching in certain public schools) or moving to a state that will help pay off your student loan debt just for moving there (currently Kansas, Maine, Maryland, and Michigan).
For an easier fix, you could consider student loan refinancing options, which might lower your rate. By dropping your interest rates, you could significantly reduce both your payments and the length of time you’ll be making them.
However, a couple of points to note. If you extend your term to lower the payment, you will pay more interest over the life of the loan. Also, do be aware that, when refinancing federal loans to private ones, you may then no longer be eligible for federal benefits and protections. However, by getting a lower interest rate, you may accelerate your path to saving for your down payment and getting keys to your very own home.
Credit card debt can also play a role in preventing you from saving for a down payment. This is typically high-interest debt, with rates currently hovering just below 25%.
There are a variety of ways to pay down this debt, such as the debt avalanche method, which has you focus on your highest-interest debt first; the debt snowball; and the debt fireball methods.
If none of these techniques seems right for you, you might look into getting a balance transfer credit card, which will give you a period of zero interest in which you may pay down debt. Or you might take out a personal loan to pay off the credit card debt and then potentially have a lower interest loan to manage.
2. Create a Budget That Will Help You Spend Less and Save More
Another way to free up funds for that down payment is to budget well. Creating and sticking to a realistic budget can help you spend less while saving for a house. While budgeting can sound like a no-fun, punitive exercise, that really doesn’t have to be the case. A budget is actually a helpful tool that allows you to manage your income, spending, and saving optimally.
To get there, you can pick from the different budgeting methods. Most involve these simple steps.
Gather your data: Figure out how much you’re earning each month (after taxes), along with how much you’re currently spending. Add it all up including cell phone bills, insurance, grocery bills, rent, utilities, your coffee habit, the dog walker, gym membership, etc. Don’t miss a dime.
List your current savings: Are you currently putting money into an IRA, 401(k), or other savings plan? List it, so you can see what you’ve already got in the bank.
Really dig into and optimize your spending: Can you cut back anywhere? You might trim some spending by bundling your renters and car insurance with one provider. Perhaps you can save on streaming services by dropping a platform or two. And how’s your takeout habit? If you really want to save for a house, you may need to learn to cook. You might even consider taking in a roommate or moving to a less expensive place to turbocharge your savings for your down payment while renting.
Making cuts, admittedly, can be the toughest step in the budgeting process, but it’s crucial to be honest with yourself about your spending. Remember: However much you cut back can help you get a new home that much sooner.
Finally, check in on your budget every so often and adjust as needed. For example, if you land a new job, get a promotion, or are given an annual raise, perhaps you can add that money to your savings account or put it toward paying off your loans. Whichever one feels more important to you is OK, so long as that extra cash isn’t vanishing on impulse buys.
3. Investigate How Big a Down Payment You Actually Need
Many prospective homebuyers think they must have 20% down to buy a house, but that is not always the case. That is how much you need to avoid paying for private mortgage insurance (PMI) with a conventional conforming loan. Private mortgage insurance typically ranges from 0.5% to 2% of the loan amount, and it’s automatically canceled when your equity reaches 78% of the home’s original value.
Here are some valuable facts: You may be able to take out a conforming loan with as little as 3% down, plus PMI. Certainly, that’s a sum that can be easier to wrangle than 20%, though your mortgage principal will be higher. According to National Association of Realtors data, the average first-time homebuyer puts down about 6%.
In addition, you might qualify for government loans that don’t require any down payment at all, such as VA and USDA loans.
You might also look into regional first-time homebuyer programs that can provide favorable terms and help you own a property sooner.
💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is as little as 3.5%.
4. Grow Your Savings
If you’ve paid off your debt, set realistic budgeting goals, and are raking in some dough to add to a savings account, you’re already on the right track. A good next move is to put your money to work for you. Among your options:
• Open a high-interest savings account. These can pay multiples of the average interest rate earned by a standard savings account. You will frequently find these accounts at online vs. traditional banks. Since they don’t have brick-and-mortar branches, online financial institutions can save on operating costs and can pass that along to consumers. Just be sure to look into such points as any account fees, as well as opening balance and monthly balance requirements. (Features such as round-up savings can also help you save more quickly.)
You can also look into certificates of deposit (CDs) and see what interest rates you might get there. These products typically require you to keep your funds on deposit for a set period of time with the interest rate known in advance.
• If you have a fairly long timeline, you might consider opening an investment account to grow your savings. The market has a historical 10% rate of return, though past performance isn’t a guarantee of future returns. You could try using a robo advisor, or you could work with a financial advisor who will walk you through investment strategies for beginners and beyond and help you invest. Just be aware that investments are insured against insolvency of the broker-dealer but not against loss.
Recommended: First-time Homebuyer Guide
5. Automate as Much of Your Finances as Possible
This is a lot of information to process, but once you get through all the work upfront, you can start automating as much as possible. For example, have a portion of your paycheck automatically go into your savings account each month to plump up that down payment fund.
You might set up the direct deposit of your paycheck to send most of your pay to your checking account and a portion to a savings account earmarked for your down payment. You can check with your HR or Benefits department to see if this is possible.
Another way to automate your savings is to have your bank set up a recurring transfer from your checking account, as close to payday as possible. That can route some funds to your down payment savings without any effort on your part. Nor will you see the cash sitting in your checking account, tempting you to spend it.
The Takeaway
While saving for a down payment isn’t exactly a piece of cake, it doesn’t have to feel overwhelming. By trying five effective strategies, which can include budgeting, paying down debt, and automating your savings, you can accumulate enough money to start on your path to homeownership.
Once you have the down payment taken care of, you’ll be ready to shop for a home mortgage that suits you.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
*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.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
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.
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.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
Inside: Are you struggling to make ends meet on a low income? This guide will teach you how to budget money effectively on a low income, so you can live a comfortable life without having to skimp on important expenses.
Let’s face it… Navigating through the budgeting on a low income can often feel overwhelming.
The fear of insurmountable bills, the anxiety associated with rising living costs, and the overall foreboding nature of budgeting often make for a persistently stressful experience.
However, it is crucial to understand that you are not alone in this journey. I have been in your spot as well as many Money Bliss readers.
Regardless of how daunting the budgeting task may appear, we truly believe that with the right guidance and adherence to solid financial principles, you are capable of achieving financial peace of mind.
This process will simply require patience, persistence, and strategic planning. This guide aims not only to shine a light on the struggles of budgeting with a low income but also to offer a beacon of hope.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
How to Budget Money on a Low Income
While it’s true that budgeting with a low income can be tough, proper money management can make it doable.
When you have less disposable income, it leaves you with less leeway in your budget. That’s why you have to be accountable and meticulously plan your spending to ensure financial stability.
So, let’s dig in and you can find success.
Step #1 – Figure out Your Monthly Income
Developing an effective budget starts with understanding your monthly income.
Here’s a step-by-step guide:
List out all income sources: This includes all your regular paychecks, part-time jobs, side hustles, social security, child support, or any other form of income you have. If your income is irregular, say from commissions or seasonal work, it’s advisable to base your budget on your lowest monthly income.
Account for taxes and deductions: To get an accurate picture of your disposable income, you need to factor in taxes and deductions from your earnings. You need to make sure you understand the difference between gross pay and net pay.
Include irregular income: If you occasionally get money from gifts, or sporadically earn from passive income sources like investments, be sure to include these too. As these are inconsistent, it is best to fund discretionary spending with this money.
Personally, I recommend using your net income with budgeting. This will give you an accurate budget that you can truly follow.
This knowledge is powerful when it comes to effective budgeting.
Step #2 – Define your bills and Expenses
Knowing how much you spend and what you spend your money on is another crucial step in budget planning.
The key is to define ALL your bills and expenses. Here are the personal budget categories that cover almost everything you can think of.
Now, you must do the following:
Identify your fixed costs: These are basics that you have to pay monthly and remain fairly constant, such as rent, car payments, and student loans.
Consider flexible costs: These expenses vary from month to month. Examples include groceries, transportation, electricity, water, and gas bills.
Remember periodic costs: Some costs only appear annually or semi-annually. For instance, insurance premiums, car registrations, and property taxes. It’s important to set aside money each month to cover these expenses when they arise. A sinking fund is great for these expenses.
Account for daily spending: Beyond fixed and flexible bills, consider your day-to-day expenses like shopping, subscriptions, and entertainment. Be honest about the little expenses. It’s often the small, frequent purchases that can derail a budget.
Prepare for unplanned costs: Finally, remember to budget for unexpected expenditures such as car repairs or medical bills.
By defining and categorizing your bills and expenses, you can see where your money is going and better manage your spending.
Step #3 – Reach a Zero Budget
A zero-based budget is a strategy that requires you to assign every dollar you earn to a specific expense or savings category, with the goal of having your income minus your expenses equal zero by the end of the month.
Write down your income: From the step before, you already know your total monthly income.
Subtract your expenses: Subtract the total of your monthly expenses (including savings) from your total monthly income. If you’ve correctly accounted for your income and expenses, the result should be zero. This is what it means to have a “zero-based budget”.
Balance the budget: If your income and expenditure don’t balance, adjust your variable expenses and other discretionary spending until they do. This can involve cutting back on nonessential overspending, like takeout meals or unnecessary purchases.
Allocate every dollar: With your budget balanced, each dollar should now have a purpose, whether it’s paying bills, going into savings, or providing for your daily needs.
Many people struggle to hit a zero based budget on the first try. It is common for your expenses to be higher than your income. Thus, a no spend challenge may help you identify what is important to actually spend your money.
Reaching a zero-based budget equips you with a clear picture of your financial status.
Thus, it allows you to use your money purposefully and prevents unnecessary spending. This way, even with a low income, you can still meet all your needs and work towards your financial goals.
What do you do if your budget shows your expenses are more than your income?
When your monthly spending exceeds your monthly income, immediate attention is needed to prevent worsening financial issues. Before panic sets in, consider taking the following steps:
Analyze your budget: Reevaluate and scrutinize your budget. There might be necessary adjustments overlooked or expenses incorrectly categorized. This will give you a clearer understanding of where your money is going.
Prioritize essential expenses: Allocate money to necessities like housing, food, utilities, and debt repayments first. Other less necessary expenditures, like entertainment and dining out, can be reduced or eliminated.
Reduce expenses: After prioritizing, identify areas where cuts can be made. Impulse buys, unnecessary subscriptions, or expensive habits might need to go.
Increase your income: Consider part-time jobs, side hustles, selling unused items, or picking up freelance work to bring in more money.
Seek advice if debt is weighing you down: As a last resort, you may look at ways to lower your interest rate on your debt. These strategies like debt consolidation or restructuring could help make your situation more manageable.
Remember, this situation, while stressful, is not permanent. With careful planning and disciplined execution, you can turn this around and regain financial stability.
Taking Control of Your Budget When Income Doesn’t Cover Your Expenses
Now, this is where you need to learn to manage your money wisely. You are in control of where you spend your money.
Many truly believe with a higher income all of their financial problems go away. From my research, most people end up with bigger money problems, the same spending habits, and still living paycheck to paycheck even with a higher income.
So, let’s reign in what you can do today to make your budget feasible.
1. Prioritize Essential Bills and Expenses. The key is to identify which expenses are truly essential to your livelihood. All remaining expenses, like entertainment or eating out, should be considered secondary and only met after the primary expenses have been satisfied.
2. Participate in a No Spend Challenge. A No Spend Challenge not only helps you save money rapidly but also makes you cognizant of your spending habits, helps identify non-essential expenses, and guides you towards a minimalist, sustainable lifestyle. Start with a no spend month.
3. Reduce your Housing Expenses. Housing costs can be one of the most significant expenses. Look at ways to downsize, negotiate rent, refinance your mortgage, or get roommates. Or even housesit permanently.
4. Be Cognizant of Bad Spending Habits. Some examples include impulse purchases, expensive convenience, not comparison shopping, or paying too much. By becoming aware of your spending habits and making conscious choices, you can break the cycle of unnecessary spending and start saving money with the penny challenge.
5. Skip the Expensive Coffee Shop. Choosing to forgo your daily coffee shop run can result in surprisingly significant savings. Implementing just this one change could save you over $600 a year!
6. Use Public Transportation to Save Money. The costs of owning a car – gas, maintenance, parking, and insurance – can quickly add up. So, look for public transportation as an alternative or even cycling, carpooling, or walking.
7. Take Advantage of Free or Cheap Entertainment. When living with a low income, entertainment expenses can quickly eat into your budget. Good news for you! There are plenty of things to do that don’t cost money.
8. Cut Back on Grocery Spending. By implementing simple strategies such as meal planning, cooking at home, cutting down on processed food and reducing waste, you can maintain a healthy diet while significantly reducing your grocery bills. Don’t forget to use those discounts and coupons!
9. Stick to Your Shopping List. Preplan your purchases before stepping into a store. This is a powerful tool in curbing those impulse purchases which can inflate your expenses substantially.
10. Start Meal Planning. Meal planning is a practical and economical way to manage your food budget. By planning your meals for the week, you can control your grocery spending and eliminate waste.
11. Stockpile Goods That Will Stay Stocked Up Long Term. Remember, the goal of stockpiling is to save money, not to transform your home into a supermarket. Purchase enough to last a few months and focus on items that you’re certain to utilize. Here are the best foods to buy when broke.
12. Pack Your Own Lunch and Skip Eating Out. With an average meal out costing around $10, you could easily save $200 a month by packing lunch from home. Over a year, that’s $2,400 in savings!
13. Drink Water and Avoid Processed Foods. Shifting dietary habits can be a significant change, but your commitment to a healthier lifestyle can reap both health and financial dividends. It’s an investment in a life of wellness and economic sustainability.
14. Take Advantage of Discounts when Shopping. Remember, the goal of shopping with discounts is to spend less on what you need, not to buy more than you need. So, make sure to use coupons wisely, shop sales, buy off season, and use Cashback apps like Rakuten and BeFrugal.
15. Avoid Impulse Purchases. By avoiding impulse purchases, you give your budget room to breathe and create an opportunity for savings. This makes a significant difference over time, especially when money is tight.
16. Apply for Discounts on Utilities and Services. Many utility companies provide low-income home energy assistance programs. The same is true for internet service. Contact your service providers to check your eligibility.
17. Get Free or Discounted Goods Through Charities. Charities, faith, professional, and local organizations often offer grants for people experiencing financial hardship. Utilizing them can be a lifetime as they help you stretch your budget further and provide necessary support in times of financial struggle. Don’t be afraid or too proud to ask for help when you need it.
18. Get Outside. Reconnecting with nature can provide you with cost-free entertainment and a sense of tranquility that’s hard to find elsewhere.
19. Avoid Unnecessary Expenditure. While each person’s definition of “unnecessary” may differ, the key to budget management is curbing expenditures that don’t add substantial value to your life. A common culprit could be brand-name goods or late fees.
20. Start the Practice of Saving with a Mini Savings Challenge. The Mini-Savings Challenge can pave the way to a habit of saving regularly, even on a tight budget. Essentially, this challenge consists of setting aside a small amount of money each day or week, gradually increasing the amount over time.
21. Show Gratitude. While it may seem less directly related to finance, practicing gratitude is indeed integral to efficient budgeting and financial wellness. Remember, financial success isn’t just about making more money. It’s also about appreciating what you have and recognizing the steps you’re taking towards your goals.
Inciting Additional Income Avenues
Okay, this section is how you take a low income and increase your money. While cutting back spending is helpful, creating more money will help you to reach money success faster. This will take the strain off.
1. Look for Ways to Earn Extra Income
Boosting your income, no matter how minimal the increase, can help cover necessary costs and elevate your financial standing.
Here are some ideas using your current job:
Work Overtime: If possible, consider getting more extra hours at your current job. Earnings from overtime or extra shifts can be significant.
Negotiate a Raise: If you’ve been with a company for a while and demonstrated your worth, it might be time to discuss a raise. Prepare well for this conversation with evidence of your productivity and value.
Every extra dollar earned can be put towards savings, paying down debt, and creating better financial stability.
2. Leverage Side Hustles for Extra Money
Side hustles have become an increasingly popular way to earn extra money online in your spare time. They allow for flexibility and can be a great supplement to your current income.
Start a Side Hustle: These can be a great way to make use of spare time to earn extra cash. This could be anything from driving for a rideshare company, offering freelance services, tutoring, delivering food or groceries to selling homemade goods online.
Sell Unused Items: You probably have items in your home that you no longer need. Selling anything from clothes to electronics or furniture can be a good source of income.
Passive Income: From writing an eBook to renting out a room in your house or investing in stocks, creating passive income streams can provide extra money over time.
Remember to choose a side gig that fits your schedule, interests, and skill set. Not only could it bring in extra money, but it could also turn into a passion project, making the work feel less like a chore.
3. House Sit for Extra Income
House sitting can be a viable option for those looking to generate extra income, especially if you’re flexible with your time and location. It typically involves looking after someone’s home (and sometimes their pets) while they’re away.
Not only is house-sitting a way to earn money, but it can also offer a free place to stay. Hello – you just lowered the biggest expense in your budget. However, remember that taking care of someone else’s home is a huge responsibility, so only take on tasks you’re confident you can handle.
Get started by building your profile on Trusted Housesitters.
4. Items You Don’t Need Anymore
Selling items you no longer need or use can both declutter your home and add to your income. It doesn’t just have to be big-ticket items; even small routine household items can yield returns.
While this may be difficult to do, look for items in good condition that you and your family no longer need or use. If you have extra baby stuff, you can rent it on BabyQuip for extra money.
Remember, while selling items won’t provide a consistent income, it can be a great one-time source of extra cash especially if you have these highly popular flipping items in your house.
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5. Pick up a Part-time Job
When you’re on a limited income, picking up a part-time job can be a reliable way to supplement your earnings. You are trading your time for money.
Many of these jobs that pay weekly offer valuable experiences, skills, and possibly even room for growth and advancement. Remember to save and plan for any taxes due as a result of your increased earnings.
Smart Use of Technology in Budgeting
Taking advantage of personal budgeting tools can make managing your finances easier. They can help track expenses, create a budget, and set saving goals. Here are some popular options:
You Need a Budget (YNAB): YNAB helps you create a budget and live within your means, educating you on effective money management along the way.
Simplifi by Quicken: This app crunches the numbers to show how much money you have for day-to-day spending after accounting for bills, goals, and savings.
Empower: This free tool offers a comprehensive financial dashboard that includes budgeting features and investment tracking.
Tiller Money: If you want a more manual approach, you can use Google Sheets or Excel to create a customizable budget spreadsheet.
Remember, the best tool is the one you use consistently. Try a few options to see which one best meets your needs and preferences. Every tool has its pros and cons, but all aim to help you control your finances effectively.
Empower Personal Wealth, LLC (“EPW”) compensates Money Bliss for new leads. Money Bliss is not an investment client of Personal Capital Advisors Corporation or Empower Advisory Group, LLC.
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Access Paychecks Early with Digital Banking Apps
With the rise of digital banking, access to innovative financial tools like early direct deposit has become more accessible, even for those with low incomes. These services can be crucial lifelines between paychecks or in case of emergencies.
Here are a few platforms that offer such services:
Chime: Once you set up direct deposit with Chime, you may get your paycheck up to two days earlier than at a traditional bank.
Current: Current, a mobile bank account, provides users with paychecks up to two days in advance.
Varo: Varo also offers early direct deposit for its users, helping you gain access to your money more quickly.
Clair: Clair’s on-demand pay solution lets you advance a portion of your paycheck before payday. This can be particularly helpful when navigating financial crunches.
It’s important to note that while accessing your paycheck early doesn’t give you extra money, it does provide more flexibility in managing your finances and can help avoid overdraft fees or high-interest loan options in times of need. As with any financial tool, it’s essential to use early paycheck access wisely and not rely on it for regular spending.
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FAQs
Saving money on a low income can seem challenging, but a few strategic changes and smart habits can make it achievable.
Engaging in a money-saving challenge can be a motivating way to encourage disciplined saving, helping you to creatively manage your finances and significantly boost your savings plan over time.
Remember, the key to saving on a low income is to stay consistent, patient, and adaptable in your approach.
Surviving on a low income budget can be challenging, but strategic planning and careful spending can help you manage your finances effectively.
The focus as Dave Ramsey likes to say is on your four walls – food, utilities, shelter, and transportation.
Remember that it’s okay to adjust your budget as you go. Circumstances change, and so should your budget. Review your budget regularly to ensure it’s still working for you and adjust as needed.
Budgeting when you’re broke might seem like an uphill battle.
The key is to make sure you stick to your budget and track your spending consistently. Don’t hesitate to reach out to local charities, government programs, and non-profit organizations for assistance.
Remember, being broke is often a temporary situation, and even small steps towards better budgeting can compound into big changes over time. Try to stay positive and focused on your financial goals.
Now, How do you Survive on a Low Budget?
Surviving on a low income involves careful planning, budgeting, and making the most of available resources. While it may seem challenging, it is indeed possible.
Every small step you take towards frugal living, such as sticking to a budget, reducing unnecessary expenses, or earning extra cash, can lead to considerable savings in the long run.
Remember, it’s also important to invest in yourself – whether that’s asking for a raise at work, learning a new skill, or starting a side hustle.
The journey of living on a low income can be tough, but it also offers an opportunity for creativity and gratitude for the essential things in life. With a positive mindset, some patience, and careful budgeting, you can not only survive but thrive, even on a low income.
The goal isn’t to just get by but to build a financially stable future.
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Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
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When you carry large amounts of debt across different credit cards and loans, it’s easy to feel snowed under. Making the minimum payment on each leaves you paying a lot in interest and doesn’t make it easy to eliminate all that debt.
One debt repayment strategy you might want to consider is the debt snowball. Many find it to be an effective method of paying off outstanding debt, and it may help you get back to healthy financial practices faster.
Let’s look at what a debt snowball strategy looks like, including how to use a debt snowball calculator.
Debt Terms Defined
Before we go into creating a debt reduction plan, let’s make sure you’re up to speed on certain debt terms.
Interest Rate: The interest rate is the percent of the amount you borrow that you pay to the lender in addition to the principal.
Annual Percentage Rate: This is the interest rate charged per year for purchases you make with a credit card, and may include other fees.
Minimum Payment: Loans and credit cards have a minimum amount you must pay each month on the balance, though you certainly can pay more.
Bankruptcy: If you’re unable to pay off your debts, filing bankruptcy may be a last-ditch solution to consider. Essentially, it reduces or eliminates your debts. Know that it will negatively impact your credit for many years. That’s why it’s worth it to come up with a plan for the ultimate debt payoff strategy. 💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. An online budget planner can give you the same insight into your budgeting and spending at a glance, without the extra effort.
What Is the Debt Snowball?
Just like an actual snowball, the debt snowball method starts out small. You first tackle the smallest debt balances you have. Once those are paid off, you apply what you were paying on those to the next smallest debts. You continue to pay at least the minimum due on all your debts.
However, by focusing your attention on one debt at a time, you then free up more money to make larger payments on other debts until it’s all gone. Your snowball of debt repayment, so to speak, grows over time.
Benefits of the Snowball Method
The snowball method is one of the fastest ways to pay off debt. And over time, this method will help you have fewer payments as you pay off credit cards and loans and put more money to the remaining debt.
Drawbacks of the Snowball Method
The smallest debts you have may not be the ones with the highest interest. So while you’re paying off the little loans, the debts with higher interest continue to accumulate interest, which adds to your debt.
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Debt Snowball vs. Debt Avalanche
If you have larger loans with higher interest, the debt snowball method may not be your best option. You might also explore another popular way to pay off debt: debt payoff strategy, the debt avalanche method.
With the debt avalanche method, you start paying down the loans and credit cards with the highest interest first. By doing so, you reduce the amount of debt you have at those higher interest rates, which slows down the amount of interest that accumulates over time.
Just like with the snowball, you pay off one debt and then put the money you were paying on that debt toward the loan or card with the next highest interest rate until it’s all paid off. 💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.
How Is Debt Snowball Payoff Calculated?
To use the debt snowball payoff method, you’ll need to gather information about all the debt you have. Let’s use the following example:
• Personal loan 1 balance: $3,000
◦ 12% interest
◦ Minimum payment: $100 per month
• Credit card A balance: $2,000
◦ 17% interest
◦ Minimum payment: $25 per month
• Credit card B balance: $1,000
◦ 22% interest
◦ Minimum payment: $30 per month
• Personal loan 2 balance: $750
◦ 8% interest
◦ Minimum payment: $20 per month
Even without a snowball debt payoff calculator, you can reorder these debts so that you focus on the one with the lowest balance first:
• Personal loan 2: $750
• Credit card B: $1,000
• Credit card A: $2,000
• Personal loan 1: $3,000
Now that you’ve ordered your debts from least to greatest, you can see how, once you pay off the $750 loan, that money can go toward the credit card with the $1,000 balance. Once that’s paid off, you put all that money toward paying off the $2,000 credit card balance, and then finally, to pay off the $3,000 loan.
Debt Snowball Payoff Examples
Let’s look at what the monthly payments for these reordered debts would look like, if you were able to set aside $400 a month toward paying them off.
# Payments
Personal Loan 2 ($750)
Credit Card B ($1,000)
Credit Card A ($2,000)
Personal Loan 1 ($3,000)
1
$245
$30
$25
$100
2
$245
$30
$25
$100
3
$245
$30
$25
$100
4
$25.19
$249.81
$25
$100
5
–
$275
$25
$100
6
–
$275
$25
$100
7
–
–
$300
$100
8
–
–
$300
$100
9
–
–
$300
$100
10
–
–
$300
$100
11
–
–
$300
$100
12
–
–
$300
$100
13
–
–
$300
$100
14
$260.72
$139.28
15
–
–
–
$400
16
–
–
–
$400
17
–
–
–
$400
18
–
–
–
$400
19
–
–
–
$400
20
–
–
–
$400
Total principal & interest
$7,568
Total interest
$829
As the chart shows, what might have taken you years to pay off can be paid off in under two years with the debt snowball method.
One way to keep your finances on track while you’re paying off debt is to create a budget. A money tracker app can help you come up with a spending and saving plan that works for you.
Is a Debt Snowball for You?
There’s no one-size-fits-all when it comes to debt payoff strategies. But to determine whether the debt snowball method is right for you, consider how many different debts you have as well as their interest rates. If your larger debts have higher interest rates, you might consider the avalanche method.
But if your interest rates vary, or the smaller debts have higher interest, you might benefit from paying off those lower amounts first before snowballing those payments into the larger debts.
The Takeaway
If you’re trying to pay off outstanding debt, you have options. The debt snowball method has been proven effective for many people. If nothing else, it’s a way for you to focus your attention on whittling down debt and minimizing how much you pay in interest.
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FAQ
How long to pay off debt using snowball?
The amount of time it takes to pay off your debt with the snowball method will depend on how much debt you have and how much you can budget to pay it down. However, you may be able to pay off your debt faster with this method.
What is the best way to pay off debt using the snowball method?
The debt snowball method pays off your smallest balances first, then rolls those payments up toward the larger debts until they are all paid off.
What are the 3 biggest strategies for paying down debt?
To pay down or pay off debt, you can consider the debt snowball method (which pays off the smallest balances first), the debt avalanche method (which pays off the balances with the highest interest first), or debt consolidation (which provides a new loan with a single payment and single interest rate).
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Debt consolidation allows you to take multiple debts and combine them into one, and you can do this with your credit card debt. Doing this makes managing the debt a little easier, and you may be able to get a lower interest rate.
Keeping track of multiple credit card bills can be difficult and potentially cause you to fall behind on payments or forget them altogether. Since payment history is the most important factor that influences your creditworthiness, not making payments on time can damage your credit score.
If you’re struggling to juggle multiple bills, you may want to consider credit card consolidation. Read on to discover eight ways to consolidate your credit card and evaluate the pros and cons of each method to find the best option for you.
Types of credit card consolidation include credit card consolidation loans, balance transfer credit cards, home equity loans, HELOCs, retirement loans, cash-out auto refinance, family loans, and debt management plans.
The advantages of credit card consolidation include lower payments, faster debt payoff, and fewer bills to keep track of.
Consider your financial situation when weighing the pros and cons of each credit card consolidation method.
Table of Contents:
What Is Credit Card Consolidation?
How to Consolidate Credit Card Debt
Credit Card Consolidation FAQ
What Is Credit Card Consolidation?
Credit card consolidation is a debt management strategy that combines different credit card balances into one.
How Does Credit Card Consolidation Work?
You can go about consolidating credit card debt in a few different ways. Generally speaking, you will take out a loan or credit card with a lower interest rate and pay off all current balances with money from the new account. Once the debt is consolidated into one loan or credit card, you can begin paying off this account.
How to Consolidate Credit Card Debt
The best way to consolidate credit card debt depends on your individual financial situation, as each option has its own advantages and disadvantages. Below are eight ways to consolidate credit card debt that you may want to consider.
Credit Card Consolidation Loans
A credit consolidation loan is a type of unsecured personal loan that comes with a set repayment period and fixed monthly payments. You’ll receive an amount of money that you’ll use to pay off your current debt.
For a credit card consolidation loan to make sense, the interest rate needs to be lower than the interest rate for your credit cards. Most personal loans are fixed rate, so you don’t have to worry about the interest rate increasing. Keep in mind that some lenders charge an up-front, one-time origination fee ranging from 1% to 10% of the total loan amount.
To get a credit card consolidation loan, take the following steps:
Step 1: Research lenders, such as credit unions, banks, or online lenders. Since credit unions are not-for-profit institutions, they typically offer the best rates, especially for individuals with poor credit, although you need to become a member to apply. Banks, on the other hand, generally require a good credit score to qualify. Make sure to consider loan terms, rates and fees.
Step 2: Get prequalified with a couple of lenders. Some lenders can prequalify your application to see what rates you qualify for so you don’t get hit with a hard inquiry that could potentially affect your credit score.
Step 3: Decide on a lender and apply. You’ll likely need to submit personal information like proof of your identity and income. After you apply for the loan, the lender will decide on final approval.
Step 4: Receive the loan and pay off your credit card debt. Once you receive the funds, you’ll use the money to pay off your credit card debt. On the other hand, some lenders will directly pay creditors, which removes the hassle on your end.
Pros
You can get low interest rates if you have good credit.
A fixed interest rate keeps your monthly payments constant.
The lender may pay your creditors directly.
It can help significantly lower your credit utilization.
Cons
You must have a good credit score to qualify for lower interest rates.
You’ll need to pay origination fees.
0% APR Balance Transfer Credit Card
This debt consolidation option involves transferring your debt to a credit card that offers a 0% APR introductory period, typically lasting between 12 and 21 months. During this time frame, you won’t be accruing credit card interest on your debt, allowing you to pay down your balance quicker and save money. With balance transfer credit cards, the goal is to pay down your entire balance within the introductory period.
While many balance transfer credit cards don’t charge an annual fee, there is typically a one-time balance transfer fee that ranges from 3% to 5% of the total amount you transfer. For example, if the company charges a 3% balance transfer fee and you transfer $600, you’ll be charged $18 in fees. To ensure this option makes sense for you, calculate how much interest you’ll save over time to verify it cancels out the cost of the fees.
It’s also important to consider the card’s interest rate following the introductory period in case you don’t pay your balance off within the 0% APR time frame.
Pros
It provides you the opportunity to pay off debt without accruing interest.
It gives you a year or more to pay down your balance.
Cons
It requires good credit for eligibility.
You’ll need to pay balance transfer fees.
The APR increases after the introductory period.
Home Equity Loans
If you’re a homeowner, you can take out a home equity loan, which involves borrowing money against the equity in your house. With this method, you’re essentially taking out a secured loan and using your home as collateral.
The main benefit of a home equity loan is that it typically offers lower interest rates than personal loans. However, since the loan is secured with your home, your property could get foreclosed on if you fall behind on payments. Additionally, you may have to pay closing costs when taking out a home equity loan, typically 2% to 5% of the loan amount.
Pros
They come with lower interest rates than other loan types.
They offer a long repayment period.
Cons
You must be a homeowner to qualify.
Your home could be foreclosed on if you fail to repay the loan.
You’ll need to pay a second mortgage that will likely have a higher interest rate.
You’ll need to pay closing costs.
Home Equity Lines of Credit (HELOCs)
Similarly to a home equity loan, a HELOC uses your home as collateral to secure a loan. While home equity loans provide a lump sum, HELOCs work like a revolving line of credit with variable interest rates. This means that the payment amount could vary from month to month. With a HELOC, you have continuous access to money for a period of time, and you can take out as little or as much as you need.
Pros
They have lower interest rates than other types of loans.
You have the ability to choose how much of your credit line to use.
Cons
Variable interest rates may make budgeting more difficult.
There is a possibility of home foreclosure if you fall behind on payments.
Cash-Out Auto Refinance
A cash-out auto refinance works similarly to a regular auto loan while allowing you to borrow additional money. For debt consolidation purposes, you can use this money to pay off your credit cards. Keep in mind that you could lose your vehicle if you fail to repay the loan.
Pros
You have the opportunity to receive a lower interest rate on your car loan.
Cons
You may lose your vehicle if you don’t make payments.
You’ll need to pay title, lender, and closing fees.
Retirement Account Loans
If you’ve been contributing to an employee-sponsored retirement plan such as a 401(k), 403(b), or 457(b), you can borrow against your savings and use the money to pay off your credit card debt. Since retirement account loans typically have lower rates than credit cards, this route could significantly lower the amount of interest you pay to creditors.
Before taking out a retirement loan, it’s important to understand how it will impact your savings. Even though you’ll pay the money back within five years, you’ll lose out on tax-free earnings.
If you leave your current job, you’ll likely have to pay back the loan immediately or within a short period.
Pros
They have lower interest rates than credit cards.
There is no credit score requirement.
The interest you pay goes into your retirement account.
Cons
The loan is tied to your current job.
It can set back your retirement savings.
You’ll pay taxes and penalties if you don’t repay the loan within five years.
Family Loans
Family loans can provide a more affordable way to pay off credit card debt. However, if you go this route, it’s important to create a written agreement that outlines the amount you’re borrowing, repayment terms, and the interest rate.
Pros
You’ll likely receive a lower interest rate than what banks, credit unions, and online lenders offer.
It doesn’t require a formal application process or credit score requirement for approval.
Cons
You could strain your relationship with your family member if you fall behind on payments.
There may be tax implications for your family member if they loan you over $17,000.
Debt Management Plans
A debt management plan is a program that nonprofit credit counseling agencies offer to help you pay off credit card debt. It involves grouping credit card balances into one payment and lowering your interest rate so you can pay off the debt within three to five years. Once enrolled in the program, a credit counselor will work with you to create a budget and a repayment plan tailored to your financial needs.
Pros
It allows you to pay off credit card debt within three to five years.
It may help you improve your credit.
Cons
It limits your access to credit cards.
It prohibits you from taking out new loans.
Credit Card Consolidation FAQ
Below are a few common questions about credit card consolidation.
What Is the Difference Between Credit Card Refinancing and Debt Consolidation?
Credit card refinancing refers to negotiating a better rate for an existing debt, while debt consolidation involves combining multiple debts.
What Are the Advantages of Consolidation?
Advantages of credit card consolidation include lower payments, quicker debt payoff, fewer bills, and the potential to improve your credit.
What Are the Disadvantages of Consolidation?
Disadvantages of credit consolidation include fees and the possibility that you won’t qualify for favorable terms.
How Does Consolidating Your Credit Cards Affect Your Credit?
While consolidating your credit cards can initially hurt your credit, the drop is only temporary. Over time, your credit score should increase as long as you make payments on time.
Is It Smart to Consolidate Credit Card Debt?
It’s smart to consolidate credit card debt if you qualify for lower interest rates and better terms than your current credit cards. Credit consolidation can help you reach your goal of paying off debt. To qualify for the best terms and rates, start by taking steps to improve your credit. Check your free credit score today to see where you stand.
An FHA loan is a type of government home loan program that the Federal Housing Administration insures. It’s a popular mortgage choice, especially for first-time homebuyers, because an FHA loan has lower down payment requirements than conventional loans.
But there are extra costs related to these loans that you might not be aware of. You can use an FHA loan calculator. to help figure out what your monthly mortgage payment and total cost might be.
Why Use a FHA Loan Mortgage Calculator Table
An FHA loan mortgage calculator table has several benefits for homebuyers. These include:
• Cost estimations: The calculator table can provide estimates of monthly mortgage payments. It helps borrowers plan their budget by showing the expenses involved in buying a home.
• Time-saving: Mortgage calculations can be confusing and complicated for first-time homebuyers. The calculator table helps simplify and speed up this process.
• Comparison tool: Buyers can compare options by entering different scenarios into the calculator table. A different interest rate or purchase price will change the monthly payment amounts. A buyer can compare homes and even different types of mortgage loans to help decide which property and loan to move forward with.
• Informed decision-making: An aspiring homebuyer can use the table to determine the various costs involved in an FHA loan. They can plug in different numbers, such as a lower or higher down payment or a different loan term to see how that might change their monthly payments.
• Financial planning: Overall, the calculator could help borrowers figure out what they can afford now and how to plan for future payments.
💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
How to Calculate Your FHA Loan Mortgage Costs
Calculating a government home loan like an FHA loan mortgage involves several steps. These include:
1. Determining the loan’s principal amount and interest. The principal is the amount of money the homebuyer borrows from the lender. The interest is the cost of borrowing the money.
2. Adding property taxes and homeowners insurance. Homebuyers typically pay state and local property taxes. And you’ll also need homeowner’s insurance to insure the house against theft, damage, or loss, among other things.
3. Including the Mortgage Insurance Premium (MIP). The MIP protects lenders in case the borrower defaults on their mortgage payments. Borrowers pay an upfront MIP of 1.75% of the loan amount, and then they pay an annual MIP that’s typically charged in monthly installments as part of the mortgage payment.
4. Adding the loan term. This is the length of the loan, which is usually 15 to 30 years for an FHA loan.
5. Finally, plugging all the information listed above into an FHA mortgage loan calculator table to estimate the total monthly mortgage cost.
This is what the table for a mortgage calculator for an FHA loan might look like. You can use the table as a template or starting point to fill in the information, adjusting as needed, and then make your calculations.
2023 FHA Loan Mortgage Calculator Table
Purchase Price
Down Payment
Interest Rates
Property Tax
MIP
30-year vs 15-year Term
Total Interest Paid
Recommended: How do FHA 203(k) Home Loans Work?
Examples of FHA Loan Mortgage Calculations
Here are two examples of FHA loan calculations to give you an idea of how the process works. Keep in mind that there might be additional costs to consider, such as closing costs.
Calculate the total monthly mortgage costs: Total Monthly Mortgage Costs = $1,081.03 (Principal & Interest) + $93.75 (MIP) + $250 (Property Taxes) + $75 (Homeowners Insurance) = $1,500.78 The total monthly mortgage cost per month is $1,500.78.
💡 Quick Tip: Don’t have a lot of cash on hand for a down payment? The minimum down payment for an FHA mortgage loan is just 3.5%.
Reasons to Calculate Your FHA Loan Mortgage First
There are a number of reasons why it makes sense to calculate an FHA mortgage before you move forward with such a mortgage. Here are five ways calculating your mortgage can be helpful.
• Determining what’s affordable: Determining the cost of the mortgage can help borrowers search for a home within their price range.
• Financial preparation: Buyers can see how much money they should plan to spend each month. They can then create a budget and financial plan in order to be prepared to meet the monthly payments.
• Comparing loan options: Buyers can look at different loan options to choose the one that works best for them. They can also see how a different interest rate, home price, or down payment amount will affect their monthly cost.
• Preventing surprises: Using the calculator helps borrowers understand what the loan costs will be so they don’t get hit with expenses they weren’t expecting.
• Helping with negotiation: The more informed a buyer is about the various costs associated with the loan and the terms, the better they may be at negotiating the best terms.
Recommended: Home Loan Help Center
Tips on How to Save on Your FHA Loan Mortgage
If you’re interested in getting an FHA mortgage, there are a few things you can do to help get the best deal for your situation.
Build your credit score. This is one of the tips to qualify for a mortgage that it’s good to know. Strengthening your credit may help you get better interest rate terms. Pay off your debts if you can, and pay your bills on time to help build your score.
Shop around for the best interest rate. Different lenders offer varying interest rates for FHA loans. See what you may qualify for. A higher credit score may help you get a better rate.
Consider making a higher down payment. This could potentially help make your overall mortgage amount and monthly payments lower.
Negotiate closing costs. Closing costs are typically 4% to 5% of the home’s purchase price. You may be able to negotiate with the lender to try to lower some of those costs.
Take advantage of down payment assistance programs. Many states and cities offer down payment assistance programs for first-time homebuyers.
Consider mortgage refinance when interest rates drop. If you get a lower rate when you refinance, you can typically reduce your monthly mortgage monthly payments.
The Takeaway
If you’re interested in an FHA loan, an FHA loan calculator can help you figure out the total costs of your loan and your monthly loan payments, which in turn can help you budget and plan for them. For instance, you’ll factor in such costs as homeowner’s insurance and Mortgage Insurance Premium.
Shopping around for the best interest rate and comparing different loan options may also help you save money on an FHA loan.
SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.
Another perk: FHA loans are assumable mortgages!
FAQ
What are the new FHA limits for 2023?
The FHA’s nationwide limit “floor” and “ceiling” for a one-unit property in 2023 are $472,030 and $1,089,300, respectively.
What is the minimum credit score for FHA in 2023?
For an FHA loan, a minimum credit score of 580 and a down payment of 3.5 percent are required. You can still qualify with a credit score as low as 500 if you can increase your down payment to at least 10%.
How is an FHA loan amount calculated?
The FHA loan amount is calculated by determining the maximum loan size that a borrower qualifies for, which is typically based on the borrower’s income, creditworthiness, and the specific FHA loan program’s guidelines. The loan amount is further influenced by factors such as the property’s appraised value and the FHA’s required loan-to-value ratio.
Photo credit: iStock/ridvan_celik
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Mortgages Terms and conditions apply. Not all products are offered in all states. See SoFi.com/eligibility for more information.
*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.
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.
DALY CITY — Prospective Bay Area home buyers are in a tough spot as mortgage rates hit a two-decade high, leaving some prospective home buyers re-evaluating their dreams.
Margarita Pabón is a single mother living in Daly City. She talked to CBS News Bay Area about the concerns she’s facing in her quest to own a home.
“My big dream is to buy a house, but unfortunately, opportunities are becoming increasingly limited,” Pabón said.
Having lived in her Daly City apartment for nearly 17 years since relocating from Nicaragua, Pabón’s desire is to purchase a home in the same neighborhood where her son attends school. However, surging mortgage rates have made this dream nearly unattainable. The rates hit an astounding 8% this week, a figure not seen since 2000.
Margarita’s realtor, Maria Jandres, describes the current situation as a nightmare for first-time homebuyers.
“In 2021, the record low-interest rate was 2.65%. But now the rates have increased to 7.9%, which is incredibly high,” said Jandres.
With the market becoming increasingly complicated and mortgage rates soaring, Pabón and Jandres are working together to navigate these challenges on a modest income. Jandres encourages clients to explore creative solutions.
“I’m working hard to empower them and tell them that maybe they can also work as a family, gather their incomes together, and create a budget they can afford,” Jandres added.
Putting the situation into perspective, Jandres explained that a buyer purchasing a $400,000 home with a 20% down payment would face a monthly payment nearly $1,000 higher than it would have been just two years ago.
However, in the Bay Area, the cheapest homes are priced at least $900,000. Consequently, Pabón — along with her son and their loyal dog Toby — continues to reside in their current apartment, holding onto a fading dream.
“Every day, the dream becomes more impossible to achieve,” she said, echoing a sentiment held by many Bay Area residents.
Many students take out loans to pay for college. While federal student loans don’t require a credit check, private student loans typically do. And, since students often don’t have much credit history, they typically require a cosigner. A cosigner can be a parent but it doesn’t have to be. You can ask other family members, friends, or even mentors to cosign your student loan.
Since a cosigner will be responsible for paying back your loan in the event you’re unable to, it’s important to choose someone you feel comfortable entering a financial agreement with. A cosigner with good credit and high income could result in lower interest rates on your loans.
Read on for a simple, step-by-step guide on how to get someone to cosign your student loan.
How to Ask Someone to Cosign Your Private Student Loan
You may have someone in mind who would make a good cosigner. The problem is, how do you ask someone to cosign a loan? It’s a big ask, and approaching the topic can be intimidating. Not to worry. What follows are some tips that can help ensure you come to the conversation prepared.
Recommended: Avoidable Mistakes for Choosing Student Loan Cosigners
1. Research Your Financial Aid Options First
Before you ask someone to cosign a private student loan, it’s a good idea to explore all of your college funding options. Around 85% of students receive some form of financial aid to pay for college.
Filling out the Free Application for Federal Student Aid, or FAFSA, will give you access to any federal student aid you may be eligible to receive. This might include grants, work-study, federal subsidized loans, federal unsubsidized student loans, and even private scholarships. Completing the FAFSA is free, and it’ll also show potential cosigners that you’ve done your due diligence and have tapped all your available options to finance your education before asking for help.
Recommended: 11 Strategies for Paying for College and Other Expenses
2. Explain Why You Need a Cosigner
Once you’ve decided who you want to ask to be your cosigner, it’s important to come to the table with a clear explanation of why you need a cosigner and what costs the loan will cover. You’ll want to be prepared to share details on your own savings, debts, and credit history. This shows a cosigner why you need help and what kind of risk they would be taking on.
Providing a clear picture of what you have and what you need demonstrates that you’re taking your education and financial goals seriously. Having followed tip #1, you’ll be in a position to show the funding gap between your own funds plus any aid you’ve received and the cost of attendance at your chosen college.
3. Outline Your Plan for Repaying the Loan
When asking someone to cosign a student loan, it’s a good idea to let them know that you have a plan for repayment and exactly what that plan is. Some private lenders allow you to defer making payments until after graduation, while others require you start making interest-only payments while still in school. Either way, you’ll want to have an idea for how you will make those payments on your own.
Failing to make payments on time each month will impact both you and your cosigner, so it’s a good idea to also make a backup plan in case something doesn’t work out. This might be getting a part-time job in any field if you find that it takes longer than expected to get hired in your chosen field.
Demonstrating your plan for repayment can help build your potential cosigner’s confidence and help them feel more comfortable about entering into a cosigner agreement with you.
Recommended: 6 Strategies to Pay Off Student Loans Quickly
4. Make Sure They Understand What They’re Agreeing To
Before moving forward to a written agreement, it’s a good idea to go over the requirements and responsibilities for being a cosigner. For starters, your cosigner must meet a minimum credit score and demonstrate a certain minimum monthly income. The exact requirements will depend on the lender.
You’ll also want to let them know that, as a cosigner, they have a legal obligation to make sure the loan is repaid, and that any late or missed payments on the loan can impact both your and their credit scores.
While these risks can feel intimidating to bring up, outlining your plan to avoid loan default can help address their concerns and show you’re taking the commitment seriously.
Recommended: Ca$h Course: A Student’s Guide to Money
5. Make a Plan for a Cosigner Release
A cosigner release effectively removes a cosigner from a loan, freeing them from any continued responsibility for repayment of your loan. Private lenders may offer the option for a cosigner release if you, at a certain point down the road, meet certain credit requirements and have a strong track record of on-time payments.
Discussing a plan or timeline for when your cosigner will be released from their responsibilities shows that you’re being considerate of the risks of being a cosigner and the impact it can have on their finances. While you may not have the strongest qualifications as a borrower today, your creditworthiness can build over time as you consistently make on-time loan payments.
You might also have the option of refinancing your student loan and, in the process, releasing your cosigner from the original loan agreement.
6. Give Them Time to Think
Cosigning a loan is a serious commitment and whomever you ask may need some time to think over the decision. For this reason, it’s a good idea to approach your potential cosigner early on so you have plenty of time to talk through the agreement and, if necessary, pursue another option.
Handling Potential Concerns and Objections
Cosigners will likely have questions and potential concerns about how the agreement could impact their finances, as well as your relationship. After you’ve made your pitch, it’s important to hear them out and be open to their input to reach an agreement that works for you both.
If a cosigner has objections that you can’t resolve, it may be time to seek out a different cosigner.
Formalizing the Cosigner Agreement
If the person you ask to cosign your loan says “yes,” it’s time to find the right private student loan for your needs. It’s generally a good idea to shop around and compare rates and terms from different lenders, including banks, credit unions, and online lenders. Some lenders allow you to pre-qualify for a student loan online, without impacting your (or your cosigner’s) credit score. This allows you to compare offers, go over rates and terms with your cosigner, and decide which loan is the best fit.
When you officially apply for the loan, you and your cosigner will need to provide a number of financial documents to the lender, so be sure to give your cosigner time to gather all their paperwork.
Repaying the Loan Responsibly
When you take out a private student loan, you’ll typically have a choice of several repayment plans. Which one you choose can have a significant impact on both your monthly payment and total cost of the loan. Options may include:
• Immediate repayment This means you make full monthly payments while still in school. Doing so will minimize the interest you pay, resulting in the greatest savings.
• Interest-only repayment Here, you’ll pay only the interest on your loan while you’re still in school. Payments will be lower than immediate repayment but you won’t chip away at your loan balance (or save as much on interest).
• Partial interest repayment This involves making a fixed monthly payment while still in school that only covers part of the interest you owe. Payments will be lower than interest-only plan but your loan balance will grow.
• Full deferment Here, you’ll pay nothing while you’re enrolled in school. During this time, though, your loan balance grows.
Once you choose a plan, you’ll want to create a budget for the minimum payment you owe each month. It’s also a good idea to enroll in autopay, to ensure you never miss a payment. Some lenders also offer a rate discount if you enroll in autopay.
After you’ve graduated and your finances allow, you may be able to make extra principal-only payments — this can help lower the total interest you pay over the life of the loan.
The Takeaway
If you need a cosigner on your student loan, you have options. Whether you choose a parent, other family member, friend, or mentor, it’s important to be transparent about the requirements and risks that go into being a cosigner.
Coming to the conversation prepared can build trust and confidence with potential cosigners and put you on the path to funding your education.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
FAQ
How do you convince someone to cosign a loan?
You’ll want to be transparent, as well as fully prepared for the conversation. Explain how the loan will support your long-term educational and financial goals, how you plan to make future loan repayments, and why you are a trustworthy borrower.
Who can I ask to be my cosigner?
It’s common for students to use parents or family members as cosigners, but there are no rules stating that your cosigner must be a relative. You can also ask mentors or family friends who are invested in your success. Just keep in mind that a cosigner will need to meet the lender’s financial and credit requirements.
Can I hire someone to be a cosigner?
There are businesses that advertise online that they will cosign your student loans for a fee, but borrower beware. These are often scams in which the “cosigner” requests cash payment in advance, then disappears. Or, the business might be legitimate but will require you to give them a portion of the loan in exchange for cosigning. Generally, it’s not worth the risk or cost.
What percentage of student loans are cosigned?
Roughly 92% of undergraduate private loans are cosigned. About 66% of graduate school loans from private lenders require a cosigner.
How do I assess my creditworthiness before seeking a cosigner?
To assess your creditworthiness, you’ll want to check your credit score and take a look at your credit reports.
You can often access your credit score for free through your bank or credit card company (check your statements on log into your online account). You can access your credit reports from the three main consumer credit bureaus (Equifax, Experian, and TransUnion) for free at AnnualCreditReport.com.
Photo credit: iStock/NoSystem images
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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 .
There is a sinking feeling in your gut that comes with credit card debt, especially when it starts to feel unmanageable. While negotiating a credit card settlement might not sound like a fun solution, there are scenarios when it may make sense. Let’s dive in.
The Difference Between Secured and Unsecured Debt
First, let’s talk about the type of debt a credit card typically is. When a credit card company issues a credit card, it’s taking a big chance on getting its money back, plus interest. It’s more than likely that the credit card you have is considered “unsecured.”
All that means is that it isn’t connected to any of your assets that a credit card company can seize in the event that you default on your payments. Essentially, the credit card company is taking your word for it that you are going to come through with the monthly payments.
Secured debt works a bit differently. They’re backed by an asset, like your car or home. If you default on a secured debt, your lender could seize the asset and sell it to pay off your debt. Mortgages and auto loans are two common types of secured debt. 💡 Quick Tip: With lower fixed interest rates on loans of $5K to $100K, a SoFi personal loan for credit card debt can substantially decrease your monthly bills.
Credit Card Debt Negotiation Steps
The process of negotiating credit card debt usually begins when you have multiple late or skipped payments — not just one. A good first step is to find out exactly how much you owe, and then research the different options that may be available to you. Examples include a payment plan, an increase in loan terms or lowered interest rates.
Once you have that information, you’re ready to negotiate. You can start by calling your credit card company and asking for the debt settlement department. Or, you can send a note by email or regular mail.
You may have to go through a number of customer service reps and managers before striking a deal, but taking the initiative can show creditors that you are handling the situation honestly and doing what you need to do.
When you do reach an agreement, be sure to get the agreed-upon terms in writing.
Types of Credit Card Debt Settlements
Lump Sum Settlement
This type of agreement is perhaps the most obvious option. Essentially, it involves paying cash and instantly getting out of credit card debt. With a lump sum settlement, you pay an agreed-upon amount, and then get forgiveness for the rest of the debt you owe.
There is no guarantee as to what lump sum the credit card company might go for, but being open and upfront about your situation could help your cause.
Workout Agreement
This type of debt settlement offers a degree of flexibility. You may be able negotiate a lower interest rate or waive interest for a certain period of time. Or, you can talk to your credit card issuer about reducing your minimum payment or waiving late fees.
Hardship Agreement
Also known as a forbearance program, this type of agreement could be a good option to pursue if your financial issues are temporary, such as the loss of a job.
Different options are usually offered in a hardship agreement. Examples include lowering interest rate, removing late fees, reducing minimum payment, or even skipping a few payments.
Why a Credit Card Settlement May Not Be Your Best Option
Watching your credit card balance grow each month can be scary. Depending on your circumstances, a settlement may be the best solution for you.
However, it’s not without its drawbacks. For starters, a settlement may result in your credit card privileges being cut off and your account frozen until a settlement agreement is reached between you and the credit card company.
Your credit score could take a hit, too. This is because your debt obligations are reported to the credit bureaus on a monthly basis. If you aren’t making your payments in full, this will be noted by the credit bureaus.
That said, by negotiating a credit card settlement, you may be able to avoid bankruptcy and give the credit card company a chance to recoup some of its losses. This could stand in your favor when it comes to rebuilding your credit and getting solvent again.
Solutions Beyond Credit Card Debt Settlements
Personal Loan
Consolidating all of your high-interest credit cards into one low-interest unsecured personal loan with a fixed monthly payment can help you get on a path to pay off the credit card debt. Keep in mind that getting a personal loan still means managing monthly debt payments. It requires the borrower to diligently pay off the loan without missing payments on a set schedule, with a firm end date.
For this reason, a personal loan is known as closed-end credit. A credit card, on the other hand, is considered open-end credit, because it allows you to continue to charge debt (up to the credit limit) on a rolling basis, with no payoff date to work towards. 💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.
Transferring Balances
Essentially, a balance transfer is paying one credit card off with another. Most credit cards won’t let you use another card to make your payments, especially if it’s from the same lender. If your credit is in good shape, you can apply for a balance transfer credit card to pay down debt without high interest charges.
Many balance transfer credit cards offer an introductory 0% APR, but keep in mind that a sweet deal like that usually only lasts about six to 18 months. After that introductory rate expires, the interest rate can jump back to a scary level — and other terms, conditions, and balance transfer fees may also apply.
Credit Consumer Counseling Services
Credit consumer counseling services often take a more holistic approach to debt management. You’ll work with a trained credit counselor to develop a plan to manage your debt. Typically, the counselor doesn’t negotiate a reduction in debts owed. However, they may be able to have your loan terms increased or interest rates lowered, which would lower your monthly payments.
A credit counselor can also help you create a budget, offer guidance on your money and debts, provide workshops or educational materials, and more.
Many credit counseling agencies are nonprofit and offer counseling services for free or at a low cost. You can search this list of nonprofit agencies that have been certified by the Justice Department.
The Takeaway
When credit card debt starts to become unmanageable, negotiating a credit card debt settlement may be an option to consider. There are different types of settlement options to consider. Understanding what’s available to you — and what makes sense for your financial situation and needs — can help you make an informed decision. If a settlement isn’t right for you, there are other solutions, such as a personal loan or credit counseling services, that may be a better fit.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
