Can’t Pay Your Student Loans? Here’s What to Do
When you can’t afford to pay your student loans, it can be a huge stressor. What happens if you don’t pay your student loans at all, or stop paying them? How can you afford to make payments if your income doesn’t change?
These are common questions that students and graduates ask all the time. Here’s what to do if you find yourself unable to make student loan payments:
COVID-19 Student Loan Forbearance: When will it end?
Last Updated: July 16th, 2021
The U.S. Department of Education Office of Federal Student Aid is actively monitoring the coronavirus/COVID-19 pandemic. At this point, the COVID-19 Emergency Relief Flexibilities will be extended through at least September 30, 2021. This includes but isn’t limited to:
- Suspension of loan payments
- 0% interest rate
- Stopped collections on all defaulted loans
Discuss options with your loan servicer
It’s easy to panic, procrastinate, or simply ignore your student loans when you can’t make your payments. When you feel any of these starting to happen, it’s a good time to contact your loan servicer. The federal government and most private lenders assign every borrower a student loan servicer, a.k.a. someone who acts as the middleman between you and the federal government that loaned you money. They collect your student loan bills and keep a record of if you’ve paid on time.
You can find out who your student loan servicer is by logging into your My Federal Student Aid account. They can also help you with switching repayment plans, certifying for forgiveness programs, and signing up to postpone loan payments.
Consider changing your repayment plan
If keeping up with your federal student loans is keeping you up at night, you might want to consider changing your repayment plan. Most federal student loans are eligible for income-driven plans, or perhaps your servicer will elect the 10-year standard student loan repayment plan for you. Keep reading to learn which plan might be right for you — it’s not worth losing any more sleep over.
Different types of repayment plans
Federal loans have a few different repayment options — standard, graduated, and extended repayment. The repayment period for standard and graduated payments are up to 10 years for individual loans or up to 30 years if your loans are consolidated. And extended repayment plans go up to 25 years. We’ll go over this in more detail below, but keep in mind:
- Standard repayment plans have a fixed monthly payment
- Graduate repayment plans begin at a lower amount and gradually get higher
- Extended payment plans let you choose whether your payments are fixed or graduated
Standard repayment plans
The standard repayment plan is the basic repayment plan for federal student loans. It saves you money over time because although your monthly payments are fixed at a higher rate than other plans, you’ll pay it off in the shortest amount of time. (Remember, payments are fixed for up to 10 years and between 10 and 30 years for consolidated loans). Because of this, you’ll pay less interest over the life of the loan.
Graduated repayment plans
If your income is relatively low right now but you expect it to grow over time, you might consider the graduated repayment plan. It works by starting with lower monthly payments that increase every two years. Payments are made for up to 10 years for all loan types, except consolidated loans. The payment will also never be less than the amount of interest that accrues between your payments.
Income-driven repayment plans
When your federal student loan payments are too high compared to your income, consider repaying your loans under an income-driven repayment plan. If your income qualifies as low enough, your payments could even be as low as $0 per month. And most federal student loans are eligible for at least one income-driven repayment plan. They work by setting your monthly payment to an amount that is intended to be affordable based on your income and family size. There are four different types of income-driven repayment plans: Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), and Income-Contingent Repayment Plan (ICR Plan).
Pay As You Earn Repayment Plan (PAYE)
The PAYE Plan (Pay As You Earn Repayment Plan) is an income-driven repayment plan that maxes out your federal student loan payments at 10% of your discretionary income and forgives your remaining balance after 20 years of repayment. It’s a great option for anyone who doesn’t expect their income to increase much over time, has graduate school debt, or for married couples who both have incomes.
Revised Pay As You Earn Repayment Plan (REPAYE)
The REPAYE Plan (Revised Pay As You Earn Repayment Plan) is also an income-driven repayment plan that caps federal student loan plans at 10% of your discretionary income. It also forgives your remaining balance after 20 or 25 years of repayment. Compared to other income-driven options, REPAYE offers the best combo of low monthly payments and availability to borrowers. It’s a great option for people who are single, have low graduate school debt, expect high-income potential, and don’t qualify for other income-driven repayment plans.
Consider student loan refinancing
Student loan refinancing has the possibility of saving borrowers money by replacing their existing student loan debt with a new, lower-cost loan through a private lender. To qualify, you typically need a credit score in the high 600s (though, ideally higher), a steady income, and a co-signer who qualifies if you can’t meet the first two requirements.
It’s free to refinance student loans, and you may be able to decrease your monthly payment or pay off your debt faster with this option. But, it’s important to do your research before committing!
Make sure you’re getting a better interest rate and that you’ve chosen the right company for your financial situation. And our advice – probably don’t refinance while the government forbearance is in effect. (Remember that date from earlier, Sept. 30, 2021?). The COVID-19 Emergency Relief Flexibilities will be extended through at least September 30, 2021, so take advantage while you can.
If you do decide to proceed, keep in mind you’ll lose access to income-driven repayment plans, loan forgiveness programs, and other federal perks.
Look into deferment or forbearance options
When you’re unable to repay your student loans due to economic hardships or having trouble finding work, deferment or forbearance might be an option for you.
With deferment, you won’t have to make any payments for up to three years. However, you won’t be making any progress towards forgiveness or paying back your loan either.
Forbearance can postpone or reduce your payments for up to 12 months if you meet certain eligibility requirements. Both options require the borrower to continue making payments until their request is approved.
See if you’re eligible for student loan forgiveness
Another viable option that might be available to you is student loan forgiveness. This means you’re no longer required to make payments on your loans due to your job. There are different types of forgiveness, including but not limited to:
- Public Service Loan Forgiveness (PSLF). This is available for employees of government or nonprofit organizations after you have made 120 qualifying monthly payments during a set repayment plan while working full-time.
- Teacher Loan Forgiveness. If you’re a full-time teacher for five complete and consecutive years in a low-income elementary, secondary school, or educational service agency, you may qualify for forgiveness of up to $17,500 on your direct loan.
- Closed School Discharge. If you’re enrolled in a school that closes either while you’re enrolled or soon after, you could be eligible for discharge of your federal student loans.
What if I can’t pay my student loans?
Of course, this question likely crossed your mind. If you fail to make a payment on your federal student loan, it can, unfortunately have serious negative impacts on your finances. The first time you miss a payment, your loan becomes delinquent, which is another way of saying you’re behind on your payments. Your loan will stay that way until all your payments are up to date, and each missed payment could result in a late fee.
If you’re more than 90 days past due, your delinquent loan will be reported to credit bureaus. This will negatively impact your credit score, thus making it harder to open a new credit card, borrow money, or even rent an apartment.
If your federal loan is more than 270 days past due, it enters what is called default, the failure to meet the legal obligations of a loan. This could lead to extreme consequences such as wage garnishment or other legal action.
What if I never pay my student loans?
There’s a big difference between “I can’t pay” and “I’ll never pay” my federal student loans.
If you never pay, this will lead to default and damage your credit history. Default means you are in breach of the legal contract you agreed to with your lender. When a loan is in default, a series of negative consequences can ensue, including wage garnishment, withheld tax refunds, garnishment of Social Security payments, late fees, growing unpaid interest, and collection costs. In other words, all things you want to avoid. Don’t be afraid to seek free financial help if you need it!
Mortgage Refinancing: Everything You Need to Know
Refinancing a mortgage gives homeowners the opportunity to save money or access equity. Keep reading to understand the process and start setting your home refinancing goals.
What does it mean to refinance a mortgage?
A mortgage refinance is the process of replacing your current home loan with a new one.
Oftentimes this is done to get a mortgage with a lower interest rate or reduce monthly payments. Other times it’s so people can pay off a loan faster or switch from an adjustable-rate to a fixed-rate loan.
How to refinance a mortgage
When you first buy your home, you get a mortgage to pay for it and all of that money goes directly to the home seller. The process of refinancing a home, however, is when you get a new mortgage and that money goes to paying off the balance of your old home loan instead of to the home seller.
To get started, research which lenders near you offer the best loan terms compared to your existing mortgage. Go with the lender that will best improve your financial situation. Then, you’ll just need to qualify for the loan the same as you would have done when applying for the original mortgage.
Simply fill out an application with a lender, and go through what is called an underwriting process (a.k.a. when an individual takes a financial risk for a fee). Once approved, you’ll close on the house the same as you would have when you first bought it.
When to refinance your mortgage
The goal of refinancing is always to save money, or at least tap into equity. We’ve listed a few common reasons below as to why someone might want to start the process. See if these fit with your own personal goals!
- Reduce your monthly payment. You’ll be able to pay less each month if you refinance into a loan that has a lower interest rate. This typically results in big savings as time goes on.
- You could pay off the loan faster. If you refinance for a 15-year instead of a 30-year mortgage, you’ll end up paying off the loan in half the time. Plus, you’ll pay less interest over the life of the loan. But on the downside, 15-year mortgages tend to have higher payments.
- Leverage equity. Refinancing allows you to borrow more than you currently owe on your loan, so a lender will give you a check for the difference. This process is called a cash-out refinance, and people often get them alongside a lower interest rate.
- Go from an adjustable-to a fixed-rate loan. The advantage of this is fixed-rate loans stay the same over time, unlike adjustable-rates which can increase and fluctuate. This can provide helpful financial stability since you can plan for paying the same payment amount each month.
How to calculate your break even point
Before you begin the refinancing process, you should figure out if it makes sense for you financially. Do so by calculating your break-even point to determine how long it will take for the savings from refinancing to be greater than the costs.
Calculating your break-even point is simple math: divide your monthly savings into the costs it would require to refinance:
Number of months to break even = Closing costs / Decrease in monthly payments
If your break point is relatively close to the time you start refinancing, it would probably be worth the costs. A shorter refinancing timeline allows you to see the benefits for a greater length of time before you sell or refinance again. If your calculation shows it would take a long time, consider how long you even want to live in the house to actually reap the savings.
How to find today’s mortgage refinance rates
Most financial institutions, such as Wells Fargo or Bank Of America, list current mortgage refinancing rates on their websites. You will also find this out when comparing different lenders.
According to Bankrate.com, here are the current mortgage refinance rates:
|30-Year Fixed Rate||3.100%||3.250%|
|20-Year Fixed Rate||3.000%||3.170%|
|15-Year Fixed Rate||2.390%||2.610%|
|10/1 ARM Rate||3.140%||4.030%|
|7/1 ARM Rate||2.990%||3.880%|
|5/1 ARM Rate||3.000%||4.030%|
|30-Year VA Rate||2.660%||2.860%|
|30-Year FHA Rate||2.800%||3.650%|
|30-Year Fixed Jumbo Rate||3.110%||3.170%|
|15-Year Fixed Jumbo Rate||2.390%||2.450%|
|7/1 ARM Jumbo Rate||3.080%||3.810%|
|5/1 ARM Jumbo Rate||2.740%||3.870%|
Frequently Asked Questions (FAQs)
How long does it take to refinance a mortgage?
It normally takes between 30 – 45 days to complete a refinance. That said, no lender will be able to give you a precise timeline. Things like appraisals, inspections, and other third parties can delay the process. A refinance could also be longer or shorter depending on the size of your property and the complexity of your finances.
Can you refinance a reverse mortgage?
A reverse mortgage is a loan for older borrowers who want to tap into their home equity. It’s different from a standard mortgage because instead of a borrower making direct payments to a lender, a reverse mortgage allows for a lender to make payments to the borrower.
You can refinance a reverse mortgage, but it only makes sense in specific situations.
We’d give a thumbs up to a reverse mortgage refi if:
- It’s been a long time since you closed on your home and interest rates have lowered
- You want to switch from an adjustable to a fixed rate
- Your home has appreciated in value and there’s extra equity you can tap into
- You want to add your spouse to the loan because they aren’t on the original loan
We’d give a thumbs down to a reverse mortgage refi if:
- The interest rate would be higher than your existing mortgage
- You’d end up paying more in closing costs and other fees such as mortgage insurance premiums, appraisal fees, credit report fees, pest inspection fees, survey fees, and loan administration fees. And that’s just naming a few.
Can I still refinance with late mortgage payments?
If you miss a payment or the payment is received 30 days or more after the due date, you will be disqualified from the refinance process. This indicates to the lender you may have financial trouble or are unable to manage your mortgage payments.
Can I refinance my mortgage without a job?
Most times lenders won’t approve unemployment as proof of income, but there are a few ways to get around not having a job when planning to refinance.
- Find a co-signer. This is someone who will pledge to pay the lender any mortgage payments you can’t afford. Having one assures the loan will be repaid and greatly increase your chances of being approved by a lender without having any income.
- Speak with a housing counselor. If you’re completely lost at where to begin, turn to a professional. They can guide you through what the process would look like, and the U.S. Department of Housing and Urban Development offers low-cost or free advice.
- Show other documentation. Prepare to show your lender you’re financially responsible in other ways. This could be showing them documents including bank account information, tax returns, proof of insurance, proof of unemployment, and proof of any additional income (like freelance work or investment income).
- Communicate with your lender. Be honest with them about your goals and see if they can offer a different repayment plan. It never hurts to ask!
What documents do I need to refinance my mortgage?
Most lenders will require you to provide all your financial details and account information, including your credit report. You’ll also need to show any account statements for your mortgage, home equity lines of credit, car loans, and student loans you might have.
A lender will also need to see a few documents showcasing your proof of income, including your W-2s, tax returns, 1099s, employment history, income history, and any recent pay stubs.
After providing all of that information, your lender will want to see you have a homeowners insurance plan that will be enough to cover their requirements. Which means a lender might order a refinance appraisal on your home. Plus, if you have title insurance, your lender will want to see that too.
Student Loans: Everything You Need to Know
Financial barriers shouldn’t get between you and your education. If you need money for school, you may consider applying for a student loan.
We’ve got you covered on understanding how they work.
What is a student loan?
A student loan will allow you to borrow a large sum of money and pay it back with interest at a later date. With higher education becoming more and more important in today’s job economy, many students are utilizing this choice.
Grants and scholarships are also a great option if you can get them as they don’t need to be paid back. Loans can also help make up the difference if you don’t win a full-ride.
See video: Abby’s Corner: What Are Student Loans?
Types of student loans — what are my options?
There are two types of student loans: federal and private.
The biggest difference is federal loans are issued by the U.S. government, while private loans are issued through various different sources, such as schools, banks, and credit unions.
A federal student loan is lent by the U.S. government. This is the most popular choice because it is often the most affordable one in terms of paying it back.
They also typically come with more benefits compared to private lenders. Some of these advantages include:
- Fixed and lower interest rates
- The option to borrow money without a cosigner
- A repayment plan that starts six months after you leave college (or attend less than half the time)
- A possibility that some of your loans can be forgiven (they won’t need to be paid back) if you work in a certain field like teaching or public service.
A private student loan comes from a private lender, like a bank, credit union, or a non-bank financial institution. These are a good alternative to federal loans if you are ineligible to receive money from the government or you need more money than a federal loan will provide.
Here are some other facts to know about private loans:
- They often require a cosigner
- You loan won’t be subsidized, so the loan will begin accruing interest as soon as you borrow money
- They come with fixed or variable interest rates
- You may have to start paying back the loan while still in school
- The interest might not be tax deductible
Parent PLUS loans (Direct PLUS loans)
A Parent PLUS or Direct PLUS loan is an option for parents to take out for their child, or dependent. This process requires the parents meet certain requirements and have good credit standing.
The maximum amount of the loan you can borrow is equal to the cost of attendance at the school the child will attend, minus any financial assistance they might receive.
Unsubsidized vs. subsidized student loans
There are two categories for student loans: unsubsidized and subsidized. Whichever you take out will determine how much you owe after graduating. If you qualify for a subsidized loan, you’ll save more money in interest.
Here are a few other key differences to note:
Direct Subsidized Loan: This is when the government pays the interest of your loan while you’re in school and during any period of deferment. These are available only to undergraduates who prove financial need. The amount of the loan is determined by FAFSA (The Free Application for Federal Student Aid).
Direct Unsubsidized Loan: This loan is given when the student does not demonstrate financial need. The borrower is responsible for the interest that accrues when they’re in school, and after. This type of loan is available to undergraduates and graduate students. The amount is determined by the cost of attendance, plus any other financial aid given.
How student loan interest works
Interest rates are one of the most complicated aspects of any student loan. When the new loan is first issued, the borrower (a student or parent) signs a promissory note that details the terms of the loan.
It’s very important to read this note in its entirety and also make sure you understand all of it, as it explains how much you owe and when your payments will be due.
Here are some key things to look out for:
- The amount borrowed. This may seem obvious, but know the total amount borrowed in each of your loans.
- The disbursement date. This is the date the funds will arrive (and when interest starts accruing).
- Interest rate. This is how much you will have to pay to borrow the funds.
- How interest accrues. This tells you if the interest is charged daily or monthly.
- First payment date. This is when you have to make your first loan payment.
- Payment schedule. This is how many payments you have to make
How to apply for student loans
The process to apply for federal versus private student loans is very different. Here’s what to know:
Federal Loans: Borrowers can get a student loan by filling out the free application for FAFSA.
If you’re a dependent student, use your parent or guardian’s financial information when filling out the form. If you’re an independent student, use your own.
You’ll need your federal tax statements, bank statements, pay stubs, and employment information to complete the application.
If you’re admitted to a program, your school will send a financial offer that may include aid and any federal loans.
Private Loans: The borrower goes straight to the bank or financial institution where they hope to get the loan.
You and your cosigner can apply with a single credit check, along with other information depending on the loaner. If approved, the funds will be sent to the college or university each semester as requested.
Paying off student loans & debt relief — what are my options?
Depending on your financial situation, paying off your student loans can seem like a daunting task.
Remember – if you have federal loans, you won’t need to pay them back while you’re still in school and there’s typically a six month grace period to begin repayment after you graduate.
Whichever type of loan you have, your lender will send you a schedule once the repayment period begins. Each schedule varies by how much you have to pay per month, but the more you can pay, the less you’ll pay overall.
How to pay off student loans quickly
There is no magic answer to paying off your student loans entirely just like that. But it doesn’t have to be overwhelming either! Tackling student loans takes time and a plan. Start by making a budget for yourself that includes throwing money at your student loan each month. Apps like Mint or Wally are great for keeping you on track. Then, try to pay more than the minimum payment when you have extra cash. Bigger payments equal owning less in a shorter amount of time. Use a student loan payoff calculator to help you figure out how extra payments will help chip away at the total loan amount you owe. And be wary of student loan forgiveness! It may sound like a dream solution, but many times there are unrealistic requirements and forgiveness isn’t always guaranteed even if you do meet them. You’re better off aiming for a job that will actually pay you enough to support yourself.
How to defer student loans
There are few instances when deferring student loans may be a good idea, such as when you’re experiencing economic hardship, graduate fellowship deferment, military service, medical reasons, or unemployment. To apply for a federal student loan deferment, visit the Federal Student Aid website to figure out which type you’re eligible for. You can fill out an application there as well. Private student loans are typically more limited, and you’ll need to reach out to your lender directly to learn about your deferment options.
Deciding whether or not to refinance your student loan is a big decision. The process of refinancing is when you take your loans, whether federal, private, or a mix of both, to another lender who pays them off for you. The goal is to secure a better interest rate and payment plan than your original terms.
(Embedded video: WHY, WHEN and HOW Should You Refinance Your Student Loans? | Ask Abby – Credit & Debt https://youtu.be/s1xXBSY4tec)
Be careful about refinancing federal loans
If you have federal student loans, it might not be a wise idea to refinance. If you do, you could lose certain protections, such as deferment or income-driven repayment, that come with a federal loan. You can only refinance federal loans with a private lender, and the only reason you should go down this path is to save more money than you would with the government. Be sure to review offers from multiple different private lenders to find the best deal.
The federal government has created specific programs to ensure you’re able to pay back your student loans. Here are a few options:
- Income-Driven Repayment (IDR) Plans: These are a viable option for people struggling to afford their monthly payments. With this plan, you’ll have a longer repayment period and your monthly payment will be a percentage of your discretionary income. Therefore, you can significantly decrease your minimum payment with this plan.
- Interest and Payment Waivers: Due to the current global pandemic, the government is suspending payments and waiving interest on federally held loans for six months (retroactive to March 13, 2020).
- Potential Loan Forgiveness: Depending on your profession, you could qualify for tax-free loan forgiveness. People who work in public service or for a non-profit are eligible.
A student loan counseling service could help you organize your finances if you’re struggling to pay back your loans. Or if you’re just completely lost in the whole process! Take the expert advice if you need it–they’ll help you make all the right decisions and possibly save money too.
What happens if you don’t pay student loans?
If you are unable to make your student loan payments, or your payments are late, your loan may go into default. In other words, default is what you call a loan when the borrower doesn’t repay the loan according to the terms agreed upon. When this happens, your default status will be reported to the national consumer reporting agencies (a.k.a. credit bureaus) which will damage your credit report. It will also make it harder to borrow money in the future. You could also be at risk for required payment through your wages and withholding your tax refunds.
Do student loans affect my credit score?
Similar to other loans, student loans do affect your credit score. If you pay them back as agreed, it’s good for your credit. If not, well, it could hurt it.
Payday Loans: Everything You Need to Know
Payday loans are an option for anyone in a sticky financial situation. But, they come at a cost.
Keep reading to learn more about how they work and if getting one is the right decision for you.
What is a payday loan?
A payday loan is a short-term, high-cost loan that you can use to cover any immediate cash needs. They’re designed to cover you until your next paycheck comes, hence the name.
You only need to show proof of income and an active bank account to get one.
How payday loans work
Payday loans work differently than other consumer and personal loans because you don’t need to have collateral to get one. You work with a physical branch or online vendor who will loan you cash based on your current income.
The laws in each state vary for how much you can borrow and how much the lender can charge in interest rates and fees. Once approved, the funds will appear in your bank account and you’ll need to repay the loan in full, plus fees, by your next paycheck.
Be sure to check out the specific rules where you live before moving forward with the process.
Pros and cons of payday loans
Payday loans are definitely a risky business. It’s important to understand what you’ll be getting and giving in return before applying.
The best part about a payday loan is it does give you a large sum of cash, which can be very helpful in an emergency situation. Plus, you only need to show proof of income and an active bank account to get one – which means your credit score (good or bad) doesn’t affect anything.
More times than not, payday loans set people up for greater debt. Because the process to obtain a loan is so easy, many people become reliant on them as a way to make ends meet.
The loans are due back so quickly and have such high fees, it can actually backfire and end up costing you more.
For example, the cost of a loan is usually $15 for every $100 borrowed. That means an interest rate of 15%. But because you have to pay back the loan in two weeks, the 15% charge equals an annual percentage rate (APR) of 400%! Yikes.
For comparison, a credit card APR is typically only 12-30%.
How to get a payday loan
To start, a payday lender will verify your proof of income and bank account information.
You’ll also need to have a valid ID and show you are at least 18 years old. The loan funds will arrive in your account within 24 hours and will need to be paid back immediately after your next payday, so typically in two weeks and up to one month.
The loan amount is determined by the amount of money you earn and lenders will charge a very high amount of interest.
What you need for a payday loan
It’s fairly easy to get a payday loan–you just need a job, valid ID, and to be at least 18 years old. A pay stub will work as proof of income.
It is possible to be rejected from getting a payday loan, though. Here are a few reasons why that could happen:
- You don’t earn enough money. Lenders often require borrowers to make at least $500 a month.
- Lenders think you won’t be able to repay the loan. If a lender suspects you aren’t worth the risk, they won’t loan you the cash.
- You already have outstanding loans. Many lenders are able to check if you’re borrowing money from somewhere else already.
- You are active-duty military. According to federal law, payday lenders cannot make short-term loans at more than 36% APR to military members.
- You’ve recently gone through bankruptcy.
- You haven’t been employed long enough to meet lender requirements.
- You have recently bounced checks.
- Your bank account hasn’t been open for a long enough amount of time.
Is a payday loan secured or unsecured?
Payday loans are unsecured personal loans because lenders charge borrowers a very high amount of interest and do not require any collateral.
Are payday loans fixed or variable?
Payday loans work by having lenders charge a fixed fee that is typically much more expensive than other forms of credit.
Can you get a payday loan with unemployment?
If you’re unemployed, a payday loan might look very tempting. But, because lenders require a consistent source of income to qualify for a loan, you probably won’t be able to get one.
Unemployment benefits are only offered for a limited amount of time, so it doesn’t look very appealing to lenders. Seasonal workers, however, are more likely to obtain a payday loan.
What happens if you don’t pay back a payday loan?
If you can’t pay back your payday loan, lenders will begin to call you and send letters from their lawyers to try to get the money.
Or, they could outsource the loan to a debt collector which could result in a civil lawsuit. They can even try to continue to withdraw money from your bank account, because they have that information already.
Hard Money Loans: Everything You Need to Know
If you’re interested in real estate or looking to grow as an entrepreneur, a hard money loan could be a way to get the cash you need (and fast, too). Keep reading to learn exactly what the process entails, plus the pros and cons.
What is a hard money loan?
A hard money loan is a loan secured by real property. It’s a way borrowers can take out a loan without using a traditional mortgage lender.
The loan either comes from an individual or investor who lends you the money based on the value of the property you’re using as collateral. Oftentimes, this type of loan is used as a last resort or considered a short-term bridge loan, meaning the loan lasts until the borrower secures enough permanent financing.
How hard money loans work
The terms of a hard money loan are all based on the value of the property being used as collateral. Your credit history and score do not have any effect on your chances as a borrower.
This is largely because traditional lenders, like a bank, do not make hard money loans. To get one, you’ll work with a private individual or company that would find value in giving you a loan.
For example, this loan is commonly issued to property flippers who plan to pay off the high loan relatively quickly.
Pros and cons of hard money loans
Hard money loans have very high interest rates, so they can be a very expensive option. There are, however, pros to getting one.
Here’s what to know:
- Easy approval process. The hard money loan approval process tends to be much quicker than applying at other traditional institutions.
Lenders are private companies or individuals who care more about the value of your collateral than your financial situation, so they can make decisions quicker. They don’t spend as much time verifying income, bank statements, etc., and if you’ve worked with the lender before, the process can be even quicker.
- They’re relatively flexible. Most lenders don’t follow a standard loan process when it comes to hard money loans.
Each borrower is evaluated on an individual basis, so your financial situation will determine a repayment schedule.
- Collateral is the name of the game. This is the most important factor for lenders, so if you’re investing in a property that’s worth a lot, the lender will give as much as it’s worth.
Sometimes, hard loan investors aren’t concerned with repayment because there could even be an opportunity for them to resell the property if the borrower defaults.
- It’s very expensive. Because the actual property is the only protection against default, hard money loans have lower Loan-to-Value (LTV) rations than other traditional loans.
For example, the LTV for a hard money loan is usually around 50% to 70% vs. a typical mortgage that has a 80% LTV. Plus, the interest rates can be very high–expect to pay rates in the double-digits.
- More pressure to succeed. Because these loans are more expensive, it’s very important the project you’re working on (i.e. the property being used as collateral) increases in value – or at least you break even.
How to get a hard money loan
To get a hard money loan, you’ll need to connect with investors looking for new properties. Start by researching companies and individuals in your area that lend money based on collateral. Local real estate agents or investor groups can be great resources for this.
Then reach out and inform them of your goals and needs so you can start a working relationship and apply for the money once you’re ready.
A traditional lender, such as a bank or credit union, is always interested in: proof you can pay them back, your credit history, and your available income.
Lenders who issue hard money loans are not.
It’s fairly easy to be approved by a hard money lender because they lend money based on collateral and they aren’t necessarily interested in your ability to repay. They know that if anything goes wrong, they can get their money back by taking your collateral and selling it.
This type of loan is usually considered a short-term loan and lasts from one to five years. It wouldn’t be financially wise to keep them any longer because of the high interest rates.
Tips for paying off a hard money loan
If you want to get into the world of real estate, hard money loans are a great option. But, because this type of loan is so much shorter than traditional loans and has a higher interest rate, it’s important to have a strategy to pay it off. Here are some things to consider:
- Sell the property being used as collateral. Most times, the main reason someone would get a hard money loan is to finance their property flipping project.
The goal is to purchase a property, use it as collateral, improve the property, then sell it for a profit. This option allows you to plan and invest in the best way to maximise profits while improving the property.
- Refinance with the lender. If your plan wasn’t to flip a piece of property but to rent it out, refinancing may be your best bet.
This strategy gives you a longer-term plan for income rather than one lump sum. Discuss this with your lender and see what they’re open to.
- Secure a traditional mortgage. If you want to stay in the property you purchased with your hard money loan, you should consider a mortgage.
You can use your hard money loan to build up your credit or pay off other debts, thus increasing your chances of being approved for a mortgage from a traditional financial institution.
What happens if you default on a hard money loan?
If you default on a hard money loan, the property used as collateral for the loan will be used as the asset to pay off the loan.
Your lender will foreclose the property, which could require you to sign a Deed of Trust, Promissory Note, or go to court to settle depending on where you live.
Do hard money loans require an appraisal?
Yes! Because the value of the property is the most important factor in receiving a hard money loan, the approval process includes an appraisal to determine what that value is.
Do hard money loans show up on credit reports?
Most hard money loans do not show up on your credit report. But because this isn’t always the case and can vary by lender, it’s important to have this conversation with whoever you’re borrowing the money from.
Personal Loans: Everything You Need to Know
A personal loan is a relatively flexible loan to be used for short-term financial needs when you don’t want to dip into your savings. Keep reading to learn exactly how they work and what you can afford to do with this type of loan.
What is a personal loan?
A personal loan is money borrowed from a financial institution (think bank, credit union or online lender) that you pay back in fixed monthly payments.
This type of loan typically lasts between two to seven years. It’s a good option if you don’t want to rely on your savings account to cover unexpected expenses or for any non-discretionary purposes, such as debt consolidation.
How do personal loans work?
Personal loans can be relatively easy to qualify for and are based off of your credit history and income.
The money can be used for almost anything, including expensive purchases or medical bills. You might also see them referred to as signature loans or unsecured loans because there is usually no collateral required to secure one (but more on that later).
Once you receive the loan, the money is typically given in one lump-sum that you repay with fixed monthly payments, plus interest (of course@!)
The interest rate — or Annual Percentage Rate (APR) — is determined by your credit score. Higher credit scores will give you better interest rates, since your risk as a borrower is calculated using your credit score.
The interest rate is typically fixed throughout the payment period. However, some lenders have different rules so be sure to check your terms to confirm that your rate won’t change in the repayment process.
Secured vs. Unsecured personal loans
The majority of personal loans are unsecured, meaning they aren’t backed by collateral and a lender decides whether or not to give you the loan based on your credit score, history, and income.
Collateral can be any asset that is able to be seized and sold to repay the loan (if necessary). If you can’t get an unsecured loan, your next option is a secured loan, which is backed by collateral, like your car or house.
What can I use a personal loan for?
Personal loans are very flexible in terms of what you can use them for. Here are a few examples:
- Debt consolidation (most commonly for credit card debt)
- Home improvement projects
- Medical bills
- Refinancing existing loans, or repaying family and friends
- Special occasions such as weddings or funerals
- Small business expenses
- Vacations and holiday shopping
- Divorce costs
- Moving expenses
How to get a personal loan
The process of applying for a personal loan usually involves three steps.
- First, pre-qualify for the loan with multiple lenders. This way, you can compare interest rates and repayment plans. You’ll need to provide information regarding the loan’s purpose, how much you want the loan to be, your ideal monthly payment, and your personal financial information (credit score, history, income, etc.).
- Then, select the best offer. Once you decide what’s best for you, you’ll submit a formal application with the lender. This includes a photo ID, proof of address and employment, your financial information and Social Security number.
- Once approved, you’re all set! And your lender could give you the money as early as the same day as applying.
If you have bad credit:
A strong credit score will give you a better chance of qualifying for a personal loan, having a simpler time applying for one, and give you a better interest rate.
That said, there are lenders who cater to people with bad credit profiles. If you don’t have time to improve your credit before applying for a personal loan, talk to your lender to see if they offer a fair credit or bad credit loan. These will have higher rates, but they’re available to people in a sticky financial situation.
Do personal loans affect my credit score?
Yes, just like any other kind of loan! If you make your personal loan payments in full and on time, this will help improve your credit score. Late or missed payments, on the other hand, will significantly damage your score.
How many personal loans can you have at once?
It depends on the lender. With some lenders, you can have multiple personal loans with them or even across different lenders. But, a lender could limit the amount of money they’ll give you because you may already have too much existing debt. Generally speaking though, there is no law against having a certain number of personal loans at once.
Can you refinance a personal loan?
Yes, it’s possible to refinance a personal loan. When you do this, you replace the existing loan with a new one to hopefully save money and qualify for a lower interest rate than you originally had.
Can you transfer a loan to another person?
Because a personal loan is determined by a person’s credit score and financial history, they generally cannot be transferred to another person. If your loan has a cosigner or guarantor, it is possible for that person to become responsible for the loan if you default. Doing so though would cause a lot of damage to your credit score.
What happens to personal loans when the borrower dies?
If a personal loan is still not paid off by the time the borrower dies, then the borrower’s estate is responsible for the remaining balance of the loan. If the loan had a co-signer, then that person would be in charge of paying off the loan.