The holidays are over and for those looking to consolidate their credit card and other major debts, nationally chartered banks like SoFi are a go-to option as the Federal Reserve raised interest rates significantly last year. American household debt is on the rise, with mortgage, student loan, and credit card debt topping the charts.
Total household debt stood at 17.9 trillion at the end of September 2023, a report by the Federal Reserve Bank of New York stated. The report further said that more millennials and those with student loans failed to make a payment towards their outstanding debt.
Student loan borrowers enjoyed the pandemic-era moratorium on loan repayments. But this moratorium expired around October last year and borrowers’ failure to repay it will go towards delinquency starting September this year. Doing nothing about it till September might just make things difficult as interest rates are at their highest level since the COVID-19 pandemic. How will Americans keep up?
SoFi, a fintech firm turned bank, offers large loan capital for interest rates between 9 – 26% annualized percentage rate. Consumers with a minimum 680 credit score, U.S. citizenship, resident or eligible non-resident status, and living in an eligible state can apply for a loan. But just like every loan, a consolidation loan comes with strings attached. Here’s everything you need to know before you look at SoFi’s impressive collection of loan offerings.
- If you’re looking for a one-time loan to consolidate your high-interest debt, look at it like a window shopping exercise. Check Google reviews, and YouTube for customer journeys and speak to certified counselors before you settle on a lender.
- When you apply for a loan with a financial institution, they are mandated to request a credit report from the Credit Bureau, which could lower your credit score. But that process takes two weeks, so you could potentially apply for more services in the same time because the resulting lowering of credit score will be the same as the first one.
- If you already have credit card debt, or other high-interest loans and wish to consolidate it with a one-time personal loan, make sure to close those credit cards. “Customers leave their credit cards open, so over time they end up regaining that credit card debt,” said Kenneth Mohammed, counseling manager at the American Consumer Credit Counseling (ACCC), a credit counseling organization that specializes in debt consolidation.
- If you plan on paying off the loan as soon as possible, make a budget that includes your daily expenses and emergency expense requirements. Most times it is possible you can’t afford to buy a loan, pay your expenses, and take care of emergency costs on your current income. In that case, reconsider your decision to take a personal loan because it’ll affect your credit till you build the discipline to pay it off.
- Read the company’s disclosure agreement closely since a lot of your private data will be held by these companies. So make sure it’s not being passed on to any third parties.
- A lot of students look at refinancing their federal loans with the help of private lenders, without realizing that the moment they get that loan money, they give up a lucrative opportunity to qualify for an income-based repayment plan and eventual loan forgiveness. Read more about these provisions here.
“I talk to people all the time who are considering private consolidation to get better rates and I think that’s a serious step,” said Martin Lynch, president of the Financial Counseling Association of America. “Repayment flexibility is really unacceptable with most private refinancers.” After you’ve taken the preliminary steps to determine if a one-time loan is on your books, it’s time to weigh the pros and cons. Pros:
- A nationally chartered bank like SoFi operates much differently than a private fintech company, in terms of lending capital. SoFi gets federally available funds at a lower interest rate than private companies do, which is why it can offer consumers a lower interest rate. However, these loans can be costlier than borrowing from traditional banks like J.P. Morgan and Chase.
“These loans offer a higher rate of interest than other banks, so your loans are almost always more expensive,” said Adam Rust, director of financial services at the Consumer Federation of America.
- Speedy Delivery: If you require faster loan approval, especially if you are down to the wire with other timely debt repayment, then SoFi is a good option for you. Once you qualify for the loan, then the amount is deposited in your account within days, as opposed to weeks or months at a traditional bank.
- Unemployment Assistance: SoFi allows consumers with “good standing” to be eligible for unemployment assistance through their loans. SoFi defined “good standing” as the consumer abiding by the terms of their loan agreement for at least 9 months.
Cons:
- Pre-qualify or not, a hard credit check is coming your way. Companies pull a “soft” credit check on you before they pre-qualify you for the loan. But once you pre-qualify for the loan, it’s time to pull a hard credit check. Information like your bill payment history, bankruptcy, and loan details are often a part of your credit report. A hard credit pull may lower your credit score. Learn more about the credit report here.
- Do you need customer service?
According to the Consumer Finance Protection Bureau, a large number of SoFi consumers have complained about the lack of customer support from the company. The company has chatbots and email contacts for any correspondence. But if one followed the consistent theme in the complaints on CFPB, shouldn’t there be better customer support? Consumers with grievances can safely rely on agencies like CFPB, which will look at a complaint pattern and reach out to the lender institution for answers. The CFPB can help if a large group of consumers turn up with similar complaints, but if you detect fraud, file a complaint with the Federal Trade Commission (FTC) or the Office of the Comptroller of the Currency (OCC).