How It Works: How SoFi Makes Money

How It Works is an ongoing series here on our blog, exploring and demystifying topics about which we hear often from our members and the public. Today, we’re taking a look at how SoFi makes money.

[UPDATED 10/29/2024 to include additional information on how SoFi Invest makes money.]

SoFi is able to offer products and services at competitive rates to members because we pride ourselves on our efficiency. As with any time a company implements a new or different way of doing things, people may wonder, “Is there a catch?”

We’re here today to explain how we make money—it’s something we think every consumer should know about the companies they do business with, in finance or any other sector. Since we offer a variety of products, we’ll break this down by product area.

Our Lending Products

First, our lending products (that’s Student Loan Refinancing, Personal Loans, Private Student Loans, and Home Loans). There are many different ways companies make money in lending—some make their money on origination fees and get paid when a borrower takes a loan, others by holding the loans and making money from the interest the borrower pays, and others by selling loans after they’re made to investors while maintaining some ownership for themselves.

We employ a blend of the last two approaches at SoFi, but primarily make money the third way, through securitizations and whole loan sales. The buyers in these securitizations are institutions like pension and insurance funds, as well as other asset managers, who pay a premium upfront for the future potential cash flows from the loans. We’re able to make money through securitizations because investors trust the quality of our loans.

This enables us to have access to funds at a very competitive rate—often, on par with large commercial banks with big balance sheets—without “selling” our relationship with our members.

We then pass those savings on to our consumers by offering them loan products at an interest rate below their current rate, but above our cost of financing. This represents a win-win: the member saves money on their loan payments and SoFi makes enough money to keep doing what it’s doing.

Who Buys SoFi’s Loans?

Who buys SoFi’s loans? Investors like pension and insurance funds, as well as other asset managers. They are willing to pay a premium above the principal value of the loan upfront for the future potential cash-flows.

We sell these loans in two ways: (1) “whole loan sales” where we sell a group (called a “pool”) of loans in their entirety to investors, and (2) “securitizations” where we group the loans together and their combined cash flows pay specific groups of investors (called “tranches”) in a specific sequence. Having multiple ways to sell our loans ensures we have cost-effective financing and reduces the risk that the market disrupts our business.

To break the process down more simply, here’s an example: let’s say SoFi extends a student loan that pays 5% annual percentage rate (APR) for five years with the principal due at the end of those five years. If our borrowers were paying 7% APR originally, for example, they now save a whopping 2% APR each year. Nice!

The value of the total loan is 125% of the original loan amount (5% APR x 5 years in interest; 100% in principal). We sell the loan to investors for 105%. For taking on the risk of loan repayment, investors will get 20% (125% – 120%) over five years; SoFi will get 5% upfront to cover its cost of borrowing funds, its operations, and the memberships perks it offers to its clients. Double nice!

Our Investment Products

SoFi Invest® charges no commissions for the buying or selling of stocks, ETFs or fractional shares in our Active Investing brokerage accounts. Our Automated Investing service also doesn’t charge a SoFi management fee. This is our robo-advisor product, which builds and rebalances portfolios automatically for Members.

We instead earn revenue in a variety of ways–all of which are common and help Members avoid SoFi fees:

•  SoFi lends out shares. The borrowers are typically short sellers, or investors who bet that prices of certain stocks will decline. They compensate SoFi and our partners with a loan fee for the shares that are borrowed.

•  We also earn money from sending customer orders to third-party market makers–a practice known as payment for order flow. The market makers carry out the customer orders, and regulatory rules require they do so by delivering “best execution.” Recommended: What Is Payment For Order Flow?

SoFi also makes money through its suite of ETFs that charge management fees annually. Below is a table of their expense ratios, or the percentage subtracted from assets each year. So if the expense ratio is 0.19%, that means $1.90 is charged each year for every $1,000 invested.

Our Deposit Account

With SoFi Checking and Savings, we earn a small amount of interest on the money in the accounts and from the merchant with each swipe of the debit card.

But unlike most banks, SoFi has lower costs from doing business online, so we pass those savings on to our members in the form of higher interest paid on deposits—and we don’t charge account fees on top.

Our Life Insurance

We also offer term life insurance through our partnership with Ladder. For life insurance, we earn a set marketing fee every time a member submits an application for life insurance.