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While it may not be as much fun as scrolling through social media posts, there’s definitely a payoff for reviewing your monthly bank statements. Consistently reviewing these documents is one of the most effective ways to stay on top of your financial health. From catching errors (or even fraud) to aligning your spending with your money goals, taking a few minutes each month to drill down your bank account statements can help you avoid costly mistakes and make smarter decisions.

Here’s your guide to reviewing bank statements as quickly and efficiently as possible.

What Is a Bank Account Statement?

A bank account statement is a summary of all transactions made through your bank account during a specific time period, usually a month. You’ll likely see your paycheck being deposited and your rent/mortgage, utilities, credit card, and subscription payments going out.

Your bank statement is provided to by your bank either through online access, in its app, or via a mailed paper copy.

What Information Does It Contain?

A typical bank statement includes:

This document serves as both a financial report and a tool for accountability.

Recommended: Understanding Bank Statement Abbreviations

Why Review Your Bank Statement Each Month?

Even if you use banking alerts or budgeting apps to track spending, looking over your bank statements can offer crucial insights. Here’s a look at four reasons why it’s important to review your bank statement each month.

Catch Errors and Unauthorized Transactions

Banks process millions of transactions daily, and while errors are extremely rare, they do happen. You might notice a double charge, an incorrect amount, or a transaction you didn’t authorize.

Checking your bank statement also allows you to catch any fraudulent charges. While it’s hard to determine the exact number of bank fraud instances in a year, the Federal Trade Commission (FTC) does receive more than 100,000 reports of bank fraud per year, and millions of cases of identity theft.^[1] Banks work hard to protect accounts from such issues, but it can be worthwhile to be vigilant.

Regular reviews help you identify and report unauthorized transactions quickly, often within the window required to dispute them and recover funds, which is typically 60 days.^[2]

Monitor Your Spending Habits

Even quickly scanning your balance summary can be revealing, since it shows you exactly how much came in that month (total deposits) and how much went out that month (total deductions).

If you consistently see that your monthly spending is around the same as your monthly earning (meaning you aren’t saving money) or, worse, that your spending tends to exceed your earning (meaning you’re going backwards), you’ll want to drill down and look at where your money is going each month in more detail.

Identify Potential Savings Opportunities

Reviewing your bank statements regularly can help you identify patterns in your spending and opportunities to save. Are you tapping your debit card daily to pay for a fancy coffee? Has your home insurance, which you have on autopay, gone up significantly without your realizing it? Are you getting hit with monthly bank fees?

Maybe that cold foam coffee becomes a TGIF treat rather than an everyday expense. Or it’s time to shop for a new, more affordable insurance policy — or a bank with lower (or no) fees. Statements can give you the reality check you need to adjust your habits and make conscious choices with your cash.

Stay on Track With Your Budget

How can monitoring your bank account transactions help you stick to your budget? For one reason, your bank statement is a snapshot of your financial behavior, which makes it a powerful tool for comparing your actual spending with your budget. Say your monthly budget earmarks $400 for groceries, but you see $600 worth of supermarket transactions. That could tell you it’s time to reassess either your budget, your buying behavior, or both.

Reviewing your statement helps you stay informed and can motivate you to ramp up your financial discipline. If after several cycles you find your earnings, spending, and savings are not well-balanced, that might be a signal that it’s time to investigate some different types of budgets, such as the envelope system of the 50/30/20 budget rule.

Tips for Reviewing Your Account Statements

While it may feel like drudgery, monthly statement reviews don’t take much time and can deliver big payoffs. Here are a few tips to make the process easier and more effective.

Set Aside Dedicated Time Each Month

Schedule a 15- to 30-minute time slot for the same day each month, ideally on or near the day your statement is issued. Consistency makes it a habit and helps you stay on top of changes in your financial behavior. For some added motivation, you might put on your favorite playlist, make yourself some matcha, or somehow link the review with something you really enjoy.

Compare Transactions to Your Records

Whether you track monthly expenses using an app, spreadsheet, or checkbook register (or simply collect receipts), it’s a good idea to cross-check your statement against your records. This little bit of bookkeeping effort can help ensure there are no discrepancies or missed entries in your records. It could ward off, say, a bounced check and the bank fees that come with that.

Look for Recurring Payments and Subscriptions

Scan for automatic charges such as gym memberships, cloud storage fees, or subscriptions. If you’re no longer using a streaming service or anything else you are being charged for on a monthly basis, it’s time to cancel.

Investigate Any Unfamiliar Transactions

If something doesn’t look familiar, don’t automatically assume it’s a mistake on your part. It could be fraud or an error. Check with your partner or family members if it’s a joint account, and then contact your bank if you can’t verify it.

How to Report Unexpected Fees and Charges

If you notice a suspicious fee or incorrect transaction, here’s how to take action:

Most banks have specific dispute resolution procedures and will refund the amount if an error or incidence of fraud is confirmed. If the charge is due to a lost or stolen debit card or PIN, you may be liable for a portion of the transaction, depending on how quickly you report the loss.^[2]

Align Spending With Your Financial Goals

Whether you’re saving for the down payment on a house, working to eliminate credit card debt, or building an emergency fund, reviewing your statement can show you places where you may be overspending and allow you to quickly correct course. This can help you save more each month and get closer to your financial goals.

Recommended: How Long Should You Keep Bank Statements?

How Often Do Most People Check Their Bank Statements?

While habits vary, many financial experts recommend reviewing your statement at least once a month. Some people check their account activity more frequently, however, via online banking and mobile banking apps.

A January 2025 MarketWatch Guides survey found that most people check their accounts either daily (36%) or a few times a week (33%).^[3] But that’s often just to eyeball the bank account balance. Fewer people take the time to carefully review their monthly statements.

Even if you frequently check your balance or transaction activity through your banking app or online account, it’s still a useful exercise to look at your monthly online or paper statement to get an overview of your monthly cash flow.

The Takeaway

Your bank statement is more than just a record of financial transactions. Reviewed carefully, it’s a monthly money check-in that can protect you from fraud, reinforce the power of your budget, and help you spend smarter. Taking time each month to review it helps you stay informed, avoid fees, and make intentional money moves.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What should I do if I see a transaction on my statement that I don’t recognize?

If you notice an unauthorized transaction on your bank statement, you’ll want to immediately contact your bank and report it. The bank will investigate the transaction and if they find it to be fraudulent or due to an error, they will typically refund any lost funds. If the charge is due to a lost or stolen debit card or PIN, however, you may be liable for a portion of the transaction, depending on how quickly you report the loss.

Can reviewing my account statement help me avoid fees?

Yes. Reviewing your account statements allows you to see when and why your bank may be charging fees, such as monthly account fees, overdraft charges, and out-of-network ATM fees. This can prompt you to take action to avoid fees in the future. Or you might move your accounts to a bank that charges fewer (or no) fees.

What is the purpose of a bank account review?

A bank account review helps you understand your financial habits, track spending, and spot any unusual or unauthorized transactions. By reviewing your bank account regularly, you can ensure all transactions are accurate, avoid overdraft fees, and identify areas where you might cut costs or save more. It also helps you stay on top of recurring charges or subscriptions you may have forgotten about. Overall, it’s a key step in maintaining financial health and making informed budgeting decisions.

Should I let my partner review my bank statements?

It depends on the nature of your relationship and level or shared financial responsibility. If you’re in a committed relationship where finances are shared, transparency can build trust and help both parties stay aligned on spending and saving goals. However, if you maintain separate finances and value financial privacy, it’s okay to set boundaries. Either way, open communication is key — discuss expectations around money management and decide together what level of access feels comfortable and fair.

How often should I review my bank statements?

It’s a good idea to review your bank statements at least once a month, ideally as soon as your statement becomes available. This can help you detect errors, fraudulent charges, or unexpected fees early. Some people like to monitor their bank accounts more frequently using mobile apps and online banking. The frequency depends on your spending habits and financial goals.

photo credit: iStock/damircudic

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

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.

SOBNK-Q225-039

That ginormous bill from the vet, the cost of a new water heater, or a plane ticket to visit your grandma who’s not doing too well: These are examples of unexpected expenses that can crop up out of nowhere and wreak havoc on your monthly budget.

It’s important to recognize that these surprise expenses can (and indeed do) pop up for many people. By preparing for these major outflows of cash, you can be financially ready and feel more secure. Here’s a look at common unexpected expenses and how to pay for them.

What Are Unexpected Expenses and Why Do They Matter?

Unexpected expenses are costs that occur without warning. Unlike your monthly rent, student loan payment, or groceries, these aren’t part of your regular budget — but they still demand attention and cash. If not managed well, they can lead to debt and stress, and they can keep you from reaching your financial goals.

Whether it’s a flooded basement or an unplanned trip across the country, unexpected expenses can put your financial resilience to the test. Many people know they should have an emergency fund parked in a traditional savings account or online bank account, but how many really have one?

According to a January 2025 survey by U.S. News, 42% of Americans have no emergency savings at all.^[1] That means almost half of all Americans are vulnerable to having their budget derailed by a surprise expense. Knowing what to look out for — and how to prep — can help you avoid being among those ranks so you can bounce back with relative ease.

Recommended: Savings Goal Calculator

Common Examples of Unexpected Expenses

While you can’t predict everything (after all, no one sees a fender bender coming), there are some unexpected expenses that occur more commonly than others. It can be wise to have them, and the funds needed to cover them, on your radar.

1. Medical Bills

Even with health insurance, a sudden illness, injury, or emergency room visit can lead to out-of-pocket expenses. From copays to surprise bills, medical costs can quickly add up. And dental expenses can be notoriously pricey.

According to a 2024 analysis by the health policy group KFF, Americans owe an eye-watering $220 billion in medical debt. Around 14 million people (6% of adults) owe over $1,000 in medical debt, and roughly three million people (1% of adults) have more than $10,000 in medical debt hanging over them.^[2]

2. Car Repairs

Your car never seems to break down at a convenient time. Then again, when would a convenient time be? Whether it’s a dead battery, flat tire, or transmission issue, car repair bills can be costly and urgent — especially if you rely on your vehicle for work, daily life, or a long-planned road trip with the family.

3. Home Repairs

If you own your own home, plumbing leaks, non-functional air conditioning, and roof damage are just a few examples of surprise home repairs that can come along and drain your savings.

In fact, so-called unexpected home expenses are so common, financial experts generally recommend setting aside 1% to 4% of home’s purchase price each year to cover them. So if you paid $400,000 for your home, you should have $4,000 to $1,600 saved per year for repairs and maintenance. If your home is fairly new, 1% is likely to be enough. If your home is more than 30 years old, on the other hand, you’ll want to aim for a 4% savings goal.^[3]

4. Job Loss or Reduced Income

A full 1.5 million Americans are laid off each month, according to February 2025 data from the U.S. Bureau of Labor Statistics.^[4] Losing a job or having your hours cut can be financially devastating. This can be especially true for recent hires and gig workers, who are unlikely to receive any severance.

Without a steady income, affording everyday living expenses (and avoiding credit card debt) can become a challenge. Considering that it may take time to get back to full-time employment, it’s wise to have three to six months’ worth of living expenses (rent, utilities, other bills, and groceries) set aside in the event of income loss.

5. Emergency Travel

A last-minute trip due to a family emergency, funeral, or urgent situation can be emotionally and financially stressful. Flights, hotels, and meals add up fast when you’re traveling on short notice. But whether it’s an ailing relative or a kid who’s miserable at summer camp, sometimes you need to jump and go where you’re needed. Having a solid cash cushion in the bank can help minimize some of the stress involved in emergency travel.

6. Pet Emergencies

Your furry friends are part of the family, but vet bills for sudden illnesses, injuries, or surgeries can be concerningly high — especially without pet insurance. Currently, an emergency vet visit can ring in at $100 to $150 on average, imaging can cost $150 to $600, and emergency surgery can run from $2,000 to $6,000.^[5]

7. Legal Fees

Whether it’s dealing with a traffic violation, custody issue, or unexpected legal dispute, attorney fees and court costs can be significant and throw a wrench into your monthly budget. As of late 2024, the median hourly fee for a lawyer was approximately $350 at a small firm.^[6] That can add up quickly.

Financial Planning for Unexpected Expenses

While you can’t prevent unpleasant surprises, you can prepare for them. A little financial planning goes a long way toward reducing the impact of unexpected expenses.

How to Reduce Financial Stress

To lower your financial anxiety, both day-to-day and when you’re confronted by an unexpected expense, it’s a good idea to take stock of your financial health. Knowing your income, expenses, debt, and savings gives you a clear picture of where you stand — and where you can improve.

It’s also a good idea to assess how much money you have that is liquid or, in other words, can be easily accessed in an emergency. That would mean funds in checking or savings accounts that you could dip into with minimal notice.

How to Handle Unexpected Expenses Without Breaking the Bank

Here’s a look at how to prepare for unexpected expenses, plus tips on what to do if you get hit with an emergency expense you don’t have enough cash to cover.

Build an Emergency Fund

As mentioned above, a common rule of thumb is to have at least three to six months’ worth of basic living expenses set aside in a dedicated high-yield savings account. However, you may want to aim higher — say six to 12 months’ of expenses if you’re the sole financial provider in your family, you’re self-employed, or you work seasonally.

You can use an online emergency fund calculator to help you do the math. Once you have a target savings goal, you might automate transfers from checking to savings to make the process seamless. Even stashing $25 per paycheck can be a solid start.

Also, think about putting any financial windfalls (an inheritance, a bonus at work, a tax refund) into your emergency fund to pump it up that much faster.

Create a Realistic Budget

To make sure you can cover an unexpected expense — and recover from one after it’s paid — it’s a good idea to set up a basic monthly spending budget. This entails making a list of your essential and nonessential expenses and looking for places where you may be able to cut back. Any cash you free up can then be siphoned into savings.

There are many different types of budgets but one popular approach is the 50/30/20 rule. This method divides your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment beyond the minimum. However, you may need to adjust the percentages based on your needs and expenses.

Recommended: 20 Commonly Forgotten Monthly Expenses

Consider Insurance Coverage

Financial planning for unexpected expenses also includes evaluating your insurance coverage. Health, home, disability, auto, and pet insurance can offer peace of mind and help offset major costs. It’s a good idea to periodically review your policies to make sure you have adequate coverage for your needs. Some people may want to look into umbrella insurance, which is extra insurance that provides protection beyond existing limits and coverages of other policies.

Explore Different Payment Options

If you get hit with an unplanned expense and don’t have enough cash to cover it, you still have options. One is to ask the provider if they offer a payment plan or zero-interest financing. If that doesn’t help, you might use a credit card with a low or 0% introductory rate to cover the, and plan to pay off your balance before the rate goes up.

Other ways to pay for unexpected expenses include getting a personal loan (these loans that can be used for virtually any purpose and generally have lower rates than credit cards) or, if you own your home, you might tap your home equity via a home equity loan or home equity line of credit (HELOC).

For a lucky few, a family member or trusted friend might offer a loan.

Negotiate Bills When Possible

If you’re facing a bill you cannot pay, it doesn’t hurt to ask the provider if they can lower the charges. For best results, you’ll want to contact their billing department, let them know your position (particularly if you’re facing financial hardship), and politely ask if they would be willing to offer a discount if you make a payment that day. Many medical providers, repair services, and even legal firms are open to negotiation if you’re upfront about your situation.

The Takeaway

Unexpected expenses are a part of life — but they don’t have to derail your financial security nor your long-term goals. By understanding what might come up and planning ahead, you can face financial surprises with more confidence and less stress. Establishing a solid budget, knowing when and how to negotiate bills, and building an emergency fund in a high-yield savings account can all be steps in the right direction.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What are some examples of unexpected expenses I should be prepared for?

Some examples of unexpected expenses to be prepared for are medical expenses (for you, your family members, and any pets); home repairs; car repairs; legal fees; and daily living expenses if you experience job loss.

How much money should I have in my emergency fund?

Financial experts recommend that people have three to six months’ worth of basic living expenses in an emergency fund. However, some note that this should be the starting point and more may be needed. It can be wise to have a larger goal for your emergency fund if, say, you are the sole breadwinner in your family, you’re self-employed, or you work seasonally.

What should I do if I face an unexpected expense and don’t have enough savings?

If you face an unexpected expense and don’t have enough to pay for it, you have options. You could negotiate with the provider (you might get the amount lowered or a zero-interest payment plan), tap into some home equity via a home equity loan or line of credit, take out a personal loan, or possibly borrow from a friend or family member.

How can I start building an emergency fund?

A good way to start building an emergency fund is to automate recurring transfers from your checking account, where your paycheck is likely deposited, into a dedicated savings account. You can start small with, say, $25 per paycheck and build your savings over time. You might also deposit a financial windfall (such as a bonus or tax refund) into the account.

Should I invest my emergency fund so that it can grow?

Since you never know when you might need to tap your emergency fund, it’s smart to keep it in a low-risk, accessible account where it can earn interest. One good option is a high-yield savings account, often offered at online banks.

If you invest the money, you take on risk, and should you need the money and your account value has dropped, it could be problematic. Withdrawing invested funds can also have tax implications, depending on the type of account, the nature of the investments, and how long you’ve held them.

photo credit: iStock/Sergei Chuyko
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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.

SOBNK-Q225-038

If you are thinking about getting a car, you may be deciding between buying or leasing. And if leasing seems like the right option for your finances and lifestyle, then you probably want to know what is needed to seal that deal.

Leasing a car typically requires both some cash and a solid credit score. If you have a high credit score, you may snag the best possible (meaning lowest) interest rate. If your credit history is not solid, then you may face higher rates or have difficulty getting approved.

Here, we take a closer look at car lease requirements, including the minimum credit score you’ll need, plus whether leasing a car can hurt or help your credit moving forward.

What Are Car Lease Requirements?

A car lease is essentially a long-term rental agreement where you pay to use a vehicle for a specific period, rather than buying it outright. When you apply for the lease, the financing company will want to make sure that you are a responsible borrower. One way they can assess that is by looking at your credit score.

So do you need good credit to lease a car? The answer is, typically yes. Having good credit may make it easier to lease a car because a leasing company may not see you as financially risky as someone who has poor credit. Not all leasing companies will necessarily approve a car lease for someone who has a low credit score.

You might also need to prove that you have a job with a certain income when you’re leasing a car. Minimum income requirements vary by lender, but you typically need to provide pay stubs or tax returns to prove your employment and salary.

💡 Quick Tip: Make money easy. Enjoy the convenience of managing bills, deposits, and transfers from one online bank account with SoFi.

What Credit Score Do You Need to Lease a Car?

Credit scores typically go from 300 to 850, with five credit score ranges:

•  Poor credit score: 300-579

•  Fair credit score: 580-669

•  Good credit score: 670-739

•  Very good credit score: 740-799

•  Exceptional credit score: 800-850.

There is no one specific credit score you need to lease a car, since the minimum credit score requirement varies by dealership. According to Experian® data, however, customers leasing new vehicles in 2024 had an average credit score of 755, which is just above “good” credit, edging into “very good” credit.

While it’s possible to lease a car with a lower credit score, you might end up having to pay a higher-than-average interest rate or put down a big down payment to get approved.

Recommended: How to Manage Your Money Better

Leasing With a Credit Score Above 680

The credit score to lease a car and get favorable rates is one that’s considered at least “good,” meaning between 670 and 739, or higher. Having good credit typically makes it more justifiable for lenders to approve you for the lease because it’s less of a risk to them.

Just as with any type of financing, applicants who have good or better credit may be offered lower interest rates on auto leases. Having an above-average credit score could give you more negotiating power over the rates and terms of the car lease.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

Leasing With a Credit Score Lower Than 680

Having a lower credit score means you’ll likely have difficulty finding a company willing to lease to you or you’ll pay more to lease a car. Leasing companies may see you as a risk, based on your credit history. You might find that having a trustworthy cosigner on the lease could help you get a lower interest rate or better terms than if you’re applying on your own.

If your credit score is lower than 680, you might want to work on building your credit profile before leasing a car so you can get a better deal. A good place to start is by checking your credit reports from the three major credit bureaus, which you can do for free at AnnualCreditReport.com.

It’s important to check your reports for accuracy — if there are any errors, contact the credit bureau that issued the report.

Recommended: How to Save Up for a Car

Building Your Credit Before Leasing

There are several ways to build your credit profile before leasing a car. Two of the most important to consider:

•  Pay down debt. This will lower your credit utilization ratio or rate, meaning the percentage of your credit limit you are using. “One way to positively impact or maintain your credit score is keeping your credit utilization low,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “Keeping it below 30% is a good starting point, but the lower the better.”

•  Pay on time. Be meticulous about paying your bills on time or even early. Just one or two late payments can have a negative impact on your credit profile.

•  Limit new credit applications. Each application for new credit results in a hard inquiry on your credit report, which can slightly lower your score.

Can Leasing a Car Build Credit?

Any time you apply for credit, you have the opportunity to build your credit. A car lease is credit, just as a car loan would be credit.

How you manage your lease payments affects your credit reports just as a loan would. Making regular, on-time monthly payments can impact your credit in a positive way. Late or missing payments, on the other hand, can have a negative influence on your credit.

In addition, a diverse credit mix, which can include a car lease, may have a positive impact on your credit profile, especially if you have limited credit history.

Can Leasing a Car Affect Your Credit Score?

As mentioned, paying a car lease on time can be a positive thing. However, missing payments or being late with payments could negatively impact your credit, making it harder to secure loans and leases with good terms in the future.

You may also see a small drop in your credit score when the lease begins because your credit report will show a new account is open. You may see a similar small drop when the lease is terminated because the account is closed. Both of these credit events — opening and closing a credit account — can have a temporary negative effect on your credit.

If you’re shopping around at different leasing companies over the course of a few weeks and apply for leases at those places, there will be inquiries into your credit history by the leasing companies. However, those multiple inquiries may show up as just one query on your credit report and minimally impact your credit.

5 Things That Impact Your Credit

Here are factors that can influence your credit profile:

1. Your Payment History

The single biggest factor in your credit score is your payment history, which can boil down to making payments on time, month after month. That can help build your credit. Paying late or not at all can negatively impact your credit.

2. The Amount Owed

This factor looks at the amount of debt you’re carrying relative to your available credit (credit utilization). High credit utilization (using a large portion of your available credit) can negatively affect your credit.

3. The Length of Your Credit History

Having a longer credit history and having managed lines of credit well for years can benefit your credit. It shows that you can successfully borrow and pay back money.

4. Your Credit Mix

Having more than one kind of credit account can show that you manage borrowed funds well. For instance, it could be helpful if you have handled both installment debt (student loans and car loans are examples of this) and revolving accounts (such as credit cards) well.

5. New Credit

If you apply for a number of new lines of credit and have what are known as hard credit pulls done as part of this, your credit could suffer. It can look as if you are applying for a lot of new debt and may soon be overextended rather than financially stable.

The Takeaway

It’s important you consider what credit score is needed to lease a car before you go car shopping. Checking your credit reports in advance will uncover any surprises in your credit history before you’re at the dealership.

If you notice any blemishes in your past, you may want to take steps to positively impact your credit profile, such as making on-time payments and paying down debt, before you lease a car. This may help you save money on your car lease and give you more negotiating power.

The less you have to spend on interest and fees, the farther your money can go while leasing. Successfully managing leases, loans, and credit in general is part of good financial habits. Having the right banking partner can also enhance how well you handle your cash.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Can you lease a car with a 600 credit score?

While it’s not impossible to lease a car with a 600 credit score, it will likely take more time and energy to find an offer. You will also probably pay a higher interest rate than someone with good or better credit, meaning you will pay more over the long term.

Does leasing a car hurt your credit?

When you apply for a car lease and the leasing company pulls your credit file, you may see a small dip in your credit score in the short term. After that, whether the lease hurts your credit depends on how well you manage the account. If you make on-time payments, it could positively impact your credit profile, but if you pay late or miss payments, your credit could suffer.

Is it better to lease or finance a car?

Whether it’s better to lease or finance a car will depend on your particular financial situation and goals. When you finance a car, you can eventually own it outright. It’s similar to buying a home with a mortgage. Leasing, on the other hand, is similar to renting. You never own the car or have it as an asset, but then again, you might like “trading up” every few years.

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Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

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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 .

SOBNK-Q325-067

Layaway may sound like an old-fashioned concept, but it’s still offered by some retailers and can help people afford an item without running up credit card debt.

Layaway allows you to buy an item over time via installment payments. When you’ve paid the full price, you get to take your purchase home. This can be a helpful financing tool in some situations, but also comes with some potential downsides. For example, there may be fees involved, as well as the possibility of forfeiting your payments if you can’t keep up with them. Here are important things to know about layaway.

What Is Layaway?

Layaway means you make a deposit and a retailer holds your item (or lays it away) and collects the rest of the money over time. When paid in full, you collect your purchase.

Here’s a bit more detail on how layaway works.

•   The customer chooses an item that’s eligible for layaway and makes whatever down payment the store requires to implement a layaway plan. (This amount varies based on the retailer, and may or may not include a service fee.)

•   The customer then makes regular payments over time based on the retailer’s schedule. These payments may be made weekly, biweekly, or monthly. Online layaway plans often let customers buy items according to scheduled deductions from their checking account.

•   At the end of the layaway plan period, when the item has been paid for in full, the customer takes their purchase home or receives it in the mail.

One additional point about how layaway works: If the customer makes late payments or cancels the layaway plan entirely, they may be charged a restocking or cancellation fee. They may also forfeit some or all of the money they’ve put toward the purchase already.

Why Use a Layaway Plan?

From the store’s perspective, layaway offers a low-risk way to make sales to those who might not otherwise be able to afford the purchase all at once.

Although the retailer might choose to charge a small fee to cover the item’s being tied up for the length of the layaway, if worse comes to worse and the buyer defaults, they can simply put the item back up on the shelf for sale.

From a buyer’s perspective, the attractiveness of layaway is even more obvious: It allows those who might not otherwise have the financial leverage to make large purchases affordably, over time.

Layaway is unique among financing options in that it often doesn’t involve interest, which means it can often be a more affordable choice than other types of credit or loans.

Recommended: How to Make Money Fast

Pros and Cons of Layaway

Like any financial approach or product, there are both benefits and drawbacks to layaway plans.

Pros of Layaway

•   You don’t have to go into debt to make a purchase you would otherwise not be able to afford. Using layaway can help you avoid charging an item on your credit card, which typically incurs high interest rates.

•   Layaway plans don’t require a credit check — which also means that your credit won’t be affected if you can’t pay the plan on time or in full.

•   Fees associated with layaway plans are generally low and often don’t include interest.

Cons of Layaway

•   Although they’re generally low, layaway plans often do come with associated fees, such as service, restocking, and cancellation fees. These are typically flat fees, however, which could make them proportionately high if you’re purchasing a relatively inexpensive item.

•   If you make late payments or fail to pay in full, you might forfeit some or all of the money you’ve already put toward the purchase (though this varies by vendor, so check with the individual retailer you’re considering for full details).

•   Repayment terms can be inflexible and it’s up to the vendor to set the repayment schedule.

•   Layaway takes time and patience; it’s an example of delayed gratification. It may be less attractive to those who want or need to take home the purchase immediately rather than waiting until it’s been paid in full.

Stores That Offer Layaway Plans

Layaway was originally offered back in the 1930s as a result of the Great Depression, then began fading away when using credit cards became more common later in the 20th century. However, the popularity of layaway surged again during the Great Recession of 2007-2009.

The history of recessions tells us they do happen over the years, and the popularity of layaway surged again during the Great Recession of 2007-2009.

These days, many retailers still offer both in-store and online layaway, either for the holidays or year-round.

In some cases, you may only be able to implement layaway on certain products — generally more expensive ones, like appliances and jewelry.

Layaway programs come and go, but retailers that currently offer layaway include the following:

•   Amazon

•   Burlington Coat Factory

•   Army & Air Force Exchange Service

•   Buckle

•   Gabe’s

•   Hallmark Gold Crown

If you’re unsure whether or not a retailer offers layaway, you can always ask!

4 Alternatives to Layaway

Here are some other ways customers can get their hands on items they might not be able to buy in a single purchase.

1. Similar Pay-Over-Time Plans

Some retailers, especially for online purchases, offer buy-now-pay-later or pay-over-time programs that are similar to layaway — rather than paying the full price today, you pay small installments over time.

On the plus side, customers can often receive their purchases before the payment plan has been completed.

However, some of these programs, like Affirm (a payment option available at checkout at many online retailers), can involve interest charges, particularly if borrowers are late on their payments or don’t complete the repayment plan in full.

2. Credit Cards

Credit cards are an obvious alternative to layaway plans — and using them, of course, means that the purchase can be taken home right away.

In fact, credit cards are sort of like the opposite of layaway: With layaway, you pay for an item and then receive it; with credit cards, you receive it now and pay for it later.

Of course, using credit cards almost always involves compounding interest charges, often close to 20%, which is nothing to sneeze at.

Since it’s easy to carry a revolving balance while making minimum monthly payments, credit cards can quickly lead to a credit card debt spiral that can be difficult to climb out of.

3. Reconfiguring Your Budget

If being unable to make large purchases is more of a systemic problem than a one-time issue, some budget management may be in order.

You might start by looking at how much money is coming in versus going out, then try to find places where you can cut back on spending. This can help free up funds that you can use to pay for purchases you really need or want in full without requiring layaway.

Recommended: How to Make a Budget in 5 Steps

4. Saving Up for a Purchase

Another option to layaway is to save up in advance until you have enough cash to go ahead and buy the item outright. Let’s say you want to buy a new laptop. You might automate your savings and have $25 transferred from checking on payday to a savings account (ideally, a high-yield savings account). Over time, the savings will build up and interest will accrue.

When you reach the amount needed, ta-da! You can go purchase your new laptop, without paying any interest or other fees related to buying it over time.

The Takeaway

Layaway is a purchasing method where you reserve an item by making a deposit and then pay the remaining balance over time before taking the item home. While this approach can cost less than putting the purchase on your credit card, it’s not necessarily cost-free. Layaway plans often involve various fees, such as service fees, restocking fees, or cancellation fees.

If you’d like to start saving for a purchase, it can be wise to find a bank account that offers low or no fees and a solid interest rate to help your money grow faster.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How does a layaway plan work?

A layaway plan lets you reserve an item by making a small down payment and then paying the remaining balance over time. The store holds the items until it’s fully paid off, at which point you can take it home. Layaway is often interest-free, but some retailers may charge service or cancellation fees. It can be a helpful option for budgeting larger purchases without using credit or paying all at once.

Is it a good idea to buy things on layaway?

Buying on layaway can be a smart choice if you want to avoid credit card interest or don’t qualify for financing. It can help with budgeting by breaking up large purchases into management payments. However, layaway may not be ideal if the store charges high service or cancellation fees. Also, you don’t receive the item until it’s fully paid off, which could be a downside for urgent needs.

What is the difference between an installment plan and a layaway plan?

The key difference lies in ownership. With an installment plan, you typically take the item home immediately and make payments over time, often with interest. With a layaway plan, the store holds the item until you finish paying, and you usually don’t pay interest. Installment plans often involve credit checks, while layaway does not. Each suits different needs: Installment plans provide quicker access, while layaway allow for more controlled, no-credit spending.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

SOBNK-Q325-056

Interest rate options are derivatives that let traders speculate on or hedge against interest rate fluctuations. These contracts are tied to benchmarks like U.S. Treasuries or Eurodollars, and are primarily used by institutions that manage rate exposure. These options are structured as calls and puts, and can be used to express a view on how yields might change over time.

This guide breaks down how interest rate options work, including key terms, common use cases, and the potential risks involved.

What Are Interest Rate Options?

Interest rate options enable investors to hedge, speculate on, or otherwise help manage their exposure to interest rates. These financial derivatives are available as both puts and calls, and are traded on major options exchanges. They can also be used to secure exposure to a specific interest rate level over a set time frame. Interest rate options offer buyers the right to profit from a known rate level at expiration, often as a hedge against rising or falling yields. This cap may help secure more predictable outcomes in a volatile rate environment.

Interest rates in the U.S. fluctuate continuously, with the Federal Reserve being a key driver, among other factors. To mitigate the risk that interest rate fluctuations could erode portfolio value, and to potentially benefit from rate changes, professional money managers turn to interest rate options as a source for managing exposure.

Interest rate options are sold on major options exchanges as standardized puts and calls — the two primary types of option contracts. Similar to puts and calls on equity securities, interest rate options represent directional bets on the value of an underlying asset.

The value of interest rate options is tied to yields on interest-rate-linked assets, typically Eurodollars and U.S. Treasuries of various maturities. These options are cash-settled and typically do not involve the delivery of a bond. Instead, buyers receive a payout if the reference rate moves in their favor.

Buyers of interest rate options can gain exposure to a specific interest rate over a defined term. Treasury maturities are standardized terms commonly sold on the CME Group exchanges. These products are used primarily by institutional investors and sophisticated traders managing large portfolios or interest rate exposure. Professional money managers may use puts or calls at any given maturity to express their views on future rate movements or the volatility of borrowing costs over time.

For example, a fund manager concerned about rising borrowing costs could purchase a call option tied to the 5-year Treasury as a hedge. If rates rise, the option gains value. This could potentially offset higher financing expenses or losses elsewhere in the manager’s portfolio.

How Interest Rate Options Work

Interest rate options afford the buyer the right to receive payment based on the spread between the yield of the underlying security on the expiration date and the original strike rate of the option, net of fees.

Interest rate options in the United States feature “European-style” options exercise terms, which means they can only be exercised on the expiration date.

This contrasts with equity options, which more often contain “American-style” exercise terms. That means they can be exercised at any time before and on the expiration date.

Buyers of interest rate options pay a premium — the price of the options contract — to acquire the right to receive a cash settlement if interest rates move in their favor. Options pricing can be complex, and to profit on a trade, the buyer needs interest rates to move in their favor enough to cover the cost of the option’s premium.

In the event that interest rates don’t move in the option holder’s favor enough to overcome the strike rate, the option will expire worthless, and the option holder incurs the total loss of their premium.

We’ll cover how this dynamic plays out with respect to both interest rate calls and puts.

How Do Interest Rate Call Options Work

Buyers of interest rate call options seek to benefit from rising interest rates. Should the yield on the underlying security close above its strike rate on the expiration date, the owner of an interest rate call option will receive a cash payout. This payout will be the difference between the option value at maturity and its strike.

Note that interest rate options are cash-settled. Unlike equity options, no exercise is required. If the rate is higher than the strike rate, the holder is paid the difference.

Interest rate call options, much like equity call options, give the buyer potential upside exposure to rising yields. They can also offer a way to effectively “lock in” an interest rate level for potential payout calculation, which benefits the buyer if rates rise above the strike.

Holders of interest rate call options bear the risk that the option might expire out-of-the-money should interest rates remain beneath the strike by the expiration date. In this case, the maximum loss the owner of an interest rate call option can expect is limited to the premium paid.

How Do Interest Rate Put Options Work

In contrast, buyers of interest rate put options seek to benefit from falling interest rates. Interest rate puts give the put holder the right to receive payment based on the difference between the strike rate and the yield on the underlying security at expiration. Since the payout depends on the yield falling below the strike rate, the buyer effectively locks in the right to receive a higher interest rate (rather than pay a lower one) for a fixed period, compared to market rates at expiration. In this case, the strike rate is typically the maximum gain that a put holder may receive.

Holders of interest rate put options bear the risk that the put option might expire worthless (out-of-the-money) if interest rates rise above the strike by the expiration date. In this case, the maximum loss the buyer of an interest rate put option will incur is limited to the premium paid.

What Are the Risks of Trading Interest Rate Options?

Trading interest rate options may involve significant risk, particularly for any trader who either, 1) lacks understanding of the basic drivers of options valuation and interest rates, or 2) doesn’t know how to structure their options trade properly to manage risk exposure. The leverage associated with options trades can result in significant losses if not managed carefully. Since these contracts define a rate level at the outset, traders risk loss if actual market rates move unexpectedly in the opposite direction.

Traders must manage a range of key risks and may want to consider different strategies for trading options, when it comes to buying interest rate puts and calls. Risks related to interest rate options include “market risk,” or the risk of price movements driven by macroeconomic factors that affect financial markets. It also includes “interest rate risk,” or the possibility that changes in interest rates could erode the value of fixed-income holdings, especially when those shifts are abrupt or unexpected. Traders may also face losses if they misjudge rate direction, timing, volatility, or fail to anticipate how quickly investors might adjust their outlook based on new interest rate information.

Interest Rate Option Example

For example, an investor seeking to hedge their portfolio against rising interest rates may choose to buy an interest rate call option on a 10-year Treasury bond, expiring in two months at a strike of $50.00.

Strikes on interest rate options reflect a rate that’s multiplied by 10 and expressed in dollar terms to standardize pricing. Therefore a 5.0% rate converts to a strike price of $50.

If the option’s premium is quoted at $0.50, then buying a single interest rate call option would cost the buyer a $50 total premium, as each interest rate option affords the buyer exposure to 100 shares of the underlying interest rate.

If yields rise for the next 2 months until the option expires, the underlying might be worth $55 by the time it’s exercised.

In this instance, you can calculate your net profit using the following equation:

(Reference Rate at Expiry – Strike Rate) x 100 – Premium Paid = Profit

($55 – $50) X 100 ) – $50 = Profit

$5 X 100 – $50 = Profit

$500 – $50 = $450 Net Profit

Remember that each option contract grants exposure to 100 units of the underlying interest rate, while options premiums are quoted for a single unit of the underlying. Remember also to use the full contract premium and apply a multiplier of 100 when calculating net profit.

The Takeaway

Interest rate options may appeal to investors who understand the underlying drivers of these securities. They provide direct exposure to interest rates, on a leveraged basis, at a relatively competitive cost.

When employed strategically, interest rate options may allow investors to profit from changes in interest rates or help mitigate their downside in a volatile rate environment.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

What are interest rate future options?

Interest rate future options are futures contracts tied to an underlying interest-bearing security. The buyer purchases the right to receive the interest rate payment in the contract, while the seller agrees to pay it.

These options allow both parties to lock in the price on an interest-bearing security, for future delivery, which offers both parties some level of price certainty within a specific timeframe.

What is an interest rate swaption?

Interest rate swaptions represent the right, but not the obligation, to enter into an interest rate swap on an agreed-upon date.

In exchange for the contract premium, the buyer of an interest rate swaption can choose whether to be a fixed-rate payer (payer swaption), or fixed-rate receiver (receiver swaption) on the underlying swap, with the counterparty taking the variable rate side of the transaction.

Unlike standard interest rate options, swaptions are over-the-counter products, allowing for more customized terms across expiration, exercise style, and notional amount.

What is interest rate risk?

Interest rate risk is the exposure of an investment to fluctuations in prevailing rates. Rates can change daily, based on economic growth, monetary policies set by central banks, or investor sentiment.

If interest rates rise, that shift may reduce the value of bonds and other fixed-income assets. Conversely, if rates fall, the value of outstanding fixed-income securities often rises. This kind of exposure defines interest rate risk.

Photo credit: iStock/LaylaBird