Financial Topics Archives | Page 26 of 822

Mar

2025

What Is a Student Checking Account?

By Janet Siroto | Financial Topics, Going to College, Growing Wealth, Life & Career, Life Stages, Terminology, Tools & Calculators | Comments Off

A student checking account is a bank account that is specially designed for students in their teens and early 20s. This type of account typically offers the same tools as a regular checking account, like a debit card and checks, but may have lower fees and minimal balance requirements to make banking more accessible for young adults. Some student bank accounts may also offer extra perks like sign-on bonuses and financial education tools tailored to students.

But student bank accounts also come with some limitations, such as low or no interest and certain eligibility requirements, so it’s important to weigh the pros and cons before choosing this type of account. Here are key things to know about student checking accounts, including their requirements and costs, and how they compare to traditional checking accounts.

Key Points

• Student checking accounts can offer students a secure, user-friendly, and low-cost way to handle their finances while they’re in school.

• Student bank account features can include no account, ATM, or overdraft fees, along with perks like financial education programs and cash back.

• To open a student checking account, you typically need to provide personal details and proof of school enrollment.

• Students under age 18 may need a parent or guardian to co-own and cosign their student bank account.

• After graduation, a financial institution may automatically convert a student checking account to a standard checking account.

What Are Student Checking Accounts?

A student checking account is a type of bank account tailored specifically for students, typically those in college. These accounts function similarly to traditional checking accounts but come with benefits tailored to young adults who may be new to banking.

Like a standard checking account, a student checking account allows you to easily deposit, withdraw, and transfer funds. These accounts typically offer a debit card, checks, mobile banking, and ATM access to facilitate shopping and bill paying. Some checking accounts may also pay a small amount of interest (especially if your account is with an online bank).

Unlike traditional checking accounts, however, student bank accounts are generally limited to students and usually require proof of enrollment in school. They also tend to charge lower and fewer fees compared to traditional accounts, along with lower balance requirements. In addition, some student accounts offer additional benefits, such as rewards programs and overdraft forgiveness.

Student Checking Account Features

Here’s a closer look at the features that a typical student checking account may offer:

• Low (or no) minimum balance requirements: Typically, students are not required to maintain a high balance in order to avoid monthly fees or keep the account open.

• Free ATM access: Many banks provide fee-free access to a large network of ATMs, making it easy to access funds whether you’re on campus or home for the summer.

• Overdraft protection: You may have the option to link your checking account to a savings account or receive alerts to prevent overdrafts. Some student accounts also forgive overdrafts, which means you won’t be hit with a fee if you accidentally overdraft your account.

• Mobile and online banking: Once you set up your account, you can typically check your balance, make payments, and transfer funds on the go via an app or online platform.

• Debit card access: Debit cards are linked to your checking account and allow you to make purchases (both online and in-store), as well as withdraw cash at ATMs.

• Direct deposit: A student checking account will typically allow you to have your paychecks or financial aid directly deposited into the account, which can give you faster access to your funds.

• Rewards programs: Many student checking accounts offer cash back on purchases made with your debit card, which can help you save money on everday expenses.

• Financial education resources: A student account often comes with tools to help students budget, save, and track expenses.

Recommended: Savings Account Calculator

Who’s Eligible to Open a Student Checking Account?

Student checking account eligibility requirements can vary among financial institutions. In general, these accounts are limited to certain age groups, which can be anywhere from age 13 to 25. If you’re below the age at which you can open a bank account, which is age 18 in most states, you will likely need to open a joint student account with a parent, guardian, or another adult.

To open a student bank account, you must typically also be a current student. This generally means full-time enrollment but some banks may allow part-time students to open a student bank account. Either way, you will likely need to provide proof of enrollment to be approved for a student account.

When you graduate school and/or age out of a student checking account, the financial institution may automatically convert your student account into a standard checking account.

Recommended: How to Deposit a Check

Pros and Cons of Student Checking Accounts

Student checking accounts come with numerous benefits, but also a few downsides. Here’s a look at how the pros and cons stack up.

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Pros:

• No or low monthly fees

• No or low minimum deposit required

• No or low minimum balance requirements

• No or low fees for overdrafting

• May offer exclusive student perks

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Cons:

• Must meet eligibility criteria

• May need to open the account in person

• Joint account holder may be required

• Pays little or no interest

• Account conversion after graduation

Advantages of Student Checking Accounts

• Waived or discounted monthly fees: Banks will often waive or reduce monthly maintenance fees for student checking accounts.

• Low or no initial deposit: You may be able to open a student checking account with a small, or no, initial deposit.

• Reduced minimum balance requirements. You may avoid being charged a fee or having your account closed due to not having a certain amount of money in your account.

• Lower (or no) penalties for overdrafts: A student account will often charge reduced penalties for overdrafts compared to traditional accounts. Some student accounts may not charge any overdraft fees.

• Special perks: Some accounts come with exclusive benefits like cash back rewards, student sign-up bonuses, and educational resources tailored for students.

Disadvantages of a Student Bank Account

• Limited availability: Only students can apply, and eligibility ends after graduation or when you turn a certain age.

• May need to visit a branch: While some banks allow you to apply for a student account online, many require you to come into a branch and apply in person.

• Low or no interest on deposits. As with a traditional checking account, student checking accounts generally pay little to no interest on any money sitting in the account.

• You may need a cosigner: Some banks only allow students (especially those under age 18) to open a joint account with a parent or a guardian. This means you may need an adult to cosign your student account when you open it.

• Potential conversion fees: Once you’re no longer a student, or turn a certain age (such as 25), the account may be converted into a regular checking account and start charging monthly fees.

How to Choose Between Different Student Checking Accounts

Choosing the right student checking account involves understanding your needs and finding the right match. Here are some considerations:

• Can you open the account on your own, or will you need a joint account holder due to your age?

• What are the requirements in terms of your school enrollment status?

• What are the monthly fees, if any?

• Will your money on deposit earn any interest? If so, how much?

• How much is the minimum initial deposit when opening the account?

• Must you maintain a certain balance in the checking account to avoid fees?

• What happens if you overdraft your account?

• Is there a sign-up bonus or are any rewards (such as cash back for using your debit card)?

• What kinds of financial education programs are available in conjunction with the student checking account?

• Does the bank have branches and/or ATMs in convenient locations?

• Will your account automatically become a standard checking account when you finish your education or age out of the student checking account?

How to Open a Student Bank Account

Once you’ve figured out which bank is your choice for a student account, you’ll typically follow these steps to open a checking account:

• Find out if you can sign up online or if you need to apply in person at a branch, and whether or not you’ll need an adult cosigner.

• Provide your personal information (such as your home address, phone number, and Social Security number) and school information (e.g., school name, address, and phone number).

• Provide a driver’s license, a student ID, or another official photo ID.

• Supply proof of enrollment in a school (if required). This might be a school report card, transcript, or acceptance letter, or your student ID.

• Have your cosigner provide their information (if required).

• Make an initial deposit (if required). Some banks require an initial deposit of $10 or $25; others may allow you to open your account without any cash at first.

Once your application is reviewed and approved, you may be able to start using your account right away. However, it can take up to 10 days or longer for your debit card and paper checks to arrive in the mail. Once that happens, you’re all set to start fully using your student banking account — congrats!

The Takeaway

A student checking account can be a great tool for a young person learning how to manage their finances. With features like low fees, mobile banking, and overdraft forgiveness, these accounts can provide the flexibility and convenience students need. However, it’s important to shop around and compare different options, understand the terms, and prepare for the transition to a regular checking account after graduation.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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.

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FAQ

Do student checking accounts charge monthly fees?

Many student checking accounts do not charge monthly fees. Banks will often waive or reduce maintenance fees as a benefit to students, helping them manage their finances without extra costs. Some banks will also waive or discount other fees, such as overdraft and ATMs fees, for students. However, it’s important to read the account terms carefully to understand any potential charges before you open a student checking account.

Can I open a student checking account if I’m an international student?

International students are often eligible to open a student checking account in the U.S. Requirements vary by bank but you may need to provide both a foreign and U.S. address, two forms of ID (such as a passport, U.S. student ID, and/or foreign driver’s license), and a foreign tax identification number (FTIN). It’s a good idea to check with specific banks to determine their policies for international students.

What happens to a student checking account after you graduate?

After your scheduled graduation date, your student checking account will likely convert into standard checking accounts, which may include monthly maintenance fees and different account terms. Some banks offer a grace period of a few months post-graduation before making the transition. To avoid unexpected fees, it’s important to check with your bank about post-graduation policies and consider switching to an account that offers benefits that are better suited to your financial situation.

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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 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, 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 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY 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, 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 members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

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Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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Mar

2025

What Is a Limit Order?

By Rebecca Lake | Growing Wealth, Investing, Terminology | No Comments

Table of Contents

What Is a Limit Order?
How Do Limit Orders Work?
Types of Limit Orders
How to Set a Limit Order
When a Trader Might Use a Limit Order
Pros and Cons of Using Limit Orders
Limit Orders vs Market Orders
Limit Orders vs Stop Orders
FAQ

What Is a Limit Order?

A limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.

When you set a buy limit order, for example, the trade will only be executed at that price or lower. For sell limit orders, the order will be executed at the price you set or higher. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.

How Do Limit Orders Work?

In the simplest terms, limit orders work as a sort of restriction that an investor can choose (to either buy or sell) with “limits” on a minimum or maximum price. An investor places an order to buy a stock at a minimum price, for instance, or places an order to sell at a maximum price, in an effort to maximize their returns.

There are two types of limit orders investors can execute: buy limit orders and limit sell orders. An important thing to know is that while a limit order specifies a desired price, it doesn’t guarantee the trade will occur at that price — or at all.

When you set a limit order, the trade will only be executed if and when the security meets the terms of the order — which may or may not happen, depending on the overall market conditions. So, when an investor sets a limit order, it’s possible to miss out on other investing opportunities.

Types of Limit Orders

As mentioned, there are two types of limit orders investors can execute: buy limit orders and limit sell orders.

What is a Buy Limit Order?

For buy limit orders, you’re essentially setting a ceiling for the trade — i.e. the highest price you’d be willing to pay for each share.If a trader places a buy limit order, the intention is to buy shares of stock. The order will be triggered when the stock hits the limit price or lower.

For example, you may want to buy shares of XYZ stock at $15 each. You could place a buy limit order that would allow the trade to be carried out automatically if the stock reaches that purchase price or better.

What is a Sell Limit Order?

For sell limit orders, you’re setting a price floor — i.e. the lowest amount you’d be willing to accept per share. If a trader places a limit order to sell, the order will be triggered when the stock hits the limit price or higher. So you could set a sell limit order to sell XYZ stock once its share price hits $20 or higher.

What is a Stop-Limit Order?

A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve setting two prices. For example: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a buy stop order of $33.

When the stock hits $33, a market order to buy will be triggered. But with a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share — say, $35 per share. Using a stop-limit order gives traders an additional level of control.

Stop-limit orders can also help traders make sure they sell stocks before they go down significantly in value. Let’s say a trader purchased stock XYZ at $40 per share, and now anticipates the price will drop. The trader doesn’t want to lose more than $5 per share, so they set a stop order for $35.

If the stock hits $35 — the stop price — the stock will be triggered to sell. However, the price could continue to drop before the trade is fully executed. To prevent selling at a much lower price than $35, the trader can set a limit order to only sell between $32 and $35.

How to Set a Limit Order

When placing a limit order with your brokerage firm, the broker or trading platform might ask for the following information:

• The stock or security

• Is it a buy or sell order

• Number of shares to buy or sell

• Stock order type (limit order, market order, or another type of order)

• Price

When setting up a limit order, the trader can set it to remain open indefinitely, (until the stock reaches the limit price), or they can set an expiration date.

Limit Order Example

Say a trader would like to purchase 100 shares of stock XYZ. The highest price they want to pay per share is $26.75. They would set up a limit buy order like this:

Buy 100 shares XYZ limit 26.75.

As noted above, the main upside of using limit orders is that traders get to name a desired price; they generally end up paying a price they expect; and they can set an order to execute a trade that can be executed even if they are doing other things.

In this way, setting limit orders can help traders seize opportunities they might otherwise miss because limit orders can stay open for months or in some cases indefinitely (the industry term is “good ‘til canceled,’ or GTC). The limit order will still execute the trade once the terms are met.

When a Trader Might Use a Limit Order

There are several reasons why you might want to use a limit order.

• Price protection. When a stock is experiencing volatility, you may not want to risk placing a market order and getting a bad price. Although it’s unlikely that the price will change drastically within a few seconds or minutes after placing an order, it can happen, and setting a limit order can set a floor or a ceiling for the price you want.

• Convenience. Another occasion to use a limit order might be when you’re interested in buying or selling a stock but you don’t want to keep a constant eye on the price. By setting a limit order, you can walk away and wait for it to be executed. This might also be a good choice for longer-term positions, since in some cases traders can place a limit order with no expiration date.

• Volatility. Third, an investor may choose to set a limit order if they are buying or selling at the end of the market day or after the stock market has closed. Company or world news could be announced while the market is closed, which could affect the stock’s price when the market reopens. If the investor isn’t able to cancel a market order while the market is still closed, they may not be happy with the results of the trade. A limit order can help prevent that.

Limit orders can also be useful when the stock being traded doesn’t have a lot of liquidity. If there aren’t many people trading the stock, one order could affect the price. When entering a market order, that trade could cause the price to go up or down significantly, and a trader could end up with a different price than intended.

Pros and Cons of Using Limit Orders

Each type of order has pros and cons depending on the particular situation.

Pros of Limit Orders:

• The trader gets to name their price. One of the chief reasons traders rely on limit orders is to set baselines for profits and losses. They won’t end up paying a price they didn’t expect when they buy or get a price below their target when it’s time to sell.

• The trader can set the order and walk away. Day trading can be time consuming and it requires a significant amount of knowledge. Investors who use limit orders don’t have to continuously watch the market to get the price they want.

• Traders may pay less in fees. Commissions can take a bite out of your profits, something many investors would prefer to keep to a minimum. When trading illiquid stocks, sometimes the bid-ask spread is enough to cover broker fees.

• Insulate against volatility. Volatility can cause you to make emotional decisions. Limit orders can give traders more control over their portfolio and ward off panic-buying or selling.

• Ride the gaps. Stock prices can fluctuate overnight due to after hours trading. It’s possible to benefit from price differences from one day to another when using limit orders.

For example, if a trader places a buy limit order for a stock at $3.50, but the order doesn’t get triggered while the market is open, the price could change overnight. If the market opens at $3.30 the next morning, they’ll get a better price, since the buy limit order gets triggered if the stock is at or below the specified price.

Cons of Limit Orders:

• The order may never be executed. There may not be enough supply or demand to fulfill the order even if it reaches the limit price, since there could be hundreds or even thousands of other traders wanting to buy or sell at the specified price.

• The stock may never reach the limit price. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute. In this case, they would miss out on potential gains.

• The market can change significantly. If a trader sets a shorter-term limit order they might miss out on a better price. For example, if a stock a trader owns is currently priced at $150, the trader may choose to set a sell limit order at $154 within four weeks. If the company then makes a big announcement about a new product after that period, and the stock’s price spikes to $170, the trader would miss out on selling at that higher price.

• It takes experience to understand the market and set limit orders. New investors can miss out on opportunities and experience unwanted losses, as with any type of investment.

Limit Order vs Market Order

Limit orders differ from market orders, which are, essentially, orders to buy a security immediately at its given price. These are the most common types of orders. So, while a market order is executed immediately regardless of terms, limit orders only execute under certain circumstances.

Limit orders can also be set for pre-market and after-hours trading sessions. Market orders, by contrast, are limited to standard trading hours (9:30am to 4pm ET).

Remember: Even though limit orders are geared to a specific price, that price isn’t guaranteed. First, limit orders are generally executed on a first-come-first-served basis. So there may be orders ahead of yours that eliminate the availability of shares at your limit price.

And it bears repeating again: There is also the potential for missed opportunities: The limit order you set could trigger a trade. But then the stock or other security might hit an even better price.

In other words, time is a factor. In today’s market, computer algorithms execute the majority of stock market trades. In this high-tech trading environment, it can be hard as an individual trader to know when to buy and sell. By using certain types of orders, like limit orders, traders can potentially limit their losses, lock in gains, and avoid swings in the market.

Though limit orders are commonly used as a part of day trading strategies, they can be useful for any investor who wants some price protection around their trades. For example, if you think a stock is currently undervalued, you could purchase it at the current market price, then set a sell limit order to automatically sell it when the price goes up. Again, the limit order can stay open until the security meets your desired price — or you cancel the order.

However, speculating in the market can be risky and having experience can be helpful when deciding how and when to set limit orders.

Limit Orders vs Stop Orders

There is another type of order that can come into play when you’re trying to control the price of a trade: a stop order. A stop order is similar to a limit order in that you set your desired price for a stock, say, and once the stock hits that price or goes past it, a market order is triggered to execute the purchase or sale.

The terms of a limit order are different in that a trade will be executed if the stock hits the specified price or better. So if you want to sell XYZ stock for $50 a share, a sell limit order will be triggered once the stock hits $50 or higher.

A stop order triggers a market order once XYZ stock hits $50, period. By the time the order is executed, the actual stock price could be higher or lower.

Thus with a stop order there’s also no guarantee that you’ll get the specified price. A market order is submitted once the stop price is hit, but in fast-moving markets the actual price you pay might end up being higher or lower.

Stop orders are generally used to exit a position and to minimize losses, whereas limit orders are used to capture gains. But two can also be used in conjunction with each other with something called a stop-limit order.

When to Consider a Market Order vs a Limit Order

If you’re trying to parse out when a market order or a limit order is the best tool to use, consider the following.

A trader might want to use a market order if:

• Executing the trade immediately is a priority

• The stock is highly liquid

• They’re only trading a small number of shares

• The stock has a narrow bid-ask spread (about a penny)

A trader might want to use a limit order if:

• They want to specify their price

• They are trading an illiquid stock

• They want to set a long-term trade (or even walk away for their lunch break and still have the trade execute)

• They feel a stock is currently over- or undervalued

• The stock has a large bid-ask spread

• They are trading a larger number of shares

Is a Limit Order Bad?

Limit orders are not necessarily good or bad. As mentioned, they can offer advantages to investors who understand how to use them.

For example, limit orders can offer more control and flexibility than using market orders. And they can work well in a number of different trading situations. If the stock being traded is highly volatile, for instance, a limit order can help traders retain control and avoid paying an unexpected price.

Each time a trader does research on a stock and decides to buy or sell shares, they also consider their goals and the current market conditions to decide whether to place a market or a limit order.

What Happens If a Limit Order Is Not Filled?

A limit order can only be filled if the stock’s price reaches the limit price or better. If this doesn’t happen, then the order is not executed and it expires according to the terms of the contract. An order can be good just for a single trading day, for a certain period of time, or in some cases it’s possible to leave the limit order open-ended using a GTC (good ‘til canceled) provision.

So if you placed a buy limit order, but the stock does not reach the specified price or lower, the purchase would not be completed and the order would expire within the specified time frame.

And if you’re using a sell limit order, but the security never reaches the specified sell price or higher, the shares would remain in your trading account and the order would expire.

Limit Orders and Price Gaps

Price gaps can occur when stocks close at one price then open at a different price on the next trading day. This can be attributed to after-market or pre-market trading that occurs after the regular market hours have ended. After-hours trading can impact stock price minimally or more substantially, depending on what’s spurring trades.

For example, say news of a large tech company’s planned merger with another tech giant leaks after hours. That could send the aftermarket trading markets into a frenzy, resulting in a radically different price for both company’s stocks when the market reopens. Pricing gaps don’t necessarily have to be wide but large pricing swings are possible with overnight trading.

Limit orders can help to downplay the potential for losses associated with pricing gaps. Placing a buy limit order or limit sell order may not close the gap entirely. But it could help to mitigate the losses you may experience when gaps in pricing exist. Whether the gap is moving up or down can determine what type of limit order to place and where to cap your limit price.

The Takeaway

Limit orders can be an effective and efficient way for investors to set price caps on their trades, and also give them some protection against market swings. Limit orders offer other advantages as well, including giving traders the ability to place longer- or shorter-term trades that will be executed even if they’re not continuously watching the market. This can potentially protect investors against losses and potentially lock in gains.

That said, limit orders are complicated because they don’t guarantee that the trade will be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.

Investors can also consider combining a limit order with a stop order. A stop-limit order can provide even more protection against potential losses.

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FAQ

Can I specify the price for a limit order?

Yes, investors can specify the price for a limit order. In fact, the price typically is the limit in a limit order, representing either a price ceiling or a price floor.

How long does a limit order stay active?

Generally, a limit order will stay active indefinitely, unless an investor cancels it or specifies otherwise. That means that if the limit is never reached, the order will not execute, and the limit order will remain active until the limit is reached.

Can I cancel a limit order once it’s placed?

Investors can cancel standing limit orders as long as conditions haven’t arrived that’s led to the order being actively executed. The cancelation process will depend on the specific exchange an investor is using, however.

What happens if the market price doesn’t reach my limit price?

If the market price of a stock does not reach the limit price — either a price floor or price ceiling — then the limit order will not execute, and the limit order will remain active until it does.

Can I place a limit order outside of regular trading hours?

It’s possible to place limit orders outside of regular trading hours, depending on the rules of a given exchange, and market conditions dictate. The order itself, of course, won’t execute until the market opens, assuming that the limit is reached.

Are there any fees associated with limit orders?

There may or may not be fees associated with limit orders, and it’ll depend on the specific exchange or brokerage an investor is using. Note that some brokerages may charge higher fees for limit orders than market orders — but some may charge no fees at all.

Are limit orders guaranteed to be executed?

No, there is no guarantee that a limit order will be executed, as it will only execute if the limit price is reached. If the limit is not reached, the order will remain active but not execute.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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Mar

2025

What Are Non-Recourse vs Recourse Loans?

By Rebecca Lake | Growing Wealth, Home Ownership, personal_loan | Comments Off

Recourse loans are secured loans in which the lender can seize a borrower’s collateral and, if necessary, other assets, should the borrower default on the loan. Common types of recourse debt are auto loans, credit cards and, in most states, home mortgages. Recourse loans are low risk to lenders so they tend to have lower interest rates than non-recourse loans.

Non-recourse loans are also secured by collateral but in this case, the lender can only seize the collateral pledged for the loan; they can’t take any other assets. Non-recourse loans are less common than recourse loans and tend to have higher interest rates due to their higher risk.

Read on to learn more about how non-recourse and recourse loans compare.

What Is a Recourse Loan?

A recourse loan is a secured loan for which the lender can seize more than just the collateral if the borrower defaults. The lender is also able to seize other assets the borrower didn’t use as collateral, including income and money in bank accounts.

How Recourse Loans Work

When a borrower defaults on a recourse debt, the lender can seize not only the loan’s collateral, but can also attempt to attach other assets to collect what’s owed. In essence, the lender has additional recourse to recoup their losses.

Between recourse vs. nonrecourse debt, recourse debt favors the lender while nonrecourse debt favors the borrower.

Examples of Recourse Loans

Hard money loans, which are typically based on the value of the collateral rather than just the creditworthiness of the borrower, tend to be recourse loans.

An auto loan is one example of a recourse loan. If an auto loan borrower defaults on the loan, the lender has the right to seize the vehicle and sell it to recoup its losses. If the vehicle has depreciated, however, and the sale doesn’t cover the loan balance, the lender can ask for a deficiency judgment for the difference. In that case, the borrower’s wages could be garnished or the lender could seize other assets.

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What Is a Non-Recourse Loan?

A nonrecourse loan is a secured loan for which the lender cannot seize assets that weren’t put up as collateral in the original loan agreement.

How Non-Recourse Loans Work

When a borrower pledges collateral on a secured loan, the lender can take that asset — but no others — if the borrower defaults on the loan. The lender will typically sell the asset to recoup their loss on the loan. The lender has no other recourse than seizing the collateralized asset, even if the sale of that asset doesn’t cover the balance of the loan.

Examples of Non-Recourse Loans

Lenders may be cautious about offering non-recourse loans because it limits their ability to recoup losses in the event of a default. Therefore, loans are typically classified as recourse loans.

Mortgages are classified as non-recourse debt as a matter of law in 12 states, meaning the lender cannot pursue a borrower’s other assets if they default and end up in foreclosure. The financial consequences would likely be limited to foreclosures of the home and damage to the borrower’s credit score.

A lender might be willing to offer a non-recourse loan to an applicant with excellent credit and steady, verifiable income if confident in their ability to repay the debt.

Recourse vs Non-Recourse Loans

Both recourse and non-recourse debt can be secured by collateral, which a lender can seize in the event of nonpayment.

The biggest difference between the two is that the lender is prevented from pursuing other assets owned by the borrower to repay what’s owed on a non-recourse debt. Basically, the lender has no other recourse for repayment of the debt other than the collateral that secures the loan.

Recourse Loan	Non-Recourse Loan
Lender can seize assets other than those put up as collateral	Lender can seize only assets that were put up as collateral
Borrower can lose collateralized and other assets if they default	Borrower can lose collateralized asset and have a negative entry on their credit report if they default
Loan rate and terms are based on the value of asset used as collateral and creditworthiness of applicant	Lender may consider creditworthiness of applicant greater than value of collateral when determining loan rate and terms
Less risky for lenders	Less risky for borrowers

Pros and Cons of Recourse vs Non-Recourse Debt

Depending on whose perspective the situation is being viewed from, recourse and non-recourse debt each has benefits and drawbacks.

Pros and Cons of Recourse Loans

Recourse debt is more favorable to the lender than the borrower because this type of debt gives the lender more avenues to collect when a debt goes unpaid.

Approval for recourse loans, on the other hand, may be easier since they pose less risk for lenders.

From the borrower’s perspective, here are some pros and cons of recourse loans:

Pros of Recourse Loans	Cons of Recourse Loans
Approval qualifications may be less stringent than for a nonrecourse loan	Lender can seize collateralized asset and other assets if the borrower defaults
Interest rates can potentially be low	Borrower assumes greater risk than lender

Pros and Cons of Non-Recourse Loans

A non-recourse loan is more favorable to the borrower in the case of default. In that situation, the lender could only seize the asset put up as collateral, but couldn’t lay claim to any of the borrower’s other assets.

Non-recourse financing is usually riskier for the lender since they’re limited to collecting only the collateral when a borrower defaults. As such, lenders may charge higher interest rates for non-recourse loans and/or require borrowers to meet higher credit scores and income requirements to qualify.

From the borrower’s perspective, here are some pros and cons of non-recourse loans:

Pros of Non-Recourse Loans	Cons of Non-Recourse Loans
Only the asset put up as collateral can be seized if the loan is defaulted on	Borrower’s credit can be negatively affected if the lender must write off uncollected debt
Personal assets are not at risk	Interest rates may be high

Managing Recourse vs Non-Recourse Loans

Generally, the only reason for a borrower to be concerned about whether they have recourse vs. non-recourse debt is if they’re in danger of default. As long as they’re keeping up with their payments, whether a debt is recourse or non-recourse shouldn’t be an issue.

But if there is a concern about potentially falling behind in paying a debt, then it helps to do some research before borrowing. For example, if trying to qualify for a home loan, asking upfront whether the loan is treated as recourse or non-recourse debt under a particular state’s laws will help in the decision making.

Making a larger down payment, for example, means less a borrower has to finance. Ultimately, though, a borrower should do what is right for their particular financial situation. It may be better for some borrowers to choose a home loan that allows for a lower down payment so they can keep more cash in the bank to cover financial emergencies down the line.

If you’re planning to apply for a car loan, you might consider buying a vehicle that tends to hold its value longer or making a larger down payment. Those could both help you avoid ending up underwater on the loan if you happen to default for any reason.

Credit cards are revolving debt, not a lump sum being borrowed, so the amount owed can change month to month as purchases are made and paid off. Some ways to manage this type of recourse debt include:

• Keeping card balances low

• Paying the balance in full each month, if possible

• Setting up automatic payments or payment alerts as notification of when a due date is approaching

With any type of debt, recourse, or non-recourse, it’s important that you get in touch with your lender or creditor as soon as you think you’ll have trouble making payments. The lender may be able to offer options to help you manage payments temporarily. Depending on the type of debt, that may include:

• Credit card hardship programs

• Student loan forbearance or deferment

• Mortgage forbearance

• Skipping or deferring auto loan payments

Reaching out before a payment is missed can help you avoid loss of assets, as well as any negative impact on your credit.

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Is a Recourse or a Non-Recourse Loan Best for You?

It’s likely you won’t have much of a choice between a recourse and a Non-Recourse loan when looking at financing options. Lenders are likely to offer only recourse loans because they have more options to recover losses if the borrower defaults on the loan.

If you are presented with both options, choosing a recourse or Non-Recourse loan may depend on your financial situation.

• A recourse loan may be a good option for those with a limited credit history because in exchange for additional avenues to recoup their losses, if necessary, a lender may offer low interest rates.

• A non-recourse loan could be a good option for an applicant with good credit and steady income, as the lender may consider them a low-risk borrower and not feel the need to have additional assets to secure the loan.

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SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

What does recourse mean in lending?

Recourse refers to a lender’s options when recouping losses when a borrower defaults on a loan. With a recourse loan, lenders can recoup defaulted loan balances by seizing both the loan collateral and — when necessary — the borrower’s other assets.

Are you required to pay a non-recourse loan?

Yes, borrowers are required to make payments on both recourse and non-recourse loans.

Are non-recourse loans more expensive?

Non-recourse loans can have higher interest rates than recourse loans because lenders may perceive them as having higher risk.

About the author

Rebecca Lake

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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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.

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Mar

2025

What Is a Home Equity Line of Credit (HELOC)?

By Rebecca Lake | Credit, Home Ownership, mortgage, personal_loan, Terminology | No Comments

If you own a home, you may be interested in tapping into your available home equity. One popular way to do that is with a home equity line of credit. This is different from a home equity loan, and can help you finance a major renovation or many other expenses.

Homeowners sitting on at least 20% equity — the home’s market value minus what is owed — may be able to secure a HELOC.Let’s take a look at what is a HELOC, how it works, the pros and cons and what alternatives to HELOC might be.

Key Points

• A HELOC provides borrowers with cash via a revolving credit line, typically with variable interest rates.

• The draw period of a HELOC is 10 years, followed by repayment of principal plus interest.

• Funds can be used for home renovations, personal expenses, debt consolidation, and more.

• Alternatives to a HELOC include cash-out refinancing and home equity loans.

• HELOCs offer flexibility but remember variable interest rates may result in increased monthly payments, and a borrower who doesn’t repay the HELOC could find their home at risk.

How Does a HELOC Work?

The purpose of a HELOC is to tap your home equity to get some cash to use on a variety of expenses. Home equity lines of credit offer what’s known as a revolving line of credit, similar to a credit card, and usually have low or no closing costs. The interest rate is likely to be variable (more on that in a minute), and the amount available is typically up to 85% of your home’s value, minus whatever you may still owe on your mortgage.

Once you secure a HELOC with a lender, you can draw against your approved credit line as needed until your draw period ends, which is usually 10 years. You then repay the balance over another 10 or 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only. You would then face steeper monthly payments during the repayment phase. Carefully review the details when apply

Here’s a look at possible HELOC uses:

• HELOCs can be used for anything but are commonly used to cover big home expenses, like a home remodeling costs or building an addition. The average spend on a bath remodel in 2023 topped $9,000 according to the American Housing Survey, while a kitchen remodel was, on average, almost $17,000.

• Personal spending: If, for example, you are laid off, you could tap your HELOC for cash to pay bills. Or you might dip into the line of credit to pay for a wedding (you only pay interest on the funds you are using, not the approved limit).

• A HELOC can also be used to consolidate high-interest debt. Whatever homeowners use a home equity credit line or home equity loan for — investing in a new business, taking a dream vacation, funding a college education — they need to remember that they are using their home as collateral. That means if they can’t keep up with payments, the lender may force the sale of the home to satisfy the debt.

HELOC Options

Most HELOCs offer a variable interest rate, but you may have a choice. Here are the two main options:

• Fixed Rate With a fixed-rate home equity line of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either. You can use a HELOC interest calculator to see what your payments would look like based on your interest rate, how much of the credit line you use, and the repayment term.

• Variable Rate Most HELOCs have a variable rate, which is frequently tied to the prime rate, a benchmark index that closely follows the economy. Even if your rate starts out low, it could go up (or down). A margin is added to the index to determine the interest you are charged. In some cases, you may be able to lock a variable-rate HELOC into a fixed rate.

• Hybrid fixed-rate HELOCs are not the norm but have gained attention. They allow a borrower to withdraw money from the credit line and convert it to a fixed rate.

Note: SoFi does not offer hybrid fixed-rate HELOCs at this time.

HELOC Requirements

Now that you know what a HELOC is, think about what is involved in getting one. If you do decide to apply for a home equity line of credit, you will likely be evaluated on the basis of these criteria:

• Home equity percentage: Lenders typically look for at least 15% or more commonly 20%.

• A good credit score: Usually, a score of 680 will help you qualify, though many lenders prefer 700+. If you have a credit score between 621 and 679, you may be approved by some lenders.

• Low debt-to-income (DTI) ratio: Here, a lender will see how your total housing costs and other debt (say, student loans) compare to your income. The lower your DTI percentage, the better you look to a lender. Your DTI will be calculated by your total debt divided by your monthly gross income. A lender might look for a figure in which debt accounts for anywhere between 36% to 50% of your total monthly income.

Other angles that lenders may look for is a specific income level that makes them feel comfortable that you can repay the debt, as well as a solid, dependable payment history. These are aspects of the factors mentioned above, but some lenders look more closely at these as independent factors.

Example of a HELOC

Here’s an example of how a HELOC might work. Let’s say your home is worth $300,000 and you currently have a mortgage of $200,000. If you seek a HELOC, the lender might allow you to borrow up to 80% of your home’s value:

$300,000 x 0.8 = $240,000

Next, you would subtract the amount you owe on your mortgage ($200,000) from the qualifying amount noted above ($240,000) to find how big a HELOC you qualify for:

$240,000 – $200,000 = $40,000.

One other aspect to note is a HELOC will be repaid in two distinct phases:

• The first part is the draw period, which typically lasts 10 years. At this time, you can borrow money from your line of credit. Your minimum payment may be interest-only, though you can pay down the principal as well, if you like.

• The next part of the HELOC is known as the repayment period, which is often also 10 years, but may vary. At this point, you will no longer be able to draw funds from the line of credit, and you will likely have monthly payments due that include both principal and interest. For this reason, the amount you pay is likely to rise considerably.

Difference Between a HELOC and a Home Equity Loan

Here’s a comparison of a home equity line of credit and a home equity loan.

• A HELOC is a revolving line of credit that lets you borrow money as needed, up to your approved credit limit, pay back all or part of the balance, and then borrow up to the limit again through your draw period, typically 10 years.

The interest rate is usually variable. You pay interest only on the amount of credit you actually use. It can be good for people who want flexibility in terms of how much they borrow and how they use it.

• A home equity loan is a lump sum with a fixed rate on the loan. This can be a good option when you have a clear use for the funds in mind and you want to lock in a fixed rate that won’t vary.

Borrowing limits and repayment terms may also differ, but both use your home as collateral. That means if you were unable to make payments, you could lose your home.

What Is the Process of Applying for a HELOC?

If you’re ready to apply for a home equity line of credit, follow these steps:

• First, it’s wise to shop around with different lenders to reveal minimum credit score ranges required for HELOC approval. You can also check and compare terms, such as periodic and lifetime rate caps. You might also look into which index is used to determine rates and how much and how often it can change.

• Then, you can get specific offers from a few lenders to see the best option for you. Banks (online and traditional) as well as credit unions often offer HELOCs.

• When you’ve selected the offer you want to go with, you can submit your application. This usually is similar to a mortgage application. It will involve gathering documentation that reflects your home’s value, your income, your assets, and your credit score. You may or may not need a home appraisal.

• Lastly, you’ll hopefully hear that you are approved from your lender. After that, it can take approximately 30 to 60 days for the funds to become available. Usually, the money will be accessible via a credit card or a checkbook.

How Much Can You Borrow With a HELOC?

Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 90% of the value of your home (or, in some cases, even more), less the amount owed on your first mortgage.

Thought of another way, most lenders require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity line of credit.

Here’s an example. Say your home is worth $500,000, you owe $300,000 on your mortgage, and you hope to tap $120,000 of home equity.

Combined loan balance (mortgage plus HELOC, $420,000) ÷ current appraised value (500,000) = CLTV (0.84)

Convert this to a percentage, and you arrive at 84%, just under many lenders’ CLTV threshold for approval.

In this example, the liens on your home would be a first mortgage with its existing terms at $300,000 and a second mortgage (the HELOC) with its own terms at $120,000.

How Do Payments On a HELOC Work?

During the first stage of your HELOC (what is called the draw period), you may be required to make minimum payments. These are often interest-only payments.

Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.

Remember that if you have a variable-rate HELOC, your monthly payment could fluctuate over time. And it’s important to check the terms so you know whether you’ll be expected to make one final balloon payment at the end of the repayment period.

Pros of Taking Out a HELOC

Here are some of the benefits of a HELOC:

Initial Interest Rate and Acquisition Cost

A HELOC, secured by your home, may have a lower interest rate than unsecured loans and lines of credit. What is the interest rate on a HELOC? The average HELOC rate in mid-November of 2024 was 8.61%.

Lenders often offer a low introductory rate, or teaser rate. After that period ends, your rate (and payments) increase to the true market level (the index plus the margin). Lenders normally place periodic and lifetime rate caps on HELOCs.

The closing costs may be lower than those of a home equity loan. Some lenders waive HELOC closing costs entirely if you meet a minimum credit line and keep the line open for a few years.

Taking Out Money as You Need It

Instead of receiving a lump-sum loan, a HELOC gives you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the lender to apply for more loans if you end up requiring additional money.

Only Paying Interest on the Amount You’ve Withdrawn

Paying interest only on the amount plucked from the credit line is beneficial when you are not sure how much will be needed for a project or if you need to pay in intervals.

Also, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to pull from it again later.

Cons of Taking Out a HELOC

Now, here are some downsides of HELOCs to consider:

Variable Interest Rate

Even though your initial interest rate may be low, if it’s variable and tied to the prime rate, it will likely go up and down with the federal funds rate. This means that over time, your monthly payment may fluctuate and become less (or more!) affordable.

Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.

Potential Cost

Taking out a HELOC is placing a second mortgage lien on your home. You may have to deal with closing costs on the loan amount, though some HELOCs come with low or zero fees. Sometimes loans with no or low fees have an early closure fee.

Your Home Is on the Line

If you aren’t able to make payments and go into loan default, the lender could foreclose on your home. And if the HELOC is in second lien position, the lender could work with the first lienholder on your property to recover the borrowed money.

Adjustable-rate loans like HELOCs can be riskier than others because fluctuating rates can change your expected repayment amount.

It Could Affect Your Ability to Take On Other Debt

Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.

Lenders will qualify borrowers based on the full line of credit draw even if the line has a zero balance. This may be something to consider if you expect to take on another home mortgage loan, a car loan, or other debts in the near future.

What Are Some Alternatives to HELOCs

If you’re looking to access cash, here are HELOC alternatives.

Cash-Out Refi

With a cash-out refinance, you replace your existing mortgage with a new mortgage given your home’s current value, with a goal of a lower interest rate, and cash out some of the equity that you have in the home. So if your current mortgage is $150,000 on a $250,000 value home, you might aim for a cash-out refinance that is $175,000 and use the $25,000 additional funds as needed.

Lenders typically require you to maintain at least 20% equity in your home (although there are exceptions). Be prepared to pay closing costs.

Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC.

Home Equity Loan

What is a home equity loan again? It’s a lump-sum loan secured by your home. These loans almost always come with a fixed interest rate, which allows for consistent monthly payments.

Personal Loan

If you’re looking to finance a big-but-not-that-big project for personal reasons and you have a good estimate of how much money you’ll need, a low-rate personal loan that is not secured by your home could be a better fit.

With possibly few to zero upfront costs and minimal paperwork, a fixed-rate personal loan could be a quick way to access the money you need. Just know that an unsecured loan usually has a higher interest rate than a secured loan.

A personal loan might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up yet.

The Takeaway

If you are looking to tap the equity of your home, a HELOC can give you money as needed, up to an approved limit, during a typical 10-year draw period. The rate is usually variable. Sometimes closing costs are waived. It can be an affordable way to get cash to use on anything from a home renovation to college costs.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

What can you use a HELOC for?

It’s up to you what you want to use the cash from a HELOC for. You could use it for a home renovation or addition, or for other expenses, such as college costs or a wedding.

How can you find out how much you can borrow?

Lenders typically require 20% equity in your home and then offer up to 90% or even more of your home’s value, minus the amount owed on your mortgage. There are online tools you can use to determine the exact amount, or contact your bank or credit union.

How long do you have to pay back a HELOC?

Typically, home equity lines of credit have 20-year terms. The first 10 years are considered the draw period and the second 10 years are the repayment phase.

How much does a HELOC cost?

When evaluating HELOC offers, check interest rates, the interest-rate cap, closing costs (which may or may not be billed), and other fees to see just how much you would be paying.

Can you sell your house if you have a HELOC?

Yes, you can sell a house if you have a HELOC. The home equity line of credit balance will typically be repaid from the proceeds of the sales when you close, along with your mortgage.

Does a HELOC hurt your credit?

A HELOC can hurt your credit score for a short period of time. Applying for a home equity line can temporarily lower your credit score because a hard credit pull is part of the process when you seek funding. This typically takes your score down a bit.

How do you apply for a HELOC?

First, you’ll shop around and collect a few offers. Once you select the one that suits you best, applying for a HELOC involves sharing much of the same information as you did when you applied for a mortgage. You need to pull together information on your income and assets. You will also need documentation of your home’s value and possibly an appraisal.

About the author

Rebecca Lake

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
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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 .

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.

SOHL-Q424-141

Mar

2025

Student Guide to Financial Literacy and Why It’s Important

By Rebecca Lake | Budgeting & Goals, Debt Payoff, Financial Topics, Life & Career | Comments Off

Teaching financial literacy to kids from an early age can yield lifelong benefits. Understanding how money works, how to manage it effectively, and how to make informed financial decisions can significantly impact a young person’s future.

While a growing number of high schools require students to take a course in economics or personal finance to graduate, many young people leave high school, and even college, without a solid understanding of personal finance. This can leave them vulnerable to debt, poor financial decisions, and missed opportunities for building wealth.

Below, we’ll explore the importance of financial literacy for students, key topics they should understand, and resources available to help both students and parents build financial knowledge.

Key Points

• Financial literacy empowers students to make informed money management decisions.

• Budgeting helps balance income and expenses, ensuring financial stability.

• Building credit through responsible use of credit cards and understanding credit scores is essential.

• Managing debt effectively and differentiating between good and bad debt can help prevent financial stress.

• Basic investing concepts and understanding taxes prepare students for long-term financial success.

Why Financial Literacy Is Important for Students

Financial literacy refers to the knowledge and skills needed to make informed decisions about managing money. For students, financial literacy is particularly important because they are at a pivotal stage in life where financial habits and decisions can have long-term effects. According to a recent survey by the National Financial Educators Council, lack of money knowledge cost the average American adult $1,015 in 2024.

Many students also face financial responsibilities early in life, such as managing a budget for college expenses, opening their first bank account, applying for student loans, or using credit cards. Without financial literacy, they may struggle with debt, overspending, poor credit scores, and missed opportunities to build wealth.

Key Topics Students Should Understand

One challenge of navigating financial education for students is deciding what’s most important for them to learn. Breaking personal finance down into smaller subtopics can make teaching financial literacy easier.

Basic Finance Concepts

At the core of financial literacy are fundamental finance concepts that students will want to understand early on. These include:

• Income: Understanding different sources of income (e.g., wages, investments, side hustles).

• Expenses: Differentiating between necessary expenses (rent, utilities, groceries, transportation) and nonessential, or discretionary, expenses (dining out, entertainment, clothing not needed for work).

• Savings: Learning the importance of saving for emergencies, future goals, and retirement.

Teaching students these basics helps them see the big picture of how money flows in and out of their lives.

Budgeting

A budget is a plan for spending money each month. On one side, you have your income and any other earnings, and on the other, you have the money that you spend and save/invest for the future. These two sides should balance.

Key steps in budgeting for beginners include:

• Listing all sources of income (e.g., job, allowance, scholarships)

• Listing all expenses (e.g., rent, groceries, transportation)

• Separating needs from wants

• Adjusting spending based on available income and savings goals

• Using budgeting apps to monitor and adjust spending habits

Teaching students how to budget prepares them to manage their money effectively and avoid financial stress.

Bank Accounts and Terms

Banking is another important concept to tackle when discussing financial education for students. Understanding how bank accounts work is essential for managing money. It’s key for students to understand these concepts and terms:

• Checking account: A checking account is designed for everyday money management. It gives you a place to deposit your paychecks and any other earnings, and comes with checks and a debit card, making it easy to access your money.

• Savings account: A savings account is used for storing money you don’t need right away and earning interest. Some banks limit withdrawals from savings accounts to six per month.

• Interest rate: Interest is the return you earn for putting your savings in a bank, typically expressed as a percentage of the principal (original) amount. Interest is also the cost of borrowing money.

• Overdraft fee: This is a charge for withdrawing more money than is available in an account.

Encouraging students to open and manage their own bank accounts helps them learn accountability and develop positive financial habits.

Recommended: How to Open a Bank Account

Credit Scores

A credit score is a numerical representation of how likely you are to repay a loan on time, based on your credit history. It’s important for students to understand:

• How credit scores are calculated: Credit scoring models look at your payment history, how much of your available credit you are using, recent credit applications, and length of your credit history, among other factors.

• Importance of a good credit score: A higher score makes it easier to get approved for credit cards, housing, and loans. It also gives you access to better rates and terms on credit cards and loans.

• How to build credit: You can start building credit by becoming an authorized user on a parent’s credit card, getting your own credit card and using it responsibly, and avoiding too many new credit inquiries.

Learning about credit scores early helps students avoid damaging their financial future.

Debt Management

Debt is often unavoidable, but managing it effectively is crucial. Important concepts include:

• Good debt vs. bad debt: Education loans and mortgages are often considered “good” debts because they can increase earning potential and help build wealth, while credit card debt with high interest is typically considered “bad” debt.

• Minimum payments: Paying only the minimum on credit cards increases overall debt due to interest charges.

• Debt snowball vs. avalanche method: These are strategies to pay off debt — snowball focuses on small debts first, avalanche tackles high-interest debts first.

Helping students use debt wisely, avoid racking up “bad” debt, and developing smart debt repayment plans can prevent financial stress and improve their financial future.

Basic Investing Concepts

Investing is a powerful way to build wealth over time. Students will want to understand:

• Types of investments: You can invest in stocks (ownership shares of a company), bonds (a loan to a government, agency, or company), mutual funds (where you pool your money with other investors to buy stocks, bonds, and other investments), and real estate.

• Compound returns: This refers to the returns you earn both on your initial investment and on the returns you’ve already accumulated. Compounding allows your money to grow at an increasingly faster rate.

• Risk and return: Investing comes with risk. Generally the higher the potential return, the higher the risk of loss.

• Diversification: Spreading investments across different types helps reduce overall risk.

Teaching students about investing early helps them take advantage of time and compound growth.

Taxes

Understanding how taxes work helps students avoid surprises and plan ahead. Key concepts include:

• Income tax: This is the percentage of your income you pay to the government.

• Deductions and credits: Deductions reduce your total amount of taxable income, while credits reduce the total tax due (which is more valuable than a deduction).

• Filing requirements: Students need to learn how to file a tax return and what forms to use.

Understanding taxes helps students avoid penalties and maximize their refunds.

Mortgages

While mortgages may seem far off for students, understanding them early helps prepare for future homeownership. It’s important for students to know about:

• Down payments: This is the upfront payment required when buying a home and is typically a percentage of a home’s purchase price. The more you put down on a home, the less you need to borrow — and the more money you save on interest over the life of the loan.

• Interest rates: When you have a mortgage, you pay interest on the amount of the loan that you haven’t yet repaid to your lender. Your interest rate affects the overall cost of a mortgage.

• Fixed vs. adjustable rates: Fixed rates remain constant over the life of the loan; adjustable rates can fluctuate based on market conditions.

Basic knowledge of mortgages helps students make better decisions about housing in the future.

Recommended: Savings Goal Calculator

Loans and Credit Cards

Student loans, car loans, mortgages, credit cards — they’re all ways that students can borrow money but they don’t all work the same way. So it’s a good idea for students to understand concepts like:

• Revolving vs. installment debt Revolving debt, like credit cards, allows you to borrow and repay repeatedly within a credit limit. Installment debt, like a car loan or mortgage, is repaid in fixed payments over a set period (or term).

• Credit limit: A credit limit is the maximum amount of money you can borrow or spend on a credit card or line of credit at any given time, set by the lender.

• Payment terms: Payment terms include the minimum amount due each month on a credit card or loan and the date it needs to be paid by. Paying on time avoids late fees and damage to credit.

Teaching responsible borrowing habits prevents students from falling into debt traps.

How Parents Can Get Involved

Teaching financial literacy isn’t limited to school; students can also learn about money at home with their parents’ help.

Some of the best ways to teach students about finance are through hands-on activities. For example, parents could:

• Help their child open a student bank account.

• Pay kids an allowance and walk them through how to create a monthly budget.

• Encourage students to set financial goals and save money toward them.

• Offer to match savings by giving a child a percentage of what they save to encourage consistent saving.

• Expose students to situations that require financial decision-making, like planning a family vacation or completing a weekly grocery shopping trip.

Parents can also teach by example if they practice healthy money habits. That includes things like making or reviewing the family budget, paying bills on time, resisting impulse purchases when shopping, and saving money regularly.

Tools to Help Teach Financial Literacy

Online tools, including games or interactive websites, can help with teaching financial literacy for kids. Using these tools helps students learn through real-life examples and interactive experiences. Here are a few resources to check out.

• Consumer Financial Protection Bureau (CFPB): The CFPB offers plenty of financial education resources for kids, parents and teachers, including links to interactive games, articles, and detailed lesson plans covering core finance topics.

• Banzai: This free financial education platform teaches real-world finance lessons and practical skills and can be used by teachers as well as students of all ages.

• Hands On Banking: This site offers access to free financial literacy content in both English and Spanish, with courses for elementary, middle, and high school students. There are also separate sections for educators, as well as parents.

• CashCourse: A crash course in financial literacy for students, access is free for students, educators, and anyone else who’s interested in expanding their money knowledge.

• FinAid: This is a hub for information about paying for college, with information on student loans, grants, scholarships, and work-study programs, along with calculators that can help students estimate the cost of earning a degree.

• FINRA Investor Education Foundation: This site is packed with resources to help students learn about everything from building emergency savings and buying a car to investing in the market.

• Bank and credit union programs: Many banks and other financial institutions offer free, comprehensive, and often beginner-friendly financial literacy programs.

The Takeaway

Financial literacy is a critical skill that empowers young people to make informed decisions about their money. When students understand financial basics (like budgeting, saving, investing, debt management, and taxes), they’re generally better prepared to navigate adulthood, avoid common financial mistakes, and create a stable financial future.
If students aren’t learning financial literacy in school, parents can step in to help teach essential lessons about money at home. Parents can also lead by example. Showing your kids how you achieve your goals through budgeting, saving, and investing can give them the knowledge and confidence to do the same.

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 during a 30-day Evaluation Period (as defined below).

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 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, 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 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY 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, 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 members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://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 Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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 .

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