Jun
17
2025

How Do Valuations of Property Work?

By | Home Ownership, mortgage | Comments Off on How Do Valuations of Property Work?

Whether you’re a first-time homebuyer or you’re thinking about putting your home on the market, it’s critical to know the value of the property. Property valuation also comes into play in home financing, property taxes, real estate investing, and home insurance. But who does the valuation, and how do they determine the value of a home?

The answers to both questions will depend on the situation. Read on to learn more about property valuations, including what they are and why they matter.

Key Points

•   Types of property valuations include appraised, assessed, fair market, actual cash, and replacement cost values.

•   Appraised value serves mortgage purposes; assessed value is used for property taxes.

•   Fair market value indicates the open market selling price.

•   Actual cash value considers depreciation and may be helpful in insurance claims.

•   Replacement cost value estimates rebuilding expenses.

What Is a Property Valuation?

Broadly defined, a property valuation is a method of determining how much a property is worth for purposes of pricing it for sale, qualifying for a mortgage, or determining a property tax bill.

Someone selling their home, for example, may use a property valuation to determine how much their house is worth and how much they can charge on the open market.

If you are applying for a mortgage, the lender will typically have a home appraisal done to determine if the price you are paying for the house reflects its actual fair market value. Insurance companies and local tax authorities also do property valuations.

Typically, property valuations are done by an independent third party, such as a licensed appraiser. The lender, buyer, seller, tax authority, and insurer generally cannot have any relationship with the appraiser so that the valuation is unbiased.

The value of a property is determined by many factors, including its location, its size, the condition of the inside and outside of the building, and the current real estate market.

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Types of Property Valuations

There are several different types of property valuations. Here are some of the most common you may encounter.

Appraised Value

When you are looking to qualify for a mortgage to buy a home, your lender will usually need to know the appraised value of the house you want to buy. The appraised value of a home is determined by a licensed appraiser who thoroughly evaluates the property’s size and features, market conditions, and comparable sales data. Typically, a lender will offer a loan for no more than 80% of the home’s appraised value (though some lenders and loan programs will allow you to borrow more).

💡 Quick Tip: When house hunting, don’t forget to lock in your mortgage loan rate so there are no surprises if your offer is accepted.

Assessed Value

The assessed value of your home is used in determining your property taxes. Depending on where you live, a municipal or county tax assessor will perform a property value assessment based on a number of factors, which may include sales of similar homes, square footage, current market conditions, and findings from a home inspection.

Local tax officials will use your home’s assessed value to calculate your property taxes. The higher your home’s tax-assessed value, generally the higher your property taxes will be. It is important to note that assessed values may not always accurately reflect the property’s market value, as they can vary depending on the jurisdiction’s assessment practices.

Recommended: Are Property Taxes Included in Your Mortgage Payments?

Fair Market Value

Fair market value of a property refers to the price at which the property would change hands in the open market between a willing buyer and a willing seller, with neither party under any pressure to buy or sell. Put another way, it’s the amount for which you could expect to buy or sell a property based on the current real estate market. This value is considered the most objective and widely used in real estate transactions.

Recommended: The Top Home Improvements to Increase Your Home’s Value

Actual Cash Value and Replacement Cost Value

Actual cash value and replacement cost value are methods used by home insurance companies to determine how they will pay out when you file a claim. Actual cash value takes into account depreciation and wear and tear when determining a property’s value. Replacement cost value estimates the cost of rebuilding or replacing a property with a similar one, considering current construction costs.

What If You Get a Low Appraisal?

If you’re buying a home and the lender’s appraised value is as much as the agreed-upon price or more, the lender will likely move forward with the home loan, assuming that the other aspects of the property and your application are in order.

If the appraisal comes in under the agreed-upon price, the lender may reduce the amount of the loan it’s willing to offer.

At that point, you or the sellers can dispute the appraisal with the lender or ask for a second look. If the value is still too low, there are a few different routes:

•  You can try to get the seller to reduce the price.

•  You can agree to contribute the difference in cash.

•  You and the seller may agree to split the difference.

If the purchase agreement contains an appraisal contingency, you are protected in the case of a low appraisal. This means that If you can’t get the seller to adjust the price or come up with the difference in cash, you can walk away from the sale and get your earnest money deposit returned to you.

Property Valuation Methods

There are different ways to assess the value of a property. Which method will be used will depend on the situation.

Sales Comparison Approach

The sales comparison approach determines a property’s value by comparing it to recently sold properties with similar characteristics in the same area, also known as “comps.” Appraisers make adjustments for differences in size, condition, and amenities to arrive at an estimated value. The sales comparison approach is the one most often used by real estate agents in determining the value of a property for sale.

Income Approach

The income approach is primarily used for investment properties that result in a stream of income, such as rental apartments or commercial buildings. It estimates the property’s value based on its income potential, taking into consideration factors such as expense statements, rental rates, vacancy rates, and market conditions.

Cost Approach

The cost approach evaluates a property’s value by estimating the cost required to rebuild or replace it on its current plot of land. This appraiser determines the replacement cost by considering the cost of materials and labor, then subtracts depreciation and adds in the value of the land to determine the property’s worth. This method is often used by insurance companies.

Automated valuation models (AVMs) are software programs that use data about other properties and sales combined with mathematical or statistical modeling to arrive at an estimate of the value of a property. There are commercial AVM providers, including Equifax®, as well as free AVMs available online, such as Zillow’s “Zestimate.”

Because AVMs are based on existing data, the property valuations they produce are only as good as the information available. An AVM may be inaccurate if the data is outdated or incorrect. While they can be speedy and convenient, at least for the time being, AVMs have not eliminated the need for appraisals or inspections.

The Takeaway

Understanding property valuations is essential for navigating any kind of real estate transaction, whether you are on the buying, selling, investing, or financing side of the deal. There are many different types of home valuations, including appraised value, assessed value, fair market value, actual cash value, and replacement cost value. There are also different ways of doing property valuations, such as the sales comparison approach, income approach, and cost approach. For a quick valuation, you can even use an online computer-generated valuation tool or AVM.

Whatever approach you take, a property valuation can help you confidently make informed decisions and negotiate effectively in the real estate market.

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FAQs

How do you determine the value of a property?

The value of a property is typically determined by an independent licensed appraiser who considers factors such as the property’s location, size, condition, amenities, and recent comparable sales data in the area.

What are the 4 ways to value a property?

The four primary ways to value a property are: the market comparison approach, which compares the property to similar recently sold properties in the same area; the income approach, in which the value is estimated based on the property’s income potential; the cost approach, which involves evaluating the cost to replace or rebuild the property on the same land; and the appraised value, in which the value of the property is determined by a qualified appraiser through a comprehensive evaluation.

How does valuation work?

Valuation of a home typically involves having an appraiser inspect the property, analyze relevant data, and apply appropriate valuation methods (such as the market comparison approach or cost approach, for instance). Appraisers will generally assess factors such as location, condition, amenities, recent sales, and market trends to determine the property’s value. A comprehensive report is then prepared, detailing the value, data, and reasoning behind the valuation. Valuation serves as a crucial step in real estate transactions, providing objective estimates of property worth.


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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.

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.

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.

SOHL-Q225-184

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Jun
16
2025

Long Put Option Guide

By | Growing Wealth, invest, Investing | Comments Off on Long Put Option Guide


Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

The simplest options strategies include purchasing calls or puts — typically called “going long.” For the bearish investor who believes an asset will see price declines over a well-defined period of time, the simplest strategy may be to purchase puts on those assets, also known as a long put strategy.

This strategy allows buyers to benefit from downward price moves while limiting losses to the premium paid upfront. Take a closer look at how long puts work, including their profit and loss potential, breakeven pricing, and how they differ from short puts or other bearish positions.

Key Points

•   A long put is a bearish options strategy where the buyer gains the right to sell the underlying asset at a set price within a specific timeframe.

•   The maximum loss for a long put is limited to the premium paid for the contract.

•   Maximum profit is realized if the underlying asset’s price falls to zero, minus the premium paid.

•   The breakeven point is calculated by subtracting the put option’s premium from its strike price.

•   Long puts can be used for speculation, hedging existing positions, or as part of multi-leg options strategies.

What Is a Long Put?

The term “long put” describes the strategy of buying put options. The investor who purchases a put has purchased the right to sell an underlying security at a specific price over a specific time period. Being the buyer and holder of any options makes you “long” that option contract.

Because the contract in question is a put, the investor is long the put and expects the put option’s value to increase as the underlying asset declines. The put option holder is bearish vs. bullish on the underlying asset as they expect its price to go down.

Conversely, an investor who sells a put option would hold a short position, which they might do if they expect the price of the underlying asset to rise or remain neutral, instead of fall.

Maximum Loss

In comparison to other options trading strategies, long puts are low risk due to their limited and well-defined downside. The maximum amount an investor can lose is the premium paid at the initiation of the transaction.

Maximum Loss = Premium Paid

Because different options trading platforms have different commission structures (some of which may be commission-free), commissions are typically omitted from profit and loss calculations.

Maximum Profit

The maximum gain for a long put strategy occurs when the underlying asset drops to zero. While this potential gain is also limited and defined, it may exceed the potential downside and could be significant. The maximum gain on a long put strategy is defined as the strike price of the put less the premium paid.

Maximum Profit = Strike Price – Premium Paid

Breakeven Price

The breakeven price on a long put strategy occurs at the strike price less the premium. Note that the formula for the maximum gain and the breakeven price is the same but the metrics represent different outcomes.

The breakeven price is the point at which the investor begins to make a profit. As the price drops past breakeven toward zero, hopefully, the investor can realize the maximum gain possible.

Breakeven Price = Strike Price – Premium Paid


💡 Quick Tip: How do you decide if a certain online trading platform or app is right for you? Ideally, the online investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Why Investors Use Long Puts

Investors utilize a long put strategy for three main reasons:

•   Speculation: The investor identifies an asset they believe will decrease in price over a defined time period. Buying a long put allows the investor to profit from this forecasted price decrease if it happens.

•   Hedging: Sometimes an investor already holds an asset like a stock or exchange-traded fund (ETF), and could be concerned that the price of the asset may drop in the short term, but still wants to hold the asset for the long term.

By purchasing a long put, the investor can offset any short-term losses through gains on the put and keep control of the underlying asset. For most assets, this strategy may serve as relatively low-cost downside protection.

•   Combination strategies: For experienced investors, long puts can be part of complicated multi-leg strategies involving the sale or purchase of other options, both calls and puts, to pursue different investment objectives.

Long Put vs Short Put

In contrast to a long put, a short put options strategy occurs when the investor sells a put. The seller of a put options contract is obligated to buy shares in the underlying security from the option holder at the strike price if the option is exercised.

Short put strategies differ from long puts in structure, obligation, and market outlook:

Long Puts

 Short Puts
Investor role Buyer Seller
Investor responsibility Right/Discretion Obligation
Investor outlook — Asset Bearish Neutral to Bullish
Risk Premium (Strike Price – Premium)
Reward (Strike Price – Premium) Premium

Long Put Option Example

An investor has been watching XYZ stock, which is trading at $100 per share. The investor believes the $100 share price for XYZ is excessive and believes the share price will fall over the next 30 days.

The investor purchases a long put with a strike price of $95 per share for a premium of $5 and an expiration date of 60 days from today. Because options contracts are sold based on 100 share lots, the price for this contract will be $5 x 100 = $500.

The options contract gives the investor the right to sell 100 shares of XYZ at $95 for the next 60 days.

The breakeven price on this investment is:

Breakeven Price = Strike Price – Premium Paid

Breakeven Price = $95 – $5 = $90

Should XYZ be trading below $90 at expiration, the option trade will be profitable.

If XYZ stock falls to $0 at expiration, the investor could realize their maximum possible profit:

Maximum Profit = Strike Price – Premium Paid

Maximum Profit = $95 – $5 = $90 profit per share or $9,000 per put option

However, if XYZ stock stays above $90 at expiration, the investor would incur their maximum possible loss, and the option will expire worthless:

Maximum Loss = Premium Paid

Maximum Loss = $5 per share or $500 per put option

Even if XYZ rose above the $100 price at purchase, the investor’s loss remains limited to the premium paid, or $500 in this example.

The Takeaway

Long put options provide a potentially accessible starting point for those exploring bearish strategies. The trading strategy may provide limited downside risk and potential profit if the underlying asset declines.

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.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is the long put option strategy?

A long put strategy involves buying a put option in anticipation that the underlying asset will decline in value. The buyer gains the right — but not the obligation — to sell the asset at a predetermined strike price before the option expires. This strategy can be used to profit from a downward move or to hedge an existing long position. The risk is limited to the premium paid, while potential profit increases as the asset’s price drops.

What is the most successful options trading strategy?

There is no single “most successful” options strategy — success depends on the trader’s goals, risk tolerance, and market outlook. For bearish views, long puts or bear spreads may be appropriate. For bullish views, strategies like covered calls or long calls are commonly used. More advanced traders may use iron condors or straddles for neutral markets. Each strategy carries trade-offs in terms of cost, complexity, and risk-reward profile. No strategy guarantees returns.

How can traders make money on long puts?

To profit from a long put, the price of the underlying asset must fall below the breakeven point, which is the strike price minus the premium paid. As the asset’s price drops, the value of the put typically increases, which may allow the trader to sell the option at a profit or exercise the option to sell the asset at a higher strike price. The lower the asset falls, the greater the potential profit — up to the maximum if the asset drops to zero.

When should an investor consider a long put?

An investor might consider a long put when they expect the price of an asset to decline within a defined time period. This strategy allows them to potentially profit from the downside move while limiting their maximum loss to the premium paid. Long puts can also serve as a form of short-term insurance for a long position in the stock, especially in volatile or uncertain markets. However, because options lose value over time, long puts are generally best suited for situations where a significant price move is expected before expiration.

Photo credit: iStock/Paul Bradbury

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

SOIN-Q225-071

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Jun
16
2025
percentage sign

What Is Interest Rate Risk?

By | Growing Wealth, invest, Investing | Comments Off on What Is Interest Rate Risk?

Interest rate risk refers to the possibility that a fixed-income asset, such as a bond, could rise or fall in value owing to changing interest rates. Interest rate risk also has implications for businesses.

When interest rates rise, bond values on the secondary market tend to fall, and vice versa: When interest rates decline, bond values tend to rise. A bond’s duration, or maturity, comes into play as well. Bonds with longer durations (i.e., more time to maturity) are more susceptible to interest rate risk.

Interest rate risk also applies to securities such as CDs (which may have floating rates), as well as loans with variable rates. These instruments can have an impact on consumers, as well as companies, who might see their debt payments increase on variable-rate loans, for example.

Key Points

•   Interest rate risk usually refers to the impact of interest rate changes on bond values.

•   When interest rates rise, bond values tend to fall, and when interest rates drop, bond values rise.

•   Longer duration bonds — those with more time to maturity — are more vulnerable to interest rates changes.

•   Interest rate risk can also impact stocks indirectly, when a company’s cash flow or performance is impacted by changes in borrowing costs and investment returns.

•   Investors with fixed-income investments may seek ways to mitigate interest rate risk.

How Does a Bond Work?

Bonds are a type of loan, with the bond issuer effectively borrowing money from the investor. The issuer could be the federal government, a state or local government, or a company.

In return for the loan, the investor is promised that they will be repaid the full amount of the bond (the principal) — plus a predetermined amount of interest (the coupon rate) — on a specific date.

Traditionally, most bonds have paid a fixed rate, although there are some with a variable or “floating” interest rate.
Bonds come with an expiration or “maturity” date, when the value of the bond must be paid back in full to the investor, plus interest.

While there’s no such thing as a safe investment, investors typically consider bonds to be lower-risk than stocks and some other investments.

Buying and Selling Bonds

An investor can sell a bond before it reaches its full maturity. If the bond issuer is doing well and the bond is in high demand, the investor could sell it on the secondary market and see a capital gain. If not, the sale might be made at a loss.

Because interest rates impact a bond’s value, the risk here is that rising rates could make a bond’s current rate less attractive. By the same token, if interest rates drop, and an investor is holding bonds with a higher rate, the value of those bonds will rise.

Interest Rate Risk and Timing

In other words, when investors buy fixed-rate bonds, they’re taking the risk that the interest rate may go up after they’ve already made their purchase.

If interest rates do increase, then new bonds are issued with higher rates, which means that existing bonds with lower returns are in lower demand, lowering the bonds’ value.

In general, longer-term bonds are more sensitive to interest rate risk than those with shorter terms. The higher interest rates rise after the bond was purchased, the more of an impact that can have on the investor’s return on investment.

Examples of Interest Rate Risk

The Office of Investor Education and Advocacy of the U.S. Securities and Exchange Commission (SEC) offers two contrasting examples to illustrate this concept.

In the first example, they assume that a Treasury bond has a 3% interest rate. A year later, interest rates drop to 2%. But investors who bought their bonds at 3% continue to receive that interest rate, making it a more valuable investment than new bonds paying just 2%.

If that bond is sold before it reaches its maturity date, the price would likely be higher than it was in the previous year. The bond’s yield to maturity, though, will be down for investors purchasing it at the higher price.

In the second example, instead of rates going down from the original 3%, rates go up to 4%. In that scenario, investors looking to sell their bonds would be competing with new bonds that offer a 4% rate. So the price of the bond that pays 3% may well fall, with the yield going up.

How Interest Rates Can Impact Stocks

Stocks can also be subject to interest rate risk, in that rate changes can impact a company’s bottom line via potentially higher borrowing costs, and expected return on investments (including CDs, which can have a variable rate).

While the impact of interest rates on stocks is indirect, interest rate risk is nonetheless a concern for equity investors as well.

Interest Rate Risk Management

One way to handle investment risk is with diversification. This means building a diversified portfolio that includes a variety of different asset classes, such as stocks, mutual funds, real estate or other asset classes.

Diversified investment portfolios may offer some risk insulation so that if one area takes a financial hit, possible growth in another area could balance out that risk.

Get up to $1,000 in stock when you fund a new Active Invest account.*

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*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.

Interest Rate Risk and High-Yield Bonds

There are pros and cons to high-yield bonds. These types of bonds — corporate bonds that were issued by companies looking to raise capital, or by “fallen angel” companies whose credit rating has dropped—might sound attractive to investors because the notion of receiving a relatively high rate of interest is appealing. But along with the high yield is the potential for a higher degree of risk.

Bonds receive ratings on their creditworthiness, with S&P Global Ratings and Moody’s serving as two of the main credit-rating agencies. Bonds with quality ratings are less likely to go into default. When a bond goes into default, interest is less likely to be paid on time, if at all, and investors may also lose their initial investment.

Bonds with high ratings include U.S. Treasury bonds and notes issued by the federal government, and those issued by large companies considered to be stable.

Bonds with lower ratings tend to need to offer higher coupon rates to entice investors. In other words, they often need to offer high-yield bonds.

When deciding whether to include high-yield bonds in their portfolio, investors may want to consider the pros and cons of doing so.

Pros of High-Yield Bonds

•  Consistent yields. Bonds typically come with an agreed-upon and consistent yield, which makes the amount owed to the investor predictable as long as the company doesn’t go into default (and many don’t).

•  Priority payment if the company fails. If assets of a failed company are liquidated, bondholders would be first in line for payouts, ahead of stockholders.

•  Possible price appreciation. If the credit rating of the company issuing the bond improves, it’s possible that the bond’s price will go up.

•  Potentially less sensitive to interest rate changes. When this is the case, it may be because high-yield bonds tend to have shorter terms than investment-grade bonds, which may be why they often have less sensitivity to fluctuations in interest rates.

Cons of High-Yield Bonds

•  Higher default rates. Because of the higher risk involved, more of these bonds default. When this happens, the investor can lose all funds, including the original principal they invested.

•  Harder to sell. There can be lower demand for this type of bonds, which can make it harder to sell them at a desired price (or at all).

•  Possible price depreciation. If a company’s credit rating drops further, then the price can further depreciate.

•  Sensitivity to interest rate changes. All bonds, including high-yield ones, are subject to interest rate risk.

The Takeaway

Bonds are a popular investment choice because they are less volatile than stocks, but they are not without risks. Interest rate risk is the potential for a bond value to drop as market interest rate rises (the opposite is also true). High-yield bonds are just as susceptible to interest rate risk as corporate or municipal bonds.

Investors can work to mitigate that risk through portfolio diversification and careful selection of bonds.

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FAQ

Why do bond prices fall when interest rates are rising?

Bond prices typically fall on secondary markets when interest rates rise because newer-issued bonds are more attractive and see higher demand.

Why are longer-maturity bonds more sensitive to interest rate risk?

When a bond has a longer maturity, i.e., five years or more, interest rates are likely to fluctuate more over that extended period. This can impact a bond’s value over time.

Is there interest rate risk if you hold onto a bond until maturity?

Yes. If an investor purchases a bond at a certain rate, and they only redeem the bond at maturity, they are locked into the interest rate of the bond. If interest rates rise, for example, the investor is losing out on potentially higher rates. If interest rates decline, however, that could spell good news for the investor.


INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

SOIN-Q225-087

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Jun
13
2025

Which Credit Bureau Is Used Most for Auto Loans?

By | ALR, Budgeting & Goals | Comments Off on Which Credit Bureau Is Used Most for Auto Loans?

Your credit score has a major impact on what kind of loan auto lenders will offer you. Equifax®, Experian®, and TransUnion® are the three major credit reporting bureaus that sell credit report data to auto lenders and dealers.

Auto lenders may rely more on Equifax and Experian for credit report insights, but TransUnion also sells consumer data to a number of automotive lenders. Credit scoring models — such as FICO® Auto Score 9 — generate a credit score based on the debt and payment information in a consumer’s credit report.

Some lenders may offer subprime auto loans based on a borrower’s FICO Score or VantageScore® 4.0. Below, we highlight the most common credit scoring models used in auto lending.

Key Points

•   Equifax and Experian are the most commonly used credit bureaus by auto lenders.

•   FICO Auto Scores are widely utilized in auto lending decisions.

•   VantageScore models, particularly versions 3.0 and 4.0, are also popular among auto lenders.

•   The credit bureau selection can depend on the lender’s preferences, the specific credit scoring models they use, and the nature of the auto loan being offered.

•   By knowing which bureau’s report will be reviewed, whether that’s for an auto loan or auto refinance, borrowers can check for accuracy and address any issues beforehand.

What Is a Credit Bureau?

At the most basic level, credit bureaus are companies that collect data from financial lenders and creditors. They compile this data into your credit history and provide that information to potential lenders in the form of a credit report. This information typically includes factors like how much debt you currently owe and whether or not you have a history of making on-time payments.

Which credit bureau is most used for auto loans? There are three nationwide credit reporting bureaus in the United States: Equifax, Experian, and TransUnion. Despite a common misconception, the credit bureaus, also known as credit reporting agencies, do not make lending decisions themselves. Rather, lenders use the reports provided by the credit bureaus to determine your creditworthiness, and each may have its own criteria for deciding when to approve or deny a loan.

The bureaus also give you the chance to look at your own report so you can understand your credit and correct any errors. You can request a free credit report from each bureau at least once per year.

Recommended: How to Check Your Credit Score for Free

Do Credit Scores Differ Between Credit Bureaus?

Your credit score may differ from bureau to bureau. That’s because it’s up to lenders and creditors to decide which information they report and who they report it to. While most lenders will report to all three credit bureaus, they aren’t required to and not everyone will.

When you apply for a new loan or new revolving credit, your lender may perform a credit check, usually with just one of the main credit bureaus. Credit inquiries like these are recorded in your credit report and can lower your credit score in the short term. However, they may only show up with the bureau the lender used for the hard credit check. This can be another source of discrepancy between different credit scores.

Your score is based on your credit history as compiled by the three major credit reporting bureaus. Each credit bureau will also have a slightly different credit scoring system, and those methodologies change over time as the bureaus try to make their scores more accurate. Multiple credit scoring models exist, but the credit scores auto lenders use most when making lending decisions are base or industry-specific FICO Scores.

Which Credit Bureaus Are Used Most for Auto Loans?

Equifax and Experian are the most commonly used credit bureaus by auto lenders. They offer services that are directed specifically at the auto industry, and each gets a portion of their revenue from the industry.

Though perhaps not as popular, TransUnion may also be used by auto lenders when they’re making their loan decisions.

Ultimately, it may not matter much which score your auto lender uses. Generally speaking, your credit report and score will be very similar no matter which bureau you go to.

However, if one of your credit reports is frozen — perhaps you’ve experienced identity theft recently and wish to prevent fraudsters from opening accounts in your name — it can be useful to find out which report your dealer uses. That way, you can unfreeze your report if the dealer needs to see it.

Why Is Your FICO Score Important?

Auto lenders may use your FICO Score, which is generated by the Fair Isaac Corporation, when making loan decisions. FICO gathers data from each of the major credit reporting bureaus to create a base FICO Score from 300 to 850, which is widely used by many lenders. Auto lenders may also rely on industry-specific FICO Auto Scores ranging from 250 to 900 or VantageScore credit scores ranging from 300 to 850 when making loan decisions.

No matter which credit scoring model is used, your credit score is generally a numerical representation of your credit history. The higher your score, the more likely creditors are to offer you a new loan or auto loan refinance with favorable terms, interest rate, and costs.

A lower interest rate can save you thousands of dollars over the life of the loan. A ‘good’ base FICO Score or industry-specific FICO Auto Score is generally considered to be in the 670–739 range (740 to 799 is ‘very good,’ and above that is ‘exceptional’). A poor score is anything less than 580.

Here are some factors to consider:

•   You can get auto loan financing with a good or bad credit score

•   Borrowers with bad credit may qualify for subprime auto loans

•   You may refinance a car loan with bad credit

•   Borrowers with prime credit may qualify for good interest rates

•   Your credit score may plunge if you lose your vehicle to car repossession

•   Surrendering your car via voluntary repossession can also damage your credit

•   It’s possible to reinstate your car loan after repossession

•   Getting a car loan after bankruptcy can be difficult at best

Recommended: Pros and Cons of Car Refinancing

What Is the Difference Between Your FICO Score and Other Credit Scores?

Theoretically, your FICO Score and your other credit scores could be the same, but they aren’t always.

Your FICO Score is based on a credit scoring model developed by the Fair Isaac Corporation, whereas your VantageScore is based on a credit scoring model developed by VantageScore Solutions, LLC. Multiple credit scoring models exist under the FICO and VantageScore brand names, and each model uses unique algorithms for generating credit scores.

The three major credit bureaus founded VantageScore in 2006 and have their own proprietary scoring systems predating VantageScore. As mentioned earlier, your credit score is generally a numerical representation of your credit history. FICO offers many different scores, including score models that work with each reporting bureau’s database.

Equifax provides generic credit scores ranging from 280 to 850 for educational purposes, not for creditors to assess a consumer’s creditworthiness. Lenders generally rely on FICO or VantageScore when making credit decisions, and lenders are free to choose which score they want to use.

Recommended: Register a Car Without a License

How Can You Build Your Credit History?

You may build your credit history by applying for consumer loans and making payments as necessary. When you get an auto loan, for example, the lender may report the status of your auto loan to at least one of the major credit bureaus each month.

Lenders are not required to report a customer’s loan account details to any of the credit bureaus, but many of them do so voluntarily. Getting approved for credit and maintaining open credit accounts over time can build your credit history.

Any active loan accounts in your name may appear on your credit report. A closed credit account may eventually be removed from your credit report within 10 years.

Recommended: What Is a Finance Charge?

The Takeaway

Equifax and Experian are the credit bureaus most commonly used by auto lenders. Yet, it ultimately may not make that much difference which bureau your auto lender uses.

As a consumer, it may be more important for you to make sure your credit is as healthy as possible by paying off debt and making payments on time. That way, no matter what bureau a lender uses, you’ll have the best chance to get an auto loan or a refinance car loan that works for you.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.


With refinancing, you could save big by lowering your interest or lowering your monthly payments.

FAQ

What is a credit bureau?

Credit bureaus are companies that collect data from lenders and creditors. There are three nationwide credit reporting bureaus: Equifax, Experian, and TransUnion. Each compiles your credit history by gathering data from lenders and creditors.

What is the difference between credit bureaus?

Each credit reporting bureau may gather slightly different data from different lenders, and each may have a different algorithm for calculating your credit score. Multiple credit scoring models exist, but base or industry-specific FICO Scores are the credit scores auto lenders use most when making lending decisions. Credit scores are based on information contained within your credit report as compiled by the credit bureaus.

Why are there multiple credit bureaus?

There are multiple credit bureaus because different companies collect, update, and analyze credit information independently. Each bureau may gather data from different lenders, leading to slight variations in credit reports and scores. Having multiple bureaus promotes competition, encourages accuracy, and provides lenders with a broader view of a borrower’s creditworthiness.

Which credit bureaus are used the most for car loans?

Auto lenders most frequently use Equifax and Experian, but TransUnion also sells credit report data to auto lenders.

Photo credit: iStock/ljubaphoto

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

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.

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

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Jun
13
2025

8 Tips on How to Refinance an Auto Loan

By | ALR, Debt Payoff | Comments Off on 8 Tips on How to Refinance an Auto Loan

Refinancing an auto loan can be a smart financial move if you’re looking to lower your monthly payments, secure a better interest rate, or adjust the terms of your loan. Whether you’ve built your credit score, interest rates have dropped, or you simply want to free up cash flow, refinancing can provide potential savings over time.

It’s important to understand the auto loan refinancing process, from checking your eligibility to comparing lender offers and submitting an application.

Here, we’ll walk you through the steps to refinance your auto loan, helping you determine if it’s the right choice for your financial situation.

Key Points

•   Before initiating the refinancing process, determine your objectives — such as lowering monthly payments, securing a better interest rate, or adjusting the loan term — to guide your search for suitable loan options.

•   A higher credit score can enhance your chances of obtaining favorable refinancing terms.

•   Having positive equity in your vehicle — meaning it’s worth more than the remaining loan balance — can make you a more attractive candidate to lenders.

•   Some auto loans include prepayment penalties, and refinancing may involve additional fees. It’s important to assess these costs to ensure that refinancing will result in overall savings.

•   It’s advisable to shop around and compare refinancing offers from various lenders, including your current financial institution, to find the best rates and terms.

What Is Auto Loan Refinancing?

Auto loan refinancing is the process of getting a new loan to pay down the balance of an original car loan. That all takes time, effort, and money (for the loan applications and servicing fees), so you should be sure you have a good reason before you go to the trouble of taking out an auto refinancing loan.

Ideally, your car is holding its resale value. If your car’s value is lower than what you owe on it, refinancing may not be a good option. Older cars could be problematic because no matter how well you’ve maintained it, a car depreciates in value over time.

What’s also important is to understand how to refinance an auto loan. If you extend your loan term or take cash out of your equity, you could wind up owing more than what your car is worth. This is called being upside down on your car loan. If you have to sell the car, you’ll need to pay the lender the difference. Clearly, this is to be avoided.

How to Refinance an Auto Loan

With refinancing, just as with your original deal, there are very particular car loan requirements.

Once your application is approved, your new auto loan provider will pay off your old auto loan or give you the funds to do so and become your auto loan manager. Future payments will go to the lender who handles your refinanced loan.

8 Tips for Refinancing an Auto Loan

These tips on how to refinance a car loan will help you avoid the pitfalls and ensure the process goes smoothly.

1. Compare Your Options

The first step is to list everything you desire from the new loan. It could be a lower monthly payment, a better interest rate, no or low fees, a streamlined application process, or solid customer service.

Now take a look around. You can start with the bank you already use for other services. Some financial institutions offer discounts on interest rates for their customers. Compare the rate offered by your current bank with rates from other lenders. Some people like to get prequalified with at least three lenders for comparison’s sake.

As you survey the refinancing landscape, remember that you may want to prioritize online auto loan refinancing options, since they tend to have fewer fees and competitive rates.

2. Determine When the Right Time Is for You to Refinance Your Car Loan

Figuring out when you should consider refinancing a car is key. People pursue a refinance for all kinds of reasons, including:

To Get a Lower Interest Rate

One of the chief benefits of refinancing a car is that the owner saves money over the life of the loan through a reduced interest rate. Take a vehicle for which the original loan was $25,000 and the refinance loan is $21,000. For a 60-month loan where the interest rate is cut from 7% to 5%, for example, the refinancing could save approximately $6,000 over the life of the loan.

To Shorten the Loan Term

Car owners who are cash flush may shorten their auto loan terms to pay off the car faster, thus saving significant cash with less paid in interest over the life of the loan.

To Extend the Loan Term

Car owners who need some financial breathing room after a job loss, an injury or illness, or a divorce or other family issue can extend the term of the loan to reduce the monthly (but not overall) loan costs.

To Get Some Extra Cash

If you have enough equity in your car, you might be able to take out a refinance loan that’s more than what you owe, known as a cash-out car refinance. But realize that if you opt for this kind of refinancing, you will still have to pay back both the car loan and the extra money.

Recommended: Smarter Ways to Get a Car Loan

3. Get the Paperwork Ready First

Before applying for an auto loan refinance, it’s best to be prepared. Documents you may need include:

Original Auto Loan

Lending institutions will require the original loan paperwork to process a new loan. The original loan paperwork should include the loan amount, the monthly payment, the interest rate, the payoff number, and the up-to-date loan balance.

Vehicle Information

Auto loan providers will also ask for your current vehicle information. This document should include the vehicle’s make, model, year, mileage, and vehicle identification number.

Auto Insurance Paperwork

Make sure you have your car insurance records, including type of insurance and the amount of the insurance included in the policy. Auto lenders won’t make a loan to an uninsured or significantly underinsured vehicle owner. That’s because the lender has a stake in the vehicle, as well. If the car is damaged or totaled, your lender will want to know it was properly insured.

Employment Records

Your auto loan refinancing lender may also ask for proof of income and employment to ensure you have the means to repay the loan.

Personal Information

In addition, a typical auto refinancing loan application likely includes the following:

•   Name

•   Date of birth

•   Email address and phone number

•   Address

•   Social Security number

•   Driver’s license number

•   Work status

•   Your bank’s name and info

4. Pay Attention to the Details

Before green-lighting an auto loan refinancing deal, you need to know the exact costs. Make sure to nail down how much you’ll save per month and, even more importantly, over the life of the loan. With an older vehicle depreciating in value, refinancing might not be the wisest course.

Watch out for fees. Auto refinancing can carry with it costs ranging from the application fee to title transfer fees, which can eat up savings. Not all lenders will charge significant fees, which is why it’s important to shop around.

5. Prepare for a Hit on Your Credit Score

Refinancing an auto loan, like any other kind of refinance, has the potential to lower your credit score temporarily. This is because it usually requires a hard pull credit check, and also the fact that you are replacing an older loan with a newer one.

When you apply for loans, each lender you apply with will request a credit check that causes a hard inquiry to be entered on your credit report. This can cause a small reduction in your credit score. If you qualify for and accept a loan offer, you’ll typically see another score dip.

Remember, prequalifying for the loan you’re interested in can reduce the number of hard inquiries.

Recommended: Does Financing a Car Build Credit?

6. Have a Backup Plan

What if you found a refinance deal you really wanted, applied, but were declined? You could consider applying through a different type of lender. Online lenders, for example, are typically easier to qualify for.

Or you could work on building your credit for a year and then applying again. Aside from the foundation of paying your bills on time, you could pay your credit card balances strategically and dispute the problems on your credit report.

7. Talk to Your Lender

Another key strategy for refinancing a car loan: Speak to your current lender, as you can refinance with the same lender. Not all lenders offer refinancing, however, so find out if yours does.

If they do, you’ll still want to shop around and see what other lenders can offer you. Ideally, you’ll want to go with the lowest interest rate and best terms. Be aware, though, that even though your original lender approved you for a loan the first time around, you may still need to provide them with proof of income. They will also likely check your credit to see if anything has changed. As mentioned, a hard credit check will lower your credit score temporarily.

8. Determine the Value of Your Car

Before going ahead with any refinancing deal, you need to know what your car is worth. You can look up your vehicle’s make, model, and year to get an estimate of its value.

If your car is still fairly new and in good shape, and you still owe quite a bit on your current loan, refinancing could help you save money. But if your auto loan is almost fully paid, refinancing may not make sense.

Typical Requirements to Refinance

It might help you improve your chances of finding a good refinance deal by getting familiar with what the lenders are looking for:

Strong Credit Score

Most lenders will expect a minimum refinance credit score from potential borrowers. Typically, a FICO® credit score of 700 or more will get you the lowest loan rates on an auto refinancing loan. That said, there are lenders that are willing to work with those with low credit scores.

History of On-Time Payments

Potential lenders will look at how well you did with paying off your existing loan. If you’ve failed to make payments on time, that won’t help your cause seeking refinancing.

Improvement in Circumstances

Lenders generally like to see an increase in income or some other quantifiable measuring stick that signals you are worth a lower interest rate.

Pros and Cons of Auto Loan Refinancing

Auto loan financing has advantages and disadvantages, and what’s best for you depends on your specific situation. But as you decide whether to move ahead with the process, weighing the pros and cons of refinancing can help.

Pros

•   You may get a lower interest rate, which could save you money.

•   Your monthly payment might be lower by either getting a lower rate or extending your loan term. Keep in mind, though, that extending your term may cost you more in interest over the life of the loan.

•   You could pay off your loan earlier. If you opt for a shorter loan term than the one you currently have, you could pay off your car sooner.

Cons

•   You may need good credit to qualify for the best rates.

•   Refinancing may involve a hard credit check, which can temporarily lower your credit score.

•   There might be additional fees you have to pay, including prepayment fees and origination fees.

Pros of Refinancing an Auto Loan Cons of Refinancing an Auto Loan
You may get a lower interest rate You may need good credit to qualify for the lowest rates
Your monthly payment could be lower There may be a hard credit check, which can lower your credit score temporarily
You could pay off your loan earlier You may need to pay additional fees, including prepayment, title transfer, origination, and application fees

Determining If You Should Refinance

Once you’ve studied the pros and cons of refinancing, you need to think about what makes the most sense for you at this stage. Is your debt-to-income ratio low? Is your credit history strong? Do you have a good credit score? If so, you may be able to get a lower interest rate, which could be beneficial. Just check to see what fees may be involved with refinancing to make sure you’ll still come out ahead.

In addition, if your car has a high value and you still owe a decent amount on your current loan, refinancing could save you money if you can get a lower interest rate.

But if your credit is not as strong as it could be, or you currently have a significant amount of debt, refinancing might not be the wisest move for you right now. Refinancing also likely won’t make sense if you are almost finished paying off your current loan. In that case, you may want to stick with what you have.

Recommended: What Should Your Average Car Payment Be?

Applying for Auto Loan Refinancing

If you’re ready to move forward with refinancing, the application process is fairly straightforward. Just follow these steps:

•   Shop around. As mentioned, you’ll want to explore your options with different lenders to find the best rates and terms you can qualify for.

•   Fill out an official loan application. You’ll need to provide personal information, such as details about your employment and income. You may also need to give the lender pay stubs as verification. In addition, the lender will need your original auto loan, your car insurance information, and the make, model, mileage, and year of your car.

•   Wait to see if you’re approved. The lender will review all your information and do a hard credit check. You’ll be notified if you are approved for the loan.

•   Review the loan offer carefully. If the loan offer looks good, sign the loan agreement and keep a copy of the paperwork in a safe place. Often, the new lender will take care of paying off your previous auto loan, but you can check with your original lender to make sure. Then, start paying your new loan, per the terms of your loan agreement.

The Takeaway

Refinancing your auto loan can be a strategic financial move to lower your interest rate, reduce monthly payments, or adjust your loan term to better fit your current financial situation.

However, it’s essential to consider factors such as your credit score, the value of your vehicle, and any potential fees associated with refinancing. By thoroughly evaluating your options and understanding the implications, you can make an informed decision that aligns with your financial goals.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.


With refinancing, you could save big by lowering your interest or lowering your monthly payments.

FAQ

What does it mean to refinance an auto loan?

When you refinance an auto loan, you are applying for a new auto loan and using that new loan to pay off your old auto loan. This gives you a new interest rate, a new loan agreement, and a new loan term.

How do you refinance an auto loan?

To refinance an auto loan, check your credit score, compare lender offers, and gather necessary documents like proof of income and vehicle details. Apply with a lender offering better terms, and if approved, use the new loan to pay off the existing one. Start making payments under the new agreement.

When might you consider refinancing your car loan?

A car loan refinance makes the most sense if you have a good credit score and, ideally, a higher income or some other positive marker than when you got your original car loan. If so, you are more likely to qualify for a lower interest rate and better terms.

Can auto loan refinancing hurt your credit?

When you apply for an auto loan refinance, the lender typically does a hard credit pull, which can lower your credit score temporarily. Your score generally recovers within several months.

Photo credit: iStock/miniseries

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

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.

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.

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

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