SoFi

Has this happened to you? You’re thinking about getting a personal loan but haven’t yet applied. Then you get a letter in the mail: “You’re preapproved or prequalified for a personal loan!” What does that mean?

Some lenders use “prequalified” interchangeably with “preapproved,” but they are different. Here, we’ll discuss preapproval vs. prequalification and how to know if you’re a good candidate for a personal loan.

What Does Being Prequalified for a Loan Mean?

Prequalification is sometimes considered the first step in the loan approval process. You can think of it as a less comprehensive version of a preapproval. Prequalification simply means that you fit the general description of a customer typically qualified for a loan.

Based on your general profile, the lender can give you an idea of the size of loan you can qualify for. While prequalification can be done fairly quickly, it does not involve a full analysis of your credit report or verification of the financial information you provide. Because of that, there’s no guarantee that your loan will be approved.

Recommended: What Is a Personal Loan?

What Does Loan Preapproval Mean?

Preapproval is a more in-depth stage of the personal loan approval process. A lender will have accessed your financial history to assess you as a potential customer. Being preapproved means that, based on the information accessed, you most likely will be approved for a loan.

Preapproval allows the lender to show you the size of the loan you might qualify for, and the interest rate and loan terms they’re willing to offer. It’s a step closer to final approval of your loan application. However, this doesn’t automatically translate to being fully approved. For example, a hard credit inquiry can pull in information previously unseen by the lender that was not considered at the preapproval stage.

Does Prequalification or Preapproval Affect Your Credit Score?

Lenders typically prequalify you on the basis of financial information that you provide and perhaps a soft inquiry into your credit history. Soft inquiries don’t affect your credit score, so it’s unlikely that prequalification will either.

Because the prequalification process varies by lender, however, it’s impossible to say for sure that prequalification won’t impact your credit. If it does, the impact will be small and temporary.

Preapprovals are more rigorous than prequalifications and closer to what you’ll experience when you actually apply for a loan. Preapprovals often involve a hard credit inquiry, which does impact your credit. But again, any effect will be minor.

Recommended: Should You Borrow Money During a Recession?

How Do I Know If I’m a Good Candidate for a Personal Loan?

A personal loan application considers your existing debt and your ability to repay the loan. Your current employment will factor into how well-suited you are to repay the loan, as will your credit score. In most cases, this means you need a good credit score to qualify for an unsecured personal loan at a low interest rate.

Lenders will also consider your “DTI” — the ratio of your income to existing debt — and what kind of monthly payments you can afford.

If you can’t otherwise qualify because of a poor credit score, consider asking a close friend or family member to cosign your personal loan. Adding a cosigner with a good credit score to your application can help you get a lower interest rate on your loan.

Will You Prequalify for a SoFi Personal Loan?

Some nontraditional lenders, like SoFi, look at other parts of a financial package when evaluating a candidate’s personal loan application.

SoFi considers additional factors such as your earning potential and cash flow after expenses. This means that even if you have a shorter credit history (because you just graduated college, for example) you may still qualify for a personal loan based on your education and career.

To find out if you qualify for a SoFi personal loan, first go through the online prequalification process. This requires you to create an account, and input your basic personal information, education, and employment history. It takes only a few minutes, after which SoFi will immediately show you which loan options you prequalify for.

After selecting a preliminary personal loan option, you’ll have to finalize your application by uploading documentation to verify your personal information. This may include pay stubs and bank statements. Once you’re approved, the loan is typically disbursed within a week.

The Takeaway

Wondering what it means to be prequalified vs. preapproved? You’re not alone. The terms may sound similar, but there are differences to be aware of.

Prequalification is often the first step of the loan application process, and it typically takes less time and requires fewer details from the borrower. Preapproval is the second step of the process. Here, you can see the size of the loan you could qualify for and the potential terms and interest rate. However, neither step is a guarantee that you’ll be approved for the loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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.

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.

SOPL-Q424-048

Renovations can improve your home and increase its value. But as any seasoned homeowner will tell you, those projects can be expensive. If you can’t afford to cover the costs out of pocket, you may wonder if a construction loan is right for you. While it is an option, there are complications that people should be aware of.

We’ll take a look at construction loans, their requirements, and some alternatives to consider.

Overview of How Construction Loans Work

Construction loans finance the building of a new home or substantial renovations to a current home. They are typically short-term loans with higher interest rates, designed to cover the costs of land, plans, permits and fees, labor, materials, and closing costs. They can also provide a contingency reserve if construction goes over budget.

With a construction loan for a remodel, applicants must submit project plans and schedules along with their financial information. Once approved, they receive funding for the first phase of building only, rather than a lump sum. As construction progresses, assessments are provided to the lender so that the next round of funds can be released. Meanwhile, borrowers make interest-only payments on the funds they’ve received.

When construction is finished — and the borrower now has a home to serve as collateral — the construction loan may be converted to or paid off by a regular mortgage. The borrower then begins repaying both the principal and interest.

Recommended: Home Maintenance Checklist

Renovation Loans vs. Construction Loans: What’s the Difference?

Though renovation loans and construction loans can be used for similar purposes, there are important differences to know. Let’s take a closer look at both types of loans.

Renovation Loans

Unlike other types of home improvement loans, a renovation loan takes into account the property’s after-repair value, which is an estimation of the home’s value once the improvements are made. This can be good news for borrowers, especially those buying a fixer-upper. That’s because they may be able to secure a larger loan amount than they would with a traditional mortgage based on the home’s current value.

What’s more, renovation loans often come with lower interest rates than credit cards and unsecured personal loans.

Some common types of renovation loans include:

•   Government-sponsored loans, such as the FHA 203(k) home loan, Freddie Mac’s CHOICERenovation loan, and Fannie Mae’s HomeStyle renovation loan. Each type has its own rules and requirements.

•   A home equity loan

•   A home equity line of credit (HELOC)

•   VA renovation loans, which are available to eligible veterans and active-duty military personnel.

Construction Loans

As we mentioned, a construction loan is commonly used to pay for building a brand-new home. In some cases, the loan can be converted to a mortgage after your home is finished. However, getting one can be more challenging than securing a conventional mortgage.

Lenders generally want to see a debt-to-income ratio of 45% or lower and a high credit score, and you may be required to make a down payment of at least 20%. Depending on the type of construction loan you apply for, you may also be required to provide a detailed plan, budget, and schedule for the construction. Some lenders will also need to approve your builder.

There are different types of construction loans to consider:

•   Construction-to-permanent loans, or single-close loans, which converts to a mortgage once the project is finished. The borrower saves money on closing costs by eliminating a second loan closing.

•   Construction-only loans, or standalone construction loans, which must be paid off when the building is complete. You will need to apply for a mortgage if you don’t have the cash to do so.

•   Renovation construction loans, which are designed to cover the cost of substantial renovations on an existing home. The loan gets folded into the mortgage once the project is complete.

Pros and Cons of Using a Renovation Loan

As you explore different home improvement loans, consider the following pros and cons of renovation loans.

Pros

•   Borrowers may have access to substantial funds that can pay for major upgrades or repairs.

•   Money can be used for a wide variety of renovation projects.

•   The loan amount is based on the home’s projected value after the repairs and renovations are complete.

•   Interest rates tend to be lower than what you’d be offered with an unsecured loan or credit card.

Cons

•   You may be required to use your home as collateral.

•   As with any loan, you’ll need to meet certain eligibility requirements, such as a good credit score, low debt-to-income ratio, and proof of income and employment.

•   A renovation loan increases your debt load, which could put a strain on your finances.

Recommended: Home Inspection Checklist

Pros and Cons of Using a Construction Loan

There are advantages and disadvantages to consider before taking out a construction loan to fund renovations.

Pros

•   Funds can be used to cover all construction expenses.

•   Borrowers can use equity from other investments as collateral.

•   Loan requirements are generally focused on the construction process instead of a borrower’s credit profile.

•   Borrowers may only need to make interest payments during construction.

•   Loan terms may be more flexible than a traditional loan.

Cons

•   Funds are released as work progresses instead of in one lump sum.

•   It can be difficult to find lenders that offer competitive rates and to qualify for them — particularly if you don’t have a flawless credit history.

•   Loans tend to be short-term and must be paid in full at the end of the term.

•   May need to provide extensive documentation on the construction process in order to get approved.

•   If construction is delayed, you may need to ask the lender for an extension on the loan. This can cause interest rates and fees to accumulate.

Alternative Ways to Finance Home Renovations

If you are planning a small construction project or renovation, there are a few financing alternatives that might be easier to access and give you more flexibility.

Personal Loans for Renovations

An unsecured personal loan can fund a renovation project or supplement other construction financing.

Personal loan interest rates are typically lower than construction loan rates, depending on your financial profile. And you can frequently choose a personal loan with a fixed interest rate.

Personal loans also offer potentially better terms. Instead of being required to pay off the loan as soon as the home is finished, you can opt for a longer repayment period. And applying for a personal loan and getting approved can be much faster and easier than for a construction loan.

The drawbacks? You won’t be able to roll your personal loan into a mortgage once your renovation or building project is finished.

And because the loan is disbursed all at once, you will have to parse out the money yourself, instead of depending on the lender to finance the build in stages.

Cash-Out Refinance for Construction Costs

A cash-out refinance is also a good financing tool, particularly if you have a lot of equity in your current home. With a cash-out refinance, you refinance your home for more than you owe and are given the difference in cash.

You can estimate your building or renovation expenses with this Home Improvement Cost Calculator. Add your estimate to what you owe on your home to get the amount of your refinance.

The Takeaway

Planning a new home or substantial renovation? There are several ways to pay for the projects. One option is a renovation loan, which lets you pay for major (and minor) renovations without having to dip into your personal savings. Another option is a construction loan, which typically covers the entirety of new construction expenses. For smaller projects, a personal loan can be a good option — and a lot less complicated.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SOPL-Q424-060

Broadly speaking, individual retirement accounts, or IRAs, offer some sort of tax benefit — either during the year that contributions are made or when distributions take place after retiring. But not all retirement accounts are taxed the same.

With a traditional IRA, it’s possible for certain individuals to both invest for their future and reduce their present tax liability. For tax year 2024, the maximum IRA deduction is $7,000 for people younger than 50, and $8,000 for those 50 and older. For tax year 2025, the maximum IRA deduction remains at $7,000 for people younger than 50, and $8,000 for those 50 and older.

To maximize deductions in a given year, the first step is understanding how IRA tax deductions work. A good place to start is learning the differences between common retirement accounts — and their taxation. And since each financial situation is different, an individual may also want to speak with a tax professional about their specific situation.

Read on to learn more about IRA tax deductions, including how both traditional and Roth IRA accounts are taxed in the U.S.

What Is a Tax Deduction?

First, here’s a quick refresher on tax deductions for income taxes — the tax owed/paid on a person’s paycheck, bonuses, tips, and any other wages earned through work. “Taxable income” also includes interest earned on bank accounts and some types of investments.

Tax deductions are subtracted from a person’s total taxable income. After deductions, taxes are paid on the amount of taxable income that remains. Eligible deductions can allow qualifying individuals to reduce their overall tax liability to the Internal Revenue Service (IRS).

For example, let’s say Person X earns $70,000 per year. They qualify for a total of $10,000 in income tax deductions. When calculating their income tax liability, the allowable deductions would be subtracted from their income — leaving $60,000 in taxable income. Person X then would need to pay income taxes on the remaining $60,000 — not the $70,000 in income that they originally earned.

For the 2024 tax year, 22% is the highest federal income tax rate for a person earning $70,000, according to the IRS. By deducting $10,000 from their taxable income, they are able to lower their federal total tax bill by $2,200, which is 22% of the $10,000 deduction. (There may be additional state income tax deductions.)

A tax deduction is not the same as a tax credit. Tax credits provide a dollar-for-dollar reduction on a person’s actual tax bill — not their taxable income. For example, a $3,000 tax credit would eliminate $3,000 in taxes owed.

💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

Putting the IRA Tax Deduction to Use

Traditional IRA tax deductions are quite simple. If a qualifying individual under age 50 contributes the maximum allowed to a traditional IRA in a year — $7,000 for the 2024 and 2025 tax years — they can deduct the full amount of their contribution from their taxable income.

That said, you are not eligible to claim your IRA deduction if you are:

•   Single and covered by a workplace retirement account and your modified adjusted gross income (MAGI) is more than $87,000 for tax year 2024 ($89,000 or more for tax year 2025)

•   Married filing jointly and covered by a work 401(k) plan and your MAGI is more than $123,000 and less than $143,000 for tax year 2024 (more than $126,000 and less than $146,000 for tax year 2025)

•   Married, only your spouse is covered by a work 401(k) plan, and your MAGI is more than $230,000 and less than $240,000 for tax year 2024 (more than $236,000 and less than $246,000 for tax year 2025).

401(k), 403(b), and other non-Roth workplace retirement plans work in a similar way (when it comes to a Roth IRA vs a traditional IRA, contributions to a Roth IRAs are not tax deductible). For the 2024 tax year, the contribution maximum for a 401(k) is $23,000 with an additional $7,500 catchup contribution for employees 50 and older. For tax year 2025, the contribution maximum is $23,500 with an additional $7,500 catchup contribution for employees 50 and older. Also for 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Thus, a person under 50 who contributes the full amount in 2024 could then deduct $23,000 from their taxable income ($23,500 in 2025), potentially lowering their tax bracket.

One common source of confusion: The tax deduction for an IRA will reduce the amount a person owes in federal and state income taxes, but will not circumvent payroll taxes, which fund Social Security and Medicare. Also known as Federal Insurance Contributions Act (FICA) taxes, these are assessed on a person’s gross income. Both the employer and the employee pay FICA taxes at a rate of 7.65% each.

Understanding Tax-Deferred Accounts

Traditional IRA, 401(k), and other non-Roth retirement accounts are deemed “tax-deferred.” Money that enters into one of these accounts is deducted from an eligible person’s total income tax bill. In this way, qualifying individuals do not pay income taxes on that invested income until later.

Because these taxes are simply deferred until a later time, the money in the account is usually taxed when it’s withdrawn.

Here’s an example of this: Having reached retirement age, a person chooses to withdraw $30,000 per year from a traditional IRA plan. As far as the IRS is concerned, this withdrawal is taxable income. The traditional IRA money will be taxed as the income.

So, what’s the point of deferring taxes? Generally speaking, people may be in a higher marginal tax bracket as a working person than they are as a retired person. Therefore, the idea is to defer taxes until a time when an individual may pay proportionally less in taxes.

Tax Brackets and IRA Deductions

Income tax brackets can work in a stair-step fashion. Each bracket reveals what a person owes at that level of income. Still, when a person is “in” a certain tax bracket, they do not pay that tax rate on their entire income.

For instance, in 2024, single filers pay a 12% federal income tax rate for the income earned between $11,601 and $47,150. Then, the tax rate “steps up,” and they pay a 22% tax on the income earned that falls in the range of $47,151 and $100,525. Even if a person is a high-earner and “in” the 37% tax bracket, they still pay the lower rates on their lower levels of income.

401(k) Withdrawals and Taxation

Now, let’s compare that with the taxation on a $30,000 withdrawal from a 401(k). Assuming 2024 income tax rates, a $12,000 withdrawal would be taxed at a 10% rate up to $11,600 and then a 12% rate for the remaining $18,400.

Taxes are assessed at a person’s “effective,” or average, tax rate. This is another reason that some folks prefer to defer their taxes until later, when they can pay a hypothetically lower effective tax rate on their withdrawals, rather than taxes at their highest marginal rate.

But, here’s why it’s not so simple: All of the above assumes that income tax rates remain the same over time. And, income tax rates (and eligible deductions) can change with federal legislation.

Still, plenty of earners opt to reduce their tax bill at their highest rate in the current year — and a tax deduction via an eligible retirement contribution can do just that.

For individual tax questions, it’s a good idea to consult a tax professional with questions about specific scenarios.

What About Roth IRAs and Taxes?

Simply put, there are no tax deductions for Roth retirement accounts. Both Roth IRA and Roth 401(k) account contributions are not tax-deductible.

The trade-off is that Roth money is not taxed when it is withdrawn in retirement, as is the case with tax-deferred accounts like a 401(k) and traditional IRA. In fact, this is the primary difference between Roth and non-Roth retirement accounts. With Roth accounts, taxes are already paid on money that is contributed, whereas income taxes on a non-Roth 401k are deferred until later.

So, then, what are some advantages of a Roth retirement account? All retirement accounts provide an additional type of tax benefit as compared to a non-retirement investment account: There are no taxes on interest or capital gains, which is money earned via the sale of an investment.

Someone might choose a Roth over a tax-deferred retirement account because they prefer to pay the income taxes up front, instead of in retirement. For example, imagine a person who earned $30,000 this year. They pay a relatively low income tax rate, so they simply may prefer to pay the income taxes now. That way, the taxes are potentially less of a burden come retirement age.

Not everyone qualifies for a Roth IRA. There are limits to how much a person can earn. For a single filer, the ability to contribute to a Roth IRA for tax year 2024 begins to phase out when a person earns more than $146,00 ($150,000 for tax year 2025), and is completely phased out at an income level of $161,000 in 2024 ($165,000 for tax year 2025). For a person that is married and filing jointly, the phase-out begins at $230,000 in 2024 ($236,000 for tax year 2025), ending at $240,000 in 2024 ($246,000 for 2025).

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Deduction and Contribution Limits

The maximum amount a person is able to deduct from their taxes by contributing to a retirement account may correspond to an account’s contribution limits.

Here are the maximum contributions for the 2024 tax year:

•   Traditional IRA Limits: $7,000 ($8,000 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•   401(k): $23,000 (additional $7,500 if age 50 or older)

•   403(b): $23,000 (additional $7,500 if age 50 or older)

•   457(b): $23,000 (additional $7,500 if age 50 or older)

•   Thrift Savings Plan (TSP): $23,000 (additional $7,500 if age 50 or older)

•   Simple IRA or 401(K): $15,500 (additional $3,500 if age 50 or older)

•   SEP IRA: The lower of 25% of an employee’s income, or $69,000

•   Simple IRA or 401(K): $16,000 (additional $3,500 if age 50 or older)

Here are the maximum contributions for the 2025 tax year:

•   Traditional IRA: $7,000 ($8,000 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•   401(k): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   403(b): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   457(b): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   Thrift Savings Plan (TSP): $23,500 (additional $7,500 if age 50 or older; for 2025, those aged 60 to 63 can contribute an extra $11,250)

•   SEP IRA: The lower of 25% of an employee’s income, or $70,000

•   Simple IRA or 401(K): $16,500 (additional $3,500 if age 50 or older)

The above lists are only meant as a guide and do not take into account all factors that could impact contribution or deduction limits — such as catch-up contributions. Anyone with questions about what accounts they qualify for should consult a tax professional.

Investing for Retirement

Different types of retirement accounts come with distinct tax benefits and, for eligible investors, IRA tax deductions. Opening a retirement account and contributing to certain tax-deferred accounts may affect how much a person owes in income taxes in a given year. Roth accounts may provide tax-free withdrawals later on.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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