Financial Topics Archives

Dec

2024

What Is Risk-Based Pricing?

By Kim Franke-Folstad | personal_loan, Tools & Calculators | Comments Off

You may not have heard the term “risk-based pricing” before, but you’ve likely seen it in action if you’ve ever gotten a loan or a credit card.

Risk-based pricing is when lenders decide which interest rate and other loan terms to offer a borrower based on that person’s creditworthiness. If the lender believes you may default or struggle to make payments on a loan, for example, you’ll likely be offered a higher rate — or you could be turned down altogether. On the other hand, if your chances of defaulting are low, you can expect to be offered a more competitive rate and better loan terms.

Read on for a look at how risk-based pricing could affect your loan terms and ways to improve your risk profile in order to secure the best rate possible.

Key Points

• Risk-based pricing involves setting loan rates and terms based on a borrower’s creditworthiness.

• Factors influencing risk-based pricing include credit score, credit history, income, and debt-to-income ratio.

• This pricing model allows lenders to offer loans to a wider range of borrowers, including those with lower credit scores.

• Borrowers with better credit profiles can secure lower interest rates and more favorable loan terms.

• Regulations require lenders to notify borrowers if they receive less-favorable terms due to their credit report.

Risk-Based Pricing Explained

If you’ve ever applied for a loan or credit card, you’ve probably noticed that everyone isn’t offered the same interest rate and terms. That’s because financial institutions typically use risk-based pricing to determine how much they’ll charge borrowers for the money they lend.

What Is Risk-Based Pricing?

The idea behind risk-based pricing is fairly straightforward: Different borrowers get different rates depending on the level of risk the lender believes it’s taking. This allows financial institutions to provide options to a wide range of consumers while also making sure they’re being compensated for taking a chance on those who may be less creditworthy.

How Risk-Based Pricing Works

A key part of the loan underwriting process is assessing a borrower’s risk profile. Lenders can’t legally consider factors such as age, race, or gender when they’re deciding whether to approve a loan application. But they can — and do — use risk-based pricing models to help determine if a borrower should get a loan and if that loan should cost more or less based on financial criteria.

Lenders want to be as sure as possible they’ll be repaid on time and in full. And though there’s no guarantee a borrower with a good financial reputation won’t default on a loan, lenders typically see it as a solid indicator of a favorable outcome.

This means an applicant with an excellent credit score and other positive financial factors can expect to be offered a lower interest rate than a person with average, fair, or poor credit. This is true whether they’re seeking a car loan, personal loan, or a mortgage.

Creditworthiness can also affect loan fees and repayment terms, and the rewards and perks available with certain credit cards.

Factors that Can Influence Risk-Based Pricing

The criteria used to determine loan eligibility and pricing can vary by lender, but here are some of the factors that are typically included in a risk assessment:

Credit Score

A credit score is calculated using information such as payment history, existing debt obligations, and credit utilization from a current credit report. Lenders typically use this three-digit score as an indicator of a person’s overall financial well-being. The higher your credit score, the more likely you are to be approved for a loan and receive better financing terms.

A score of 670 to 739 is generally considered “good” on the credit rating scale, while scores of 740 to 799 are in the “very good” range, and 800 and above is “excellent.” Individual lenders may set their bar higher or lower when judging credit applicants.

Credit History

To get a more complete look at how you’ve handled credit in the past, lenders may also check one or more of your credit reports for signs of trouble. Potential red flags include past delinquencies, a mortgage foreclosure, bankruptcy, or debts that went to collection.

Income

Your income and employment history also can be a factor in determining risk. Lenders will want to see documentation that shows you earn enough to repay the loan and that you have stable employment.

Debt-to-Income Ratio

Along with your income, lenders will take a look at your debt-to-income (DTI) ratio to ensure you can manage all your debt payments. (You can calculate your DTI by dividing your monthly debt payments by your monthly gross income.) An acceptable DTI may vary by lender and the type of loan you are applying for. But in general, a DTI ratio below 43% is considered good, while many lenders prefer 36% or below.

Loan Type

Lenders tend to look at different types of debt as carrying varying levels of risk. For example, loans that are secured with some kind of collateral or down payment, such as mortgages, car loans, and home equity loans, usually come with lower interest rates than unsecured loans and credit cards.

Impact on Consumers

It may seem as though risk-based financing is all about protecting lenders — helping them minimize their losses by allowing them to tailor their rates to fit an individual borrower’s risk profile. But because it expands the range of lending options to include those with fair or even poor credit, risk-based lending can also benefit those who otherwise might not qualify for financing.

It also can serve as an incentive to consumers to improve their credit reputation in order to improve their loan terms in the future by refinancing, negotiating for a new and better rate on a current loan, or waiting to apply for financing until their credit is in better shape.

Regulations Governing Risk-Based Pricing

How can you know if you’ve been personally impacted by risk-based pricing? The Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB), and federal banking agencies have all published rules stating that if a lender denies a loan application or offers “materially less-favorable terms” based on a consumer credit report, it must provide the applicant with a notice that explains this decision. If you don’t agree with the terms you’ve been offered — for example, if you’re given a higher-than-expected annual percentage rate (APR) — you aren’t obligated to accept the loan.

Pros and Cons of Risk-Based Pricing

As with most things related to finances, there are benefits and drawbacks associated with risk-based pricing.

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Pros:

• It gives lenders objective measures to assess each individual borrower’s risk profile.

• It protects lenders by allowing them to charge risky borrowers more for a loan to offset the higher probability of default.

• It allows lenders to offer a wide range of financing options to borrowers with different levels of creditworthiness.

• It can benefit low-risk borrowers, who may qualify for the more competitive rates and other loan terms a lender is offering.

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Cons:

• Borrowers who don’t check all the low- or medium-risk boxes may find it more challenging to get an affordable loan.

• It may be tempting for high-risk borrowers who need a loan to get in over their head with rates and terms they can’t really afford.

• It may be difficult for borrowers who have red flags in their credit history to qualify for a loan they can afford.

Strategies to Improve Your Risk Profile

If you’re trying to build or rebuild your credit, risk-based lending may seem unfair or even punitive. But if you keep working on your financial health, you can eventually replace the missing or negative information on your credit reports with positive numbers.

Here are some steps that can help you boost your credit profile and show lenders you’re worthy of better loan terms:

Pay Off Debt

Paying down high-interest credit card balances and lingering loan debt can help you raise your credit score and lower your DTI — two key factors lenders look at when determining a borrower’s risk. If you’re repaying several debts to different lenders, you may want to look into how debt consolidation works and whether it makes sense for you.

Increase Your Income

If a low-paying job is getting in the way of getting a loan, you might consider taking on a side gig, asking for a raise, or looking for an employer that pays more for what you do.

Monitor Your Credit Score and Credit Reports

Regularly reviewing your credit reports and promptly disputing dated info or errors can help you ensure your credit profile reflects your current financial standing. You can check your credit score for free through your bank, credit card company, Experian, or a money tracker app. And you’re entitled to a free credit report weekly from each of the three credit bureaus via AnnualCreditReport.com.

Choose Appropriate Loan Products

Think about how you plan to use the money you want to borrow and which lending product might be the best choice for that goal. If you plan to make a major purchase, for example, a personal loan might be a better option than a credit card, because interest rates are typically lower.

Recommended: What Is Risk Tolerance?

Do Some Comparison Shopping

You also may be able to save money by taking the time to shop around for the best rates and terms available for the type of loan or credit card you want. Some lenders and loan types may have less-stringent standards for borrowers than others. And while you’re looking, you can read online reviews of the lenders you’re considering.

The Takeaway

For low-risk borrowers, risk-based pricing could mean a lower interest rate and other favorable terms. For a higher-risk borrower, it can result in a more expensive loan — or the loan application being rejected. This is why it’s a good idea to know where your credit stands before you apply for any type of financing. That way, you can be an informed shopper as you look for the best rates and terms based on your current creditworthiness. Or you can work to improve your financial health so lenders regard you as less of a risk.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

How does risk-based pricing differ from flat-rate pricing?

With risk-based pricing, the cost of a loan can be adjusted to fit the creditworthiness of the borrower. With flat-rate pricing, everybody who is approved is charged the same rate, whether they have good, bad, or fair credit.

Can I negotiate better terms if I’m offered high rates due to risk-based pricing?

Whether or not you can negotiate better terms may depend on the type of loan you applied for and the lender. If, for example, you’re a long-standing customer, your lender may be willing to work with you even if you present as a high-risk borrower.

How often do lenders reassess risk for existing loans?

Because a borrower’s risk profile can change over time, lenders may periodically review a customer’s credit score, payment history, and other financial factors. How often that happens varies by lender.

Are all types of loans subject to risk-based pricing?

The rates and terms borrowers are charged for most loan types are based on risk-based pricing.

Photo credit: iStock/MicroStockHub

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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.

SOPL-Q424-002

Dec

2024

How to Finance a Shed

By Jackie Lam | Budgeting & Goals, Family Finances, personal_loan | Comments Off

Adding a shed to your home can mean the difference between rummaging around in a cluttered garage for a tool and having sundry garden tools, outdoor equipment, and off-season lawn furniture all in a designated space. Having a spot to store such items can save time and reduce mental fatigue.

One thing: Sheds can be expensive. According to HomeAdvisor, sheds can cost anywhere from $200 to $30,000 to build, with an average cost of $3,500.

Don’t have the cash on hand to front the costs? Enter shed financing. Here, we’ll walk you through different options for shed financing and alternatives to consider.

Key Points

• Sheds can be costly, with prices ranging from $200 to $30,000, and an average cost of $3,500.

• Financing options include personal loans, contractor financing, savings, family loans, and credit cards.

• Personal loans offer flexibility and can start as low as $500, suitable for small projects.

• Home equity loans or HELOCs are alternatives but come with the risk of losing your home if payments aren’t met.

• Building good credit and getting preapproved can help secure better loan terms and interest rates.

Understanding the Cost of Shed Installation

As mentioned, the average cost to build a shed is $3,500. When installing one of these structures, you’ll need to consider factors like size, building materials, labor costs, and details such as windows, doors, and electrical wiring. As you might expect, designing and building a custom shed is more expensive than constructing one from a premade kit.

Figuring out the cost per square foot can give you a general idea of the total price tag. But to determine the true cost of a shed, you’ll want to do your homework to figure out the cost of materials, labor, and permits.

Personal Loans for Shed Financing

A popular route for shed financing is to take out a personal loan. The beauty of personal loans is their flexibility — the funds can be used for essentially anything. Plus, personal loan amounts often start as low as $500, so they can be a good fit for smaller DIY projects like building a shed.

Payment terms on a personal loan are typically between two and seven years, which can provide some breathing room in your budget. And personal loans tend to have lower interest rates than credit cards. As of August 2024, the national average for interest rates on a 24-month personal loan is 12.33%, while the national average for interest rates on a credit card is 21.76%. (Use a personal loan calculator to figure out what the monthly payments might be, depending on the loan term and interest rate.)

If you know the total cost of the shed, you can use the proceeds from a home improvement loan to cover the different expenses. However, be aware that some lenders charge an origination fee, which can be anywhere from 1% to 5% of the loan amount — and sometimes as high as 10%. This one-time upfront fee is taken from your loan proceeds.

A couple of drawbacks of a personal loan include being responsible for monthly payments, which kick in after you receive the loan proceeds. Plus, lenders will need to do a hard pull of your credit, which can cause your credit score to temporarily dip by a few points.

Recommended: Where to Get a Personal Loan

Contractor Financing and Payment Plans

Besides personal loans, another way to pay for a shed is to get financing directly from the contractor. Some contractors have teamed up with third-party lenders to offer customers a loan option to cover the costs of a home improvement project. Like a personal loan, contractor financing is an installment loan, which means you’re responsible for making monthly payments until the balance is paid off.

While it can be an easy way to get a shed loan, interest rates from contractor financing can be more expensive than other options. Plus, you’re stuck with the contractor if things go south with the project.

Comparing Shed Financing Alternatives

If you’re curious about options besides a personal loan or contractor financing, here are some other ways to finance a shed.

Savings

If you’re not in a rush, you can pause on installing a shed. Instead, figure out how much you’ll need and put money into a savings account. To help you make steady progress in your goals, automate your savings, and figure out a target date and amount.

Family Loans

Family loans are something to consider should you have trusted friends or family who might have the means to give you a loan. As you’ll potentially be mixing personal relations with financial matters, take the time at the outset to discuss any concerns. And just like with any other type of loan, go over the terms and come up with a written plan to pay back the money.

Credit Cards

Tapping into an existing card can be an easy way to finance a shed, but it can also be expensive. Credit card interest rates are usually higher than other types of financing, and if you fall behind on payments, you could get hit with late fees.

Home Equity Loan or HELOC

Have you built up some equity in your home? You may want to consider borrowing against it by taking out a home equity loan or a home equity line of credit (HELOC). Both options are often easier to qualify for than unsecured forms of credit, such as a personal loan or a new credit card. However, if you’re unable to keep up with payments, you risk losing your home.

Tips for Securing an Affordable Shed Loan

Remember, the less you pay in interest and fees, the less expensive the total cost of your shed loan. Here are some steps you can take to help you position yourself for better rates and terms.

Build Your Credit

Having a good or excellent credit score can mean lower interest rates and more flexible terms. To build good credit, stay on top of your monthly payments, keep credit usage low and unused credit cards open, and avoid overspending.

Explore Shed Options

Before applying for a personal loan for a shed, poke around and see the options in terms of size, materials, and details like the door, windows, and shelving. Request estimates to get an idea of the type of shed you’d like to build.

Understand How Much You Need to Borrow

Knowing the type of shed you’d like to build helps you narrow the costs involved. Once you have a ballpark figure, borrow only what’s necessary.

Get Preapproved

If possible, get preapproved for loans from different lenders. That way, you can gauge the loan amount and terms you’ll likely qualify for. Lenders typically allow you to get preapproved online, and the process generally requires a soft credit pull, which won’t impact your credit score.

The Takeaway

While building a shed can be expensive, landing on an affordable way to finance the project is doable. Start by doing your homework on different shed options, and use your findings to determine how much you’ll likely need to borrow. From there, start exploring the financing choices available to you and decide what makes the most sense for your finances.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

FAQ

Are there any government programs for shed financing?

Government programs are available, and you might be able to use the proceeds from the loan or grant to finance a shed. However, you’ll need to meet eligibility criteria, which can depend on your income, age, location, type of home improvement project, and whether you belong to certain groups.

How do shed loans compare to other home improvement loans?

Shed loans are the same as other home improvement loans. One main difference is the loan amount. How much you need to borrow depends on several factors, including the shed type, the size, and whether you’re building from scratch or constructing one from a prefabricated kit.

What is the typical repayment period for a shed loan?

Shed loans, which are a type of personal loan, usually have repayment terms of between two and seven years. You’ll want to get a loan term that’s a good fit for your budget and a monthly payment you can afford.

Photo credit: iStock/irina88w

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 .

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.

^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
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.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

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-Q424-004

Dec

2024

Preapproval vs Prequalify: What’s the Difference?

By Bonnie Gibbs Vengrow | personal_loan, Terminology | No Comments

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.

Key Points

• Prequalification is a preliminary step in the loan process, offering a general idea of loan eligibility without a full credit analysis.

• Preapproval involves a detailed review of financial history, indicating a higher likelihood of loan approval.

• Prequalification typically involves a soft credit inquiry, which doesn’t affect credit scores, while preapproval may involve a hard inquiry, impacting credit scores slightly.

• Factors like earning potential and cash flow are considered, allowing those with shorter credit histories to qualify for loans.

• Final loan approval requires documentation verification, and approved loans are usually disbursed within a week.

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.

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. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

SOPL-Q424-048

Dec

2024

31 Facts About FAFSA for Parents

By Kaitlyn Farley | Going to College, Student Loans, student_loan | Comments Off

Editor’s Note: The new FAFSA form for the 2025-2026 academic year is available. Based on early testing by students and families, the process seems to be improved from the 2024-2025 form. Still, it’s best to get started on the form and aim to submit your application as soon as possible.

Applying for federal aid is a crucial step most high school students take while transitioning to college life. Parents going through the college admissions process for the first time, though, may not realize that they also play a huge role in helping their children apply for grants and scholarships through the Free Application for Federal Student Aid or FAFSA.

Applications for the 2025-2026 FAFSA opened on November 21, 2024, and will remain open until June 30, 2026. If you’re looking for facts about FAFSA that will help your child apply for college aid for the 2025-2026 academic year, we’ve compiled some of the most important information on how you can help your child during the FAFSA process.

FAFSA Facts and Tips

Filling out FAFSA for the first time? These facts and FAFSA tips can help you prepare for the application process and offer suggestions for getting the most aid.

1. FAFSA Is Required to Receive Government Student Loans

For those who may be new to the financial aid process, FAFSA is the form students fill out to apply for federal financial aid, including federal student loans. More than 17 million students fill out the FAFSA each year. Your child won’t be eligible for government-funded college aid, such as federal loans or grants if they don’t apply.

2. Your Child Could Qualify for Grants by Filling Out FAFSA

While you can get subsidized or unsubsidized loans through FAFSA, your child may also be eligible for grants. One common federal grant is the Pell grant, which is awarded to first-time undergraduate students who show exceptional financial need, such as coming from a low-income family.

3. It Determines Work-Study Eligibility

Federal work-study is a way for students to earn income at a part-time job while in college. These jobs can be on or off-campus and vary by school, although not all schools participate in the program. You have to fill out FAFSA to determine if you’re eligible for work-study programs.

4. Some Schools Use FAFSA to Determine What Aid They Offer

If the schools your child applies to offer their own aid, such as need-based scholarships, they may use FAFSA to determine eligibility. You may want to check with the schools your child is applying to and ask if they have a separate application for internal scholarships and grants.

Recommended: FAFSA Guide

5. Most Applicants Under Age 24 Are Considered Dependents

Most students under the age of 24 who are neither married nor parents themselves won’t be able to apply as an independent student . As a result, for most incoming freshmen, their parents’ income is counted in the determination of financial need.

6. Your Child Needs Your Information to Apply

If your child is filing as a dependent, then they’ll need some basic information about your finances, such as your income and paid taxes. You may also elect to apply for a Parent PLUS loan at some point, which can help cover your child’s educational expenses if they don’t receive enough in loans and grants to cover costs. Note that you may need to provide additional information to apply for a Parent PLUS loan.

7. High-Income Families May Want to Still Apply

If your family is middle- or upper-class, you may wonder if your child will receive any FAFSA aid. However, applying is free, and family income is just one of many factors considered during the application process. Additionally, your child’s school still may require the FAFSA to consider them for institutional aid, such as non-need based scholarships, so it may be worth applying for even if you don’t think your child will need or receive aid.

8. Grades Don’t Affect FAFSA Eligibility

FAFSA does not have a GPA requirement to apply. However, your child may want to keep in mind that they could lose any aid given to them through FAFSA if they have poor grades for multiple semesters after they receive the aid.

9. Deadlines May Differ by State and School

While the FAFSA doesn’t close until June 30, 2026 for the 2025-2026 academic year, FAFSA application deadlines vary by state and school. State and school deadlines may close prior to the federal deadlines. If you’re not sure what deadlines apply to your student, consider checking with the financial aid office of each school your child applies to and asking what their FAFSA deadlines are.

10. Having Multiple Kids in College No Longer Affects Financial Aid Awards

In January 2024, a new law went into effect that removes the number of family members in college from the financial aid calculation. Before, families with multiple children in college may have qualified to receive more aid. That is no longer the case. However, at the same time, the Pell Grant opportunity has been expanded so that students who might not have gotten a Pell Grant before may now get one. These are two of many changes created through the FAFSA Simplification Act, which aims to simplify the FAFSA form and therefore encourage more families to fill it out.

11. Expected Family Contribution Is Also Changing

Expected family contribution (EFC) is an estimate of how much FAFSA believes families can contribute to the cost of a student’s education. However, as part of the FAFSA Simplification Act, EFC was replaced with the Student Aid Index (SAI), which went into effect for the 2024-2025 academic year.

12. FAFSA Is Changing the Process for Children of Divorce

Before the new simplified FAFSA, in the case when a child’s parents are separated, the custodial parent’s information was included on the form. However, with the new changes, the parent who provides the most financial support to the student is responsible for filling out the FAFSA.

13. Your Child Will Need Their Social Security or Alien Registration Number

As your child prepares to fill out the FAFSA, they’ll need their Social Security or Alien Registration number if they are not a U.S. citizen.

14. Have Certain Nontaxable Income Information at the Ready

On the 2025-2026 FAFSA, there are far fewer questions about nontaxable income for parents than there used to be. What you will still need to provide are such things as the amount of the untaxed portion of any IRAs and pensions you may have, and deductions and contributions to self-employed SEP IRA, SIMPLE IRA, and qualified plans.

15. Your Child May Need to Report Grants and Scholarships

Most first-time college students won’t need to report any grants or scholarships they received. However, they may have to include them on the FAFSA if they had to report them on their taxes, such as:

• AmeriCorps benefits living allowances and education awards

• Taxable work-studies, assistantships or fellowships

• Other grants or scholarships reported to the IRS

If you have any doubts about what types of grants may be taxable, consider consulting a tax professional.

16. Have Bank Statements Available

To fill out FAFSA, you’ll need bank statements for both you and your child. This information helps determine how much aid your child will be eligible for.

17. You Don’t Have to Have a Social Security Number to Sign the Form

If you’re filing the FAFSA online and you don’t have a Social Security number, you can create a federal student aid (FSA) ID without it. Your FSA ID is your login and password. Then you can proceed with filling out your portion of the form.

18. You Don’t Need to File Taxes Before Submitting the FAFSA

If you filed for an extension for your tax return, you can use your W-2 or 1099 statements. But you will need to update the FAFSA once you file. This is because which tax bracket you’re in can impact how much aid your child is eligible for.

19. You’ll Need to Have a List of Assets Ready

FAFSA uses parental assets to help determine aid eligibility. You’ll need to know how much in assets you have, which include (but are not limited to):

• Money in cash, savings, and checking accounts

• Non-retirement investments (such as stocks and mutual funds)

• Businesses

• Investment farms (in other words, you don’t live on and operate the farm)

• Other investments, such as real estate and stock options

20. Some 529 Plans Are Also Considered Assets

When filling out information about assets, you’ll also need to provide the value of the 529 College Savings Plans you own. Also, if your dependent child owns a 529 plan, you will need to report it as a parental asset — and not as the student’s asset. However, a 529 owned by anyone else, such as the student’s grandparents, is no longer reported as an asset on the FAFSA.

21. Your Primary Home Doesn’t Need to Be Listed as an Asset

One common FAFSA mistake is listing your primary home as an asset. However, FAFSA does not require you to do so. In fact, listing it as an asset can decrease the amount of aid your child receives.

22. You Don’t Need Your Retirement Information

FAFSA also doesn’t count the value of retirement accounts as assets. Again, including them can inflate the number of assets you have and therefore may decrease the amount of aid your child is offered. However, as mentioned above, you will need to report the untaxed contributions and withdrawals from these accounts on the FAFSA.

23. You’ll Need to Include Each School Your Child Is Applying To

When you and your child fill out the FAFSA, you’ll want to have a list of all the schools your child may be interested in applying to. You’ll need each school’s federal school code to add them to the list of schools you want your FAFSA information sent to, although you can also search for this information on the form itself if you can’t find it on the school’s website. It may be wise to include schools your child isn’t sure they want to apply to yet since it’s easier to simply add the school to the list now than having to send the school your FAFSA information later.

24. Schools, Not the Government, Will Give You Financial Aid Updates

Part of the reason you’ll need to send your FAFSA to schools your child is considering applying to is because schools, not the government, send out financial aid packages. As such, each school your child applies to may offer a different financial aid package.

25. Skipping Information Can Be Costly

Before hitting submit, you might want to double check that every section of the FAFSA is filled out (and accurate). Skipping FAFSA sections may result in delays in your application being processed, errors that prevent you from submitting, or even a decrease in the amount of financial aid you may get.

26. Your Child Will Need to Take Student Loan Entrance and Exit Counseling

Students who receive Direct Subsized or Unsubsidized loans or Direct PLUS loans for graduate students are required to take student loan entrance counseling. If a student is a first-time student loan borrower or a graduate student who has not previously received a Direct PLUS loan, they will need to take entrance counseling before their loans are disbursed. The counseling informs student borrowers about the terms and conditions of their loans, including interest rates, repayment options, and how to avoid default or delinquency.

Your child can take entrance counseling by logging into their account on StudentAid.gov. The session must be completed in one session. It’s important to note that some schools have different entrance counseling requirements, so check with the financial aid office to make sure nothing else is needed.

Similarly, after graduation, federal student loan borrowers need to take mandatory student loan exit counseling to help them navigate how the student loan repayment process works. A reminder will be sent to your child’s email in their last year of school about when this exit counseling is due. However, you and your child may want to consider reviewing student loan exit repayment options before the counseling is due to ensure they pick the best option based on their financial situation.

27. File Early to Get the Most Aid

While it may seem like you have a ton of time to fill out the FAFSA, it may be best to complete it sooner rather than later. Delaying can mean financial aid for your state or school dries up before your child can even be considered for it. Additionally, knowing how much aid each school is offering your child may help them when deciding on which school to attend.

28. You Could Be Selected for FAFSA Verification

After your child receives their student aid report, they may get a message saying they were selected for verification. FAFSA verification is used by some schools to simply verify that students’ FAFSA information is accurate. Some schools randomly select people to be verified, some verify all students, and some may elect not to verify any students.

29. You Can Appeal Your Aid Package

Once your child has their financial aid packages, they may find that they were offered less than they expected or hoped for. If your child’s dream college didn’t offer enough aid (or perhaps even didn’t offer them any aid), they may be able to appeal for more financial aid. This process may be especially important if your financial situation has changed since you and your child first applied for FAFSA. While schools may deny the request, it doesn’t cost you or your child anything but time to ask for more aid.

30. You Can List Unusual Circumstances That Affect Your Finances

Another way to try and increase your financial aid package is by listing unusual financial circumstances both on your FAFSA and in an appeal letter to schools you’re applying to. Some common unusual circumstances include (but are not limited to):

• Having tuition expenses in elementary and/or secondary schools

• Experiencing unusual medical or dental expenses not covered by insurance

• Having a family member become unemployed recently

• Experiencing changes in income and/or assets that could affect aid eligibility

31. You’ll Have to Reapply Every Year

Once you’ve filed your FAFSA, you may want to keep your login information in a safe place. You’ll need that information to file for FAFSA every year your child is in school, and losing your FSA login information may delay your ability to apply next year. You may also want to set a reminder on your phone or calendar to apply next year, although FAFSA will send you an email reminder when next year’s FAFSA is open.

The Takeaway

Filling out and submitting the FAFSA is an important first step in helping your child pay for college. Knowing how the FAFSA works and how to optimize the amount of aid your child receives can help increase the amount of federal aid they’re offered.

However, if your child’s financial aid package isn’t enough to cover college costs, they may want to consider private student loans. It’s important to note, however, that private student loans don’t offer the same borrower protections as federal student loans. That’s why it’s wise to consider all the options to make the best choice to help pay for your child’s education.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

Photo credit: iStock/wagnerokasaki

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Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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

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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.

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Dec

2024

How to Create a Home Budget: Step-by-Step Guide

By Kayla McCormack | Budgeting & Goals, Financial Independence, money | No Comments

Managing your everyday expenses as part of a household can sometimes get complicated. Your finances have been on track, say, but then a frigid winter arrives and sends your heating bill soaring. Or you suddenly have to account for a new sofa purchase and realize you’re perilously close to overdrafting.

Wrangling one’s cash flow and meeting financial goals can be simpler (and often less stressful) if you have a home budget, which is a method of tracking and managing your money as it comes in and goes out. Creating a realistic household budget can help you find the right balance. Learn the ropes of creating your own home budget here.

Key Points

• A household budget helps manage money by tracking income and expenses, aiding in financial goal achievement.

• There are different budgeting methods to choose among, such as the 50/30/20 rule or envelope method.

• One of the first steps is to identify all household expenses, including housing, food, utilities, and transportation, to create an accurate budget.

• Tools like bank dashboards or apps to track spending and adjust the budget can be used as needed.

• It’s wise to regularly review and tweak the home budget to accommodate changes in expenses or financial goals.

How to Create a Household Budget

A household or home budget is a plan for how you will utilize the money coming in to cover expenses and savings goals. It typically covers one month at a time, but it can be smart to tweak it to reflect how spending varies over the year. Here are the steps that can help you create a flexible, helpful household budget.

Have a partner? Collaborate on your household budget together so you can be aligned on your financial management, which may mean keeping some aspects of your money separate (say, you might have one shared pool of money and also each have your own checking account as well). And if you have roommates, a household budget can help you identify and divvy up shared expenses appropriately.

1. Choose an Ideal Budget for the Household

A vital first step for creating a household budget is picking a good system. There are many ways to budget, and the right one is the one that works for your personal money style and financial goals. It can be helpful to review some of the options such as:

• The 50/30/20 budget rule: With this popular system, you divide your take-home earnings as follows. Half or 50% is allocated for the needs in life; food, shelter, health care, minimum debt payments, and the like. Then, 30% goes toward wants: dining out, vanilla lattes to go, entertainment, travel, and fun purchases. The last 20%? That’s for savings or additional debt payments.

• The envelope budgeting method: With this technique, you think about the different categories of spending in your household and create an envelope for each with the amount of money needed per month in it. Then, each month, you use those funds to pay your bills. So if you have an envelope with $100 in it for dining out and use it all up on the 15th of the month, that’s it! You stop spending in that category or else borrow from a different envelope that has excess funds.

• The zero-sum budget: With this budget, every dollar has a job to do. The goal is to spend each dollar (and that can mean applying some to, say, building an emergency fund in a savings account.

It’s often wise to review a few different budget methods (you can likely find more online), and pick what looks like the right fit. It may be great, or you may want to pivot and try something else. Or create your own home budget method that uses the best of various techniques. Trial and error can be a valuable part of the process as you find a system that works for you.

2. Identify All Household Expenses

An integral part of almost any household budget will be accounting for your expenses. Many people are well aware of exactly how much money they earn (which is also an important component of a budget), but expenses can be variable and somewhat hard to capture.

While not an exhaustive list, here are some typical ones to note. You can tally up how each category tracks for a few months, and then divide by the number of months to get an appropriate sum for your budget.

• Housing: This category can include rent or mortgage payments and property taxes. If you are a homeowner, you may have various infrastructure expenses, such as annual HVAC inspections and the like. Don’t forget about your renters or homeowners insurance either. Need a new mattress? That can land in this category, too.

• Food: It can make sense here to consider how much you spend on groceries in one bucket and dining out (which includes things like wine with colleagues after work) in another.

• Entertainment: This can include books, movie tickets, streaming platforms, sports events, concerts, plays, downloaded music or e-books, and the like.

• Utilities: Here’s where you account for heating and cooling costs, phone, wifi, and other expenses that keep your household connected and comfortable.

• Transportation: This may include a mix of car payments, auto insurance, gas costs, public transportation, rideshare payments, and other expenses.

• Clothing: With this category, you may want to divide expenses up into necessary expenditures (a new winter coat) and fun purchases, such as an outfit to wear to a holiday party. This can help you determine how much to spend on needs vs. wants.

• Debt payments: Make sure to include such expenses as credit card payments, student loans, car payments, and the like.

As you consider your spending, don’t forget about those annual or somewhat random expenses that crop up, such as money for the holiday party you always host or gutter cleaning every year.

You’ll want to do your best to accommodate those expenses. If you don’t budget for them, you could wind up dipping into savings or adding to any credit card debt you are carrying.

3. Get the Right Tools to Track Your Expenses

Budgets involve accounting for expenses vs. your income. After reviewing at least a few months’ worth of expenses, you’ll be creating guidelines for spending vs. your income. You can chart different expenditure categories and see how much you can allocate toward them and where you can make some cuts. You might focus on lowering spending on, say, dining out so you can put more money toward debt repayment or rising property taxes.

To help you with this, you may also want to select the right tools to help you track your expenses as monthly variations can impact on your financial standing. A few options:

• A good place to start can be to check out the tools your financial institution offers. Many traditional and online banks have dashboards, trackers, alerts, and other ways to monitor (and then adjust) your spending.

• Another option is to try third-party tools available online and as apps. These can be free or may involve a fee for premium features.

• For some people, setting up a budget in Excel works well. This can involve logging your expenses regularly to see how you’re tracking.

• For others, the right tools could simply be a dedicated notebook and colored pens or an accordion folder to keep receipts.

These tools can help motivate you to dive in, similar to the way buying back-to-school supplies used to get you psyched up for the start of classes. They can keep you engaged as you work with the guardrails your budget provides.

Recommended: 50/30/20 Budget Calculator

4. Monitor and Change Your Budget As Needed

Setting up a budget is all about having a framework for managing your money. It helps you keep spending in check and achieve your financial goals. A few points to note as you live with a household budget:

• It often takes tweaking to get your budget balanced. For instance, when inflation is surging, you may find expenses like groceries, gas, and utilities rising. You might have to trim elsewhere to keep your budget humming nicely along. Or life happens: Your sister gets engaged, and you run out and buy her a great gift that requires some budget retooling.

• It can be wise to check in with your budget every week or so to see how you’re tracking and make any changes needed. For instance, if your rent goes up when you renew your lease, you might find a lower-priced health insurance and be able to rebalance your household budget.

• If you discover that you’ve made your home budget too intricate and are avoiding it for any reason, switch to a different system.

At the end of the day, how to set up a household budget is about making your money work for you, so that you can spend it on the things (and people) you love. Make changes as you see fit. Flexibility in a budget is important to its success. If you find that you are having a hard time sticking to your budget, you might decide to work with a financial counselor to help you with professional advice.

Recommended: 10 Most Common Budgeting Mistakes

The Takeaway

Creating a household budget can be a good way to monitor your earnings and expenses. The process typically involves picking a budgeting method, accounting for expenses (such as utilities and food costs), using tools to track your spending, and then adjusting your budget as needed. Developing a household budget can be a path to managing your money better and meeting your financial goals.

FAQ

What is the 50/30/20 budget rule?

This popular budget technique involves allocating 50% of one’s take-home pay to the needs of life (such as food, shelter, transportation), 30% to the wants of life (fun spending on dining out, entertainment, and more), and 20% to savings or additional debt payments.

How do you start a household budget?

To start a household budget, a person can pick a budgeting method and then allocate their earnings toward expenses each month. Tracking one’s spending and working toward goals (such as an emergency fund) can be an important part of the process.

What is usually the biggest household expense?

For most Americans, the biggest household expense is housing. Research shows that this can typically account for 33% or more of the average person’s spending, and that figure can soar higher in certain areas, such as major cities.

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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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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.

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