What Is a Bridge Loan?

Bridge Loan: What It Is and How It Works

A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the home they’re ready to purchase.

But there are pros and cons to using this type of financing. A bridge loan can prove expensive.

Is a bridge loan easy to get? Not necessarily. You’ll need sufficient equity in your current home and stable finances.

Read on to learn how to bridge the gap between addresses with a bridge loan or alternatives.

Key Points

•   Bridge loans offer temporary financing for buying a new home before selling the current one.

•   Secured by the current home, these loans have higher interest rates and fees.

•   Approval requires sufficient equity and strong financials.

•   Alternatives include personal loans, HELOCs, and home equity loans, each with pros and cons.

•   Bridge loans can be risky if the current home doesn’t sell quickly, leading to multiple loan payments.

What Is a Bridge Loan?

A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help if you’re buying and selling a house at the same time.

Just like a mortgage, home equity loan, or home equity line of credit (HELOC), a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).

Most bridge loans are set up to be repaid within a year.

Note: SoFi does not offer bridge loans at this time. However, SoFi does offer HELOC options.

How Does a Bridge Loan Work?

Typically lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home.

Even if you prequalified for a new mortgage with that lender, you may not automatically get a bridge loan.

What are the criteria for a bridge loan? You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.

You’ll also have to have enough home equity (usually 20%, but some lenders might require at least 50%) in your current home to qualify for this type of interim financing.
Lenders typically issue bridge loans in one of these two ways:

•   One large loan. Borrowers get enough to pay off their current mortgage plus a down payment for the new home. When they sell their home, they can pay off the bridge loan.

•   Second mortgage. Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.

It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the bridge loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.

Bridge Loan Costs

A bridge loan may seem like a good option for people who need to buy and sell a house at the same time, but the convenience can be costly.

Because these are short-term loans, lenders tend to charge more upfront to make bridge lending worth their while. You can expect to pay:

•   1.5% to 3% of the loan amount in closing costs

•   An origination fee, which can be as much as 3% of the loan value

Interest rates for bridge loans are generally higher than conventional loan rates.

Repaying a Bridge Loan

Many bridge loans require interest-only monthly payments and a balloon payment at the end, when the full amount is due.

Others call for a lump-sum interest payment that is taken from the total loan amount at closing.

A fully amortized bridge loan requires monthly payments that include both principal and interest.

How Long Does It Take to Get Approved for a Bridge Loan?

Bridge loans from conventional lenders can be approved within a few days, and loans can often close within three weeks.

A bridge loan for investment property from a hard money lender can be approved and funded within a few days.

Examples of When to Use a Bridge Loan

Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date. They could then go about getting a mortgage on their new home using the down payment they have stashed away.

Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding.

Common scenarios when homebuyers might consider a bridge loan include the following.

You’re Moving for a New Job, or Downsizing

You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.

Or maybe you’ve fallen in love with a smaller home that just hit the market, decided that downsizing your home is the way to go, and you must act quickly.

Your Closing Dates Don’t Line Up as Hoped

Even if you’ve accepted and offer on your current home, the new-home closing might be weeks or even months away. To avoid losing the contract on the new home, you might decide to get interim funding.

You Need Money for a Down Payment

If you need the money you’ll get from selling your current home to make a down payment on your next home, a bridge loan may make that possible.

Bridge Loan Benefits and Disadvantages

As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.

Benefits

The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game-changer if you’re in a time crunch.

Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.

Disadvantages

Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.

Borrowers can expect to pay a higher interest rate, as well as several fees.

Borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.

If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan.

Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.

Alternatives to Bridge Loans

If the downsides of taking out a bridge loan make you uneasy, there are options that might suit your needs.

Home Equity Line of Credit (HELOC)

Rather than the lump sum of a home equity loan, a home equity line of credit lets you borrow, as needed, up to an approved limit, from the equity you have in your house.

The monthly payments are based on how much you actually withdraw. The interest rate is usually variable.

You can expect to pay a lower rate on a HELOC than a bridge loan, but there still will be closing costs. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)

Many lenders won’t open a HELOC for a home that is on the market, so it may require advance planning to use this strategy.

Home Equity Loan

A home equity loan is another way to tap your equity to cover the down payment on your future home.

Because home equity loans are typically long term (up to 20 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home.

You can expect to pay some closing costs on a home equity loan, though, and there could be a prepayment penalty.

Keep in mind, too, that you’ll be using your home as collateral to get a home equity loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.

401(k) Loan or Withdrawal

If you’re a first-time homebuyer and your employer plan allows it, you can use your 401(k) to help purchase a house. But most financial experts advise against withdrawing or borrowing money from your 401(k).

Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.

Personal Loan

If you have a decent credit history and a solid income, typical personal loan requirements, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.

Other benefits:

•   You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.

•   A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.

•   You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.

•   Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.

The Takeaway

A bridge loan can help homebuyers when they haven’t yet sold their current home and wish to purchase a new one. But a bridge loan can be expensive, and not all that easy to get. Only buyers with sufficient equity and strong financials are candidates.

If you find yourself looking to bridge the gap between homes, you might also consider a personal loan or a HELOC, a home equity loan, or a personal loan among other alternatives. With a little due diligence and some paperwork, you’ll soon be financially prepared to purchase your next home.

FAQ

What are the cons of a bridge loan?

It can be harder to qualify for a bridge loan than for a standard home loan, and both costs and interest rate may be higher as well. And taking out a bridge loan means you may have to make payments on two loans if your first property doesn’t sell.

Why would someone get a bridge loan?

A homebuyer who has found their perfect next property but who is in a short-term cash crunch might opt for a bridge loan if they feel very confident that they can sell their current home quickly. This might be especially true in a hot market, where there is lots of competition for homes and the buyer wants to move quickly.


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

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.

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.
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In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.


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Payday Loan vs. Installment Loan: What Are the Main Differences?

Payday Loan vs. Installment Loan: Which Is Right for You?

If you need cash to cover an emergency expense, like a car repair or medical bill, a payday loan or an installment loan are two options you may consider. However, these two loans are different in key ways that are important to understand before making a choice between them. Namely, a payday loan tends to have a short turnaround before you need to pay it off, and typically offers extremely high interest rates.

We’ll explain more about the features of each loan type, and why people choose payday loans vs installment loans.

Key Points

•   Installment loans provide a lump sum upfront, repaid in fixed payments over time, and can be secured or unsecured.

•   Payday loans are short-term, high-fee loans due on the next payday, often leading to debt cycles.

•   Personal loans, a type of installment loan, offer lower rates than payday loans and can be used for various purposes.

•   Eligibility for installment loans depends on credit score, income, and other factors, while payday loans require minimal qualifications.

•   Payday loans are considered predatory due to high fees, whereas installment loans offer more favorable terms if eligibility requirements are met.

Understanding Payday Loans

There is no set definition of a payday loan. Generally speaking, they are short-term loans that are due to be paid back on your next payday. Payday loans don’t charge interest per se, but they do charge high fees.

Payday loans are typically for relatively small amounts. In fact, many states limit the amount of a payday loan to $500. Borrowers usually repay the loan in a lump sum on their next payday. The specific due date is often between two and four weeks from when the loan was made.

To repay the loan, borrowers must make out a post-dated check to the lender for the full balance of the loan plus any fees. As an alternative, borrowers can give permission for the lender to electronically debit the funds from their bank account on a certain date. If the borrower doesn’t repay the loan by the due date, the lender can cash the check or debit the funds. Either way, the lender gets paid.

In some states, borrowers may be able to roll over the amount of the loan, paying only the fees when it comes due, while the lender pushes out the due date.

To qualify for a payday loan, you generally need to be 18 years or older and have proof of income, a valid ID, and an active bank, credit union, or prepaid card account.

Risks of a Payday Loan

The risks of payday loans include sky-high fees and the potential for falling into a cycle of debt. Many states set a limit on payday loan fees, but they can still run from $10 to $30 for every $100 borrowed. Consider that a $15 fee for $100 is the equivalent of a nearly 400% APR.

By comparison, the average personal loan interest rate as of December 2024 is 12.33%, according to the Federal Reserve of St. Louis.

Pros and Cons of Payday Loans

Before signing on for a payday loan, carefully consider the advantages and disadvantages.

Pros of Payday Loans

Cons of Payday Loans

Provide quick access to cash, often with same-day turnarounds. Very expensive, with fees equivalent to a 400% APR.
No credit check required. To qualify, you typically need to be 18 years old, have a government I.D., bank account, and regular source of income. Lenders don’t consider your ability to repay the loan, and the loan doesn’t help you build credit. As a result, these lenders are considered “predatory.”
Unsecured: Borrowers are not required to put up property as collateral. Borrowers can get trapped in a cycle of debt. If they are unable to pay back the loan, borrowers will pay expensive fees each time they roll over or renew their loan.

Exploring Installment Loans

When a borrower receives an installment loan, their lender will give them a lump sum upfront, which the borrower has to repay in fixed payments with interest over a set period of time.

Personal loans are a good example of an installment loan.

They can range in size from a few hundred dollars to $100,000, and the money can be used for any reason, from covering unexpected expenses or consolidating debt to remodeling a home. Repayment terms may stretch from a few months to a few years.

How Installment Loans Work

During the loan application process, lenders will consider factors such as a borrower’s credit score and reports, their income, and the amount and length of the loan.

Typically, borrowers with good credit scores will receive the best terms and interest rate options. These loans may have variable interest rates or fixed, meaning they don’t change over the life of the loan.

Installment loans may be secured or unsecured. Unsecured loans, such as unsecured personal loans, do not use collateral to back the loans. Secured loans do require collateral and may offer borrowers a lower interest rate since they present less risk to the lender.

Pros and Cons of Installment Loans

Personal installment loans tend to offer borrowers the option of borrowing at lower rates than are available through revolving credit or payday loans. However, it’s still important to consider disadvantages in addition to benefits.

Pros of Installment Loans

Cons of Installment Loans

Borrowers can finance a big purchase over 2-12 years. Interest rates may be higher than other alternatives, such as a home equity line of credit.
Payments typically remain fixed over the life of the loan, unless the borrower chooses a variable interest rate. May be subject to fees, such as closing costs.
Secured loans don’t require collateral, while unsecured loans may offer lower interest rates. Missed payments can damage credit scores. Defaulted loans may be sent to collections.

Pros and Cons of Installment Loans

Eligibility requirements vary by lender, but generally speaking, you’ll need:

•   Proof of identity

•   Proof of income

•   Proof of address

Your credit score is an important factor, as it helps determine the interest rate you’re offered.

Key Differences Between Payday Loans and Installment Loans

By now you’ve likely got a good sense that installment loans and payday loans differ in some important ways. Here’s a side-by-side comparison.

Payday Loans

Installment Loans

Repayment terms Payment is due on the borrower’s next payday, usually two to four weeks from the date the loan was taken out. Loan is repaid in regular installments, often monthly, typically over 2 to 7 years. Large personal loans can be repaid over 12 years.
Loan amounts Often limited to $500. Can range between a few hundred dollars and $100,000.
Interest rates Payday loans don’t charge interest, but they do charge costly fees that can be the equivalent of up to 400% APR. Interest rates vary, depending on a borrower’s credit history, among other factors. The average personal loan interest rate is 12.33%.
Use cases Payday loans are typically targeted to borrowers with poor credit and few other lending options. Loan money can be used for any reason. Some installment loans, such as auto loans or mortgages, are limited in how they can be used. Personal loans can be used for any purpose.
Risk Payday loans are predatory loans that can trap borrowers in a cycle of debt. Lenders don’t consider a borrower’s ability to repay the loan, and the loan won’t help build credit. Failure to repay an installment loan on time can damage credit. Defaulting on secured loans may result in loss of property.
Credit requirement None. The application process for installment loans requires a credit check.

Choosing the Right Loan for Your Needs

As you can see, there are important differences between payday and installment loans. Not sure which sort of loan is right for you? A good place to start is to determine what your short- and long-term financial goals are and which type of loan best aligns with them. Interest rates, terms, fees, and repayment options are all factors to consider.

You’ll also want to assess your repayment capabilities. Can your income cover your normal expenses plus the loan debt? Finally, check your credit score and the eligibility requirements of potential lenders to see where your application is more likely to be approved.

The Takeaway

Payday loans and installment loans both provide quick cash to cover emergency expenses. However, because of their astronomical fees — equivalent to a 400% APR — payday loans fall under the heading of “predatory lending.” On the other hand, installment loans vary in their terms but generally are a much better deal, provided that you meet eligibility requirements.

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

FAQ

Are payday loans installment loans?

No, payday loans usually require you to pay off the loan amount in full on your next payday, usually two to four weeks from when the loan was made.

What is an installment loan?

When you take out an installment loan, you immediately receive the money you’re borrowing. You then pay it back to your lender in a series of regular fixed payments known as installments.

Are personal loans installment loans?

Personal loans are one type of installment loan. Money from the loan can be used for any purpose, such as debt consolidation or a home remodel.


Photo credit: iStock/Prostock-Studio
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.

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Personal Loan Glossary: Loan Terms To Know Before Applying

Personal Loan Glossary: Loan Terms To Know Before Applying

Applying for a personal loan is a big financial decision — and it’s important to know exactly what you’re getting into before you sign any paperwork. Finance has vocabulary that may be unfamiliar to some people, which can make it difficult to understand.

This easy-to-reference glossary may help you read your new loan agreement with confidence and understand what each clause of the document means. From APR to cosigners vs. co-borrowers, we’ve got you covered.

Key Points

•   Personal loans are disbursed in lump sums and repaid in equal installments.

•   Key loan terms include principal, interest, APR, origination fee, borrower, and lender.

•   Prepayment fees may apply for early payoff; origination fees are charged at initiation.

•   Collateral secures loans, reducing lender risk; unsecured loans rely on trust and may have higher interest.

•   Understanding loan terminology aids in navigating the loan process and choosing suitable loans.

What Is a Personal Loan?

Before we dive in, a quick bit of review to get us started: What is a personal loan? A personal loan is a closed-end loan that is disbursed in one lump sum and repaid in equal installments over a set amount of time.

There are many types of personal loans, and it’s common for them to be unsecured, which means there’s no collateral required.

People use personal loan funds for many reasons, from home renovations to debt consolidation to vacations.

What Are the Main Terms Used in a Personal Loan Agreement?

Understanding personal loan terminology will help you navigate the loan process with confidence.

Amortization

Amortization refers to listing the loan’s repayment schedule over the life of the loan, which the lender does when processing the loan. An amortization schedule lists the amounts of principal, interest, and escrow (if included in the loan) that each payment consists of.

A loan may be re-amortized, also. For example, the remaining repayments can be recalculated if you’re thinking of making a lump sum payment on the loan. You would be able to see the change in interest owed over the life of the loan and how much quicker the loan could possibly be paid in full. With this information, you could determine if the extra payment would be worthwhile for your financial situation.

Annual Percentage Rate

An annual percentage rate (APR) is the percentage of the loan principal you can expect to pay in interest over the course of a single year, including any additional fees that might be charged by the lender.

Application Fee

Some loans may require you to pay a fee when you apply for the loan. Not every lender charges an application fee, though, so it’s worth shopping around to find one that doesn’t.

Automatic Payment

Many lenders make it possible to set up an automatic bill payment that will be taken directly from your bank account on the loan’s monthly due date. This strategy can simplify your financial housekeeping — but make sure you’ll have enough funding in the account each month to avoid an overdraft.

Borrower

The borrower is the person or party who is borrowing money as part of the loan agreement. (Most likely, that’s you.)

Collateral

Collateral is an asset a borrower offers to secure a loan, making it less risky for the lender. For example, in a mortgage, the house is used as collateral — which is why a bank can seize and sell a home if the buyer goes into default, a process called foreclosure. Similarly, in an auto loan, the car is used as collateral, which is why it can be repossessed by the bank if the borrower fails to make the loan payments.

Co-borrower

If a loan applicant doesn’t have strong enough financial credentials to be approved for a loan on their own, they might choose to add a co-borrower to the application. This person, ideally with a more robust financial profile than the primary borrower, will also be financially responsible for the loan.

Co-borrowers are applying for a loan together and typically have shared ownership of the borrowed money or asset it purchased. For example, you and your spouse might apply as co-borrowers on an auto loan for a jointly owned car.

Cosigner

Similar to a co-borrower, a cosigner can help bolster the primary loan applicant’s chances of approval. A parent may be a cosigner on their child’s student loans. This person will be responsible for making the loan payments if the primary borrower fails to do so, but they have no ownership of the loan proceeds or asset they purchased.

Credit Agency

A credit agency, also known as a credit bureau, is a company that compiles information on individuals’ and businesses’ debts. These are the companies that calculate and report credit scores to creditors that make an inquiry.

The three main credit bureaus are Equifax, Experian, and TransUnion. You can request a full credit report from each of them once a week at no charge, which you can access at AnnualCreditReport.com .

Recommended: Everything About Tri-Merge Credit Reports

Credit History

Credit history refers to the broad scope of your experience with debt. Positive credit history is one that shows timely payments on debts owed to creditors. Negative credit history will reflect missed or late payments on debts. Some people, typically young people who have never taken on debt, will have no credit history. However, there are ways to build credit over time.

Credit Report

A credit report is a document that details your credit history, including both open and closed accounts, on-time or late payment history, accounts in default or collections, bankruptcies, liens, judgments, and other financial information. It’s important to check your credit reports regularly to detect any incorrect information and correct it as early as possible.

Credit Score

Your credit score sums up your creditworthiness with a numeric score.

Lenders most commonly refer to your FICO® Score, which can range from 300 to 850. VantageScore, which uses the same scoring range, is also used by lenders, but less commonly.

The higher your credit score, the less of a credit risk lenders tend to assume you will be. The average credit score of U.S. consumers is 717 (FICO).

Debt Consolidation

Debt consolidation is an approach to debt repayment wherein you take out one larger debt — like a personal loan — in order to pay off multiple, smaller debts such as credit cards. Doing so can help simplify your monthly finances by having fewer payments to make. You could potentially pay less in interest than you would on the former debts or lower your monthly debt payments, making it easier to meet your financial obligations each month.

Default

Defaulting on a loan means failing to repay it as agreed (for example, not making payments at all), and can lead to a loan going into collections.

Fixed Interest Rates

Fixed interest rates are those that don’t change over time. You’ll pay the same set amount of interest on the loan for its entire term. Comparing rates on personal loans from several lenders is a good way to find a rate that works with your financial situation.

Floating Interest Rates

Floating interest rates rise and lower in accordance with the market. They might also be called adjustable or variable interest rates.

Guarantor

A guarantor is similar to a cosigner or co-borrower in that they can bolster the strength of a loan application. Like a cosigner, a guarantor has no ownership of the loan proceeds or asset purchased with them. The biggest difference between a cosigner vs. guarantor is that a guarantor is only called upon to repay the loan if the primary borrower goes into default.

Gross Income

Your gross income equals the money you earn each year from working, investment returns, and other sources before deductions or withholding.

Installment Loans

Installment loans are loans that are repaid in regular monthly installments. Personal loans, auto loans, and mortgage loans are examples of installment loans.

Interest Rate

The interest rate is the base percentage charged when borrowing money. It does not include fees or other charges that may be associated with a loan.

Hard Credit Check

A lender will perform a hard credit check, or hard inquiry when you apply for a loan or open a line of credit. A large number of hard credit checks in a short period of time can have a negative effect on your credit score.

Late Payment

A late payment is a debt payment made after its due date. Since payment history is one of the most important factors used to calculate your credit score, late payments can have a major negative impact on your credit score.

Lender

The lender is the party lending the money, whether that’s a bank or credit union, or a friend or family member.

Line of Credit

If you don’t need a lump sum of money at one time, a line of credit might be an option when looking for financing. Lines of credit have limits, but the borrower can draw funds as needed instead of all at once. The borrowed funds can be repaid and borrowed again, up to the credit limit.

Recommended: Personal Loan vs Personal Line of Credit

Loan Agreement

The loan agreement is the legally binding contract you sign with your lender to initiate a loan. It will include details about each party’s rights and responsibilities. For the borrower, it may include the loan amount, interest rate, APR, potential fees and penalties, the payment schedule, and other information. It’s important to read the loan agreement carefully and ask questions about anything that you don’t understand.

Origination Fee

Some lenders might charge an origination fee when a loan is initiated — an up-front fee that remunerates the lender for the work of setting up the loan. These fees are typically a percentage of the principal and vary by lender.

Payday Loans

Payday loans are a type of short-term loan, typically for small amounts, meant to fill in a financial gap until the borrower’s next payday.

Despite their relatively low balances, these loans can be exorbitantly expensive. The Consumer Financial Protection Bureau says their rates can typically hover around 400% APR. Payday loans are usually worth avoiding in favor of other, lower-cost loan options.

Payment Terms

The payment terms of a loan are the terms and conditions the borrower agrees to when signing a loan agreement. Your payment terms can include how long the loan will last, how much will be repaid each month, the amount that can be charged for late payment, and other loan details.

Prepayment Fees

Prepayment fees, or penalties, are sometimes charged by lenders when a borrower pays their loan in full before its final payment due date. The lender will not make as much profit from the loan if the borrower pays it off early, and a prepayment fee is a way to recoup some of that loss.

Principal

The principal amount of a loan is the amount borrowed, not including interest or fees. For example, if you take out a personal loan for $10,000, that $10,000 is the principal amount. You’ll pay the lender more than that over the lifetime of the loan with interest factored in.

Revolving Credit

Revolving credit allows you to borrow funds as needed, up to your credit limit, making at least a minimum payment each month you have a balance. Credit cards are a common form of revolving credit.

Secured Loan

A secured loan requires the borrower to pledge collateral, an asset owned by the borrower, to the lender as a guarantee that they’ll repay the loan. If the borrower defaults on the loan, the lender can take ownership of the asset in repayment of the loan. Common examples of secured loans are mortgages or auto loans.

Unsecured Loan

The foundation of unsecured personal loans is trust. The lender trusts that the borrower will repay the loan without requiring collateral to back up that promise. Unsecured loans can come with higher interest rates than secured loans, however, because they present additional risk to the lender.

The Takeaway

When you’re acquainted with personal loan vocabulary, you have a better chance of getting a personal loan that fits your unique financial situation and needs, and understanding your loan agreement before signing it.

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

FAQ

What is personal loan terminology?

Personal loan terminology is terms and definitions of words and phrases you might see in a loan agreement or other documents related to a personal loan.

What are the main terms used in a personal loan agreement?

Common references in a personal loan agreement are principal, interest, APR, origination fee, borrower, and lender.

What is the definition of a personal loan?

A personal loan is a closed-end loan disbursed in one lump sum and repaid in equal installments over a set amount of time.


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Defensive Investment Strategy: Definition and Types

A defensive investment strategy is a way to manage a portfolio to try and minimize risk and protect capital. When the stock market is volatile, investors might wonder if their investment strategy makes sense for the specific conditions. After all, a volatile market may act as a drag on a portfolio, making it harder for an investor to meet their financial goals.

With all investing strategies, it helps to know the upsides and downsides before committing to a particular path. Defensive investing, like other investing strategies, has pros, cons, and timing factors to consider for when it might make the most sense to use this strategy.

Key Points

•   A defensive investment strategy aims to minimize losses and preserve capital while generating modest returns, making it suitable for risk-averse investors or those nearing retirement.

•   Common defensive investments include high-quality, short-maturity bonds, blue-chip stocks, dividend-paying stocks, and ETFs that mimic market indexes.

•   Advantages of defensive investing include capital preservation, income generation through dividends or interest, and reduced volatility, making it a stable option for risk-averse investors.

•   Disadvantages include limited growth potential, potential underperformance in rising markets, loss of purchasing power due to inflation, and fewer investment options.

•   Defensive strategies are beneficial during market downturns and volatility, helping investors protect their capital and sleep better at night.

What Is a Defensive Investment Strategy?

A defensive investment strategy is a way investors try to minimize losses on their investments. The goal of a defensive investment strategy is to reduce the risk of losing principal while still generating modest returns. Investors who are risk-averse or nearing retirement and want to preserve the value of their assets may employ a defensive investment strategy.

The strategy is what the name suggests: defensive. Instead of an aggressive or offensive strategy, which targets high-growth assets and has the potential for high risk, a defensive strategy focuses on preserving a portfolio’s capital while still pursuing modest growth in the form of a dividend or interest payments.

Generally speaking, an investor with a defensive strategy portfolio would likely try to diversify their holdings across industries and regions, invest in blue-chip stocks, regularly rebalance their portfolio, buy short-maturity bonds, and place stop-loss orders.

What Are Defensive Investments?

Defensive investments are designed to provide stable, long-term returns with minimum volatility. These types of investments are often considered to be less risky, and therefore, suitable for investors looking to preserve their capital.

Typical investments in a defensive portfolio include:

•   High-quality, short-maturity bonds (such as U.S. Treasury notes)

•   Exchange-traded funds (ETFs) that mimic market indexes

•   Large, high-quality established company stocks (i.e., blue-chip stocks)

•   Dividend-paying stocks. These investments may provide lower returns than assets in a growth-oriented portfolio, but they can help investors preserve their wealth and generate a steady income stream.

Additionally, investors may hold cash and cash equivalents, like money market accounts and certificates of deposit (CDs), in a defensive portfolio. The advantage to these conservative investments is that they’re liquid assets, meaning that if an investor needs cash quickly, they’re easily convertible.

5 Examples of Defensive Investments and Strategies

There are several different types of defensive investments and strategies, each with its unique set of advantages and disadvantages. Some of the most common types of defensive investment strategies include:

Portfolio Diversification

Diversifying your portfolio spreads your investment across a wide range of asset classes, such as stocks, bonds, and cash. The idea behind portfolio diversification is that by investing in various assets – like defensive stocks, blue-chip stocks, and high-quality bonds – you can reduce the overall risk of your portfolio and protect yourself against market downturns.

Some defensive stock sectors include utilities, consumer staples, and healthcare.

Portfolio Rebalancing

Another tool for defensive investing is portfolio rebalancing. A portfolio’s asset allocation will change depending on how the assets perform. For example, if the stock market is particularly strong, stocks may become a higher percentage of a portfolio than desired.

Rebalancing is when an investor or portfolio manager adjusts investments to reflect the agreed-upon asset mix. For defensive online investing, it would likely be a smaller percentage of stocks and a higher percentage of bonds or other, more conservative investments.

Dollar Cost Averaging

A dollar cost averaging strategy is when you regularly invest a fixed amount of money in a particular asset, such as monthly or quarterly. This can help smooth out the market’s ups and downs and reduce your exposure to volatility.

Value Investing

Value investing is a strategy in which you focus on investing in companies with strong balance sheets and solid performance track records. Searching for value stocks can help protect your portfolio from the risks associated with more speculative investments.

Stop-Loss Orders

Defensive investing includes strategies such as using stop-loss orders to minimize losses. A stop-loss order is when an investor tells a stockbroker to sell a stock when its price falls to a predetermined level. Setting up stop-losses helps an investor shed falling stocks automatically to minimize losses.

Pros and Cons of Defensive Investing

A defensive investor may find the risk-averse nature of a conservative portfolio appealing, but it’s still critical to be aware of the pros and cons of this investing strategy.

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Pros:

•   Capital preservation

•   Potential income generation

•   Lower volatility

•   Diversified portfolio

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Cons:

•   Limited growth

•   Potential underperformance

•   Loss of purchasing power

•   Limited investments

Pros of Defensive Investing

Some of the advantages of using a defensive investing strategy include:

•   Capital preservation: Defensive investing focuses on preserving capital by investing in low-risk assets less likely to suffer significant losses in a volatile market. This can help investors avoid substantial losses and protect their wealth.

•   Potential income generation: Defensive investments often generate income through dividends or interest payments. This can provide investors with a regular stream of income they can use to meet their financial needs or to fund other investments.

•   Reduced volatility: Defensive investments are generally less sensitive to market fluctuations, making them less likely to experience significant price swings. This can make them a more stable option for investors who are risk-averse or have a low tolerance for stock volatility.

•   Diversification: A defensive investment strategy can help investors diversify their portfolios and reduce their overall risk. This can be especially beneficial for investors with concentrated holdings in a single asset or sector.

Cons of Defensive Investing

Some of the disadvantages of using a defensive investing strategy include the following:

•   Limited growth potential: Because defensive investments are generally less risky, they may offer a lower potential for high returns than investments in stocks or other growth-oriented assets. This means that investors who pursue a defensive strategy may miss out on opportunities for significant gains.

•   Underperformance in rising markets: Defensive investments may underperform in a bull market. Because these investments are designed to be less sensitive to market fluctuations, they may benefit less from increased market values. This can make them a less attractive option for investors who are looking to maximize their returns.

•   Loss of purchasing power: The income generated by defensive investments may not keep pace with inflation, which can erode the purchasing power of investors’ capital over time. This can make it difficult for investors to maintain their standard of living or meet their long-term financial goals.

•   Fewer investment options: Defensive investing typically involves investing in low-risk, income-generating assets such as government bonds and dividend-paying stocks. This limits the range of investment options available to investors and may not provide exposure to other asset classes or sectors that could offer higher returns.

When Is It Smart to Use a Defensive Investment Strategy?

When deciding how to invest, it’s important to know the options at hand, and when it’s best to employ a certain strategy.

For defensive investing, several factors come into play. If an investor is risk-averse, this type of conservative strategy may be recommended, as it typically offers less risk (but not no risk!).

There are a number of reasons why an investor might be risk-averse. For example, a retiree on a fixed income could fall into this category, or, someone who has limited funds and not much wiggle room for losing capital.

Another possibility is someone who is nearing retirement, and who wishes to preserve the gains they made with earlier investing. An investor who wants to conserve money, yet still aims to outpace inflation, might also choose this strategy.

Outside of individual preferences and situations, defensive investing could be helpful in times of market downturn and volatility. In turbulent environments, a defensive investment strategy can help investors sleep at night by keeping assets in less risky investments.

During times of economic stress, investors might opt for a defensive strategy to help them hang on to capital. While no investment is risk-free, shifting a portfolio to more conservative assets can help provide a cushion for volatility.

The Takeaway

A defensive investment strategy may be a useful way of mitigating risk and preserving the value of your investments. By understanding the different types of defensive strategies available, you can choose the approach that best suits your needs and goals.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Overview: The History of the Federal Reserve

You may give little thought to the Federal Reserve, but the Fed looms large over your life as you borrow, save, spend, and invest.

The Fed’s mission is to control inflation and maintain maximum employment. The goals can be at odds with each other.

Let’s look at the Federal Reserve’s origin story and what the central banking system is currently up to.

Key Points

•   Established to control inflation and maintain employment, the Federal Reserve was founded in 1913.

•   The Fed influences personal finances by setting the federal funds rate, which can affect borrowing costs, among other things.

•   Historical events like the Great Depression and Great Inflation underscore the Fed’s role in managing economic crises.

•   Recent actions include rate hikes from 2022 to 2023 to combat inflation, followed by rate cuts in 2024.

•   The Fed’s dual mandate aims for maximum employment and price stability, impacting decisions on interest rates and economic policies.

How It All Began

A secret meeting in 1910 on an island off Georgia laid the foundation for the Federal Reserve. After a series of financial panics and recessions in the Gilded Age, six men gathered at the Jekyll Island Club to write a plan to reform the nation’s banking system.

At that time, U.S. banks held large reserves of cash, but they were scattered. During a crisis, the reserves would be frozen. In addition, the supply of currency was inelastic and supplies of gold limited. And U.S. banks could not operate overseas.

The Panic of 1907 — a worldwide financial crisis surpassed only by the Great Depression — galvanized Congress, and particularly Senate Finance Committee Chairman Nelson Aldrich. In the fall of 1910, Aldrich and his Jekyll Island colleagues developed a plan for a central bank with 15 branches. The national body would set discount rates for the system and buy and sell securities.

Political wrangling ensued, but Congress passed, and President Woodrow Wilson signed the Federal Reserve Act in 1913. The bill resembled the Aldrich plan.

The law called for a central banking system with a governing board and multiple reserve banks. The hybrid structure endures.

A golden factoid: Banking panics before 1913 tested the mettle of Manhattan banks, but what is now the most influential of the 12 reserve banks, the Federal Reserve Bank of New York, is home to the world’s largest gold storage reserve, with about 500,000 gold bars owned by the U.S. government, foreign governments, other central banks, and international organizations.

The First Century of the Federal Reserve

Before the Fed was born, financial panics caused by speculation and rumors led to the call for a central banking authority that would support a healthier banking system.

World War I, 1914 to 1918

The Federal Reserve Board and the 12 reserve banks were just getting organized as war broke out in Europe. But once the nation entered World War I, the Fed quickly became a major player by supporting the U.S. Treasury’s war bond effort and offering lower interest rates to member banks when the proceeds were used to buy bonds.

The Fed also gave better interest rates to banks purchasing Treasury certificates. Lower rates led to increased borrowing by businesses and households, which stimulated economic growth. But the increased money supply eventually led to rising prices. When the war ended, the Fed took action to control that inflation.

Stock Market Crash of 1929

On Oct. 28, 1929, now known as “Black Monday,” the Roaring Twenties ended with a thud when the Dow Jones Industrial Average dropped nearly 13%. The market collapsed the next day. It was the most devastating stock market crash in U.S. history.

Many economists and historians blame the Fed for the crash because of its decision to raise interest rates in 1928 and 1929 to control over speculation (what today might be called “irrational exuberance”) in the stock market.

Leaders decreased the money supply starting in 1928 and pressured member banks in 1929 to rein in their loans to brokers and charge a higher rate on broker loans.

The Great Depression, 1929 to 1941

The deepest downturn in U.S. history lasted from 1929 to 1941. The contraction began in the United States and reverberated around the globe.

The banking panics in 1930 and early 1931 were regional, but in late 1931 the commercial banking crisis spread throughout the nation. The Fed’s efforts to contain the collapse were not enough, and the situation reached rock bottom by March 1933.

On March 6, 1933, President Franklin Roosevelt — who’d been inaugurated just two days before — announced a weeklong suspension of all banking transactions. Legislative intervention soon followed.

In 1933 the Glass-Steagall Act separated commercial and investment banking and gave the federal government and Federal Reserve enhanced powers to deal with the economic crisis, which led to the creation of the Federal Deposit Insurance Corp. and regulation of deposit interest rates. (At an FDIC-insured bank today, deposits are insured up to $250,000 per depositor, per institution, and per ownership category.)

The Banking Act of 1935 gave the Fed more independence from the executive branch; shifted power from the regional reserve banks to the Board of Governors, based in Washington, D.C.; and led to the modern form of the Federal Open Market Committee (FOMC), the Fed’s main monetary policymaking committee, which consists of the Fed governors in Washington and the presidents of the 12 regional banks.

World War II, 1941 to 1945

The Fed’s role during World War II was similar to its role in World War I. Its main mission became financing the war, and it helped the Treasury Department market war bonds in cooperation with commercial banks and businesses.

The reserve banks also reduced their discount rate to 1% and set a rate of half a percentage point for loans secured by short-term government obligations. During the war years, the Fed kept its eye on inflation by regulating consumer credit. It required large down payments and shorter terms on loans used to buy a variety of consumer goods.

Korean War, 1950 to 1953

At the start of the Korean War, inflation was a growing concern. But the Fed was once again under pressure — this time from the Truman administration — to help finance the war effort.

In February 1951, the Fed declared its independence in fiscal matters, and in March, the Treasury and the Fed announced that they had reached an accord on how they would handle “debt management and monetary policies” going forward.

The Great Inflation, 1970s and ’80s

Keeping inflation under control has always been an important role for the Fed, but in the 1970s, when the stock market slumped and the country found itself in an inflation crisis so deep it was known as the “Great Inflation,” it became a special challenge.

Check the history books and you’ll find plenty of finger-pointing. It was President Richard Nixon’s fault for disengaging from the gold standard. Or maybe it was the Fed’s fault for employing a confusing stop-go monetary policy that had interest rates going up, then down, then back up.

Then new Fed chairman, Paul Volcker, took over in 1979 and switched the Fed’s goal from targeting interest rates to targeting the money supply. It was painful. The prime lending rate (the rate banks offer their most creditworthy customers when they’re looking to take out a line of credit or a loan) skyrocketed to over 21% at one point.

Unemployment reached double digits in some months. The country went through two recessions. But eventually, prices stabilized.

And the federal funds rate hasn’t been in the double digits since the mid-1980s.

The Great Recession, 2007 to 2009

When a period in U.S. history is labeled “great,” it’s often anything but. During the Great Recession, home prices fell. Unemployment rose. Gross domestic product fell. And in 2008, the market crashed.

Home prices had peaked at the beginning of 2007, and the subprime mortgage market had been busy.

This recession was, for many Americans, the worst of times; they lost their jobs, their homes, and their confidence in the economy.

Enter the Fed, which started by tackling the slump with a traditional response: From September 2007 to December 2008, the Fed lowered the federal funds rate from 5.25% to zero to 0.25%, and FOMC policy statements noted that it would be keeping the rate at exceptionally low levels for a while. But it didn’t stop there.

In 2008 it also began its first round of quantitative easing, buying $600 million in mortgage-backed securities, and continued that effort in 2009. Also in 2008, President George W. Bush signed the $700 million Troubled Asset Relief Program into law. Two more rounds of quantitative easing started in 2010 and 2012 under President Barack Obama.

Recommended: Common Recession Fears and How to Cope

The Covid Crisis, the Fed, and Inflation

At the onset of the Covid-19 pandemic and resulting recession in 2020, making sure the U.S. economy did not fall into a prolonged recession became a higher priority than maintaining inflation at the Federal Reserve’s 2% target rate.

The Fed seeks to control inflation by influencing interest rates. When inflation is too high, the Fed typically raises its benchmark interest rate to slow the economy and tame inflation. When inflation is low, the Fed often lowers the federal funds rate — the interest rate that banks use when they lend money to one another overnight — to stimulate the economy.

After keeping the rate near zero, in March 2022, the Fed approved its first rate increase in more than three years. Between March 2022 and July 2023, the Fed raised rates eleven times, the fastest tightening campaign since the 1980s. The Fed held rates at 5.25% to 5.50% from July 2023 to September 2024. Then as the cuts seemed to achieve their goal, inflation slowed. Inflation, as evidenced by the Consumer Price Index (CPI), peaked in June 2022 and has improved since then. The most recent CPI data, for the 12 months ending in September 2024, showed inflation at 2.4%, close to the Fed’s 2% goal. Given this, in September 2024, the Fed decided it was time to begin cutting the rate. Some economists anticipate further cuts in 2025.

How the Federal Reserve Affects Your Finances

So how do the Fed’s decisions have an impact on you as an individual consumer? For one, banks base their prime rate on the federal funds rate; the prime rate is generally 3 percentage points higher. This rate in turn helps determine the rates that lenders offer their customers.

Fed rate hikes increase the cost of borrowing money for a mortgage or to pay for a car, or for carrying a credit card balance. Rate increases also create a more volatile stock market that could hurt 401(k) plans, increase the amount you earn on a CD, or affect what you might pay for a bond. (Fortunately there are some way to protect your money from inflation next time it rears its head. For example, if you can swing it, buying a house vs. being a renter may help protect you from inflation because you can lock in a fixed monthly payment long term. You can also read up on how to invest during a time of inflation.)

You may be scratching your head at why Fed rate cuts in the fall of 2024 didn’t immediately result in reduced interest rates on home mortgage loans. The short answer is that lenders look at multiple economic data points when they set rates, and the Fed’s action, while important, is not the only factor.

Prospective homebuyers may be wondering, is this a good time to buy a house? The answer is a very personal one, and chances are it won’t be found in scrutinizing the Fed’s movements. Emotions are also involved: Owning a home not only gives you a place where you enjoy living, but homeownership can help build generational wealth and some people may want to begin building that equity immediately, especially when future mortgage rates, like Fed rate cuts, are not within their control.

Recommended: What to Learn From Historical Mortgage Rate Fluctuations

The Takeaway

If you’re planning a vacation, you might not want to tuck away a book on the history of the Federal Reserve. (Or maybe you will. No judgment.) The Fed has a dual mandate to aim for maximum employment and price stability, and it has historically raised interest rates as the antidote for rising inflation.

If you find yourself musing about buying a home soon, it’s important to look at the history of mortgage rates to put the current conditions into context, and it helps to read up on the benefits of homeownership.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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FAQ

What is the prime rate?

The prime interest rate is the interest rate that banks charge the customers they consider to be the lowest risk — those who have a good credit history and are deemed least likely to default on a loan or miss payments.

What does the Federal Reserve do?

The Federal Reserve has several roles. It sets monetary policy, with a goal of maximum employment and stable inflation. It also regulates banks and other financial institutions. Its overall objective is to control risks to the economy and financial markets.


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

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

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