19 Key Banking Terms to Know

Most of us don’t learn bank terms in school, but knowledge of these concepts is an important part of developing your financial literacy. Becoming familiar with banking vocabulary can help you better understand financial products and might even boost your money-management skills.

Here, you’ll find a glossary of 19 banking terms and definitions to know. Whether you’re opening your very first checking account or diversifying your investments, this bank terminology can enhance your personal finance journey.

Key Points

•  Understanding frequently used banking terms, such as FDIC, APY, and EFT, as well as common types of bank accounts can help you manage your finances.

•  Savings accounts, checking accounts, and money market accounts are key banking products, each offering unique features like interest earnings and transaction capabilities.

•  Certificates of Deposit (CDs) are accounts that may provide higher interest rates for funds committed for a fixed term, with penalties for early withdrawal.

•  Knowing the differences and similarities between common banking terms, such as APY vs. interest rate and EFT vs. ACH, can help you make informed financial decisions.

•  Familiarity with financial terms may help you identify and avoid certain types of banking fees.

19 Banking Terms

Here’s a list of 19 important banking terms and definitions to know:

1. Savings Account

A savings account is a type of bank account that lets you safely store your money. Money in a savings account earns interest and grows over time, thanks to the power of compounding interest.

Savings accounts can be a good place to stash funds for an emergency fund or short-term goals, such as next year’s vacation. You can typically access funds as needed, although some financial institutions may limit how often you can take money out of your savings account.

When shopping for a savings account, know that a high-yield savings account can pay out more interest than a typical savings account. Currently, some HYSAs pay 9x the national savings account interest rate or more.

2. Checking Account

Checking accounts are also a common type of bank account that enable consumers to access and spend their money easily. You can tap funds in your checking account by writing paper checks, using an ATM, swiping or tapping a debit card, entering account information online, or using mobile payment apps. Many checking accounts don’t earn interest, but you may find some that offer a low interest rate, often at online banks.

Checking accounts may come with a variety of fees, so it can be wise to compare charges for at least a few accounts before opening one. You’ll also want to make sure you understand whether there’s a minimum opening deposit or balance requirement.

3. Money Market Account

Another type of bank account is a money market account. These are often structured as a blend of savings and checking accounts. Like a savings account, a money market account usually has a higher interest rate than a checking account (which may or may not earn any interest at all) in exchange for having certain restrictions, such as a limited number of withdrawals that can be made each month. But it may also have some checking account features, like the ability to write checks.

4. Certificate of Deposit (CD)

You can also open a certificate of deposit (CD), a kind of term deposit, at many financial institutions. Here, your money is less liquid (i.e., it’s not as easily available). When you put money in a CD, you agree to a set number of months or years that you won’t access that cash — typically between a few months and several years. In exchange, however, you may receive an interest rate that’s higher than most standard savings accounts. If you do tap your funds before the CD term ends, you will likely be assessed a penalty.

5. Account Number

Your bank account number is a unique string of numbers (usually between eight and 12 digits) that identifies your individual bank account. Every time you open a new bank account, you’ll get a new account number — and you can typically find it on your account statements, on paper checks, and on your bank’s website and in its app when you’re logged in.

Recommended: How to Balance Your Bank Account

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6. Routing Number

While an account number is unique to your individual account, a routing number is unique to your bank. Most banks have a single routing number, though larger banks may have multiple routing numbers, with each number attributed to a specific region.

A routing number (also called an American Bankers Association number, or ABA number) is always nine digits and helps other entities route payments to and from your bank.

By the way, when thinking about routing numbers vs. account numbers, remember that they are important bits of personal information, to be kept confidential. In the wrong hands, they could be used to commit bank fraud.

7. Direct Deposit

Direct deposit is a method wherein a business or government agency can pay you electronically by transferring funds into your bank account. If you receive payment from your employer directly into your bank account, you’re already using direct deposit; more than 95% of American workers get paid this way.

8. Annual Percentage Yield (APY)

Annual percentage yield (APY) refers to how much interest you’ll earn each year from money in a deposit account, like a savings account. Unlike the straight interest rate, however, APY also accounts for compound interest (earning interest on the interest you’ve earned thus far).

9. Credit Union

A bank is one common type of financial institution. But you can also get typical banking services — like deposit accounts and loans — from credit unions. Credit unions are member-owned nonprofits and are typically local, rather than a national network. You may need to qualify to join one, based upon such attributes as where you live or your profession. Depending on your needs, you might choose a credit union vs. a bank to get the best fit for your finances.

10. Federal Deposit Insurance Corporation

Congress created the Federal Deposit Insurance Corporation (FDIC) in 1933 to create a safety net in the event of a bank failure and instill confidence in the U.S. banking system. Today, the FDIC offers insurance typically up to $250,000 per depositor, per account category, per insured institution. Some banks have programs to offer even a higher level of insurance than that. Worth noting: Most but not all banks are FDIC-insured. It’s worthwhile to check that you keep your funds at one that is, to enjoy that protection.

Deposits at credit unions are also typically insured in a similar manner, but by the National Credit Union Association, or NCUA, vs. FDIC insurance.

11. Fintech

Fintech, meaning “financial technology,” refers to companies leveraging new technologies to improve or provide innovative financial services. They may be a chartered online bank or an unchartered neobank, often offering higher interest rates on savings accounts and lower or no fees as a result of their having less overhead than traditional brick and mortar banks. Many fintechs have built their models on younger consumers’ frustrations with the traditional banking experience.

12. Automated Teller Machine (ATM)

You probably know automated teller machines as ATMs, and they’re an important part of banking. An ATM allows you to access certain banking services — like cash withdrawals — on the go. You can find ATMs all over, from inside bank branches to hotels and airports.

Just make sure an ATM is in your bank’s network before using it. If you use an out-of-network ATM, you may incur high ATM fees.

13. Debit Card

A debit card is a form of payment that typically comes with a checking account. You can swipe, tap, or wave the debit card at a point of sale to pay for goods and services with money from your checking account. You can also enter your debit card to pay bills or shop online, or tie your debit card to peer-to-peer transfer apps to send money between friends.

14. Joint Account

A joint bank account allows more than one person to manage the account. That means any account holder can withdraw or deposit money at their discretion. With so much power available to multiple account holders, there are a lot of pros and cons of joint accounts to consider before moving forward, but it can be a good tool for couples or family members who want to merge their finances.

15. Electronic Fund Transfer (EFT)

An electronic fund transfer refers to any type of electric payment where money moves electronically. Examples of EFTs include wiring money, paying with a debit or credit card, sending funds via P2P transfer, receiving direct deposit, and conducting ACH transfers. They are typically quick and secure.

16. ACH Transfer

An ACH transfer is a type of electronic fund transfer. ACH stands for Automated Clearing House, and an ACH transfer simply refers to the electronic movement of money from one bank account to another. That process is regulated by the Automated Clearing House (governed by the National Automated Clearing House Association, or NACHA).

17. Overdraft Fee

If you pay for a transaction with a check or debit card but don’t have enough money in your account to cover the purchase, your payment can be declined or the purchase can still go through, which is called overdrafting. Essentially, your bank may cover the shortfall. Some financial institutions charge you an overdraft fee when this happens. The average fee is currently quite high, over $27. You may be able to link accounts (say, your checking and savings accounts) to provide coverage in the case of overdraft.

18. Emergency Fund

An emergency fund is money set aside in a savings account that you can access in an emergency, such as if you are laid off, need unexpected car repair, or have to pay a high vet bill. The amount of money you need in an emergency fund can vary, but most experts advise working toward saving enough cash to cover three to six months’ worth of basic living expenses. Saving this much can keep you from needing to take out a personal loan or going into credit card debt when unplanned expenses arise.

19. Minimum Account Balance

A minimum account balance, also called minimum daily balance or simply minimum balance, is the amount of money you must keep in your bank account to avoid minimum balance service fees (if your bank charges these). Not all bank accounts require minimum balances, and, of those that do, the amount can vary from one financial institution to the next. The amount may also vary by account type.

Why Understanding Banking Terms Matters

Understanding banking terms — and the concepts and products they describe — can help you pick the right bank for your needs. It can also help build a good foundation of knowledge that can enhance your money management for years to come.

The Takeaway

Knowing basic financial terms, like ACH, EFT, and FDIC, as well as those that describe different types of bank accounts, can build your financial literacy. This, in turn, can help equip you to make well-informed decisions and manage your money better.

Another important aspect of managing your money is partnering with the right bank.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

What are basic banking terms?

Some basic banking terms include savings account, checking account, direct deposit, routing number, and electronic fund transfer. If you’re new to banking, it’s a good idea to review a list of common banking terminology to get a better handle on your finances and how to manage them.

What are common banking transactions?

Some common banking transactions include cash withdrawals or deposits at the bank or ATM, mobile check deposits via an app, and direct deposits into and direct debits from a bank account. Individuals can also transfer money from one bank account to another, like from their checking to their savings.

What are banking processes?

Common banking processes include managing customers’ checking and savings accounts, which can include charging fees or paying interest. Banks also often offer loans, which have a range of processes from underwriting to account servicing.


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*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

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

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

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

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

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.

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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Counter Credits Explained

Despite the advent of digital banking and managing your finances on a screen, many people still step inside a brick-and-mortar bank to make a deposit. When they do, this transaction may turn up on their monthly statement as a “counter credit.” The reason why: They approached the counter at the branch and handed over funds that were credited to their account.

Here, learn more about counter credits and the role they can play in your financial life.

Key Points

•  Counter credits involve in-person deposits at a bank branch, using cash or checks handed to a teller.

•  Counter credits often clear immediately or within a business day, providing individuals with quick access to funds.

•  Bank statements reflect counter credits to differentiate them from other deposit types.

•  Those less comfortable with digital technology and frequently making large cash deposits may find counter credits ideal.

•  Despite digital banking trends, counter credits can be helpful for personal interaction and when handling large sums.

What Is a Counter Credit?

A counter credit is a cash or check deposit made to your checking or savings account in person at a brick-and-mortar branch of a bank or credit union. In that way, it’s really the most straightforward, traditional kind of deposit you can make.

This counter credit meaning is pretty narrow: It doesn’t include deposits made at an ATM, it doesn’t include mobile check deposits, and it certainly doesn’t include direct deposits from an employer. It has to be in person, at a bank, and with a teller.

As briefly noted, it’s called counter credit because you make the deposit at the counter inside the branch, and the teller then credits your account the amount you deposited. (If you withdraw money at the counter, it should show up on your bank statement as a counter debit.)

How Do Counter Credits Work?

Don’t let the unfamiliar terminology fool you: You’ve likely made a counter credit before. You simply enter your bank and then hand the money or check to a teller.

If you use a deposit slip from your checkbook, you can just add the date and the amount of money. If you use a bank’s blank deposit slip, it will require you to know your bank account number. If you don’t know it, don’t sweat it: Just take the slip to the teller and show your ID, and the teller should be able to help you with the rest.

Or, you may well be able to skip the deposit slip altogether. Often, just having your debit card and PIN handy will be enough to move the transaction ahead with the teller.

How Long Does a Counter Credit Take to Clear?

Cash deposited via counter credit should be available in your bank account quickly; sometimes almost immediately, especially with small sums. At other times, the funds may clear within a business day. This makes it an attractive way to deposit your funds. Worth noting: Large cash deposits may take longer to clear.

Check deposits can take a little longer, whether made at the counter or via mobile deposit. Typically, a domestic check takes one or two business days to clear. Checks for large sums or drawn on international banks may take longer.

Recommended: How Long Does Direct Deposit Take?

Why Do Counter Credits Appear on Bank Statements?

Your bank statement gives a complete picture of account activity during a statement period (usually a month). Every transaction and transfer is accounted for.

Because counter credits are a type of deposit to your account, a bank will include them. Labeling them as counter credits can make it easier for you to identify which deposits were made in person vs. other deposits, like mobile check deposits, ATM deposits, and direct deposits from an employer, a company (like an insurance company depositing a payout), or the government.

How Do You Make Counter Deposits?

As noted above, counter deposits occur when an account holder gives a deposit to a teller at the counter of a bank branch. The customer might use a deposit slip, filled out with account details, or they might swipe their debit card and enter their PIN. This process allows the teller to ensure that the deposit is going to the intended account.

Typically, the bank customer will get a paper receipt, showing that the deposit was accepted.

Although the deposit is handed off in person, typically a check will be verified and processed before the funds are fully available. This can take a couple of business days or sometimes longer. A cash deposit, on the other hand, usually clears within a day, though a large deposit can take longer.

Deposits vs. Counter Credits

Counter credits are a type of deposit. Thus, all counter credits are deposits, but not all deposits are counter credits.

In today’s world of advanced banking technology, you can deposit money into your account in a number of ways:

•  Direct deposit: A third party, like an employer with your paycheck or the federal government with a tax refund or unemployment payment, will electronically transfer money into your account.

•  Other electronic funds transfers: Other forms of electronic fund transfers that you might use to deposit money into your account include transferring money from one bank to another or moving money from a peer-to-peer payment app into your bank account after a friend sends you money.

•  Mobile check deposit: Mobile banking technology enables consumers to take pictures of their checks on their phone, from the comfort of their own home, then deposit them via the bank’s app.

•  ATM and retailer deposits: You can often deposit money to your bank account at an ATM or participating retailer. When depositing cash at an ATM, it can be a good idea to find an in-network ATM to avoid paying ATM fees. However, be aware that not all online banks support cash deposits at ATMs and may instead allow you to make these deposits at participating retailers, which could impose a small fee. (SoFi, for example, only supports cash deposits at participating retailers at this time.)

As you see, counter credits are just one of many techniques that can be used to get money into your bank account.

Recommended: What Is a Cashier’s Check?

Is Counter Credit Obsolete?

With more people using online banking, you might think counter credit is obsolete. However, in-person banking still has its place.

Some people just prefer the customer experience of walking into a bank and working with another human to deposit their funds. A counter credit can also be reassuring when you’re depositing a large sum of cash and don’t want to feed it into an ATM.

Pros and Cons of Counter Credits

What are the advantages and disadvantages of counter credits? Consider these points.

Pros

The upsides of counter credits are as follows:

•  Quick access to funds: When depositing a check or cash, the money is often available in your bank account soon thereafter, especially when depositing cash. There’s no need to wait for, say, the ATM you deposited your money into to be emptied.

•  In-person customer service: If you need help, the bank teller is literally right on the other side of the counter — and should be happy to assist you.

•  Ideal for large deposits and people who use cash: Some people who work primarily with cash and make large deposits may prefer to hand the cash or check directly to the bank teller. This can be a positive when an ATM or retailer deposit may be less practical (and might have deposit limits).

•  Easy to understand: People who have grown up with tech may argue that digital deposits are easier and more convenient, but if you’re not comfortable with these technologies, it may be simpler for you just to head to the bank and deposit money in person.

Cons

Next, review the downsides of counter credits:

•  Inconvenience: For many, the thought of driving to a bank and waiting in line in person is wildly inconvenient in this era of digital banking.

•  Inaccessible when traveling: Whether you are a digital nomad or simply traveling on your summer vacation, sometimes you simply can’t get to a bank branch. Mobile deposit (or signing up for direct deposit to automate the process) can help eliminate this issue.

•  Limited hours: Banks aren’t always open. They close in the evening, they may have short Saturday hours (if any), and they’re closed for holidays. But with online banking, you can make a mobile deposit any time of day (and often in the evenings at participating retailers).

Recommended: Online Banking vs. Traditional Banking

The Takeaway

Counter credits refer to in-person deposits (check or cash) into your bank account, made at a brick-and-mortar location. If you bank in person at a traditional bank, it’s likely you’ll see these transactions on your monthly bank statement. However, with the advent of online banking, you may make all or most of your deposits via functions like mobile check deposit and electronic fund transfer, as well as at participating ATMs and retailers.

If you don’t have a need for in-person banking, consider the benefits of an online bank account with SoFi. Note that SoFi does not currently support cash deposits at ATMs, though it enables you to make cash deposits at participating retailers nationwide for a small fee.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

🛈 While SoFi does not support counter credits, members can deposit funds using the mobile check deposit feature or make in-person cash deposits following these instructions.

FAQ

Is counter credit a direct deposit?

A counter credit is not a direct deposit. A counter credit refers to an in-person deposit made by you at your bank’s counter with a teller. A direct deposit is an electronic process in which a third party, like an employer or the government, transfers money directly into your bank account.

What is a counter transaction?

A counter transaction is a banking transaction made in person with a bank teller at the counter of a brick-and-mortar branch. This might include depositing money (a counter credit) or withdrawing money (a counter debit).

What is an over-the-counter deposit?

An over-the-counter deposit (aka a counter credit) is a cash or check deposit made into a bank account in person at a bank or credit union branch. The counter refers to the counter at which the bank teller works. You may see counter credits on bank statements referencing these transactions.


Photo credit: iStock/Fly View Productions

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

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

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

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

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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Can You Get a Debit Card for a Savings Account?

You usually can’t get a debit card for a savings account. Typically, debit cards are issued for checking accounts.

There’s a simple reason for that. Savings accounts are designed to hold money that you don’t plan to spend right away. Earning interest on deposits is the reward you get for adding money to your savings balance. Checking accounts, on the other hand, are designed for spending.

There’s a backdoor way to use a debit card for a savings account, but it requires you to have a checking account and transfer funds. Knowing the rules for debit cards and bank accounts can make it easier to manage your money.

Key Points

•  Savings accounts typically don’t come with debit cards; they are designed for holding money and earning interest.

•  Debit cards are often linked to checking accounts, which are meant for spending.

•  ATM cards can sometimes be issued for savings accounts, allowing limited access to funds.

•  Alternatives to debit cards for savings accounts include transferring funds to checking accounts or making in-person withdrawals.

•  Understanding the rules and limits of savings accounts can help you manage funds effectively.

What Accounts Offer Debit Cards?

Usually, you cannot get a debit card with standard or high-yield savings accounts. You can, however, get a debit card with other types of bank accounts, such as:

•  Traditional checking accounts

•  High-yield checking or interest checking

•  Money market accounts

•  Cash management accounts

•  Health savings accounts

You can find traditional checking accounts, high-yield checking, and money market accounts at traditional banks or online banks. Some banks also offer HSAs with a debit card so that paying for health care is easy and convenient.

A cash management account is a little different. These accounts, which you can find at a brokerage, blend features of savings and checking accounts. You can use them to pay bills, make purchases with a debit card, or hold funds that you plan to transfer into your investment account.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 3.80% APY on savings balances.

Up to 2-day-early paycheck.

Up to $3M of additional
FDIC insurance.


Debit Cards vs. ATM Cards

Debit cards and ATM cards may look the same at first glance, but there are some key differences between them.

•  A debit card is a PIN-enabled card that’s linked to a checking account or a money market account. You can use a debit card to make purchases, pay bills, or withdraw cash at ATMs. When you complete a debit card transaction, the money is deducted from your checking or money market account.

•  ATM cards are also PIN-based but they have less functionality than a debit card. You can use an ATM card to view your balance, withdraw cash, or make deposits at an automated teller machine. You cannot, however, use a debit card to make purchases.

Banks can issue ATM cards for checking accounts, though it’s more common to get a debit card instead. Some banks also offer ATM cards for savings accounts, though that’s more of an exception than the rule. If you have an ATM card for checking or savings, there may be an ATM withdrawal limit that dictates how much cash you can take out daily or weekly.

Accessing Your Savings Account Funds

If you want to access money in your savings account but don’t have a debit card, your options will depend on your bank’s policies. Generally, the alternatives can include:

•  You can use an ATM card if you’re issued one for transferring funds into a checking account and withdrawing from there. Or you can make a transfer on your financial institution’s website or in the app. That’s the backdoor method that was mentioned earlier. This process can be especially easy if you have linked checking and savings accounts at the same financial institution.

•  If you have a savings account at a traditional bank, you could also make withdrawals in person at the teller window.

When accessing savings account funds, it’s important to know what limits your bank imposes. For instance, it’s not uncommon for banks to limit you to six withdrawals from savings per month. If you go over that limit, the bank can charge an excess withdrawal fee for each additional transaction or convert your savings into a checking account.

Tips for Using Your Savings Account

Savings accounts are not meant to be complicated or confusing, but there are some rules to know about using them. These tips can help you make the most of your savings.

•  Choose the right bank to open a savings account. Online banks can offer higher interest rates on savings with fewer fees, compared to traditional banks. The trade-off is that you don’t have access to bank branches.

•  Know your limits. As mentioned, banks may limit you on the number of withdrawals you can make from savings per month. There may also be limits on how much you can transfer from savings to checking or withdraw in cash at a teller.

•  Link savings to checking. Linking your savings account to a checking account can make it easy to transfer funds between them. Just keep in mind that linking accounts is not an excuse to siphon away money from savings unnecessarily. This is especially true if your savings account is your emergency fund.

•  Automate deposits. Setting up automatic deposits to savings is an easy way to grow your balance. You can also use direct deposit to send some of your paycheck to savings or create a recurring transfer from checking to savings each payday.

If your bank offers an ATM card with a savings account, remember to check the ATM withdrawal limits. Also, it’s important to be aware of any added ATM fees you might pay for using another bank’s machine to withdraw cash.

Alternatives to Getting a Debit Card for Savings Accounts

If you can’t get a debit card for a savings account, you have some other options for managing your money. For instance, you could:

•  Link your savings account to a checking account (especially an interest-bearing one) for convenient transfers.

•  Set up a cash management account that combines features of a checking and savings account, including a debit card.

•  Open a money market account that includes a debit card and check-writing privileges.

•  You could also use a prepaid debit card to hold your savings. That can make it easy to access your money, but there are a few drawbacks. You won’t earn interest the way that you could with a savings account at a bank. Also, if your card is lost or stolen you might be out your entire savings if you don’t report the loss to the card issuer right away. Prepaid debit cards can also charge fees, which can nibble away at your savings balance.

These are some work-arounds since you usually can’t get a debit card with a savings account, and as you see, each can have its pros and cons.

The Takeaway

Savings accounts can help you set aside money toward your big (or small) financial goals. While you usually don’t get a debit card for savings accounts, you could still get a great rate for your money to make up for it. If you are determined to get something akin to a debit card with a savings account, you might look at such alternatives as money market or cash management accounts or link your checking and savings accounts for easy transfers and then withdrawals.

Another smart move: Bank with SoFi. We offer checking and savings in one convenient place, with debit card access.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

Do banks give debit cards for savings accounts?

Banks usually do not issue debit cards for savings accounts. Money market savings accounts may be an exception, as those can sometimes come with a debit card, paper checks, or both. Debit cards are most commonly associated with checking accounts.

Is there a card for a savings account?

A bank may offer an ATM card for a savings account. If you get a savings account with an ATM card, you could use your card to deposit or withdraw cash at ATMs. You would not, however, be able to make purchases with the card.

Can I use an ATM card to access my savings account?

You could use an ATM card to access a savings account if the bank issues one to you. If you don’t have an ATM card for your savings account, you may need to first transfer money to checking and then withdraw it using your debit card.


Photo credit: iStock/Miljan Živković

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

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

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

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

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

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What Is a Bank Draft?

A bank draft (which SoFi doesn’t offer at this time) is a document that looks like a check, but the payer’s bank guarantees the funds, making them extremely reliable. Since bank drafts have no limit, their increased security makes them ideal for hefty transactions, such as purchasing a car. They are often used in business transactions as well.

Bank drafts can foster trust in a deal involving large sums of money since there’s no worry about a bounced check or handing over piles of physical cash. Here’s how a bank draft works and what to expect when you use one.

Key Points

•   Bank drafts are secure financial tools that are guaranteed by the issuing bank, and cannot bounce.

•   There is no limit on the amount of a bank draft, which can make them ideal for significant purchases, such as cars.

•   Bank drafts can be requested from a bank and typically have a fee of up to $10.

•   Bank drafts are physical documents that can be lost or stolen, and are difficult to cancel.

•   Alternatives to bank drafts include ACH payments, wire transfers, and money transfer apps.

🛈 While SoFi does not currently offer bank drafts, there are alternative online transfer methods you can use through the SoFi app or a web browser.

Bank Draft Definition

A bank draft is a financial instrument used to make payments — frequently large ones — that have your bank’s financial backing. Bank drafts look like typical checks but can’t bounce because the bank ensures the payment will go through, usually within 24 hours. In addition, bank drafts can be for any amount you like, unlike the situation with wrangling, say, ATM withdrawal limits.

You typically obtain a bank draft either by visiting a bank branch in person or making a request in writing. You’ll usually pay a fee of $0 or $10 to get a bank draft drawn on your checking account. While bank drafts technically don’t expire, financial institutions may refuse to process a bank draft that is more than a few months old.

Money Orders vs Bank Drafts

You can use both money orders and bank drafts to make payments, but these tools differ in several ways.

•   Money orders sent domestically must be less than $1,000, while bank drafts don’t have limits.

•   You must have a bank account to draw upon in order to get a bank draft, but you can get a money order from a bank, U.S. post office, and select grocery stores and retail locations. Money orders are often bought with cash, a debit card, or a traveler’s check.

•   You can cancel a money order and get a refund if your payee hasn’t cashed it yet, but banks usually won’t cancel a bank draft.

Knowing these differences can help you determine which financial tool is best suited for your situation.

How Do Bank Drafts Work?

To get a bank draft, you will typically follow these steps.

•   Ask your bank or credit union to issue a bank draft for the desired amount. You can do so in person at a branch or in writing.

•   Next, your financial institution confirms your account has sufficient funds for the bank draft and moves the money from your account into its reserve account. This way, they can guarantee the bank draft, meaning your payee can be sure of receiving payment.

•   Lastly, your financial institution creates the physical document with the payee’s name on it. Typically, you get a bank draft in person at a branch, though they can also be obtained via mail.

Like ATM fees, your financial institution may charge a nominal fee for bank drafts (as noted above, typically close to $10). However, you might receive the first several bank drafts for free at your bank. In addition, using a specific amount of bank drafts per month might eliminate the fee.

Pros and Cons of Bank Drafts

Bank drafts have pros and cons, just as checks, e-checks, money orders, and cash do. Keep the following in mind when using bank drafts:

Pros

First, the advantages of bank drafts:

•   Your financial institution acts as the intermediary for the transaction, making the payment secure and convenient. It adds a level of trust.

•   A bank draft is safer than carrying thousands of dollars in cash.

•   Bank drafts can’t bounce since your financial institution guarantees the payment.

•   Bank drafts have no limit in terms of the amount.

•   Therefore, they’re helpful for sizable transactions, such as a down payment for a home.

•   The Federal Deposit Insurance Corporation, or FDIC, insures most financial institutions, meaning the government will fulfill the bank draft’s value in the rare instance of a financial institution failing. This insurance covers up to $250,000 per depositor, per account category, per institution.

•   Bank drafts generally clear within 24 hours.

•   Financial institutions can usually convert bank drafts into the payee’s preferred currency, from U.S. dollars to euros and beyond.

As you can see, bank drafts can be a very useful tool to make a large payment.

Cons

Next, the downsides of bank drafts:

•   Your financial institution might charge you to issue a bank draft.

•   The bank draft isn’t an electronic transfer; it’s a physical document you must deliver to your payee.

•   Since it’s a physical document, your bank draft might become lost, stolen, or damaged.

•   It’s typically impossible to cancel a bank draft and receive a refund.

•   It may be challenging (but not impossible) to recover your money if it is lost.

•   Fees could be higher than other methods.

In these ways, there are some negative aspects to bank drafts that may mean they are not appropriate for every situation.

Canceling a Bank Draft

Generally, you can only cancel a bank draft in dire situations. Theft or fraud are usually the only reasons a financial institution will cancel a bank draft. However, your financial institution may have a policy stating they won’t cancel bank drafts under any circumstances.

That said, if you want to cancel a bank draft for a reason other than theft or bank fraud, you could have the payee cash the bank draft and give you the money. This option requires trusting the payee to agree to and provide the refund.

Bank Draft Alternatives

While bank drafts may suit some payment scenarios, they are just one among many ways to send money.

•   One alternative to bank drafts is automatic clearing house (ACH) payments. The ACH network allows banks, credit unions, and financial institutions to transfer funds to each other electronically. ACH payments are usually free but may have transfer limits. Also worth noting: They are solely for domestic transactions.

•   You could use a wire transfer, another electronic payment type that usually completes the payment within 24 hours. As with ACH payments, wire transfers have limits, such as $10,000 or $100,000. However, wire transfers are viable for foreign transactions.

•   Checks are another option. Receiving a large sum via a standard check involves the risk of it bouncing, so payees may hesitate to accept this form of payment. You could pay for a cashier’s check from your financial institution. This means the bank uses its funds to guarantee the payment. A certified check, in which the bank verifies that you to have the necessary funds in your account, is another possibility.

•   Money transfer apps, including such P2P platforms as PayPal and Venmo, are a financial tool that can offer speed and security as you move funds. (Instant accessibility may be available if the recipient pays a fee.) These apps may charge transaction fees and usually have daily transaction limits.

Money transfer apps link to your bank account, making their use seamless and convenient. However, depending on the app, your transaction might not have FDIC insurance, meaning a botched transaction could result in the permanent loss of money. In addition, the payer and payee need to have the same app to conduct a transaction.

As you see, there are many ways to transfer funds if a payment by bank draft doesn’t suit your needs.

The Takeaway

A bank draft is a financial tool typically used for large transactions, such as the payment for a home, a vehicle, or the purchase of office equipment. The bank guarantees payment to the payee by using its own reserves after verifying and transferring the issuer’s funds into a reserve account, which adds a layer of security and trustworthiness. However, because bank drafts are physical documents that you can’t easily cancel and that are subject to damage or theft, it’s best to handle them carefully and perhaps consider alternatives, such as electronic payments.

FAQ

How long does it take for bank draft to clear?

Bank drafts usually take 24 hours or less to clear because the payer’s financial institution guarantees the funds. However, the receiving bank may have its own policies about when it makes funds available to the account holder, so check with your financial institution about timing if you are receiving a bank draft.

Is a bank draft available immediately?

Bank draft funds generally become available within 24 hours of the payee depositing them. However, the payee’s financial institution might take up to a few business days to make the funds available, depending on its policies.

What do you need for bank draft?

You need a bank account to issue a bank draft. In addition, you need your account to have funds equal to or greater than the payment amount. You may also need to pay a small fee for the bank draft; typically, the cost is $10 or less.

Does a bank draft require a signature?

Neither the issuer nor the payee need to provide a signature for a bank draft. The sole party that signs a bank draft is an employee of the issuer’s bank or financial institution.


Photo credit: iStock/deepblue4you

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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The Different Types Of Home Equity Loans

The Different Types Of Home Equity Loans

How does a home equity loan work? First, it’s important to understand that the term home equity loan is simply a catchall for the different ways the equity in your home can be used to access cash. The most common types of home equity loans are fixed-rate home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing.

Key Points

•   Home equity loans allow homeowners to borrow against the equity in their homes.

•   There are two main types of home equity loans: traditional home equity loans and home equity lines of credit (HELOCs).

•   Traditional home equity loans provide a lump sum of money with a fixed interest rate and fixed monthly payments.

•   HELOCs function like a credit card, allowing homeowners to borrow and repay funds as needed within a set time frame.

•   Home equity loans and HELOC can be used for various purposes, such as home renovations, debt consolidation, or major expenses.

What Are the Main Types of Home Equity Loans?

When folks think of home equity loans, they typically think of either a fixed-rate home equity loan or a home equity line of credit (HELOC). There is a third way to use home equity to access cash, and that’s through a cash-out refinance.

With fixed-rate home equity loans or HELOCs, the primary benefit is that the borrower may qualify for a better interest rate using their home as collateral than by using an unsecured loan — one that is not backed by collateral. Some people with high-interest credit card debt may choose to use a lower-rate home equity loan to pay off those credit card balances, for instance.

This does not come without risks, of course. Borrowing against a home could leave it vulnerable to foreclosure if the borrower is unable to pay back the loan. A personal loan may be a better fit if the borrower doesn’t want to put their home up as collateral.

How much a homeowner can borrow is typically based on the combined loan-to-value ratio (CLTV ratio) of the first mortgage plus the home equity loan. For many lenders, this figure cannot exceed 85% CLTV. To calculate the CLTV, divide the combined value of the two loans by the appraised value of the home. In addition, utilizing a home equity loan calculator can help you understand how much you might be able to borrow using a home equity loan. It’s similar to the home affordability calculator you may have used during the homebuying process.

Of course, qualifying for a home equity loan or HELOC is typically contingent on several factors, such as the credit score and financial standing of the borrower.

Fixed-Rate Home Equity Loan

Fixed-rate loans are pretty straightforward: The lender provides one lump-sum payment to the borrower, which is to be repaid over a period of time with a set interest rate. Both the monthly payment and interest rate remain the same over the life of the loan. Fixed-rate home equity loans typically have terms that run from five to 30 years, and they must be paid back in full if the home is sold.

With a fixed-rate home equity loan, the amount of closing costs is usually similar to the costs of closing on a home mortgage. When shopping around for rates, ask about the lender’s closing costs and all other third-party costs (such as the cost of the appraisal if that will be passed on to you). These costs vary from bank to bank.

This loan type may be best for borrowers with a one-time or straightforward cash need. For example, let’s say a borrower wants to build a $20,000 garage addition and pay off a $4,000 medical bill. A $24,000 lump-sum loan would be made to the borrower, who would then simply pay back the loan with interest. This option could also make sense for borrowers who already have a mortgage with a low interest rate and may not want to refinance that loan.

Recommended: What Is a Fixed-Rate Mortgage?

Turn your home equity into cash with a HELOC from SoFi.

Access up to 90% or $500k of your home’s equity to finance almost anything.


Home Equity Line of Credit (HELOC)

A HELOC is revolving debt, which means that as the balance borrowed is paid down, it can be borrowed again during the draw period (whereas a home equity loan provides one lump sum and that’s it). As an example, let’s say a borrower is approved for a $10,000 HELOC. They first borrow $7,000 against the line of credit, leaving a balance of $3,000 that they can draw against. The borrower then pays $5,000 toward the principal, which gives them $8,000 in available credit.

Unlike with a fixed-rate loan, a HELOC’s interest rate is variable and will fluctuate with market rates, which means that rates could increase throughout the duration of the credit line. The monthly payments will vary because they’re dependent on the amount borrowed and the current interest rate.

HELOCs have two periods of time that are important for borrowers to be aware of: the draw period and the repayment period.

•   The draw period is the amount of time the borrower is allowed to use, or draw, funds against the line of credit, commonly 10 years. After this amount of time, the borrower can no longer draw against the funds available.

•   The repayment period is the amount of time the borrower has to repay the balance in full. The repayment period lasts for a certain number of years after the draw period ends.

So, for instance, a 30-year HELOC might have a draw period of 10 years and a repayment period of 20 years. Some buyers only pay interest during the draw period, with principal payments added during the repayment period. A HELOC interest-only calculator can help you understand what interest-only payments vs. balance repayments might look like.

A HELOC may be best for people who want the flexibility to pay as they go. For an ongoing project that will need the money portioned out over longer periods of time, a HELOC might be the best option. While home improvement projects might be the most common reason for considering a HELOC, other uses might be for wedding costs or business start-up costs.

Home Equity Loan Fees

Generally, under federal law, fees should be disclosed by the lender. However, there are some fees that are not required to be disclosed. Borrowers certainly have the right to ask what those undisclosed fees are, though.

Fees that require disclosure include application fees, points, annual account fees, and transaction fees, to name a few. Lenders are not required to disclose fees for things like photocopying related to the loan, returned check or stop payment fees, and others. The Consumer Finance Protection Bureau provides a loan estimate explainer that will help you compare different estimates and their fees.

Home Equity Loan Tax Deductibility

Since enactment of the Tax Cuts and Jobs Act of 2017, interest on home equity loans and HELOCs is only deductible if the funds are used to substantially improve a home. Checking with a tax professional to understand how a home equity loan or HELOC might affect a certain financial situation is recommended.

Cash-Out Refinance

Mortgage refinancing is the process of paying off an existing mortgage loan with a new loan from either the current lender or a new lender. Common reasons for refinancing a mortgage include securing a lower interest rate, or either increasing or decreasing the term of the mortgage. Depending on the new loan’s interest rate and term, the borrower may be able to save money in the long term. Increasing the term of the loan may not save money on interest, even if the borrower receives a lower interest rate, but it could lower the monthly payments.

With a cash-out refinance, a borrower may be able to refinance their current mortgage for more than they currently owe and then take the difference in cash. For example, let’s say a borrower owns a home with an appraised value of $400,000 and owes $200,000 on their mortgage. They would like to make $30,000 worth of repairs to their home, so they refinance with a $230,000 mortgage, taking the difference in cash.

As with home equity loans, there typically are some costs associated with a cash-out refinance. Generally, a refinance will have higher closing costs than a home equity loan.

This loan type may be best for people who would prefer to have one consolidated loan and who need a large lump sum. But before pursuing a cash-out refi you’ll want to look at whether interest rates will work in your favor. If refinancing will result in a significantly higher interest rate than the one you have on your current loan, consider a home equity loan or HELOC instead.

The Takeaway

There are three main types of home equity loans: a fixed-rate home equity loan, a home equity line of credit (HELOC), and a cash-out refinance. Just as with a first mortgage, the process will involve a bank or other creditor lending money to the borrower, using real property as collateral, and require a review of the borrower’s financial situation. Keep in mind that cash-out refinancing is effectively getting a new mortgage, whereas a fixed-rate home equity loan and a HELOC involve another loan, which is why they’re referred to as “second mortgages.”

While each can allow you to tap your home’s equity, what’s unique about a HELOC is that it offers the flexibility to draw only what you need and to pay as you go. This can make it well-suited to those who need money over a longer period of time, such as for an ongoing home improvement project.

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

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

FAQ

What is the downside of a home equity loan?

The primary downside of a home equity loan is that the collateral for the loan is your home, so if you found yourself in financial trouble and couldn’t make your home equity loan payment, you risk foreclosure. A second consideration is that a home equity loan provides you with a lump sum. If you are unsure about how much you need to borrow, consider a home equity line of credit (HELOC) as well.

How much does a $50,000 home equity loan cost?

The exact cost of a $50,000 home equity loan depends on the interest rate and loan term. But if you borrowed $50,000 with a 7.50% rate and a 10-year term, your monthly payment would be $594 and you would pay a total of $21,221 in interest over the life of the loan.


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


SoFi 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.


*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.

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.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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