The 30-year fixed-rate mortgage dominates the American landscape, but the adjustable-rate mortgage (ARM) gains some steam when homebuyers are feeling the pinch of high mortgage rates or house prices.
Because the initial ARM rate is usually lower than that of a fixed-rate loan, buyers who expect to sell within a few years are sometimes attracted to the low rates and payments.
Taking a closer look at each type of mortgage will help you decide whether a fixed-rate or adjustable-rate mortgage works better for your particular situation.
Adjustable-Rate Mortgage Loans
In a nutshell: lower initial rate, more risk.
In most cases, an ARM rate will be fixed for three, five, seven, or 10 years and then periodically adjust.
ARMs are labeled with numbers that delineate a) the length of the introductory fixed phase and b) the frequency of rate adjustments afterward. The 5/1 ARM, for example, has a low five-year introductory rate that can then change every year for the remainder of the loan.
If you see a 7/6 or 10/6 ARM, that means the rate on the home loan can adjust every six months after the introductory period.
Pros of Adjustable-Rate Mortgage Loans
A five- or seven-year ARM tends to have an introductory rate that’s lower than that of a 30-year fixed-rate conventional loan. A three-year ARM rate may be much lower.
So during periods of elevated mortgage rates, ARMs offer a great option for borrowers to save money before the initial rate adjustment.
That includes first-time homebuyers who are looking for lower initial rates and monthly payments and who understand that their rate will likely rise if they keep the loan.
ARMs have caps on how much the rate can increase or decrease. There is usually an initial cap, a periodic adjustment cap, and a lifetime cap. More and more of the loans have rates tied to a new index, the Secured Overnight Financing Rate (SOFR). For those, the rate may go up or down a maximum of one percentage point every six months (which is why you see a 7/6 and so on) after an initial adjustment, which could be two or five percentage points, with a 5% lifetime cap.
Cons of Adjustable-Rate Mortgage Loans
ARMs provide less stability than fixed-rate mortgages. After the initial fixed-rate period, there’s no certainty about how much monthly payment amounts will go up or down.
Most ARMs are fully amortizing, but if you choose an interest-only loan, you won’t be paying down any principal for years.
Fans of ARMs point out that buyers can refinance the loan before the initial rate adjustment — to a fixed-rate loan or to another adjustable-rate mortgage — betting that rates will be lower then. But that’s a risk.
Fixed-Rate Mortgage Loans
In a nutshell: long-term predictability.
A fixed-rate mortgage has an interest rate that stays the same for the life of the loan, regardless of changes in the broader economy.
Pros of Fixed-Rate Mortgage Loans
Fixed-rate mortgages offer greater stability and predictability over the long term compared with adjustable-rate loans.
The National Association of Realtors® puts the average homeowner tenure at 10 years, while Redfin found that the typical homeowner had spent almost 12 years in their home. Older homeowners may stay longer. So if you’re not going to get a move on within a few years, it may be comforting to lock in your rate. You can refinance later if rates decrease.
Cons of Fixed-Rate Mortgage Loans
The 30-year fixed-rate home loan has a higher average interest rate than most ARM introductory rates.
Small differences in interest rates can add up. Use a mortgage calculator to see for yourself.
Then again, lifetime rate caps on most ARMs are five percentage points above the introductory rate.
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Generally the shorter the mortgage term, the lower the rate. Some people who can afford to make a high monthly payment take out 10-year loans.
Even if you initially take out a mortgage for a certain number of years, you have the option to pay off the mortgage early.
Understand How Your Adjustable Rate Would Work
If you’re seriously considering an adjustable-rate mortgage, you’ll want to understand the rate caps and adjustments.
If your rate reached the maximum, would you still be able to afford the payments?
It doesn’t hurt to get loan estimates for both fixed-rate and adjustable-rate mortgages when shopping for a mortgage. After learning the loan details, you may decide that an ARM is right for you. If you aren’t comfortable with the terms, you might opt for a fixed rate.
The Takeaway
If you’re looking for a mortgage, you’ll want to think about how long you might stay in the home and whether you’ll want to refinance in the coming years. Weigh the pros and cons of an adjustable-rate loan and a fixed-rate loan to decide what might be best for your situation.
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FAQ
Can an adjustable-rate mortgage go down?
Yes, when interest rates fall at the time of the scheduled rate adjustment, it is possible for an adjustable-rate mortgage to adjust down. However, there is usually a floor below which the rate will not fall.
Why would someone choose a fixed-rate mortgage over an adjustable-rate one?
Borrowers are often attracted by the predictability of a fixed-rate mortgage, even though the initial interest rate for an adjustable loan might be lower. The ARM may feel more risky, as rates can rise after the initial rate period.
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If you’re looking for a safe place to invest and grow your money, you might be considering both certificates of deposit (CDs) and U.S. Treasury bills (T-bills). Both investment options offer steady and predictable returns, while protecting your principal. However, there are some key differences between them, including how long you need to lock up your money, initial investment requirements, and how your earnings will be taxed. Read on for a closer look at T-bills vs. CDs.
Key Points
• CDs require locking up money for a term ranging from three months to five years, while T-bills generally have shorter terms — between four weeks to one year — which can make them a good option for short-term savings goals.
• The minimum investment for opening a CD varies by bank but is typically at least $500, while the minimum purchase amount for Treasury bills is $100.
• Interest on CDs is taxed in the year it is earned, whereas Treasury bill interest is taxed when the T-bill is sold.
• CD interest is taxable at both federal and state levels, while T-bill interest is exempt from state taxes.
• If interest rates are expected to fall, it can be advantageous to lock in a high rate on a multi-year CD.
What Is a Certificate of Deposit?
A certificate of deposit, commonly referred to as CD, is a type of savings account offered by banks and credit unions. You can also get CDs through brokerages, called brokered CDs, though these are still issued by banks. When you open a CD, you deposit a set amount of money into the account and agree to leave it there for a specific period of time, which generally ranges from three months to five years.
CDs pay a fixed interest rate that is typically higher than the average annual percentage yield (APY) for savings accounts. If you withdraw your money early, however, you will likely have to pay a penalty, often in the form of interest earned over a certain time period.
Like other types of savings accounts, CDs are insured, which means you get your money back in the unlikely event your bank goes bankrupt. CDs at banks insured by the Federal Deposit Insurance Corporation (FDIC) are typically covered up to $250,000 per depositor, per ownership category, for each insured bank. Co-owners of joint accounts at the same bank are typically each insured up to $250,000. Credit unions offer similar insurance through the National Credit Union Administration (NCUA).
Pros and Cons of CDs
CDs come with a number of benefits, but also have some drawbacks. Here’s a look at some of the top reasons you might or might not want to invest in a CD.
Pros
• Guaranteed returns: CDs offer a fixed interest rate, so you know exactly how much you will earn by the end of the term. Even if market interest rates go down, your CD rate will stay the same.
• Safety: As FDIC- or NCUA-insured products, CDs provide a high level of security, protecting your principal up to $250,000.
• Higher interest rates: CDs typically offer higher interest rates than traditional savings accounts, which can help your money grow faster.
Cons
• Limited liquidity: Funds invested in a CD are locked in for the entire term of the CD. If you need to access your money before the CD matures, you will typically incur a penalty, which can eat into your earnings.
• Could potentially earn more: While guaranteed, the returns on a CD can be lower than what you might earn with more aggressive (aka, higher-risk) investments like stocks or bonds.
• Inflation risk: If the interest rate on your CD doesn’t exceed, or even keep up with, the rate of inflation, the actual purchasing power of your money can erode over the term of the CD.
What Are U.S. Treasury Bills?
Another safe way to invest your money is to buy U.S. Treasury bills. Also called T-Bills or Treasuries, Treasury bills are short-term government securities issued by the U.S. Department of the Treasury. Treasuries are backed by the full faith and credit of the U.S. government and considered one of the safest investments available.
When you buy a T-bill, you pay less than the bill’s face value, which is the amount you will receive at maturity. The difference between the purchase price and the face value at maturity is your interest earned. You’ll owe federal taxes on any income earned, but no state or local tax. T-bills are considered short-term securities because they mature in four weeks to one year.
Pros and Cons of Treasury Bills
Like CDs, Treasuries come with both benefits and drawbacks. Here are some to keep in mind.
Pros
• Safety: T-bills are backed by the U.S. government, making them virtually risk-free if held until maturity.
• Predictable returns: Returns are guaranteed, based on the agreed-upon rate of the Treasury bill that you purchase.
• Tax benefits: The interest earned on a U.S. Treasury bill is exempt from state taxes, which can be a significant advantage for investors in high-tax states.
Cons
• Lower returns: While safe, the returns on T-bills are generally lower than what you can potentially earn by investing in the market over the long term.
• Inflation risk: Like all fixed-rate investments, if the rate you earn on your T-bill doesn’t exceed the inflation rate, the actual purchasing power of your money will diminish over the term of the Treasury.
• Market risk: While treasuries are stable, their value can fluctuate over time. If you sell before the T-bill reaches maturity, you may not get as much interest as you expected.
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Comparing CDs vs Treasury Bills
While CDs and Treasury bills have a number of similarities, there are also some key differences that you’ll want to understand before investing in either one. Here’s a closer look.
Tax Implications
One key difference between CDs and Treasuries is that interest on CDs is taxable at the federal and state level. Treasuries, on the other hand, are exempt from state income tax. If you are investing in a taxable account and live in a state with a high income tax, this can make investing in Treasuries attractive.
Another tax difference: With CDs, you pay taxes on interest earned the year it is added to the account, whether you cash out the CD or not. With Treasuries, the interest you earn is only taxable when you sell the T-Bill, which may be a different tax year than the year in which you bought it.
In both cases, the interest you earn will be reported on Form 1099-INT.
Expected Earnings
With both a CD and a Treasury bill, you’ll know beforehand how much interest you’ll earn if you hold it until its maturity. If you sell a CD early, you may forfeit some or all of your expected interest and also possibly pay a penalty. Selling Treasury bills before they reach their maturity may be possible (since there is a secondary market for them) but if you do, you may not earn all the interest you would earn if you held it to its maturity.
Other Key Details to Consider
When deciding whether to put your money in T-bills or CDs, here are some other factors to keep in mind.
• When you’ll need the money: T-Bills are more liquid than CDs since they typically have shorter maturities and can be sold on the secondary market. If you need access to your funds quickly, T-Bills may be the better option. While you can sell a CD before maturity, doing so typically incurs a penalty that can reduce your returns.
• Initial investment amount: The minimum investment for opening a CD varies by bank but is typically at least $500. The minimum purchase amount for Treasury bills is $100. A higher initial investment requirement could make opening a CD difficult if you are just starting out and don’t have a lot of extra cash to invest.
• Interest rate environment: While T-bills and CDs generally offer comparable rates, you may want to consider time to maturity and where interest rates could be headed. If interest rates are expected to fall, for example, locking in a good rate on a multi-year CD could be a smart move.
How To Purchase CDs and Treasury Bills
You can buy CDs directly from banks and credit unions, either online or in-person. Rates and terms vary by institution, so it’s generally a good idea to shop around to find the best CD for your needs. You typically don’t have to have an existing account at a bank or credit union to open a CD.
You can purchase Treasuries either through a brokerage firm or directly from the U.S. Department of the Treasury at TreasuryDirect.gov. The most commonly offered maturity dates are four weeks, eight weeks, 13 weeks, 17 weeks, 26 weeks, and 52 weeks. T-bills are sold in increments of $100, and the minimum purchase is $100.
Similar Investments to Keep in Mind
If you are looking for a relatively safe place to park your savings and earn a decent return, there are other options besides T-bills and CDs. Here are some to consider.
• Series I savings bonds: I bonds are a type of U.S. savings bond with an overall rate that is based on both a fixed rate that never changes and a variable interest rate,designed to keep up with inflation, that resets every six months. You need to hold the bond for at least one year and will pay a penalty if you cash out before five years. Like T-bills, interest payments are exempt from state taxes.
• Money market fund: A money market fund is a type of mutual fund that invests in CDs, short-term bonds, and other low-risk investments. The money you invest is liquid, and yields are typically higher than regular savings accounts. However, the funds are not protected by the FDIC or NCUA.
• High-yield savings account: While not technically an investment, high-yield savings accounts pay more than the average APY for savings accounts, while offering more liquidity than CDs or T-Bills. Your money is insured, but the APY on a high-yield savings account isn’t fixed, meaning it can rise or fall depending on market rates.
The Takeaway
CDs and Treasury bills are both considered safe investments, allowing you to earn a guaranteed return without putting your initial investment at risk. However, there are some key differences that can make one a better fit than the other.
T-bills often have shorter terms than CDs, making them a good option for a savings goal that is a year or less down the road, like buying a car. With some terms as long as five years (or more), a CD may work better for a longer-term savings goal, such as making a downpayment on a home. If you’re looking for safety and competitive returns along with liquidity, you might also consider putting your money in a high-yield savings account.
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FAQ
Are CDs and Treasury bills considered safe investments?
Yes, both certificates of deposit (CDs) and Treasury bills (T-bills) are considered safe investments. CDs offer a fixed interest rate over a specified term, and are typically insured up to $250,000, making them low-risk. Treasury bills are short-term government securities backed by the U.S. government, making them one of the safest investments available. They are sold at a discount and mature at face value, with the difference representing the investor’s interest. Both options can be ideal if you’re a conservative investor seeking minimal risk.
Should I keep my emergency fund in a CD or Treasury Bill?
You generally want your emergency funds to remain highly liquid and easily accessible, so a regular savings account can work better than a certificate of deposit (CD) or Treasury bill.
CDs usually require you to leave your funds untouched for a fixed term, with penalties for early withdrawal. Treasury bills also tie up your money, though terms are relatively short (typically four weeks to one year). A Treasury bill might work for an emergency fund if you have other funds you can tap in a pinch before the maturity date. Otherwise, consider keeping your emergency cash in a high-yield savings account or a money market account.
How do CDs and Treasury bills differ from savings bonds?
Certificates of deposit (CDs), Treasury bills, and savings bonds are all low-risk investments, but there are some key differences between them.
• CDs offer fixed interest over a specific term, and are typically used for short- to medium-term savings goals.
• Treasury bills are short-term government securities that mature in a year or less and are sold at a discount.
• Savings bonds, such as Series I and EE Bonds, are long-term government bonds with interest that compounds semi-annually. They are generally intended for long-term savings goals, such as education or retirement.
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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).
Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible 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 Eligible 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 an Eligible Direct Deposit or receipt of $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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible 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.
Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. 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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The nonfarm payroll report measures the number of jobs added or lost in the United States. The report is released by the Bureau of Labor Statistics (BLS), usually on the first Friday of every month, and is closely watched by economists, market analysts, and traders. The nonfarm payroll report can have a significant impact on financial markets. A strong or weak jobs report may lead to stock market volatility, as investors feel confident or pessimistic about the direction of the economy.
The nonfarm payroll report is just one of many economic indicators that investors can use to gauge the economy’s strength. However, market participants often pay attention because it provides a monthly snapshot of the U.S. economy’s health.
What Are Nonfarm Payrolls?
Nonfarm payrolls are a key economic indicator that measures the number of Americans employed in the United States, excluding farm workers and some other U.S. workers, including certain government employees, private household employees, and non-profit organization workers.
Also known as simply “the jobs report,” the nonfarm payrolls report looks at the jobs gained and lost during the previous month. This monthly data release provides investors with a snapshot of the health of the labor market, and the economy as a whole.
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The U.S. Nonfarm Payroll Report, Explained
The nonfarm payroll report is one of two surveys conducted by the BLS that tracks U.S. employment in a data release known as the Employment Situation report. These two surveys are:
• The Establishment Survey. This survey provides details on nonfarm payroll employment, tracking the number of job additions by industry, the average number of hours worked, and average hourly earnings. This survey is the basis for the reported total nonfarm payrolls added each month.
• The Household Survey. This survey breaks down the employment numbers on a demographic basis, studying the jobs rate by race, gender, education, and age. This survey is the basis for the monthly unemployment rate reported each month.
When Is the NFP Released?
The Bureau of Labor Statistics usually releases the nonfarm payrolls report on the first Friday of every month at 8:30 am ET. The BLS releases the Establishment Survey and Household Survey together as the Employment Situation report, which covers the labor market of the previous month.
4 Figures From the NFP Report to Pay Attention To
Investors may look at several specific figures within the jobs report to help inform their investment decisions:
1. The Unemployment Rate
The unemployment rate is critical in assessing the economic health of the U.S., and it’s a factor in the Federal Reserve’s assessment of the nation’s labor market and the potential for a future recession. A rising unemployment rate could result in economic policy adjustments – like changes in interest rates that impact stocks, both domestically and globally.
Higher-than-expected unemployment could push investors away from stocks and toward assets that they consider more safe, such as Treasuries, potentially triggering a decline in the stock market.
2. Employment Sector Activity
The nonfarm payroll report also examines employment activity in specific business sectors like construction, manufacturing, or healthcare. Any significant rise or fall in sector employment can impact financial market investment decisions on a sector-by-sector basis.
3. Average Hourly Wages
Investors may consider average hourly pay a barometer of overall U.S. economic health. Rising wages may indicate stronger consumer confidence and a more robust economy. That scenario could lead to a rising stock market. However, increased average hourly wages may also signify future inflation, which could cause investors to sell stocks as they anticipate interest rate hikes by the Federal Reserve.
4. Revisions in the Nonfarm Payroll Report
Nonfarm payroll figures, like most economic data, are dynamic in nature and change all the time. Thus, investors watch any revisions to previous nonfarm payroll reports to reevaluate their own portfolios based on changing employment numbers.
How Does NFP Affect the Markets?
Nonfarm payrolls can affect the markets in a few ways, depending on the state of the economy and financial markets.
NFP and Stock Prices
If nonfarm payrolls are unexpectedly high or low, it can give insight into the economy’s future direction. A strong jobs report may signal that the economy is improving and that companies will have increased profits, leading to higher stock prices. Conversely, a weak jobs report may signal that the economy is slowing down and that company profits may decline, resulting in lower stock prices as investors sell their positions.
NFP and Interest Rates
Moreover, nonfarm payrolls can also affect stock prices by influencing the interest rate environment. A strong jobs report may lead the Federal Reserve to raise interest rates to prevent an overheated labor market or curb inflation, leading to a decline in stock prices. Conversely, a weak jobs report may lead the Federal Reserve to keep interest rates unchanged or even lower them, creating a loose monetary policy environment that can boost stock prices.
Investors create a strategy based on how they think markets will behave in the future, so they attempt to factor their projections for jobs report numbers into the price of different types of investments. An unexpected jobs report, however, could prompt them to change their strategy. Surprise numbers can create potentially significant market movements in critical sectors like stocks, bonds, gold, and the U.S. dollar, depending on the monthly release numbers.
How to Trade the Nonfarm Payroll Report
While long-term investors typically do not need to pay attention to any single jobs report, those who take a more active investing approach may want to adjust their strategy based on new data about the economy. If you fall into the latter camp, you’ll typically want to make sure that the report is a factor you consider, though not the only factor.
You might want to look at other economic statistics and the technical and fundamental profiles of individual securities you’re planning to buy or sell. Then, you’ll want to devise a strategy that you’ll execute based on your research, your expectations about the jobs report, and whether you believe it indicates a bull or a bear market ahead.
For example, suppose you expect the nonfarm payroll report to be positive, with robust job growth. In that case, you might consider adding stocks to your portfolio, as share prices tend to rise more than other investment classes after good economic news. If you believe the nonfarm payroll report will be negative, you may consider more conservative investments like bonds or bond funds, which tend to perform better when the economy slows down.
Or, you might take a more long-term approach, taking the opportunity to buy stocks at a discount and invest while the market is down.
The Takeaway
The jobs report can be used as one of many economic indicators that investors take into account when weighing their next investment moves. The report offers a snapshot of the health of the labor market, and the economy at large. But it’s important to keep in mind that it’s only one indicator.
Markets move after nonfarm payroll reports, but long-term investors don’t have to change their portfolio after every new government data release. That said, active investors may use the jobs report as one factor in creating their investment strategy.
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Labels like prime and subprime help denote loans that are designed for people with different credit scores. Prime loans are built for borrowers with good credit, while subprime loans are designed for those with less-than-perfect credit. While subprime loans can help this group finance big purchases like a home or a car, they also come with potentially significant downsides.
Here are key things to know about prime and subprime loans to help you make better borrowing decisions.
Prime Loan vs Subprime Loan
When you’re shopping for a loan, lenders will consider your credit history to help them determine how much default risk they’d be taking on were they to loan you money.
Your credit score is a three-digit representation of your credit history that lenders use to understand your creditworthiness. While there are different credit scoring models, the FICO® score is one of the most commonly used. Lenders and other institutions may have different rules for which credit scores determine prime vs subprime loans.
For example, Experian, one of the three major credit reporting bureaus, defines a prime loan as requiring a FICO score of 670 to 739. With a score of 740 or above, you’re in super prime territory. Borrowers with a FICO score of 580 to 669 will likely only qualify for subprime loans.
Here are some key differences between the two that borrowers should be aware of.
Interest Rates
Borrowers with lower credit scores are seen as a greater lending risk. To offset some of that risk, lenders may charge higher interest rates on subprime loans than on prime loans.
What’s more, many subprime loans have adjustable interest rates, which may be locked in for a short period of time after which they may readjust on a regular basis, such as every month, quarter, or year. If interest rates are on the rise, this can mean your subprime loan becomes increasingly more expensive.
Down Payments
Again, because subprime borrowers may be at a higher risk of default, lenders may protect themselves by requiring a higher down payment. That way, the borrower has more skin in the game, and their bank doesn’t need to lend as much money.
Loan Amounts
Subprime borrowers may not be able to borrow as much as their prime counterparts.
Higher Fees
Fees, such as late-payment penalties or origination fees, may be higher for subprime borrowers.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.
Repayment Periods
Subprime loans typically carry longer terms than prime loans. That means they take longer to pay back. While a longer term can mean a smaller monthly payment, it also means that you may end up paying more in interest over the life of the loan.
Prime Loan vs Subprime Loan: What Type of Loans Are They?
Prime and subprime options are available for a variety of loan types. For example, different types of personal loans come as prime personal loans or subprime personal loans. When you’re comparing personal loan interest rates, you’ll see that prime loans offer lower rates than subprime. Common uses for personal loans include consolidating debt, paying off medical bills, and home repairs.
You can also apply for prime and subprime mortgages and auto loans. What is considered a prime or subprime score varies depending on the type of loan and the lender.
By checking your credit score, you can get a pretty good idea of whether you’ll qualify for a prime or subprime loan. That said, as mentioned above, the categories will vary by lender.
The process for applying for a prime or subprime loan is similar.
Get Prepared
Lenders may ask for all sorts of documentation when you apply for a loan, such as recent paystubs, employer contact information, and bank statements. Gather this information ahead of time, so you can move swiftly when researching and applying for loans.
Research Lenders
Banks, credit unions, and online lenders all offer prime and subprime loans. You may want to start with the bank you already have a relationship with, but it’s important to explore other options too. You may even want to approach lenders who specialize in subprime loans.
To shop around for the best possible rate, you may be able to prequalify with several different lenders. This only requires a soft credit inquiry, which won’t impact your credit. That way you can see which lender can offer you the best terms and interest rates. Applying for credit will trigger a hard inquiry on your credit report, which will temporarily lower your credit score.
Consider a Cosigner
If you’re having trouble getting a subprime loan, you may consider a cosigner with better credit, such as a close family member. They will be on the hook for paying off your loan if you miss any payments, so be sure you are both aware of the risk.
Subprime Loan Alternatives
There are alternatives to subprime loans that also carry a fair amount of risk. Some, like credit cards, are legitimate options when used responsibly. Others, like payday loans, should be avoided whenever possible.
Credit Cards
Credit cards allow you to borrow relatively small amounts of money on a revolving basis. If you pay off your credit card bill each month, you will owe no interest. However, if you carry a balance from month to month, you will owe interest, which can compound and send you deeper into debt.
💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.
Predatory Loans
Payday loans are a type of predatory loan that usually must be paid off when you receive your next paycheck. These lenders often charge high fees and extremely high interest rates — as high as 400%, or more. If you cannot pay off the loan within the designated period, you may be allowed to roll it over. However, you will be charged a fee again, potentially trapping you in a cycle of debt.
The Takeaway
Subprime loans can be a relatively expensive way to take on debt, especially compared to their prime counterparts. If you can, you may want to wait to improve your credit profile before taking on a subprime loan. You can do this by always paying your bills on time and by paying down debt. That said, in some cases, taking on a subprime loan is unavoidable — you may need a new car now to get you to work, for example — so shop around for the best rates you can get.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Why are subprime loans bad?
Subprime loans are not necessarily bad. However, these loans typically charge higher interest rates and fees than their prime counterparts. Borrowers may also be asked to put down a higher down payment, and they may be able to borrow less.
What is the difference between subprime and nonprime?
Nonprime borrowers have credit scores that are higher than subprime but lower than prime.
What type of loan is a subprime loan?
A variety of loan types may include a subprime category, including mortgages, auto loans, and personal loans. All loans in the subprime category likely have higher interest rates and fees.
Photo credit: iStock/Nikola Stojadinovic
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Stock exchanges are platforms that allow investors to buy and sell stocks in a venue that is regulated and transparent. These exchanges enable investors of all stripes to trade stocks and other securities, potentially benefiting from a stock’s share price appreciation and dividend payments.
Stock exchanges help the stock market work, and are a big part of the overall economy. Understanding stock exchanges and how they work may help you how they affect you and your investments.
What Is a Stock Exchange?
A stock exchange is a marketplace where the shares of publicly-traded companies are bought and sold between investors.
Exchanges are generally organized by an institution or association that hosts the market, like the New York Stock Exchange or Nasdaq. These organizations and government regulators – like the Securities and Exchange Commission (SEC) in the U.S. – set up the rules and regulations of what companies investors can trade on a stock exchange.
If a company is “listed” on an exchange, it means that the company can be traded on that exchange. Not all companies are listed because each exchange regulates which companies meet their requirements. Companies not listed on the exchange are traded over-the-counter, or OTC for short.
Investors who want to buy or sell stocks commonly trade through an investment broker, a person or entity licensed to trade on the exchanges. Brokers aim to buy or sell stock at the best price for the investor making the trade, usually earning a commission for the service. Most investors will now use online brokerage firms for this service, paying little to no commissions for trades.
Historically, stock exchanges were physical locations where investors came together on a trading floor to frantically buy and sell stocks, like what you may have seen in the movies or on TV. However, these days, more often than not, stock exchanges operate through an electronic trading platform.
Major Stock Exchanges
10 Largest Stock Exchanges by Market Capitalization of Listed Companies
Exchange
Location
Market capitalization (in trillions)*
New York Stock Exchange (NYSE)
U.S.
$28.8
Nasdaq
U.S.
$25.43
Euronext
Europe
$7.15
Shanghai Stock Exchange
China
$6.52
Tokyo Stock Exchange
Japan
$6.25
London Stock Exchange
U.K.
$5.63
Shenzhen Stock Exchange
China
$4.29
National Stock Exchange of India
India
$4.53
Hong Kong Exchanges
Hong Kong
$3.97
Saudi Stock Exchange
Saudi Arabia
$2.86
*As of August 2024
Why Do We Have Stock Exchanges?
Stock exchanges exist because they provide a place for buyers and sellers to come together and trade stocks. Stock exchanges are also important because they provide a way for businesses to raise money. When companies issue stock to raise capital, investors will then trade the company’s shares on the stock exchange in which it is listed.
The individual stock exchanges set the rules for how stocks are traded. Stock exchanges are also regulated markets, which means that a government agency oversees the activity on the exchange. These rules and regulations provide a level of safety for investors and help to ensure that the market is fair, transparent, and liquid.
The stock market is made up of a network of different stock exchanges, including OTC markets, and the companies that are traded on these exchanges.
When you hear mentions of the stock market and its performance, it is usually in reference to a particular stock market index, like the S&P 500 or Dow Jones Industrial Average. However, the stock market is more than the specific companies that make up these stock market indices.
Generally, stock markets facilitate the buying and selling of shares between companies and institutional investors through initial public offerings (IPOs) in the primary market. Once a company has an IPO, the company’s shares are traded in secondary markets, like stock exchanges.
Stock Market Volatility
Volatility in the stock market occurs when there are big swings in share prices. Share prices can change for various reasons, like a new product launch or the most recent earnings report. And while volatility in the stock market usually describes significant declines in share prices, volatility can also happen to the upside.
Pros of the Stock Market
As mentioned above, the stock market allows companies to raise capital by issuing shares to investors. Raising money was one of the main reasons why stock issuances and trading began. It allows businesses to raise money to expand a business without taking out a loan or issuing bonds.
And because investors can own shares of companies, they can benefit from the growth and earnings of a business. Investors can profit from a company’s dividend payments, realize a return when the stock’s price appreciates, or benefit from both. This helps investors build wealth.
The relationship between stock markets, companies, and investors has arguably led to more economic efficiency, allowing money to be allocated in more productive ways.
Cons of the Stock Market
For companies, issuing shares on the stock market may be onerous and expensive due to rules and regulations from the stock exchanges and government regulators. Because of these difficulties, companies may be wary of going through the IPO process. Instead, they are more comfortable raising money in the private markets.
There are several potential risks associated with investing in the stock market. For example, the stock market is subject to market volatility, resulting in losses. Investors must be willing to take on the risks of losing money for the possibility of gains in the future.
Additionally, there is the potential for stock market fraud and manipulation by companies and investors, which harms individual investors, companies, and the economy.
A stock exchange is a marketplace where investors can buy and sell stocks or other securities, and where companies can list shares to try and raise capital. There are numerous stock exchanges, but the biggest in the U.S. are the New York Stock Exchange, and the Nasdaq.
Knowing the ins and outs of stock exchanges and how they influence the broader stock market may help you become a better-informed investor. Further, by learning about stock exchanges, their different rules, and their advantages and disadvantages, you may better understand the stock market as a whole. This may allow you to invest confidently and prepare for future stock market volatility.
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).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
What is the stock market?
The stock market is a collection of markets where stocks are traded between investors. It usually refers to the exchanges where stocks and other securities are bought and sold.
What are the benefits of investing in the stock market?
Some benefits of investing in the stock market include the potential for earning income through dividend payments, experiencing share price appreciation, and diversifying one’s financial portfolio beyond cash. Note, however, that there are significant risks associated with investing in the stock market, too.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
