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Q: What Is a Personal Loan?

A personal loan is a borrowed sum of money that the borrower then pays back, with interest, to the lender.

Oct

2023

What Is a Personal Loan? How Do Personal Loans Work?

By Janet Schaaf | personal_loan, Terminology | No Comments

A personal loan is a flexible type of loan issued by a bank, credit union, or online lender that you pay back in regular, fixed payments over a set term.

Personal loans work a little differently than other types of loans. Consumer loans typically specify what the money should be spent on: Mortgages are used to purchase or refinance homes, and student loans are used to pay for an education. But there aren’t as many restrictions on how you can or can’t spend personal loan funds, which allows for more flexibility than other types of loans.

Read on to learn more about how personal loans work, including how much you can borrow, how to apply, and the different types of personal loans.

Table of Contents

What Is a Personal Loan?
How Do Personal Loans Work?
Personal Loan Uses
The Personal Loan Application Process
Types of Personal Loans
What Personal Loan Lenders Look at in Your Application
Deciding If a Personal Loan Is Right for You
Alternatives to Personal Loans

What Is a Personal Loan?

As mentioned before, a personal loan is a one-time lump sum you borrow from a bank or other financial institution and repay over time, usually with interest. The funds can be used for almost anything.

Loan amounts generally range from $1,000 to $50,000, though some lenders offer personal loans up to $100,000. Repayment terms are usually anywhere from two to seven years.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

Key Points

• A personal loan is a flexible type of loan issued by a bank, credit union, or online lender that you pay back in regular, fixed payments over a set term.

• Personal loans can be used for almost anything. Loan amounts generally range from $1,000 to $50,000, though some lenders offer personal loans up to $100,000. Repayment terms are usually anywhere from two to seven years.

• The interest rate on a personal loan is determined by the lender and is based on a number of factors, including the applicant’s financial history, income, debt, and credit score.

• Personal loans can be used for various purposes, including debt consolidation, home improvement expenses, <loans for wedding costs, unexpected medical expenses, moving expenses, funeral expenses, family planning, car repairs, and vacation

• Before you apply for a personal loan, you’ll want to consider how much money you want to borrow, how much you can afford to pay each month, how long you want to make payments, and whether or not you want to put up collateral.

How Do Personal Loans Work?

Personal loans are typically unsecured loans (meaning you don’t have to pledge an asset to secure the loan) that provide you with money you then pay back in regular installments over the term of the loan.

How Do You Get the Money?

The first step is applying for a personal loan (more on that below). After loan approval, the lender typically deposits the loan proceeds directly into the borrower’s bank account.

Repaying a Personal Loan

You repay a personal loan in monthly installments that go toward both principal and interest.

Typically, personal loans are amortized. This means the total amount you owe is divided into equal monthly payments over the term of the loan. Even though the total monthly payment remains the same, the amounts being directed to principal and interest will change each month. An amortization schedule can show you exactly how much of your payment is going towards paying down the principal and how much is being paid in interest.

Personal loans with longer terms may offer lower monthly payments, but cost more in interest over the life of the loan. A shorter-term personal loan can have higher monthly payments, but cost less overall in interest.

How Personal Loan Interest Rates Work

The interest rate on a personal loan is determined by the lender and is based on a number of factors, including the applicant’s financial history, income, debt, and credit score. Generally speaking, the better an applicant’s credit score, the better the chance they have to receive a lower interest rate on the loan. The higher the interest rate, the more money the loan will cost over its term.

Reasons To Take Out Personal Loans

Personal Loan Uses

Personal loans can be used for just about anything. That said, there are some common reasons people take out different types of personal loans, including:

• Debt management and consolidation

• Home improvement expenses

• Wedding costs

• Unexpected medical expenses

• Moving expenses

• Funeral expenses

• Family planning

• Car repairs

• Vacation

What not to use personal loans for

The Personal Loan Application Process

While it’s not as simple as walking into a bank, asking for a loan, and walking out with a check, the application process for personal loans is relatively easy.

Before you apply for a personal loan, you’ll want to consider how much money you want to borrow, how much you can afford to pay each month, how long you want to make payments, and whether or not you want to put up collateral (though less common, some lenders offer secured personal loans). There may be other considerations for specific financial circumstances, which can vary from person to person.

Checking Your Own Credit

Because lenders will be looking closely at your creditworthiness, it’s a good idea to give your financial health a check-up before you begin the application process. You can get a free copy of your credit reports from the three main consumer credit bureaus — Equifax, Experian, and TransUnion — for free at AnnualCreditReport.com.

Once you get your reports, it’s a good idea to review them carefully and report for any errors. Correcting anything that isn’t accurate means your credit report will look as good as possible to lenders.

Comparing Loans

Just like shopping around for the best prices before making a large purchase, comparing lenders’ rates and terms is a smart move before the application process actually begins.

Here are some things to look for when researching lenders:

• How much do they lend on personal loans? If the amount you need to borrow doesn’t fall within the range offered by the lender, you may need to look elsewhere.

• Do they charge any fees or penalties? Some lenders charge an origination fee equal to a percentage of the loan amount to process your application. Some personal loans also have a prepayment penalty if you pay off your loan ahead of schedule.

• How are fees and penalties charged? Some lenders may roll any fees into the loan amount, which increases the total amount you’ll owe. Other lenders may deduct the fee amounts from the loan proceeds, so the amount you receive will be lower than the actual amount of the loan.

• Can I get prequalified so I’ll know what interest rate they might offer me? Prequalification involves the lender doing a soft pull on your credit report, which will not affect your credit score. This step will give the lender a sneak peek at your financial history so they can give you an estimated interest rate. Going through this process with multiple lenders is one way to compare rates and terms you may qualify for.

• What if I can’t make my loan payments due to financial hardship? Missed or late payments could result in late fees, affect your credit score, or lead to your account being sent to collections. Some lenders may offer protections for borrowers who have lost their job or are having difficulty making their payments for other reasons.

Applying for a Loan

When you’ve selected a lender, it’s time to submit the actual application. For an unsecured personal loan, lenders typically require:

• A photo ID

• Proof of address

• Proof of income or employment

Each lender has different requirements, though, so it’s important to carefully read and follow the lender’s application instructions. At this stage, the lender will usually do a hard credit check, which can have a small and temporary negative affect on your credit score.

Waiting for Approval

Once you’ve submitted the application and all required documents, it’s time to play the waiting game. Rest easy, though, because some personal loan approvals happen quickly — sometimes in just a day. More complicated applications could take a week or more.

Personal loans can range anywhere from $1,000 to $100,000, depending on the lender. Once you apply and are approved for the loan, you’ll receive the amount of money you were approved for in a lump sum, minus any origination fees that some lenders may charge. You then start paying back that money in installments which are set by the specific terms of your loan.

Types of Personal Loans

There are a variety of different types of personal loans. Factors like how much money you plan to borrow, your credit and financial history, and how much debt you already have will influence which type of personal loan is right for you. Here’s a look at some common personal loan options.

Unsecured vs Secured Personal Loans

An unsecured personal loan is the most common type of personal loan. Unsecured means the loan is not backed by collateral, like a house or car. The approval and interest rate you receive on an unsecured personal loan is mostly based on your creditworthiness.

Secured personal loans require an asset to be pledged to “secure” the loan. Think of a house when it comes to a mortgage loan, or a car when it comes to a car loan. If you fail to repay your loan, the lender can then seize the collateral.

Some banks offer secured personal loans that allow you to borrow against the equity of your car, personal savings, or other assets. Since secured loans are backed by an asset that the lender can seize if you default on the loan, they generally have a lower interest rate than an unsecured personal loan.

Here’s a look at some pros and cons of unsecured and secured personal loans:

	Unsecured Personal Loans	Secured Personal Loans
Advantages	Funds may be disbursed the same day or within a week Interest rates are typically lower compared to credit cards No collateral required	Interest rates are typically lower compared to unsecured personal loans Can be a good way to improve credit if payments are regular and on time Tend to have a longer repayment period
Disadvantages	May need to meet minimum credit score requirements for approval Interest rates may be higher compared to secured personal loans Credit score may be negatively affected if borrower defaults	Collateral is required Lender can seize the collateral if borrower defaults Application and approval process may involves more steps

Unsecured Personal Loans

Secured Personal Loans

Advantages

Funds may be disbursed the same day or within a week

Interest rates are typically lower compared to credit cards

No collateral required

Interest rates are typically lower compared to unsecured personal loans

Can be a good way to improve credit if payments are regular and on time

Tend to have a longer repayment period

Disadvantages

May need to meet minimum credit score requirements for approval

Interest rates may be higher compared to secured personal loans

Credit score may be negatively affected if borrower defaults

Collateral is required

Lender can seize the collateral if borrower defaults

Application and approval process may involves more steps

Fixed-Rate vs Variable-Rate Personal Loans

Most personal loans are typically fixed-rate loans, meaning your rate and monthly payment stay the same (or are fixed) for the life of the loan. Fixed-rate loans can make sense if you’re looking for something with consistent payments each month. A fixed-rate loan is also worth considering if you are concerned about rising interest rates on longer-term personal loans.

As the name suggests, the interest rate on a variable-rate loan can fluctuate over the life of the loan. Interest rates on this type of loan are tied to benchmark rates or indexes. Based on how the benchmark rate or index changes, the interest rate on a variable-rate loan will also change, directly affecting your monthly payment.

Generally, variable-rate loans carry lower annual percentage rates (APRs) and some have limits on how much the interest rate can rise or lower over a specific period, or even over the life of the loan. A variable-rate loan could be a good choice if you are taking out a small amount of money with a short repayment term.

Here are some pros and cons of variable-rate personal loans and fixed-rate personal loans. Choosing between variable vs. fixed rates will come down to personal preference and what you are approved for.

	Variable-Rate Personal Loans	Fixed-Rate Personal Loans
Advantages	Loans often start out with a lower interest rate compared to fixed-rate loans If benchmark rate goes down, interest rate on the loan also goes down Flexible	Monthly payments are consistent Can avoid rising interest rates Easy to understand
Disadvantages	If benchmark rises, the cost of the loan also rises Borrowers have a greater risk of defaulting on loan if the interest rate increases significantly As interest rates change, so will the monthly payment	Won’t be able to take advantage of changes in interest rates Interest rates tend to be higher compared to variable-rate loans May pay more over time if you took out your loan when interest rates were high

Variable-Rate Personal Loans

Fixed-Rate Personal Loans

Advantages

Loans often start out with a lower interest rate compared to fixed-rate loans

If benchmark rate goes down, interest rate on the loan also goes down

Flexible

Monthly payments are consistent

Can avoid rising interest rates

Easy to understand

Disadvantages

If benchmark rises, the cost of the loan also rises

Borrowers have a greater risk of defaulting on loan if the interest rate increases significantly

As interest rates change, so will the monthly payment

Won’t be able to take advantage of changes in interest rates

Interest rates tend to be higher compared to variable-rate loans

May pay more over time if you took out your loan when interest rates were high

Small vs Large Personal Loans

Just as personal loans are taken out for a variety of reasons, the dollar amount borrowed can vary, too.

A small personal loan, which is generally for $3,000 or less, typically has a lower APR than other types of short-term debt, such as payday loans. Many banks and other financial institutions have limits on the minimum amount they’ll lend. Some credit unions may offer alternatives to payday loans in an effort to help their members save money and avoid being stuck in a cycle of debt.

A large personal loan might be used to pay for major expenses such as home repair or remodeling, medical expenses, or an expensive life event, such as a wedding. Some lenders offer personal loans up to $100,000.

It’s important to keep in mind your ability to repay the loan when deciding how much to borrow. Here’s how small and large loans compare:

	Small Personal Loan	Large Personal Loans
Advantages	Can use the money for a wide variety of purposes Interest rates are typically lower compared to credit cards Usually has better terms than payday loans	Can use the money for a wide variety of purposes Greater ability to combine multiple credit card balances into one balance Can be a good way to improve credit if payments are regular and on time
Disadvantages	Can often get a better interest rate with a larger loan No grace period Lenders may limit how much you can borrow	The larger the loan, the more debt you’re taking on Increases your debt-to-income ratio Lenders may limit how much you can borrow

Small Personal Loan

Large Personal Loans

Advantages

Can use the money for a wide variety of purposes

Interest rates are typically lower compared to credit cards

Usually has better terms than payday loans

Can use the money for a wide variety of purposes

Greater ability to combine multiple credit card balances into one balance

Can be a good way to improve credit if payments are regular and on time

Disadvantages

Can often get a better interest rate with a larger loan

No grace period

Lenders may limit how much you can borrow

The larger the loan, the more debt you’re taking on

Increases your debt-to-income ratio

Lenders may limit how much you can borrow

What Personal Loan Lenders Look at in Your Application

When you apply for a loan, the lender typically considers your credit score, debt-to-income (DTI) ratio, and other factors.

Credit Score

A person’s credit score shows lenders what the theoretical likelihood of that person paying back a loan would be. Generally, the lower a person’s credit score, the more of a risk they are assumed to be. Conversely, the higher a person’s credit score, the lower a risk they are assumed to be — and the more likely they are to be approved for lower interest rates and higher loan amounts.

If your credit score isn’t ideal, you might still qualify for a personal loans for bad credit, though you may face higher interest rates and stricter repayment terms. Some lenders specialize in offering options for borrowers with lower credit scores, providing a pathway to access the funds you need.

Debt-to-Income Ratio

Your DTI is a percentage that tells lenders how much money you spend on monthly debt payments versus how much money you have coming into your household. You can calculate your DTI by adding up your monthly minimum debt payments and dividing it by your monthly pretax income.

Lenders generally want to see a DTI of 35% to 40% or less but may make exceptions if you have good credit.

Credit History

Lenders will review your credit report for anything that might stand out as a risk for them. If there are a high number of inquiries on your credit report or if there were multiple debt accounts opened in a short time period, that might indicate high risk to a lender. Borrowers who are considered high risk may find it more difficult to get a loan and could pay higher interest rates.

Deciding If a Personal Loan Is Right for You

Not sure whether a personal loan makes sense for your situation? Here are some questions to ask yourself:

• Do I need the money quickly? If you do, then a personal loan might be a smart move.

• Can I afford the monthly payments? Before you take on any debt, it’s important to set a realistic plan on how you’ll repay what you owe.

• Do I already have a high amount of debt? Taking out a personal loan when you have significant debt can put a serious dent in your budget and savings goals. It can also increase your DTI, which lenders look at when reviewing your loan application.

• Do I have a “bad” credit score? If your credit score isn’t so great — FICO defines “bad” as 579 or below — then you may want to wait on taking out a loan and instead work on your credit.

• Does a personal loan offer the lowest interest rate of all the options available? It’s a good idea to shop around for the rate and terms that best fit your needs before you apply with a lender.

Recommended: Personal Loan Calculator

Alternatives to Personal Loans

There may be times when you need help covering a big expense, but taking out a personal loan isn’t the best choice. Fortunately, there are alternative funding options. Here are a few you may want to explore:

Credit Cards

Like personal loans, credit cards offer a line of credit that can be used for a wide range of purposes. You may want to consider using a credit card if you have a smaller expense that you can pay off quickly.

Home Equity Line of Credit

If you own your home and have at least 20% equity, you may be able to get a home equity line of credit (HELOC). This option could be a smart move if you need to borrow a large amount of money or plan on having ongoing expenses, like those with a remodeling project.

401(k) Loan

If you have a financial emergency or want to pay off high-interest debt — and no other option is available — then you may want to consider borrowing from your 401(k). Keep in mind that you may face taxes and penalties when you withdraw the money, so be sure you understand how your plan works and what it allows.

💡 Quick Tip: While HELOCs may require an appraisal before you get approved, a SoFi home improvement loan does not. That means you can get approved and funded the same day.^*

The Takeaway

Personal loans can offer flexibility when you’re looking for funds for a variety of uses, and typically have lower interest rates than credit cards. Depending on your financial needs and financial circumstances, there may be a personal loan that fits. Comparing multiple lenders is a good way to make sure you’re getting a personal loan that works for you.

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

How do personal loan payments work?

Personal loans are typically repaid in monthly installments. When you take out a personal loan, you agree to repay the borrowed amount plus interest over a set period, usually through equal monthly payments. Each payment consists of a portion that goes towards reducing the principal balance and another portion that covers the interest charges. The loan agreement will specify the amount of each payment, the duration of the loan, and the interest rate.

What are the risks of a personal loan?

Personal loans come with certain risks that borrowers should be aware of. One risk is defaulting on the loan, which can lead to late fees, damage to your credit score, and even legal action from the lender. Another risk is needing to take on additional debt if you borrow more than you can afford to repay. In addition, personal loans may have higher interest rates compared to secured loans like mortgages or auto loans. It’s important to carefully consider your financial situation and ability to repay before taking on a personal loan.

What are the disadvantages of a personal loan?

Personal loans have a few potential disadvantages to consider. One is that they tend to have higher interest rates compared to loans secured by collateral. Personal loans may also have origination fees or other associated costs. Another potential disadvantage is that, should you miss payments or default on the loan, it could have a negative impact on your credit score.

Is a personal loan bad for your credit score?

A personal loan itself is not inherently bad for your credit score. In fact, when managed responsibly, a personal loan can have a positive impact on your credit. Making timely payments and paying off the loan as agreed can demonstrate your ability to handle debt responsibly, which can improve your credit profile. However, if you miss payments or default on the loan, it can have a negative affect on your credit. It’s important to borrow within your means, make payments on time, and consider the impact on your credit score before taking on a personal loan.

Does personal loan money go to your bank account?

Yes, when you are approved for a personal loan, the funds are typically deposited directly into your bank account. This allows you to have immediate access to the loan amount. The specific timeline for receiving the money may vary depending on the lender and the loan application process.

Do you get money right away from a personal loan?

The timing of receiving money from a personal loan can vary depending on the lender and their processes. Typically, you receive the money within five to seven business days of approval, and some lenders even offer same-day funding.

^* Same-Day Personal Loan Funding: 82% of typical SoFi Personal Loan applications, excluding Direct Pay Personal Loans and Personal Loan refinance, from January 1, 2022 to January 1, 2023 that were signed before 7pm ET on a business day were funded the same day.

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

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Oct

2023

What Is Yield?

By SoFi Editors | Growing Wealth, Investing, Terminology | No Comments

Yield is the income generated by an investment over a period of time. Yield is typically calculated by taking the dividend, coupon or net income earned, dividing the figures by the value of the investment, then calculating the result as a percentage.

Yield is not the same as return or the rate of return. Yield is a way to track how much income was earned over a set period, relative to the initial cost of the investment or the market value of the asset. Return is the total loss or gain on an investment. Returns often include money made from dividends and interest. While all investments have some kind of rate of return, not all investments have a yield, because not all investments produce interest or dividends.

How Do You Calculate Yield?

Yield is typically calculated annually, but it can also be calculated quarterly or monthly.

Yield is calculated as the net realized income divided by the principal invested amount. Another way to think about yield is as the investment’s annual payments divided by the cost of that investment.

Here are formulas depending on the asset:

= Dividends Per Share/Share Price X 100%
= Coupon/Bond Price X 100%
= Net Income From Rent/Real Estate Value X 100%

For example, if a $100 stock pays out a $2 dividend for the year, then the yield for that year is 2 ÷ 100 X 100%, or a 2% yield.

Cost Yield vs. Current Yield

One important thing to think about when doing yield calculations is whether you’re looking at the original price of the stock or the current market price. (That can also be referred to as the current market value or face value.)

For example, in the above example, you have a $100 stock that pays a $2 dividend. If you divide that by the original purchase price, then you have a 2% yield. This is also known as the cost yield, because it’s based on the cost of the original investment.

However, if that $100 stock has gone up in price to $120, but still pays a $2 dividend, then if someone bought the stock right now at $120, it would be a 1.67% yield, because it’s based on the current price of the stock. That’s also known as the current yield.

Rate of Return vs. Yield

Calculating rate of return, by comparison, is done differently. Yield is simply a portion of the total return.

For example, if that same $100 stock has risen in market price to $120, then the return includes the change in stock price and the paid out dividend: [(120-100) + 2] ÷ 100, so 0.22, or a 22% total return.

The reason this matters is because the rate of return can change if the stock price changes, but often the yield on an investment is established in advance and generally doesn’t fluctuate too much.

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

Definition of Yield for Different Investments

Yield in Stock Investing

When you make money on stocks it often comes in two forms: as a dividend or as an increase in the stock price. If a stock pays out a dividend in cash to stockholders, the annual amount of those payments can be expressed as a percentage of the value of the security. This is the yield.

Many stocks actually pay out dividends quarterly. In order to calculate the annual yield, simply add up all the dividends paid out for the year and then do the calculation. If a stock doesn’t pay a dividend, then it doesn’t have a dividend yield.

Note that real estate investment trusts (REITs) are required to pay out 90% of their taxable income to existing shareholders in order to maintain their status as a pass-through entity. That means the yield on REITs is typically higher than for other stocks, which is one of the pros for REIT investing.

Sometimes investors also calculate a stock’s earnings yield, which is the earnings over a year, dividend by the share price. It’s one method an investor may use to try to value a stock.

Yield in Bond Investing

When it comes to bonds vs. stocks, the yield on a bond is the interest paid—which is typically stated on the bond itself. Bond interest payments are usually determined at the beginning of the bond’s life and remain constant until that bond matures.

However, if you buy a bond on the secondary market, then the yield might be different than the stated interest rate because the price you paid for the bond was different from the original price.

For bonds, yield is calculated by dividing the yearly interest payments by the payment value of the bond. For example, a $1,000 bond that pays $50 interest has a yield of 5%. This is the nominal yield. Yield to maturity calculates the average return for the bond if you hold it until it matures based on your purchase price.

Some bonds have variable interest rates, which means the yield might change over the bond’s life. Often variable interest rates are based on the set U.S. Treasury yield.

Is There a Market Yield?

Treasury yields are the yields on U.S. Treasury bonds and notes. When there is a lot of demand for bonds, prices generally rise, which causes yields to go down.

The Department of the Treasury sets a fixed face value for the bond and determines the interest rate it will pay on that bond. The bonds are then sold at auction. If there’s a lot of demand, then the bonds will sell for above face value also known as a premium.

That lowers the yield on the bond, since the government only pays back the face value plus the stated interest. (If there’s lower demand, then the bonds may sell for below face value, which increases the yield.)

When Treasury yields rise, interest rates on business and personal loans generally rise too. That’s because investors know they can make a set yield on government issued products, so other investment products have to offer a better return in order to be competitive. This affects the market in that it affects the rates on mortgages, loans, and in turn, market growth.

There isn’t a set market yield, since the yield on each stock and bond varies. But there is a yield curve that investors track, which is a good reference. The yield curve plots Treasury yields across maturities—i.e., how long it takes for a bond to mature. Typically, the curve plots upward, since it takes more of a yield to convince an investor to hold a bond for a longer amount of time.

An inverted yield curve can be a sign of an oncoming recession and can cause concern among investors. While you don’t necessarily need to track 10-year Treasury yields or worry about the yield curve, it is good to know what the general yield meaning is for investors so you can stay informed about your investments.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

The Takeaway

A high yield means more cash flow and a higher income. But a yield that is too high isn’t necessarily a good thing. It could mean the market value of the investment is going down or that dividends being paid out are too high for the company’s earnings.

Of course, yield isn’t the only thing you’re probably looking for in your investments. Even when investing in the stock market, you may want to consider other aspects of the stocks you’re choosing: the history of the company’s growth and dividends paid out, potential for future growth or profit, the ratio of profit to dividend paid out. You may also want a diversified portfolio made up of different kinds of assets to balance return and risk.

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.

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Oct

2023

What Are Emerging Markets?

By Ashley Kilroy | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Emerging markets or emerging market economies (EMEs) are in the process of achieving the building blocks of developed nations: they’re establishing regulatory bodies, creating infrastructure, fostering political stability, and supporting mature financial markets. But many emerging markets still face challenges that developed market countries have overcome, and that contributes to potential instability.

To further answer the question, “What are emerging markets?”, it helps to understand developed markets.

Developed economies have higher standards of living and per-capita income, strong infrastructure, stable political systems, and mature capital markets. The U.S., Europe, U.K, and Japan are among the biggest developed nations.

Because these economies wield so much power globally, many investors don’t realize that, in truth, emerging markets make up the majority of the global economy.

India, China, and Brazil are a few of the larger countries that fall into the emerging markets category. Some emerging market economies, like these three, are also key global players — and investors may benefit by understanding the opportunities emerging markets present.

What is an Emerging Market?

In essence, an emerging market refers to an economy that can become a developed, advanced economy soon. And because an emerging market may be a rapidly growing one, it may offer investment potential in certain sectors.

Internationally focused investors tend to see these countries as potential sources of growth because their economies can resemble an established yet still-young startup company. The infrastructure and blueprint for success have been laid out, but things need to evolve before the economy can truly take off and ultimately mature. At the same time, owing to the challenges emerging market economies often face, there are also potential risks when investing in emerging markets.

Investors might bear the brunt of political turmoil, local infrastructure hurdles, a volatile home currency and illiquid capital markets (if certain enterprises are state-run or otherwise privately held, for example).

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Emerging Market Examples

What constitutes an emerging market economy is somewhat fluid, and the list can vary depending on the source. Morgan Stanley Capital International (MSCI) classifies 24 countries as emerging; Dow Jones also classifies 24 as emerging. There is some overlap between lists, and some countries may be added or removed as their status changes. Greece, for example, is no longer considered a developed market but an emerging one.

India is one of the world’s biggest emerging economies. Increasingly, though, some investors see India as pushing the bounds of its emerging market status.

China

China is the second-largest economy globally by gross domestic product (GDP). It has a large manufacturing base, plenty of technological innovation, and the largest population of any country in the world.

Yet China still has a few characteristics typical of an emerging market. For example, the gross national income per capita falls below the threshold established by the World Bank for a developed country: about $12,600 per year versus the higher standard of above $13,200 per year. With its Communist-led political system, China has embraced many aspects of capitalism in its economy but investors may experience some turbulence related to government laws and policy changes. The Renminbi, China’s official currency, has a history of volatility. And finally, post-Covid, China’s economy has lagged.

India

India is another big global economy, and it’s considered among the top 10 richest countries in the world, yet India still has a low per-capita income that is typical of an emerging market and poverty is widespread.

At the same time, India was ranked as being among the more advanced emerging markets, thanks to its robust financial system, growing foreign investment, and strong industrials, especially in telecommunication and technology.

Characteristics of an Emerging Market Economy

As noted above, there isn’t a single definition of an emerging market, but there are some markers that distinguish these economies from developed nations.

Fast-Paced Growth

An emerging market economy is often in a state of rapid expansion. There is perhaps no better time to be invested in the growth of a country than when it enters this phase.

At this point, an emerging market has laid much of the groundwork necessary for becoming a developed nation. Capital markets and regulatory bodies have been established, personal incomes are rising, innovation is flourishing, and GDP is climbing.

Lower Per-Capita Income

The World Bank keeps a record of the gross national income (GNI) of many countries. For the fiscal year of 2022, lower-middle-income economies are defined as having GNI per capita of between $1,136 and $4,465 per year. At the same time, upper-middle-income economies are defined as having GNI per capita between $4,466 and $13,845. (By way of contrast, the U.S. is considered a high-income economy, with a GNI of $76,370.)

The vast majority of countries that are considered emerging markets fall into the lower-middle and upper-middle-income ranges. For example, India, Pakistan, and the Philippines are lower-middle-income, while China, Brazil, and Mexico are upper-middle-income. Thus, all these countries are referred to as emerging markets despite the considerable differences in their economic progression.

Political and Economic Instability

For most EMEs, volatility is par for the course. Risk and volatility tend to go hand in hand, and both are common among emerging market investments.

Emerging economies can be rife with internal conflicts, political turmoil, and economic upheaval. Some of these countries might see revolutions, political coups, or become targets of sanctions by more powerful developed nations.

Any one of these factors can have an immediate impact on financial markets and the performance of various sectors. Investors need to know the lay of the land when considering which EMEs to invest in.

Infrastructure and Climate

While some EMEs have well-developed infrastructure, many are a mix of sophisticated cities and rural regions that lack technology, services and basic amenities like reliable transportation. This lack of infrastructure can leave emerging markets especially vulnerable to any kind of crisis, whether political or from a natural disaster.

For example, if a country relies on agricultural exports for a significant portion of its trade, a tsunami, hurricane, or earthquake could derail related commerce.

On the other hand, climate challenges may also present investment opportunities that are worth considering.

Currency Crises

The value of a country’s currency is an important factor to keep in mind when investing in emerging markets.

Sometimes it can look like stock prices are soaring, but that might not be the case if the currency is declining.

If a stock goes up by 50% in a month, but the national currency declines by 90% during the same period, investors could see a net loss, although they might not recognize it as such until converting gains to their own native currency.

Heavy Reliance on Exports

Emerging market economies tend to rely heavily on exports. That means their economies depend in large part on selling goods and services to other countries.

A developed nation might house all the needs of production within its own shores while also being home to a population with the income necessary to purchase those goods and services. Developing countries, however, must export the bulk of what they create.

Emerging Economies’ Impact on Local Politics vs. Global Economy

Emerging economies play a significant role in the growth of the global economy, accounting for about 50% of the world’s economic growth. Moreover, it’s predicted that by 2050 three countries will have the biggest economies: the U.S., China, and India, with only one currently being a developed economy.

But, while emerging markets help fuel global growth, some of those with higher growth opportunities also come with turbulent political situations.

As an investor, the political climate of emerging market investments can pose serious risks. Although there is potential for higher returns, especially in EMEs that are in a growth phase, investors need to consider the potential downside. For example, Thailand and South Korea are emerging economies with high growth potential, but there is also a lot of political unrest in these regions.

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Pros and Cons of Investing in Emerging Markets

Let’s recap some of the pros and cons associated with EME investments.

Pros

• High-profit potential: Selecting the right investments in EMEs at the right time may result in returns that might be greater than most other investments. Rapidly growing economies could provide ample opportunity for profits. But as noted above, it’s impossible to guarantee the timing of any investment.

• Global diversification: Investing in EMEs provides a chance to hold assets that go beyond the borders of an investor’s home country. So even if an unforeseen event should happen that contributes to slower domestic growth, it’s possible that investments elsewhere could perform well and provide some balance.

Cons

• High volatility: As a general rule, investments with higher liquidity and market capitalization tend to be less volatile because it takes significant capital inflows or outflows to move their prices.

EMEs tend to have smaller capital markets combined with ongoing challenges, making them vulnerable to volatility.

• High risk: With high volatility and uncertainty comes higher risk. What’s more, that risk can’t always be quantified. A situation might be even more unpredictable than it seems if factors coincide (e.g. a drought plus political instability).

All investments carry risk, but EMEs bring with them a host of fresh variables that can twist and turn in unexpected ways.

• Low accessibility: While liquid capital markets are a characteristic of emerging markets, that liquidity still doesn’t match up to that of developed economies.

It may be necessary to consult with an investment advisor or pursue other means of deploying capital that may be undesirable to some investors.

Why Invest in Emerging Markets?

Emerging markets are generally thought of as high-risk, high-reward investments.

They are also yet another way to diversify an investment portfolio. Having all of your portfolio invested in the assets of a single country puts you at the mercy of that country’s circumstances. If something goes wrong, like social unrest, a currency crisis, or widespread natural disasters, that might impact your investments.

Being invested in multiple countries can help mitigate the risk of something unexpected happening to any single economy.

The returns from emerging markets might also exceed those found elsewhere. If investors can capitalize on the high rate of growth in an emerging market at the right time and avoid any of the potential mishaps, they could stand to profit. Of course timing any market, let alone a more complex and potentially volatile emerging market, may not be a winning strategy.

Recommended: Pros & Cons of Global Investments

The Takeaway

While developed nations like the U.S. and Europe and Japan regularly make headlines as global powerhouses, emerging market countries actually make up the majority of the world’s economy — and possibly, some very exciting opportunities for investors.

China and India are two of the biggest emerging markets, and not because of their vast populations. They both have maturing financial markets and strong industrial sectors and a great deal of foreign investment. And like other emerging markets, these countries have seen rapid growth in certain sectors (e.g. technology).

Despite their economic stature, though, both countries still face challenges common to many emerging economies, including political turbulence, currency fluctuations and low per-capita income.

It’s factors like these that can contribute to the risks of investing in emerging markets. And yet, emerging markets may also present unique investment opportunities owing to the fact that they are growing rapidly.

Emerging market exchange-traded funds (ETFs) might invest in different assets within a single country or spread their investments throughout multiple countries. Bonds can also play a role in an emerging market portfolio. Many countries with developing economies have used the issuance of new debt to borrow money to build out their infrastructure. That means some emerging economies could offer bonds with attractive yields. But investors need to carefully weigh the potential risks.

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

SOIN0723054

Oct

2023

Introduction to Weighted Average Cost of Capital (WACC)

By Brian O'Connell | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Properly formulated, the weighted average cost of capital, or WACC, merges a business’s cost of capital across financial components. Once weighted for proportional balance, WACC bundles all company financial sources (with an emphasis on equity and debt) and adds them together. The final figures represent the current value of a company, or a project or initiative undertaken by a company.

Understanding the weighted average cost of capital, or the cost of capital, is both a business calculus and an economic term. It’s a term to describe the relationship between two key economic components – equity and debt, as a financial ratio.

What Is WACC?

The WACC is the rate that a company must pay, on average, to finance its operations. It’s a figure that business leaders use to make strategic decisions, and a data point used by investors as part of their fundamental analysis of a company.

In general, a low weighted average cost of capital shows that a business is in good financial health and can more efficiently and economically pay for company operations, either through debt financing or equity financing. Earnings are robust enough to curb company debt loads and offer solid investment returns to market investors, which should increase capital to the company.

Recommended: How to Know When to Sell a Stock

A higher weighted average cost of capital suggests the opposite outcome. The firm is likely paying more to handle their debt and paying more to raise capital for company projects. That scenario can lead to a business with a lower valuation with less demand from investors to buy company stock or invest in its bond issues, as returns on those investments would likely be lower.

Who Uses Weighted Average Cost of Capital?

The weighted average cost of capital formula can be used by a number of people in or around a business. That can include company management, who can use it to guide decisions about the direction of the company, along with investors and investment analysts, who are keeping tabs from the outside.

High vs Low WACC Calculations

Investors can use the results of WACC calculations to help guide their investment decisions. In general, a high WACC may be a turn-off for some investors, as it indicates that the company isn’t as likely to provide investors with a high rate of return. The opposite is also true – a low WACC may be a bullish sign for investors.

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What is the WACC Formula?

The calculation used for WACC includes cost of equity and cost of debt, along with additional economic components commonly used by businesses.

Here is how those components are broken down in a WACC formula.

• E = Market value of the business’s equity

• V = Total value of capital (equity + debt)

• Re = Cost of equity

• D = Market value of the business’s debt

• Rd = Cost of debt

• T = Tax rate

Once you have those numbers, here’s how to calculate WACC:

How to Calculate WACC

Calculating WACC looks like this:

WACC = (E/V x Re) + ((D/V x Rd) x (1-T))

To use the WACC formula, you need to first multiply the costs of each financial component and include that component’s proportional rate. Once you’ve arrived at those figures, multiply them by the company’s corporate tax rate. The resulting figure gives you the company’s weighted average cost of capital.

Difficulties With Using WACC

There’s a caveat to be mindful of when calculating the weighted average cost of capital: The formula heavily relies on the cost of equity in its equation, which is largely unknown, since that value can vary. A company’s share capital depends on what the market (i.e., investors) are willing to pay to invest in the company, as exhibited by the company’s stock price.

Given that unknown, companies must evaluate the expected return of their stock, through an investor’s eyes. That represents the value of the company’s equity and any effort to hide or diminish that value could put a damper on a company’s share price.

That’s why companies factor the estimated cost of equity into the WACC equation – they view the cost of equity as the amount of capital a company needs to spend to maintain a stock price that’s largely acceptable to market investors.

An Example of the WACC at Work

As an example of the WACC at work, let’s look at a company’s weighted average cost of capital – let’s say ABC Company has an annual return of 15% and an average cost of 5% annually to pay for operations. That dynamic represents a 10% profit on its investment in the company.

From an investor’s viewpoint, that same profit scenario represents 10 cents of every dollar invested in the company. That’s 10 cents of capital a business can use to either invest back into the company or can be used to pay down company debt.

On the other end of the equation, if XYZ Company generates an annual investment return of 10% yet owns an average annual cost of capital of 15%, that company is down 5 cents on each dollar invested in the company.

In that scenario, XYZ Co. is in a bind that no company wants to find itself in – its costs of doing business exceed its investment returns. That translates into fewer investors until the firm realigns its financing picture, cuts debt, and gives investors a good reason to buy its stocks and bonds.

Why the Need for Weighted Average Cost of Capital?

The weighted average cost of capital breaks down a firm’s cost of doing business by weighing the debt (including bonds and other long-term debt) and equity structure (including the cost of both common and preferred stock) of the company.

Primarily, companies need to finance their operations in three ways:

1. Debt financing

2. Equity financing

3. A combination of debt and equity

No matter which option a company chooses, sources of capital come with a financial cost.

The WACC seeks to find the “true cost of money” in operating a business by comparing the cost of borrowing of capital to run a company versus raising capital through equity to pay for common business needs like property and equipment, research and development, human capital (i.e., employees), and business expansion, among other costs.

When company executives know the WACC, they can leverage that financial ratio to decide on funding the firm through debt or equity financing. The cost of equity will depend on the value of the company’s stock, while the cost of debt will reflect interest rates.

Basically, companies require an accurate weighted cost of capital to properly weigh expenses and provide fair cost of analysis on projects in the pipeline. Additionally, companies can leverage their WACC to evaluate their capital structure and weigh the myriad financial sources needed to fund operations, proportioned accurately.

Using one form of capital to fund a company’s operations makes the cost of capital formula fairly simple. However, when companies use multiple forms of capital the formula becomes more complicated and requires financial modeling.

The Takeaway

The weighted average cost of capital is not exactly a precise measurement of a company’s financial health, but it can be a highly useful one, especially for investors. If you’re looking at potentially investing in a company, it can be one piece of information that provides more detail into the company’s relative strength.

The data is easily found in a publicly-traded company’s balance sheets, which are made available to investors on a regular basis. Just visit the company’s web site, locate its financial information page, and look for the relevant data.

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FAQ

How can you calculate WACC for a private company?

Calculating WACC for a private company is more or less the same process as calculating WACC for a public company, but the calculation will need to be done using estimates of the company’s value, perhaps through cash flow analysis.

What is the difference between WACC and Required Rate of Return (RRR)?

While WACC and RRR are similar, the two are distinct from one another. In fact, WACC can be a tool used to determine RRR, but the two produce different values that can be important for investors for different reasons.

How does WACC influence sensitivity analysis?

WACC calculations can change in different scenarios, and sensitivity analysis can help determine how and what those changes are. Effectively, by experimenting with different values, you can get a sense of how sensitive a WACC calculation is, which can be important for investors.

Photo credit: iStock/fizkes

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN0723168

Oct

2023

PAYE vs Repaye vs SAVE: What’s the Difference?

By Sulaiman Abdur-Rahman | Financial Independence, Student Loans, student_loan, Terminology | No Comments

Struggling to make your federal student loan payments? An income-based repayment plan may ease the burden. Previously, two of the primary income-based plans were Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). But the former is no longer taking new enrollees, and the latter has been replaced by a new program — the SAVE Plan. In all cases, the plans adjust your monthly loan payments based on your income and family size. In this article we’ll look at how SAVE compares to the old REPAYE, as well as to the PAYE Program.

Table of Contents

PAYE vs REPAYE: An Overview
SAVE vs REPAYE
SAVE vs PAYE
What Is the Interest Subsidy?
Answers to Common Questions
Income-Driven Repayment Alternatives
The Takeaway

PAYE vs REPAYE: An Overview

The former PAYE and REPAYE federal student loan payment plans were similar, but differed in a few key areas. Both plans had income-based repayment terms generally set at 10% of a borrower’s discretionary income.

Some borrowers didn’t qualify for PAYE because the initial enrollment step required partial financial hardship as determined by your annual discretionary income and family size. You couldn’t enroll into PAYE if your federal student loan monthly payment would be lower under the Standard Repayment Plan. You also cannot enroll into PAYE after June 30, 2025; however, current PAYE enrollees can remain on the plan after that date.

The 2023 debt ceiling bill officially ended the three-year Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1, 2023, and payments to resume in October 2023 under any federal student loan repayment plan.

Here are the key differences between the former PAYE and REPAYE plans:

• PAYE required partial financial hardship to sign up for first-time enrollment

• No new PAYE enrollees are being accepted, but borrowers already enrolled in PAYE can continue repaying under that plan after July 1, 2025

• REPAYE did not require low-income, moderate-income, or partial financial hardship to enroll

• REPAYE no longer exists as a federal student loan repayment plan

SAVE vs REPAYE

March 26, 2025: The SAVE Plan is no longer available after a federal court blocked its implementation in February 2025. However, applications for other income-driven repayment plans and for loan consolidation are available again. We will update this page as more information becomes available.

Saving on a Valuable Education (SAVE) Plan is the federal income-driven repayment (IDR) plan that replaced REPAYE in July 2023. If you were enrolled on the REPAYE Plan at that time, you’ve been automatically enrolled into the SAVE Plan.

The SAVE Plan is essentially a major upgrade to the former REPAYE Plan, as shown in the table below:

SAVE	REPAYE
$0 monthly payment if your income is within 225% of the federal poverty guideline (or less than $32,805 for a single borrower and $67,500 for a family of four in 2023).	Fewer borrowers qualified for a $0 monthly payment because the threshold was set at 150% of the federal poverty guideline.
Your loan balance won’t grow over time if your monthly payment amount is less than the interest accruing.	It was possible for borrowers to see their loan balances grow over time if their monthly payment was insufficient to pay the accrued interest.
Inclusion of your spouse’s income is not required if you file your taxes separately.	Inclusion of your spouse’s income was required
Beginning July 2025, payment amounts are based on 5% of discretionary income for undergraduate loans, 10% for graduate loans, and a weighted average for borrowers who have both.	Payment amounts were based on 10% of discretionary income
Beginning July 2025, borrowers with original principal balances of less than $12,000 can have their remaining loan balance forgiven after 10 years of monthly qualifying payments.	Loan forgiveness would only occur after 20 years of monthly qualifying payments for undergraduate loans and 25 years for graduate loans

SAVE vs PAYE

Both SAVE and PAYE are federal income-driven repayment plans not available to private student loan borrowers. New enrollments in PAYE ended in July 2025.

The below table highlights the key differences between SAVE and PAYE:

SAVE	PAYE
Annual adjusted gross income does not determine your eligibility for this IDR plan.	Enrolling into this plan typically required low or moderate income, also known as a partial financial hardship.
You don’t have to pay if your income is below 225% of the federal poverty guideline.	You don’t have to pay if your income is below 150% of the federal poverty guideline.
Beginning July 2025, payment amounts are based on 5% of one’s discretionary income for undergraduate loans, 10% for graduate loans, and a weighted avera.ge for borrowers who have both.	Payment amounts are generally 10% of one’s discretionary income, but never more than the 10-year Standard Repayment Plan amount.
Also beginning July 2025, borrowers with original principal balances of less than $12,000 can have their remaining loan balance forgiven after 10 years of monthly qualifying payments.	Your remaining loan balance is forgiven after 20 years of monthly qualifying payments.
There’s no deadline to enroll and make payments on this plan.	No new enrollments will occur after July 1, 2025, but current enrollees can remain on this IDR plan after that date.

Depending on your original principal balance amount, student loan forgiveness on the SAVE Plan may occur after 10 to 25 years of monthly qualifying payments beginning in July 2025.

If you’re a federal student loan borrower working toward Public Service Loan Forgiveness, you may qualify for forgiveness of any remaining loan balance after 10 years of qualifying payments.

Recommended: Student Loan Forgiveness Programs

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What Is the Interest Subsidy?

The SAVE Plan has a permanent interest subsidy, whereas the PAYE Plan offers a temporary interest subsidy to eligible borrowers.

If you’re on the SAVE Plan, 100% of your unpaid accrued interest is not charged if your monthly payment is less than the interest accruing. The effect of this permanent interest subsidy is that your loan balance won’t grow over time if your SAVE Plan monthly payment is less than the interest accruing.

Under the PAYE Plan, the U.S. Department of Education may provide an interest subsidy if your monthly payment is less than the interest accruing. This PAYE Plan interest subsidy is discontinued after the first three years of repayment and only applies to Direct Subsidized Loans and the subsidized portion of Direct Consolidation Loans.

Some borrowers on the PAYE Plan may see their loan balances grow over time. This can happen if you’re not covered by an interest subsidy when making a monthly payment that’s insufficient to pay the accrued interest. (Effective July 1, 2023, your unpaid accrued interest is not capitalized if you switch from PAYE to another repayment plan, fail to recertify your income, or no longer have a partial financial hardship.)

Answers to Common Questions

How do I apply for a federal IDR plan?

You only need to submit one application for any federal income-driven repayment plan and will need to supply financial information. It will take about 10 minutes. The Federal Student Aid Office also will recommend a repayment plan based on your input. Remember that private student loans are not eligible for federal IDR plans.

I want to apply for PAYE. How is partial financial hardship defined?

Unfortunately, there’s no option to apply for PAYE after July 1, 2025.

What if I’m in PAYE and no longer demonstrate hardship?

Your loan payments will stop being based on your income. Instead, your monthly payment will be based on the amount you would pay under the 10-year Standard Repayment Plan. Your maximum required payment in PAYE will never be higher than the 10-year standard payment amount.

What if I forget to recertify my income and family size?

If you’re on the SAVE Plan, failing to recertify your income and family size may switch you to an alternative repayment plan with a larger monthly payment.

If you’re on the PAYE Plan, failing to recertify by the annual deadline may give you a larger monthly payment resembling what you would pay under the Standard Repayment Plan.

Auto-recertification is available beginning in July 2025 if you agree to securely share your tax information with the U.S. Department of Education.

Does a Parent PLUS Loan qualify for SAVE?

No. Federal Parent PLUS Loans are not eligible for the SAVE plan.

Recommended: Types of Federal Student Loans

Income-Driven Repayment Alternatives

One of the alternatives to federal income-driven repayment is student loan refinancing. You can refinance your student loans — private and federal — with a private lender and potentially qualify for a lower interest rate. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

The federal Direct Consolidation Loan program combines federal student loans into a single federal loan, but the interest rate is the weighted average of the original loans’ rates rounded up to the nearest eighth of a percentage point, which means the borrower usually does not save any money. Lengthening the loan term can decrease the monthly payment, but that means you may spend more on total interest.

Federal IDR plans like SAVE offer federal protections and benefits, such as access to the Public Service Loan Forgiveness program. Any loans you refinance with a private lender will not be eligible for PSLF, Teacher Loan Forgiveness, or federal IDR plans. A student loan refinancing calculator can help you determine whether student loan refinancing is right for you.

💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

The Takeaway

The SAVE Plan is generally the most affordable federal student loan repayment plan. It replaced the former REPAYE Plan and offers a permanent interest subsidy, among other perks that you couldn’t get with PAYE.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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.

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