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A soft pull personal loan means that the lender only requires a soft credit check for preapproval or approval, which won’t impact your credit score. With a soft pull, a lender is able to look at information in your credit report impacting your credit score. It differs from a hard credit pull, which typically lowers your score by several points.

Read on for a closer look at what soft pull personal loans are and what skipping a hard pull means for borrowers.

What Is a Soft Credit Inquiry?

A soft credit inquiry (or pull) is a type of credit check that isn’t tied to a formal credit application and does not impact your credit score. It occurs when a creditor, employer, landlord, or other authorized individual looks over your credit report to see how you manage your debt. When you access your own credit report, it’s also considered a soft credit check.

A soft credit check can take place without your consent, or even your knowledge. If you’ve ever received a prequalified credit card offer in the mail, the company making that offer did a soft pull on your credit to prescreen you for the card.

If you apply to prequalify for a loan, the lender will also do a soft credit pull. If you like the rate and terms in your offer, you can then decide to officially apply for that loan, which will require a hard credit pull.

Other instances of a soft credit check can include renting an apartment or applying for a job. Getting a look at how you manage your money can prove reliability and bring peace of mind to an employer, landlord, or creditor.

How Soft Credit Checks Work

During a soft credit check, a lender or other third party reviews your credit report to gather specific information about your creditworthiness. Unlike a hard credit check, which requires your explicit consent and can impact your credit score, a soft pull is typically used for informational purposes or prequalification.

For example, let’s say you’re shopping around for personal loan offers and want to check your interest rate. Lenders may perform a soft pull to assess your creditworthiness and determine if you meet their initial criteria. This initial evaluation helps lenders provide you with personalized loan offers without affecting your credit score.

Recommended: Personal Loan Calculator

Information Provided for a Soft Pull

A soft credit pull generally provides a snapshot or a modified version of your credit report. Exactly what a third party will see depends on the purpose of the soft pull. A creditor will likely be able to see:

•  Your overall credit history

•  Your current debts and payment behavior

•  The length of your credit history

•  The types of credit accounts you have

Do Soft Pulls Affect Your Credit Score?

No, soft credit inquiries do not impact your credit score. They are not visible to other creditors, and they do not leave any trace on your credit report. Soft pulls are considered “soft” because they are only visible to you when you review your own credit report.

If you want to view the soft inquiries on your credit reports, you can request a free copy of your report from each major credit bureau (Experian®, Equifax®, and TransUnion®) at AnnualCreditReport.com. Keep in mind that each report could have different inquiries. A soft inquiry is only added to the credit report that was checked.

Soft Pull vs Hard Pull

Whether you’re shopping around for a personal loan or looking for a new apartment, it’s important to understand the difference between soft vs, hard credit inquiries. Here’s a quick summary of how the two compare.

The key difference between soft vs. hard credit inquiries is that soft inquiries don’t have any impact on your credit scores. Hard inquiries, by contrast, may remain in your credit reports for about two years and can impact your credit scores.

The impact of hard inquiry, however, is typically small, as well as temporary. As long as no additional negative information is added to your credit report, your credit scores will typically rebound within a few months.

While multiple hard inquiries in a short time frame can do more significant damage to your scores, scoring models will typically combine multiple inquiries that occur within one or two months to avoid unfairly penalizing people who are rate shopping.

What to Know About Personal Loans With Soft Credit Pulls

Some personal loan lenders look at your credit report using a soft pull, allowing them to prequalify you for a loan while letting you know your approved interest rate. This can be beneficial for both sides — the lender gets information about your creditworthiness while you get important information that can help you make borrowing decisions.

While prequalification for a personal loan with a soft pull isn’t a guarantee you’ll get approved for a loan, it can give you a good idea of the loan amount, rate, and terms you may be able to qualify for. If you choose to then apply for the loan, the lender will then do a hard credit pull.

Some lenders advertise that they will only do a soft pull, even when you apply for the loan. But you’ll want to approach these lenders with caution. If a lender doesn’t require a hard credit check, they will often make up for the increased risk involved by charging exorbitant interest rates and fees.

Be Aware of Predatory Loans

If you’re looking at soft pull personal loans, it’s important to be aware of predatory loans that may take advantage of individuals with limited credit history or poor credit.

Predatory loans, such as payday loans, often target individuals who may have difficulty obtaining traditional loans. However, these loans often come with high-interest rates, excessive fees, and unfavorable terms. When looking at this type of loan, you’ll want to be sure to research reputable lenders and read reviews to ensure you’re working with a legitimate and trustworthy institution.

Also be sure to read the loan agreement carefully and make sure you fully understand all the terms before proceeding.

Common Soft Inquiries

Soft inquiries are commonly used in various scenarios, including:

•  Prequalification for credit cards or loans

•  Employment background checks

•  Rental applications

•  Insurance quotes

•  Credit monitoring services

•  Checking your own credit

The Takeaway

A soft pull personal loan may only perform a soft credit check when evaluating an applicant. However, you may have a hard pull done as part of the actual loan approval process, or you might be charged a high interest rate plus fees for the loan. Shopping around and finding the best fit can be wise when seeking a personal loan.

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

FAQ

Do personal loans do hard or soft credit inquiries?

Personal loans can involve both hard and soft credit inquiries. When you apply for a personal loan, the lender may perform a hard credit inquiry, which can temporarily lower your credit score. However, some lenders also offer prequalification or preapproval processes that involve soft credit inquiries. These soft pulls do not impact your credit score and provide lenders with a basic overview of your creditworthiness.

Do lenders see less of your credit history with a soft pull?

With a soft inquiry, a lender or creditor will typically see a modified version of your credit report. They likely won’t be able to see information like your account numbers but will see things like your payment history and if you have any accounts in collections.

Can a soft credit pull affect your credit score negatively?

No. Soft inquiries are not visible to other lenders and do not leave a trace on your credit report. They are used for informational purposes or prequalification and do not have any direct impact on your creditworthiness. Only hard credit inquiries, which occur when you apply for credit or a loan, may temporarily lower your credit score by a few points.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

SOPL-Q325-033

Leveraged exchange-traded funds (ETFs) are tradable funds that allow investors to make magnified bets on an underlying index. Leveraged ETFs have been popular among investors looking to amplify their exposure to a market with a single trade. But it’s important to know that leveraged ETFs are much more complicated than traditional ETFs, and they’re also higher risk.

Because they’re constructed to deliver multiples of the daily performance of the benchmark they track, investing in leveraged ETFs can lead to massive losses. And for reasons related to their inner mechanics, they’re not good for investors who may be looking for returns when held for an extended time.

How Do Leveraged ETFs Work?

Exchange-traded funds, or ETFs, are securities, and can embody a form of index investing. They’re typically baskets of stocks, bonds, or other assets that aim to mirror the moves of an index, though ETFs can have many different aims or goals. Leveraged ETFs use derivatives so that investors may potentially double (2x), triple (3x) or short (-1) the daily gains or losses of the index. Financial derivatives are contracts whose prices are reliant on an underlying asset.

In finance, leverage is the practice of using borrowed money to increase the potential return on an investment. Leveraged ETFs use derivatives to increase the potential return on an investment.

Let’s look at a hypothetical example. Say an investor buys a regular, non-leveraged ETF. Here’s how such an ETF would work. If it tracks the S&P 500 Index and the benchmark gauge rises 1% on a given day, the non-leveraged ETF would also climb about 1%.

If, however, the investor buys a triple leveraged ETF or 3x ETF, their return for that given trading day could be a 3% gain. The reverse scenario could also happen, though. If the S&P 500 fell 1% on a given day, the owner of the triple leveraged ETF can suffer a 3% loss.

Most of these ETFs are designed to try to outperform a benchmark or index’s daily performance, and holding them longer than a day could result in losses, as such. Accordingly, they’re not intended for long-term investing strategies.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Is “Decay” in Leveraged ETFs?

There are pros and cons to ETFs themselves. But leveraged ETFs can be particularly problematic for investors due to their design. They are constructed to deliver multiples of an underlying asset’s daily returns, not weekly, monthly or annual returns. Leveraged ETFs don’t deliver the exact magnitude of 2x or 3x if held for longer than a day.

So, if the S&P 500 were to rise 5% in a week, a triple leveraged S&P 500 would not climb 15% in that week. The same would be true for a double leveraged ETF. There’s no guarantee it would return 2x or 10% to its owner.

That’s because of how leveraged ETFs are constructed. In order to maintain their 2x or 3x exposure, leveraged ETFs use derivatives that need to be rebalanced at the end of each day. This process can erode the returns of the ETFs — a process known as “decay” in the market.

Types of Leveraged ETFs

Here are some of the types of leveraged ETFs on the market:

•   Double Leveraged (2x) ETFs give investors double exposure to the daily return of an index of stocks, bonds, or commodities. So if an asset or market moves 1.5% in a single day, the fund aims to deliver a return of 3% that day.

•   Triple Leveraged (3x) ETFs try to provide investors with 3x amplification. So if the underlying asset or index rises or falls 2% on a trading day, the ETF seeks to rise or fall 6%.

•   Inverse (-1) ETFs are also considered to be leveraged ETFs. They move in the opposite direction of the underlying asset they’re designed to follow. So if an index moves -1%, the ETF would aim to climb 1%, and vice versa. Inverse ETFs are essentially a form of shorting a stock. Investors are able to short the underlying market by buying shares of an inverse ETF.

Pros of Leveraged ETFs

Some of the advantages of leveraged ETFs include the following:

Easy Leveraged Trades

Leveraged ETFs have made it easier for investors to make leveraged wagers on the market, which can be a day-trading strategy but not a practice that’s readily available to all investors, particularly retail investors at home who may be trading in smaller increments.

Useful For Quick Leveraged Market Wagers

Leveraged ETFs can be useful for a one-day wager that an investor wants to make on an underlying market, such as technology stocks, high-yield bonds, or emerging markets.

Allow For Easy Shorting

Inverse ETFs can give investors the ability to short, or bet against, an asset. Short sales aren’t easily available to non-professional investors, particularly retail investors at home. Shorting can be a way for investors to hedge or offset the risk in their holdings.

Cons of Leveraged ETFs

Some of the potential disadvantages of leveraged ETFs include the following:

Potential For Outsized Losses

With leveraged ETFs, investors could potentially see outsized losses due to how the products compound returns. For instance, if an index were to tumble 3% in a single day, a holder of leveraged ETFs would experience a plunge of 9% in the shares of their fund.

Increased Investment Risk

Inverse ETFs allow investors to short assets, but because of how there’s no limit to how high an asset can go, that means investors could see their holdings in the inverse ETF go to zero.

Derivative Risks

Leveraged ETFs use derivatives to achieve their amplified returns. Therefore, investors should be aware of the counterparty risk — or the risk from the other parties involved in the derivatives.

Higher Costs

Leveraged ETFs tend to be more expensive than traditional ETFs. Investors who want to understand how fund fees work should look at the ETF’s expense ratio. For instance, some popular leveraged ETFs can have an expense ratio of 0.95%. That compares with more traditional ETFs, which can have an expense ratio of around 0.20%.

Closure Risks

There’s a high risk of closure. Investors who don’t sell out of their leveraged ETF shares before the delisting date could be left with positions that are difficult or costly to liquidate.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Regulation of Leveraged ETFs

Regulators’ rules on leveraged ETFs have varied in recent years. And they continue to change.

Most recently, in early 2023, the Securities and Exchange Commission (SEC) issued a bulletin about leveraged ETFs, warning investors about the particular risks associated with them.

In October 2020, the SEC made a rule change that would make it easier to launch leveraged ETFs, while capping the amount of leverage at 200%. The move was a break away from prior announcements that sought to slow down the creation of new leveraged ETFs. The SEC had previously allowed existing leveraged ETFs to be continued to be traded, while putting restrictions on the approval of new such funds. The SEC issued an alert about leveraged funds to retail investors in 2009.

In May 2017, the SEC approved the first quadruple (4x) leveraged ETF, only to halt its decision soon after.

Some investment firms and ETF providers have pushed for the term “ETF” to not be applied to leveraged and inverse funds. They argue that the term “ETF” is used for a range of products that can lead to significantly different outcomes for investors.

The Takeaway

Leveraged ETFs use derivatives in their construction to try to deliver amplified returns for an investor. Relative to index funds, ETFs can allow entire markets to be more easily traded, similar to how shares of a stock are traded. Leveraged ETFs are not safe for all investors, particularly inexperienced ones.

These ETFs can cause massive losses because of how they may magnify returns and losses. In addition, market observers and regulators have said that leveraged ETFs may be better suited for professional or experienced investors to be used within a single trading session. The use of derivatives in such funds causes their performance to veer from the underlying market if the ETFs are bought and held. As always, it’s important to do your research about any ETF or investment before investing.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What are examples of different types of leveraged ETFs?

There are several types of leveraged ETFs, including double leveraged (2x) ETFs, which give investors double exposure to the daily return of an index of stocks, bonds, or commodities. There are also triple leveraged (3x) ETFs that try to provide investors with 3x amplification. Inverse (-1) ETFs are also considered to be leveraged ETFs. They move in the opposite direction of the underlying asset they’re designed to follow.

What are some drawbacks of leveraged ETFs?

Leveraged ETFs allow for the potential of outsized losses, introduce additional investment and derivative risks, and may have higher associated costs than traditional ETFs.

Are leveraged ETFs good for beginning investors?

Leveraged ETFs are not intended for beginning investors, as they’re more complex, and have additional risks. As such, traditional ETFs may be a better option, depending on the specifics of an investor’s situation.