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Jan

2023

Available Credit on a Credit Card: What It Is & Why It’s Important

Put simply, available credit on a credit card is how much money a cardholder has left to spend in a billing cycle. Being aware of your available credit is key to ensuring you don’t spend beyond your credit limit. Doing so can lead to having a purchase declined or facing penalties, such as a higher interest rate.

Once you know what available credit means, however, you may find that you have further questions. How much available credit should you have? How can you check your available credit? And are there any ways to increase your available credit?

What Is Available Credit on a Credit Card?

Available credit is the amount of money that’s left on a cardholder’s account in the current billing cycle. As a cardholder uses their credit card, the purchase amounts are deducted from their credit limit, which is the maximum amount a cardholder can spend on the card. The remaining amount is what’s known as available credit.

Credit card companies recalculate your available credit every time you make a purchase and when you make a card payment. When you buy something with your credit card, your available payment falls, whereas your available credit rises when you make a payment. One of the key differences between available credit and credit limit is that your credit limit will remain the same, regardless of your spending or payments.

The Importance of Having Available Credit

Knowing your available credit can have a significant impact on your credit card experience. The more available credit you have, the more you can spend on your card. If your available credit is low, you’ll know that you’re nearing your credit limit.

When you aren’t aware of whether you have available credit, the following scenarios can become a reality depending on how your credit card works:

• You could have a purchase declined if you don’t have the available credit to cover it.

• You could incur an interest rate penalty, meaning your rate will go up.

• You could owe an over-limit fee.

• Your credit card issuer could lower your credit limit, or even close your account after multiple overages.

How to Check Your Available Credit

Cardholders can easily check their available credit in the following ways:

• On their monthly credit card statement

• Via the credit card company’s app or website, listed under “accounts”

• By calling their credit card issuer through the number on the back of their card

Calculating available credit is also fairly straightforward. All a cardholder has to do is subtract their current credit card balance from the account’s total credit limit. In other words, the formula is: credit limit – current balance = available credit.

Make sure to factor in all card-related costs when making this calculation, account fees and interest charges, which will apply if you’re carrying a balance on a credit card.

Recommended: What is a Charge Card?

How Much Available Credit Does It Make Sense to Use?

It’s recommended that credit card users regularly check their credit card balance and refrain from overspending in order to maintain a lower credit utilization rate. This rate reflects how much of their overall credit limit they’re using at a given time.

Credit utilization is not only important for household budget considerations — it also impacts credit score. The lower the credit card utilization rate, the better for a cardholder’s credit score. Aim to maintain a credit-to-debt ratio of no more than 30%, meaning the cardholder has 70% of their available credit remaining on the card account.

Tips for Increasing Your Available Credit

Cardholders looking to boost their available credit can leverage several action steps to get the job done.

Pay Down Your Card Balances

Perhaps the most efficient way to boost your available credit — short of not using the card at all — is to make regular payments. This will keep your credit card debt as low as possible.

For maximum results, pay as much as your household budget allows each month toward your credit card balance rather than only making the minimum payment. Done regularly, this will help to keep your credit card debt down and your available credit up.

Recommended: When Are Credit Card Payments Due?

Request a Credit Limit Increase

Technically, asking for — and getting — a credit limit increase from your credit card company will also boost your available credit. You’ll need good credit and a solid credit card payment history to gain approval from your credit card company though. Also note that the request for a credit limit hike will also lead to a hard credit check, which could negatively impact your credit score.

Once you get approved for a credit limit boost, resist the temptation to overspend now that you have a higher credit limit. To be safe, don’t ask for a credit limit boost unless you’re able to pay off your current balance. That’s a good sign you can handle any potential added credit card debt.

Recommended: What Is the Average Credit Card Limit?

Get a New Credit Card

As long as you’ve done a good job of making timely debt payments and have maintained a stellar credit score, you stand a chance of getting approved for a new credit card with a higher credit limit.

If your new credit card doesn’t offer a higher credit limit, you’ll still benefit from the available credit earned from the new card.

Recommended: How to Avoid Interest On a Credit Card

The Takeaway

Knowing how much available credit you have on a credit card clues you in to how much you still have available to spend. However, you’ll want to avoid using the entirety of your credit limit — meaning whittling your available credit down to $0 — due to the consequences that can have. Not only could that result in a declined credit card or a hiked interest rate, a high credit utilization rate can have implications for your credit score.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How much available credit should I have?

A good rule of thumb is to have at least 70% of your credit limit available. That will allow you to maintain a credit utilization rate of 30%, which can help you to avoid negative impacts to your credit score.

What does available credit mean on a credit report?

Available credit on a credit report means the amount of credit available to a consumer relative to their outstanding debt. Lenders and creditors want to see consumers with high available credit and low debt balances, as this shows responsible borrowing habits.

Is available credit the amount I can spend?

Yes, available credit is the amount of credit available to a cardholder that they can use.

Why is my available credit low?

Low available credit means you’ve used a large portion of your credit limit. You might aim to spend less in the future to maintain a lower credit utilization rate. In the meantime, keep a close eye on your spending to avoid hitting your credit limit, which can have negative consequences.

Photo credit: iStock/Ridofranz

Jan

2023

Tips for Building Credit With a Credit Card

One of the best ways to build credit with a credit card is through responsible use of your card, such as paying off your credit card in full each month and maintaining a low credit utilization rate. This behavior can help build your credit by showing you’re able to meet your debt obligations, which is something potential lenders want to see.

What if you’re interested in using a credit card to build credit, but don’t yet have a credit card? In this case, there are credit cards that are marketed to those with a limited credit history who want to build their credit. Depending on your personal situation, here’s a look at the best way to build credit with a credit card.

Building Credit With a Credit Card

If you’re looking to build up your credit, a credit card can be a great place to start. Getting a credit card may be easier than getting approved for a mortgage or other type of loan. Plus, unlike most other loans, you won’t have to pay any interest with a credit card as long as you pay your statement balance in full each month.

Recommended: How to Avoid Interest On a Credit Card

8 Tips to Build Credit With a Credit Card

Curious how to build credit with a credit card? Here are eight tips to try.

1. Regularly Pay Your Bills on Time

Paying history is one of the biggest factors that makes up your credit score. If you’re focusing on building your credit score, you’ll want to make sure that you pay your bills on-time, each and every month. If your credit report shows a history of late or missed payments, that can really drag down your credit score.

2. Maintain a Low Credit Utilization Rate

Another factor that helps to build credit is maintaining a low credit utilization rate, ideally under 30%. Your credit utilization rate is your total outstanding debt balance divided by your total credit limits expressed as a percentage. You can lower your utilization rate by paying down debt or increasing your total credit limit.

Recommended: What is the Average Credit Card Limit?

3. Pay Your Credit Card in Full

In addition to paying your credit card statement before the due date, it’s also a great idea to pay the full statement balance every month, if possible. This helps lower your credit utilization rate, which is an important factor in determining your credit score. Additionally, it prevents you from paying interest.

If you’re not able to pay your credit card statement in full, make a plan and consider adjusting your financial habits going forward.

Recommended: What is a Charge Card?

4. Become an Authorized User

If you’re not ready or can’t get approved for a credit card in your own name, consider becoming an authorized user on the credit card account of a trusted friend or family member. You’ll receive a secondary card in your name, also known as a supplementary credit card, and you can benefit from the payment history and good credit of the primary account holder. This can help you when you go to get a credit card for the first time on your own.

However, you’ll want to be careful about whose account you become an authorized user on. If they miss payments or pay late, it can affect your credit score negatively.

5. Use Your Card Regularly

It’s not enough to simply have a credit card — you also have to use it. Using your credit card responsibly shows potential lenders that you’re more likely to be responsible with new debt or loan obligations.

Consider using your credit card to pay some of your monthly bills to keep it in regular use. Just make sure that you’re using credit cards wisely by also setting aside money to pay off the statement in full when it comes due.

Recommended: When Are Credit Card Payments Due?

6. Consider a Secured Credit Card

If you’re having trouble getting approved for an unsecured credit card on your own, you might consider a secured credit card. With a secured card, you typically put down a refundable security deposit, which serves as your credit limit.

As you consistently and responsibly use your secured credit card, you can ask your credit card issuer to increase your credit limit and refund your initial security deposit.

7. Limit New Credit Applications

Another factor that goes into determining your credit score is how many new credit applications you’ve had recently. Almost every time that you apply for new credit, such as a credit card or a loan, the potential lender will do a hard pull on your credit report. Having too many of these recent credit inquiries on your credit report can have a negative impact on your credit score.

8. Keep Your Credit Accounts Open

If you’ve had trouble in the past with credit card debt, your first thought might be to cut up your credit card and close your account. One reason to keep your credit card accounts open is that another factor that goes into determining your credit score is the average age of your accounts. Keeping an old account open — especially if it comes with no annual fee — can be a good way to build credit.

Alternative Ways to Build Credit

Besides leveraging credit cards, there are a few other ways to build credit.

Get an Auto Loan

If you’re in the market for a new or used car, consider getting an auto loan. Like a credit card, any auto loan balance or payment history that you have will show up on your credit report. Making reliable and on-time payments on your auto loan can be another positive indicator to your credit score.

Take Out a Personal Loan

Besides an auto loan, a personal loan is another type of debt product that typically shows up on your credit report. With a personal loan, you receive money upfront from the lender and then pay it back over time, with interest. Having a history of on-time payments on a personal loan can be another way to build credit.

Get a Cosigner

If you’re not ready to apply for credit in your own name or are having trouble getting approved for a loan or credit card, you might consider a cosigner. A cosigner is a trusted friend or family member who will sign their name to your loan alongside your own. That makes them also financially responsible for the debt as well, so you’ll want to be careful about who you choose to cosign with. However, it can be a helpful step toward establishing credit.

The Takeaway

Using a credit card can be a great way to build credit — as long as you do it responsibly. Make sure to use your credit card in such a way that you can pay off your full statement balance completely, each and every month. Showing responsible payment history over time and keeping your overall credit utilization rate low are two of the biggest factors that make up your credit score.

FAQ

What is the fastest way to build credit with a credit card?

Building credit is usually not something that will happen overnight. Instead, most potential lenders are looking for a history of making on-time payments over time. This can take months or potentially even years to fully build up your credit.

How do you use a credit card to build credit for the first time?

When you get a credit card for the first time, you’ll want to start using the card to pay for some of your monthly expenses. Just make sure to set aside the money for those purchases, so that you can pay your credit card statement in full when it comes at the end of the month. Establishing a history of on-time payments will help you to build your credit, as it shows other potential lenders that you’ll be responsible with your debt obligations.

How long does it take to build credit with a credit card?

Establishing credit is not something that usually happens over a short period of time. Instead, building your credit is something that happens over months, if not years. Demonstrating a history of reliably meeting your debt obligations is one of the biggest factors that makes up your credit score, so always make sure to pay your bills on time and in full, each and every month.

Photo credit: iStock/Ridofranz

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.

Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points toward active SoFi accounts, including but not limited to, your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, Student Loan Refinance, or toward SoFi Travel purchases, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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 .

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Jan

2023

What Is Income Tax Withholding and How Does It Work?

By Susan Guillory | Life & Career, money | Comments Off

“What happened?!” may be your response when you look at your paycheck and see all of those deductions, whittling your hard-earned cash down to a (much) lower figure than you expected.

And perhaps, if you look more closely, you’ll notice a line on your paystub that shows a major amount of money subtracted and think, What is withholding tax? And why do they take so much?

Federal and state withholding taxes are funds that your employer takes out and sends to the government. To put it another way, this is what “taxes withheld” means; the funds have gone to help federal programs. These taxes have a purpose, and in the long run, you’ll probably be glad they are deducted from your check rather than owed as a mega lump sum on Tax Day.

But that said, it can be wise to learn more about what income tax withholding is and what those funds do. Read on learn answers to such questions as:

• What is tax withholding?

• What are factors that determine withholding taxes?

• How can you calculate withholding taxes?

What is Income Tax Withholding?

Many people think their taxes are due mid-April, but did you realize that, if you are a salaried employee, you are actually paying your taxes throughout the year? When you see those federal and possibly state and local taxes being whisked out of each paycheck, that’s exactly what is happening.

So what does withholding tax mean, and how does it work? A withholding tax is an amount, based on your salary, that your employer sets aside and then pays directly to the government on your behalf. It’s a credit against the full amount of personal income tax you will owe for the year. By doing this, your employer is helping you avoid paying all of your annual taxes come April.

That said, how much is deducted from your paycheck can vary depending on a variety of factors. You are able to designate what portion of your check goes toward your taxes on the IRS W-4 form (more on that in a bit).

• If you allocate too much, that means more than necessary is taken out, and you will likely receive a tax refund when you file your taxes.

• If you set aside too little, you will probably owe a balance or have what’s known as a “tax bill” due during tax season to make up the difference.

Your federal withholding tax rate depends on your income and tax bracket.

Factors That Determine Tax Withholding

There are several factors that determine just how much tax is withheld from your paycheck, whether it arrives as a paper check or via direct deposit. Here are some of the factors that control the amount:

• How much you earn; it’s likely that the more you earn, the higher the rate at which taxes are withheld

• What your filing status is (for instance, single; married, filing singly; or married, filing jointly)

• How many (if any) withholding allowances are claimed. Typically, if you claim a higher number of allowances, that means your tax deductions are lower. This will free up more cash to flow your way on each payday, but you might owe taxes when you file. If you have a lower number of allowances, that means more money is taken out for taxes, and you could wind up getting a refund when your tax return is processed.

• Whether an employee decides to have additional money withheld each pay period so they won’t owe takes in April. Some individuals may ask their employers to withhold, say, an extra $100 or more per pay period if they find they typically owe taxes at year’s end.

Recommended: How to Reduce Your Taxable Income

What Is State Income Tax Withholding?

If you live in a state that charges state income tax, you will also see tax withholding for that on your paycheck. In terms of the different types of taxes collected, there are just nine states that don’t tax earned income. In other words, you will not pay state taxes if you live in:

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Washington

• Wyoming.

The concept of tax withholding works in the same way at the state level as it does at the federal: A certain portion is put toward your future state tax bill, and you may either owe or get a refund, depending on how much you paid in.

Quick Money Tip:Direct deposit is the fastest way to get an IRS tax refund. More than 9 out of 10 refunds are issued in less than 21 days using this free service, plus you can track the payment and even split the funds into different bank accounts.

What Is the Purpose of Tax Withholding?

As briefly mentioned above, tax withholding saves you from owing a huge bundle of taxes in April. If people were left to their own devices to set aside money for taxes, well, that might not always be a success. It can be hard to save money from your salary. Every time you receive your paycheck, there are bills to pay, dinners out and movies to tempt you, and vacations to plan and take.

If you received your gross vs. net income, you might spend more than you mean to and then wind up owing a large sum to the IRS when tax-filing takes place. This is one reason why the IRS spreads out the federal income tax withheld across paychecks throughout the year.

You don’t see the taxes you pay as such a large sum when bits are taken throughout the year, and you likely don’t miss that money the way you would if you paid all at once.

And the government probably prefers to receive revenue from federal withholding throughout the year rather than all at once. This money is put toward healthcare programs, education, infrastructure, and other things that keep the country moving forward.

Tax and Employment Documents to Know

When you are first hired at a company, you fill out a W-4 form that includes your salary and tax withholding. Whether you are single or married and whether you have dependents or other withholding allowances will determine how much of each paycheck is diverted toward your federal tax bill. You may also opt to have additional funds withheld from each paycheck.

Then when tax time rolls around, you will receive IRS Form W-2. This includes information on how much income you earned in a given tax year, as well as how much you paid in federal, state, and other taxes.

You’ll use this W-2 to file your taxes, and it will determine whether you receive a tax refund, owe more taxes, or break even.

Calculating Income Tax Withholding

It can take a bit of tweaking to find that balance between overpaying in federal withholding and having to pay more when you file your taxes.

Some people like getting a tax refund because it’s a lump sum they can put toward debt or invest. But realize that overpaying is a bit like giving the government a free loan throughout the year!

While there may be fast ways to get a tax refund, perhaps you’d rather just hold onto that money in the first place. If you better balanced what is taken out of your paychecks, you could take the excess you would have paid and invest it.

If you’re wondering what is a withholding tax allowance that’s right for you, there’s help. The IRS has a Tax Withholding Estimator you can use based on your current situation. In general, the more allowances or exemptions you have, the less taxes that will be taken out of your pay. And the opposite is true: The fewer the exemptions, the higher the amount of taxes that will be withheld.

While you aren’t asked to fill out a new W-4 each year, you may request one if you think you need to adjust the withholding amount.

Some of the times it might be wise to adjust how much income tax is withheld include:

• Starting a new job or position

• Having a child

• Getting married or divorced

• Buying a house.

Quick Money Tip:Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. An online bank account is more likely than brick-and-mortar to offer you the best rates.

Can I Be Exempt from Tax Withholding?

To be exempt from tax withholding means that no federal taxes will be withheld from your pay. You might also have no state or local taxes (if applicable) deducted. Here are the ways in which someone might qualify to be exempt from such taxes:

• If all of your federal income tax was refunded because you have no tax liability and you expect the same thing to happen this year, then you may be exempt from withholding taxes. (But note, Social Security and some other taxes may still be withheld as part of other types of payroll deductions.)

• Another consideration: Certain types of income are considered exempt. For instance, money paid to foster parents for their taking care of children in their homes may be tax-free. Payments from workers’ compensation is another example of funds that may be tax-exempt.

The Takeaway

No one likes the idea of taxes, but the fact is that money is put toward things we all enjoy, like smooth roads and education programs. And federal withholding from your paycheck keeps you from having a giant bill when you file taxes.

The important thing is to understand how much is being withheld and knowing whether you need to modify your W-4 to find a better balance between overpaying and owing more money in taxes.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.30% APY on SoFi Checking and Savings.

FAQ

Does the government pay for income tax withholdings?

Money that is withheld from your earnings, known as income tax withholding, goes to the government. These dollars help pay for federal programs that benefit citizens and keep our country running, from education to transportation to economic security expenses.

How can someone qualify for withholding exemption?

To qualify as tax-exempt, you would have to have had all taxes refunded and have no liability in the previous year and expect the same status in the current tax year. Another consideration: Some forms of income may be tax-exempt, such as payments for in-home foster care of children or for workers’ compensation.

Why has my employer withheld too much income tax?

If your employer withheld too much income tax, then you will likely get a refund at tax time. You can update your withholding on your W-4 form; the more allowances you have, the lower the taxes that will be taken out.

Why has my employer withheld too little income tax?

If you wound up owing the IRS money at tax time, the issue could be that you have too many exemptions or allowances claimed on your W-4 form, meaning your employer is not withholding enough money from your paycheck. Adjust your W-4, knowing that the lower your number of allowances, the higher the level of taxes that will be taken out and sent to the IRS on your behalf.

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

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.

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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Jan

2023

Avoiding Loan Origination Fees

By Becca Stanek | Budgeting & Goals, Financial Independence, Home Ownership, mortgage | No Comments

One thing you should always look out for — regardless of the type of loan you’re applying for — is loan origination fees. Many lenders charge origination fees for new loans to help cover costs on their end. However, what these fees are called and the amount of these fees can vary quite a bit from lender to lender.

Before you settle on a lender, here are some things you need to know about origination fees, so you can make the best borrowing decision for your financial situation.

What Is a Loan Origination Fee?

An origination fee is a cost the lender charges for a new loan. It’s a one-time fee charged at the time the loan closes. The fee covers the costs the lender incurs for processing and closing the loan.

How Are Origination Fees Determined?

Loan origination fees depend on a number of factors. This includes:

• Loan type

• Loan amount

• Credit score

• Inclusion of a cosigner

• Your financial situation, including assets, liabilities, and total income

Do I Have to Pay Origination Fees?

You don’t necessarily have to pay origination fees — while most lenders charge this fee, not all do. Additionally, origination fees may be negotiable. If you ask, a lender could simply lower the fee, or they could offer a credit to offset at least a portion of the origination fee. Or, they might agree to lower the fees if you’ll pay a higher interest rate.

To minimize the sting of loan origination fees, it also pays to research your loan options. Make sure to compare how much you’d pay overall for different loan offers, factoring in the term of the loan, the interest rate, and any fees.

One way to effectively compare and contrast different loan options is to check each loan’s annual percentage rate (APR), an important mortgage basic to understand. A loan’s APR provides a more comprehensive look at the cost you’ll incur over the life of the loan. This is because APR factors in the fees and costs associated with the loan, in addition to the loan’s interest rate.

The Truth in Lending Act requires all lenders to disclose an APR for all types of loans. You’ll also see any fees that a lender may charge listed there, including prepayment penalties.

How Much Are Loan Origination Fees?

How much a lender charges (and what the fee is called) varies based on the type of loan and the lender.

A traditional origination fee is usually calculated based on a percentage of the loan amount — and that percentage depends on the type of loan. For a mortgage, for instance, an origination fee is generally 0.50% to 1%. Origination fees for personal loans, on the other hand, can range from 1% to 8% of the loan amount, depending on a borrower’s credit score as well as the length, amount, and sometimes intended use of the loan.

There are a variety of other origination fees that lenders may charge, and these can be a flat amount rather than a percentage of the loan amount. Other fees that lenders may charge to originate a loan could be called processing, underwriting, administration, or document preparation fees.

Can Loan Origination Fees Affect Your Taxes?

Loan origination fees, categorized by the IRS as points, can be deductible as home mortgage interest. This can be the case even if the seller pays them. Borrowers who can deduct all of the interest on their mortgage may even be able to deduct all of the points, or loan origination fees, paid on their mortgage.

To claim this deduction, borrowers must meet certain conditions laid out by the IRS. They’ll then need to itemize deductions on Schedule A (Form 1040), Itemized Deductions.

The Takeaway

Loan origination fees are important to consider when shopping for a loan during the home-buying process. These fees are charged by lenders to help cover their costs of processing and closing a new loan application. While many lenders do charge origination fees, not all do, and some may be willing to negotiate.

Origination fees are just one reason it’s important to take the time to shop around and compare home loans. With a SoFi Home Loan, for instance, qualified first-time homebuyers can make a down payment as low as 3%.

Ready to get started with the home-buying process? Check out SoFi Mortgages.

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.

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

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

SOHL1222020

Jan

2023

Home Equity Loans vs HELOCs vs Home Improvement Loans

By Janet Siroto | Family Finances, Home Ownership, personal_loan | No Comments

Maybe you’ve spent a serious amount of time watching HGTV and now have visions of turning your kitchen into a chef’s paradise. Or perhaps you have an entire Pinterest board full of super-deep soaking tubs that you’re dreaming about.

Either way, the home improvement bug has bitten you, and you’re hardly alone. In the U.S. $538 billion was spent on home improvement in 2021, and that number is expected to hit $625 billion by 2025. For a bit more context, consider that the average American spent almost $8,500 on home improvement projects in 2022. That’s a lot more than just buying a new bathroom sink.

While your home might be begging for some updates and improvements, not all of us have close to $10,000 stashed away in a savings account. For many people, realizing their home improvement goals means borrowing money. But how exactly?

Read on to learn about some of your options. This guide will cover:

• What’s the difference between home equity loans, HELOCs, and home improvement loans?

• In which situations do home equity loans, HELOCs, and home improvement loans work best?

• Which home improvement loan option is right for you?

Key Points

• Home equity loans, HELOCs, and personal home improvement loans offer different benefits for financing renovations.

• Home equity loans provide a lump sum with fixed interest rates, using home equity as collateral.

• HELOCs offer flexible access to funds up to a certain limit during a set period, with variable interest rates.

• Personal home improvement loans are unsecured, typically quicker to obtain, and may have higher interest rates.

• Choosing the right financing option depends on the borrower’s equity, the amount needed, and preferred repayment terms.

What’s the Difference Between Home Equity Loans, HELOCs, and Home Improvement Loans?

If you’ve figured out how much a home renovation will cost and now need to fund the project, the options can sound a bit confusing because they all involve the word “home.”

What’s more, you may hear the term “home equity loan” loosely applied to any funds borrowed to do home improvement work. However, there are actually different kinds of home equity loans to know about, plus one that doesn’t involve home equity at all.

So, before digging into home improvement loans vs. home improvement loans vs. HELOCs, consider the basics for each:

• A home equity loan is a lump-sum payment that a lender gives you using the equity in your home to secure the loan. These loans often have a higher limit, lower interest rate, and longer repayment term than a home improvement loan.

• A home equity line of credit, or HELOC, is a revolving line of credit that is backed by your equity in your home. It operates similarly to a credit card in that the amount you access is not set, though you will have a limit on how much you can access.

• A home improvement loan is a kind of lump-sum personal loan, and it is not backed by the equity you have in your home. It may have a higher interest rate and shorter repayment terms than a home equity loan. What’s more, it may have a lower limit, making it well suited for smaller projects.

Worth noting: If you use your home as collateral to borrow funds, you could lose your property if you don’t make payments on time. That’s a significant risk to your financial security and one to take seriously.

Next, here’s a look at how key loan features line up for these options.

How Much Can I Borrow?

The sky isn’t the limit when borrowing funds. This is how much you will likely be able to access:

• For a home equity loan, you can typically borrow between 80% and 85% of your home’s value, minus what’s owed on your mortgage. So if your home’s value is $300,000, 80% of that is $240,000. If you have a mortgage for $200,000, then $240,000 minus $200,000 leaves you with a potential loan of $40,000.

• For a HELOC, you can typically access up to 80% of the equity you have in your home, though some lenders may go even higher. In that case, you are likely to pay a higher interest rate. In the scenario above, with a home valued at $300,000 and a mortgage of $200,000, that means you have $100,000 equity in your home. A loan for 80% of $100,000 would be $80,000. As with other lines of credit, your credit score and employment history will likely factor into the approval decision.

• For a home improvement loan, the amount you can borrow will depend on a variety of factors, including your credit score, but the typical range is between $3,000 and $50,000 or sometimes even more.

What Can the Funds Be Used for?

Interestingly, some of these funds can be used for purposes other than home improvement costs. Here’s how they stack up:

• For a home equity loan, you can certainly use the funds for an amazing new kitchen with a professional-grade range, but you can also use the money for, say, debt consolidation or college tuition.

• For a HELOC, as with a home equity loan, you can use the money as you see fit. Redoing your patio? Sure. But you can also apply the cash to open a business, pay for grad school, or knock out credit card debt.

• For a home improvement loan, there is often the requirement that you use the funds for, as the name suggests, a home improvement project, such as adding a hot tub to your property. In some cases, you may be able to use the funds for non-home purposes. Your lender can tell you more.

How Will I Receive the Funds? How Long Will It Take to Get the Money?

Consider the different ways and timing you may encounter when getting money from these loan options:

• With a home equity loan, you receive a lump sum payment of the funds borrowed. The timeline for getting your funds can take anywhere from two weeks to two months, depending on a variety of factors, including the lender’s pace.

• With a HELOC, you open a line of credit, similar to a credit card. For what is known as the draw period (typically 10 years), you can withdraw funds via a special credit card or checkbook up to your limit. It typically takes between two and six weeks to get funds, but some lenders may be faster.

• With a home improvement personal loan, you receive a lump sum of cash. These tend to be the quickest way to get cash: It may only take a day or so after approval to have the funds available.

How Much Interest Will I Pay?

How much you pay to access funds for your project will vary. Take a closer look:

• For a home equity loan, you typically get a lower interest rate than some other loan types, since you are using your home equity as collateral. These are typically fixed-rate loans, so you’ll know how much you are paying every month. At the start of 2023, the average rate of a fixed, 15-year home equity loan was 5.82%.

• For a HELOC, the line of credit will typically have a rate that varies with the prime rate, though some lenders offer fixed-rate options. HELOCs may have lower interest rates than personal and home equity loans, but you will need a high credit score to snag the lowest possible rate.

• For home improvement loans, which are a kind of personal loan, rates vary widely. Currently, you might find anything from 6% to 36% depending on the lender and your qualifications, such as your credit score. These loans are typically fixed rate.

How Long Will I Have to Repay the Funds?

Repayment terms differ among these three options:

• For home equity loans, you will agree to a term with your lender. Terms typically range from five to 20 years, but 30 years may be available as well.

• With a HELOC, you usually have a draw period of 10 years, during which you may pay interest only. Then, you may no longer withdraw funds, and move into the principal-plus-interest repayment period, which is often 20 years.

• With a home improvement personal loan, your repayment terms are typically shorter than with the other options and will vary with the lender. You may find terms of anywhere from one to seven years or possibly longer.

Here’s how these features compare in chart form:

Feature	Home Equity Loan	HELOC	Home Improvement Personal Loan
Type of collateral	Secured via your home	Secured via your home	Unsecured
Borrowing Limit	Typically up to 80% – 85% of home value, minus mortgage	Typically up to 80% or more of your home equity	Typically from $3,000 up to $50,000 or more
How funds can be used	For a variety of purposes	For a variety of purposes	Often strictly for home improvement
How funds are dispersed	Lump sum	Line of credit	Lump sum
How long to receive funds	Typically two weeks to two months	Typically two to six weeks	Often within days
Type of interest rate	Typically fixed rate and may be lower than other loans	Typically variable but some lenders offer fixed rate; rates vary	Typically fixed rate; rates vary widely
Repayment term	Typically 20 to 30 years	Typically 20 years after the 10-year draw period	Typically 1 to 7 years

Which Home Improvement Loan Option Is Better?

Now that you’ve learned about the features of these loan options, here’s some guidance on which one is likely to be best for your needs.

When Home Equity Loans Make Sense

Here are some scenarios in which a home equity loan may be a good choice:

• If you have significant home equity and are looking to borrow a large amount, a home equity loan could be the right move to access a lump sum of cash.

• If you want to have a long repayment period, the possibility of a 30-year term could be a good fit.

• When you are seeking to keep costs as low as possible. These loans may offer lower interest rates.

• A home equity loan can be a wise move when you need cash for other purposes, such as debt consolidation or educational expenses.

• Some interest payments may be tax-deductible, depending on how you use the funds, which could be a benefit of this kind of loan.

When HELOCs Make Sense

A HELOC may be your best bet in the following situations:

• You aren’t sure how much money you need and like the flexibility of a line of credit.

• You want to keep your payments as low as possible in the near future. HELOCs can usually be an interest-only loan during the first 10-year draw period of the arrangement.

• A HELOC can be a good fit for people who are doing a renovation in stages, and want to draw funds as needed versus all upfront.

• You need cash for something other than just home renovation, such as to pay down credit card debt or fund tuition.

• Depending on what you put the money towards, interest payments may be tax-deductible to a degree.

When Home Improvement Personal Loans Make Sense

Consider these upsides:

• These personal loans tend to have a straightforward, fast application process, and often have fewer fees, such as no origination fees.

• Home improvement loans are usually approved more quickly than other kinds of home loans.

• These loans can be a good way to borrow a small sum, such as $3,000 or $5,000 for a project you need to complete quickly (say, a bathroom without a functional shower).

• Home improvement loans can be a good option for new homeowners, who haven’t yet built up much equity in their home but need funds for renovation.

• For those who are uncomfortable using their home as collateral, this kind of loan can be a smart move.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

The Takeaway

Home improvement is a popular pursuit and can not only make daily life more enjoyable, it can boost the value of what is likely your biggest asset. If you are ready to take on a renovation, you’ll have options in terms of how to access funds; depending on your needs and personal situation, you might prefer a home equity loan, a home equity line of credit (HELOC), or a home improvement personal loan.

SoFi can help with two of these: If you’ve decided that a personal loan could be the right move for you, SoFi’s home improvement loans are fee-free, range from $5K to $100K, and you may be able to get same-day funding.

SoFi also offers a home equity line of credit or HELOC with low interest rates, the flexibility to use the amount you need, and you can borrow up to 95% or $500K of your home’s equity.

Let SoFi help you transform your home into your palace with a flexible and convenient HELOC.

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.

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

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.

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.

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

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

SOHL1222005

Available Credit on a Credit Card: What It Is & Why It’s Important

What Is Available Credit on a Credit Card?

The Importance of Having Available Credit

How to Check Your Available Credit

How Much Available Credit Does It Make Sense to Use?

Tips for Increasing Your Available Credit

Pay Down Your Card Balances

Request a Credit Limit Increase

Get a New Credit Card

The Takeaway

FAQ

How much available credit should I have?

What does available credit mean on a credit report?

Is available credit the amount I can spend?

Why is my available credit low?

Tips for Building Credit With a Credit Card

Building Credit With a Credit Card

8 Tips to Build Credit With a Credit Card

1. Regularly Pay Your Bills on Time

2. Maintain a Low Credit Utilization Rate

3. Pay Your Credit Card in Full

4. Become an Authorized User

5. Use Your Card Regularly

6. Consider a Secured Credit Card

7. Limit New Credit Applications

8. Keep Your Credit Accounts Open

Alternative Ways to Build Credit

Get an Auto Loan

Take Out a Personal Loan

Get a Cosigner

The Takeaway

FAQ

What is the fastest way to build credit with a credit card?

How do you use a credit card to build credit for the first time?

How long does it take to build credit with a credit card?

What Is Income Tax Withholding and How Does It Work?

What is Income Tax Withholding?

Get up to $300 when you bank with SoFi.

Factors That Determine Tax Withholding

What Is State Income Tax Withholding?

What Is the Purpose of Tax Withholding?

Tax and Employment Documents to Know

Calculating Income Tax Withholding

Can I Be Exempt from Tax Withholding?

The Takeaway

FAQ

Does the government pay for income tax withholdings?

How can someone qualify for withholding exemption?

Why has my employer withheld too much income tax?

Why has my employer withheld too little income tax?

Avoiding Loan Origination Fees

What Is a Loan Origination Fee?

How Are Origination Fees Determined?

Do I Have to Pay Origination Fees?

How Much Are Loan Origination Fees?

Can Loan Origination Fees Affect Your Taxes?

The Takeaway

Home Equity Loans vs HELOCs vs Home Improvement Loans

What’s the Difference Between Home Equity Loans, HELOCs, and Home Improvement Loans?

How Much Can I Borrow?

What Can the Funds Be Used for?

How Will I Receive the Funds? How Long Will It Take to Get the Money?

How Much Interest Will I Pay?

How Long Will I Have to Repay the Funds?

Which Home Improvement Loan Option Is Better?

When Home Equity Loans Make Sense

When HELOCs Make Sense

When Home Improvement Personal Loans Make Sense

First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.

The Takeaway

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with as little as 3% down.

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