What Is a Credit Spread? Explained and Defined

What Is a Credit Spread? Explained and Defined

The term “credit spread” refers to two distinct financial concepts: the difference in yield between Treasury and corporate bonds, which can serve as a market indicator, or an options strategy that capitalizes on premium differences.

As a market indicator, a credit spread uses these differing yields as an indicator of investor sentiment, and as a way to gauge how optimistic or risk-averse investors are feeling.

In options, a credit spread refers to a trading strategy in which an investor sells a higher-premium option while simultaneously purchasing a lower-premium option on the same underlying security.

Key Points

•   Credit spreads reflect yield differences between Treasury and corporate bonds, which can indicate investor sentiment versus credit quality.

•   Credit spreads can serve as a market risk indicator, with wider spreads suggesting higher perceived risk.

•   Macroeconomic factors and market sentiment cause credit spreads to fluctuate.

•   In options trading, a credit spread involves selling a higher-premium option and buying a lower-premium option.

•   Strategies like bear call spreads and bull put spreads are types of credit spreads that try to benefit from option premium differences.

Credit Spread – the Market Indicator

A credit spread is the gap between the interest rate offered to investors by a U.S. Treasury bond versus another debt security with the same maturity. The differences in the yield of the different bonds– or credit spread – typically reflects differences in credit quality between Treasuries and other bonds.

Investors will also sometimes call credit spreads “bond spreads” or “default spreads.” For investors, credit spreads give investors a quick method for comparing a particular corporate bond versus its Treasury-based, lower-risk alternative.

When investors refer to credit spreads, they usually describe them in terms of basis points, each of which is a 1/100th of a percent (or a percent of a percent). For example, a 1% difference in yield between a Treasury bond and a debt security of the same duration would be called a credit spread of 100 basis points.

For example, if a 10-year Treasury note offers investors a yield of 3%, while a 10-year corporate bond offers to pay investors a 7% interest rate, there would be a 400 basis-point spread between them.

Recommended: What is Yield?

U.S. Treasury bonds are widely considered the benchmark of choice because the financial services industry views them as being relatively low-risk, given their backing by the U.S. government. By contrast, corporate bonds are generally seen as carrying higher risk even when they’re issued by well-established companies with good credit ratings.

Investors look for compensation in the form of extra yield when purchasing corporate bonds, given their additional risk. This is where a debt security’s credit spread comes in handy as an indicator of perceived risk.

Because they have a lower risk of defaulting, higher quality bonds can offer lower interest rates – and lower credit spreads – to investors. Conversely, lower quality bonds have a greater risk of default, and so they must offer higher rates – and higher credit spreads – to compensate investors for taking on additional risk.

Why Do Credit Spreads Fluctuate?

The credit spreads of corporate bonds may change over time for a number of reasons. This could be due to macroeconomic fluctuations such as inflation, or the degree of market enthusiasm for the company issuing the bond.

When equity markets appear to be heading for a downturn, both institutional and retail investors may sell stocks and corporate bonds, and then reinvest in U.S. Treasuries. This shift can lower the yields on U.S. Treasury bonds as investors seek safer assets, while corporate bond yields may rise in order to compensate for the perceived increase in risk. The result is often a widening of credit spreads.

This is one reason investors look at average credit spreads as a window into the overall market sentiment. Wider credit spreads indicate declining investor sentiment. Narrower credit spreads typically signify more bullish sentiment among investors.

What Is a Credit Spread in Options Trading?

In options trading, a credit spread takes on a new meaning. In an option credit spread strategy (also known as a “credit spread option” or a “credit risk option”), an investor buys and sells options on the same underlying security with the same expiration, but at different strike prices.

The hope is that the premium received for the option they sell is higher than the premium paid for the option they buy, resulting in a net credit for the investor.

The strategy takes two forms:

Bull Put Spread

In a bull put spread, an investor buys and sells options in which they’ll make a maximum return if the value of the underlying security goes up.

A bull put spread, also called a put credit spread, involves an investor selling a put option and purchasing a second put option with a lower strike price. The investor buys the same amount of both options with the same expiration date.

In a bull put spread strategy, as long as the price of the underlying security remains above a certain level, the strategy will begin to produce profits as the differences between the value of the two options begins to evaporate as a result of time decay. Time decay is how much the value of an options contract declines as that contract grows closer to its expiration date.

The maximum profit is limited to the net credit received, and losses are limited to the difference between the strike prices, minus the premium received.

As the name indicates, the bull put spread is a strategy used by investors who are bullish on a security. The higher the underlying security rises during the options contract, the better the investor will do. But if the underlying security falls below the long-put strike price, then the investor can lose money on the strategy.

Bear Call Spread

The other type of credit spread in options trading is known as a bear call spread (or a call credit spread). A bear call spread is essentially the opposite of a bull call spread: investors expect that a security’s price will go down. Thus, the investor buys and sells two options on the same security with the same expiration date, but at different strike prices.

A bull put spread can be a profitable strategy if the investor remains under a certain level over the duration of the options contracts. If the security is below the short call’s strike price at expiration, then the spread seller gets to keep the entire premium, giving the investor a healthy return. But the risk is that if the price of the security rises above the long-call strike price at the expiration of the strategy, then the investor faces a loss.

The Takeaway

A credit spread is an important indicator of investor sentiment. It’s also an options investing strategy where a high premium option is written and a low premium option is bought on the same security. Understanding the meaning of terms like credit spread is an important step for both new investors and experienced investors interested in options trading.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.


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Financial Assistance Options for the Disabled

Financial Assistance for People With Disabilities

Approximately 26% of Americans live with a disability that can impact cognition and mobility skills, according to the National Center for Birth Defects and Developmental Disabilities. These disabilities can make it challenging to manage daily tasks or full-time employment, putting a significant strain on finances and possibly making it challenging to make ends meet.

On top of that, according to research from Stony Brook University, the University of Tennessee, the National Disability Institute, and the Oxford Institute of Population Ageing, a household containing an adult with a disability (with limited ability to work) requires 28% more income (or an extra $17,690 annually) to meet the same standard of living as a household without someone with a disability.

Fortunately, various programs are available that provide financial assistance to disabled adults. So, whether you need help with housing costs or healthcare, understanding your options can help you get the assistance you need.

Read on for the details.

How Many People Have Disabilities in the U.S.?

As briefly noted above, about 26% of Americans live with a disability; that means more than one in four people are facing issues with mobility or cognition.

That is a significant number. If you or someone you care about is living with a disability, it’s important to know about the programs that can help access aid.

Types of Help Available for People With Disabilities

When it comes to financial help for the disabled, there are many options. Here are some programs that can assist in this situation.

Healthcare

There are healthcare programs that provide financial help for disabled adults, so medical bills don’t seem so overwhelming. Available programs include:

•   Medicare. Usually, enrolling in Medicare is a program associated with seniors. However, Medicare also offers medical cost assistance for folks with disabilities under 65 years old. If you just began receiving Social Security Disability Insurance (SSDI) benefits, you usually have to wait 24 months before your Medicare coverage kicks in. However, eligible applicants can forgo the waiting period if they meet specific requirements.

•   Medicaid. Medicaid is designed to offset the cost of medical bills for low-income and disabled individuals. To see if you qualify for this federal and state-funded program, you can check with your state’s Medicaid office. Usually, your eligibility depends on your age, income, the number of people in your family, and if you’re disabled.

•   Marketplace health insurance coverage. If you don’t qualify for instant Medicare coverage, you can apply for a low-cost private insurance plan to fill in your coverage gap while you complete the waiting period. In addition, depending on your income and level of need, you may qualify for a “premium tax credit,” which can reduce your monthly premium payment.

Housing

Housing assistance can help you identify an affordable place to live, modify your home for your disability, or help you toward a path to live independently. Housing programs that provide financial help for people with disabilities include:

•   State-run independent living centers. Living independently can be difficult for those with a disability. That’s why states and local municipalities offer independent living centers to help folks develop their skills to live without assistance.

You can also contact your state’s department of human services or disability office to discover programs that assist with home modifications, locating housing, and housing counseling for first-time home-buyers.

•   Housing Choice Vouchers (HCV). Public Housing Agencies (PHA) offer this government-backed housing program to help people with disabilities buy homes and pay housing expenses. However, since every PHA jurisdiction is allowed to decide whether or not HCVs are offered within their jurisdiction, check with your local PHA to see if this program is available in your neck of the woods.

•   Non-Elderly Disabled (NED) Voucher. If you’re not a senior but have a disability, you may qualify for a Non-Elderly Disabled (NED) Voucher. This voucher gives you access to housing communities usually explicitly reserved for seniors.

•   Public housing. Local housing agencies (HA) offer affordable public housing to low-income families or individuals with disabilities. Each local HA determines eligibility based on your income and disability. Nationwide, close to a million families live in public housing units.

•   Low-Income Home Energy Assistance Program (LIHEAP). This government-funded program offers financial help for people with disabilities who have difficulty paying their utility bills. Also, if your utilities are turned off due to unpaid bills, the LIHEAP can provide emergency assistance.

Income and Daily Expenses

If you have a disability, you may also need help paying for basic expenses, such as food and clothing. Here are some programs available that can provide monthly financial assistance for disabled individuals and their families.

•   The Social Security Administration. Through the Social Security Administration (SSA), you may qualify for either Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), which both offer financial assistance for people with disabilities. SSDI offers financial support to disabled individuals who have worked and paid Social Security taxes long enough to qualify for assistance (you may be able to have a savings account while on SSDI incidentally). SSI also offers financial support to meet the basic needs (food, clothing, and shelter) of disabled people with limited (or no) income.

Recommended: 9 Common Social Security Myths

•   Supplement Nutrition Assistance Program (SNAP). Also known as the food stamp program, SNAP helps low-income or disabled folks suffering financial hardship save on their grocery bill. This can include using food stamps online. As a disabled adult, you could qualify for increased assistance.

•   Temporary Assistance for Needy Families (TANF). If your SSI benefits haven’t kicked in yet and you’re tight on cash, you may qualify for TANF. This is another government-backed program that offers grants to families in need of immediate financial support. It can be a source of financial assistance for the disabled in the short-term.

•   Veteran disability compensation. If you have a disability that either resulted from or worsened due to service in the military, you could qualify for a government grant or other financial assistance through government disability programs.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and an online bank are more likely than brick-and-mortar banks to offer you the best rates.

Education

If you have a disability but want to achieve a degree, financial assistance for people with disabilities is available. Here are some programs worth exploring.

•   Free Application for Federal Student Aid (FAFSA). To ease the financial burden of higher education costs, you can use the FAFSA to determine if you qualify for a variety of aid programs such as the Federal Supplemental Educational Opportunity, Grant Federal Pell Grant, and Federal Work-Study programs.

•   State and independent education agencies. You can also seek financial support from your state’s department of education or independent agencies around where you live. Remember that eligibility requirements and guidelines will vary by state and organization.

•   Total and Permanent Disability (TPD) Discharge. If you took out federal student loans to pay for higher education costs but can no longer work due to your disability, you could qualify for a TPD discharge. If you’re eligible, the TPD will serve as a disability discharge for student loans, wiping away your student debt.

What’s more, you won’t have to repay your federal loans or meet your TEACH Grant service obligations.

Other Financial Assistance for Disabled Adults

There are other programs that can offer financial assistance for disabled adults. Here are a few other options to consider.

•   Achieving a Better Life Experience (ABLE) savings account. Individuals with disabilities may qualify for an ABLE account, a tax-advantaged saving vehicle. This means account holders are not taxed on the earnings if they use the money within the account to cover qualified disability expenses such as education, housing, or medical costs.

•   Disability loans. A disability loan is a personal loan that provides financial support for disabled adults while they wait for disability benefits to kick in. Applicants can use this type of loan to cover living costs, medical bills, or any other expense they have pertaining to their disability. Borrowers must meet the lender’s eligibility requirement to qualify. Remember, the disability loan must be repaid according to the lender’s terms and conditions.

•   Disability insurance. Many employers offer disability insurance as part of their compensation package. So, if you become disabled, your disability insurance will pay a portion of your income. Usually, short-term disability insurance supplements your salary for three to six months, while long-term disability can supplement your income from two years until the time when you can retire, depending on the plan and your condition. Plans can pay between 40% and 70% of your salary.

Worth noting: You can buy private disability insurance if you don’t have a plan through your employer.

•   Debt repayment plans.You can consider a debt management plan if your credit card debt is weighing you down. With a debt repayment plan, you work with a credit counseling agency that helps you create a solid repayment plan and can even negotiate with your creditors.

•   Loan forbearance. Some lenders offer forbearance programs if you’re struggling to pay your mortgage, halting your payments for a provisional amount of time. Your lender may also be willing to revamp the terms of your loan to make payments more manageable.

Tips on Applying for Financial Assistance

Applying for disability benefits from the Social Security Administration (SSA) might be a great place to start sourcing financial assistance if you have recently become disabled from a medical disorder.

To determine if your disability meets the eligibility requirements for benefits, you’ll want to complete the Social Security Disability (SSD) application online, via or at your local Social Security office. The application is detailed and requires documentation to support your case. Preparing carefully in advance may help you improve your chance of approval.

Here are some tips to streamline the process.

•   Include detailed responses to all application questions. It’s best to provide as much information on your application as you can. Since the purpose of the application is to prove your disability doesn’t allow you to work, you’ll want to make your answers very detailed. Simply providing “yes” or “no” answers can result in an application denial.

•   Submit ongoing medical records. Your doctor will provide your initial medical records for your application proving your disability. In addition, you should provide any other medical records when you receive them. Medical records can include lab tests, medication paperwork, treatment documents, and more. Whenever you receive a medical record from your medical professional’s office, you could forward it to the SSA. The more supporting documentation you have, the better your chances of qualifying.

•   Partner with a disability lawyer. Disability lawyers are well-versed on SSD applications. Yes, it could be an additional expense, but their expertise could be advantageous when completing the application. It might even increase the odds of benefit approval.

You can expect the entire application process usually takes anywhere between three to six months. However, the SSA may grant you an expedited process if you have a rare condition or aggressive disease.

In addition to benefits from the SSA, other government and non-profit organizations provide financial assistance to disabled adults and their families. If you’re in need, explore all available options starting with the list above. Once you pinpoint several programs to apply for, gather all your documentation (i.e., income documents, medical records, etc.) in advance to streamline the application process. Keep in mind there might be a waiting period before benefits are approved. So, it’s best to apply as soon as you can.

The Takeaway

Having a disability can be emotionally, physically, and financially challenging. The same applies if you care for a person with disabilities, literally or figuratively. Fortunately, plenty of programs are available to help with medical bills, income, housing, education, and much more. These can be available to help with short-term and ongoing needs. By doing some research and outreach, you may be able to get financial assistance to help with your needs.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Is there an income limit for these financial assistance options for the disabled?

Income limits vary by the program you’re applying for. For example, the monthly income limit is $1,620 for non-blind disabled SSDI or SSI applicants, and $2,700 for blind SSDI applicants in 2025.

Is there a chance that someone can get denied assistance?

Yes, but it depends on the program. For example, only about 20% to 30% of disability benefits applicants are awarded financial support. Denials can result from a variety of factors, including technical errors and issues with medical information.

What is the criteria for getting financial assistance as a disabled person?

Criteria and eligibility depend on the program. So, before you apply, make sure you understand the requirements of the aid you are hoping to qualify for.


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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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All You Need to Know About IRA Certificates of Deposit (CDs)

All You Need to Know About IRA Certificates of Deposit (CDs)

An IRA CD is simply an individual retirement account (IRA) in which the investor has opened one or more certificates of deposit (CDs).

This may provide tax advantages and be a smart long-term move for some savers. Keep reading to learn how an IRA CD works and its pros and cons.

What Is an IRA CD?

An IRA CD is an IRA where your money is invested in certificates of deposit. In other words, an IRA CD is a traditional, Roth, or other type of IRA account where the funds are invested at least partly in CDs.

Investing in CDs can offer some tax advantages and may be a good option for long-term savings. As you may know, a CD, or certificate of deposit, is a time deposit. You agree to keep your funds on deposit for a certain amount of time, typically at a fixed interest rate.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

How Do IRA CDs Work?

If you choose to put your retirement money in an IRA, you have the chance to choose investments that might include stocks, mutual funds, bonds — and also CDs. By investing in CDs within an IRA, you can add to your portfolio’s diversification. Unlike equities, CDs can offer a predictable rate of return.

By investing in an IRA CD, you no longer have to pay taxes on the interest gains, and the money can grow taxed-deferred.

But if you withdraw funds prior to the CD’s maturity date, and you’re under age 59½, you’ll need to pay income taxes and likely a 10% penalty. Plus, your bank may charge you a fee for making an early withdrawal from the CD. Once the IRA CD matures, you can renew the CD or transfer the funds into another investment held in your IRA.

How much can you contribute to an IRA CD? It depends on the type of IRA account you choose. The annual contribution limit for a traditional and Roth IRA is $7,000 for both 2024 and 2025. Those 50 and older can contribute an additional $1,000 per individual, for a total of $8,000 per year. The contribution limits for SEP IRAs are typically higher.

If you choose an IRA CD with a bank or credit union backed by the Federal Deposit Insurance Corp., or FDIC, your money in the IRA CD is insured for up to $250,000 per depositor, per account ownership category, per insured institution. This means that if the bank goes under for any reason, your retirement funds are covered up to that amount.

CD Basics

A CD or a certificate of deposit is a type of savings or deposit account that usually offers a fixed interest rate for locking up your money for a certain period of time, known as the term. An investor deposits funds for the specified terms (usually a few months to a few years), and cannot add to the account or withdraw funds from the account until the CD matures.

In exchange, for keeping your money in a CD, the bank will offer a higher interest rate compared with a traditional savings account. But the chief appeal for retirement-focused investors is that CDs can provide a steady rate of return, versus other securities in a portfolio which may entail more risk.

You may be able to find variable-rate and promotional-rate CDs as well.

Recommended: How Investment Risk Factors into a Portfolio

IRA Basics

An IRA or individual retirement account is a tax-advantaged account designed for retirement planning. There are different IRA types to choose from, such as a traditional IRA, Roth IRA, or SEP IRA. By contributing to this type of account, you can have your money grow tax-free or tax-deferred, depending on the type of IRA you open.

Think of an IRA as a box in which you place your retirement investments. With an IRA, investors have the flexibility to invest in a variety of securities for their portfolio.

For this reason, it might make sense for some investors to include CDs as part of their asset allocation within the IRA.

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Pros and Cons of IRA CDs

IRA CDs have unique characteristics that can benefit account holders as they think about how to handle their retirement funds. The upsides include:

•   Compared to investing in the stock market where investment returns can be volatile and unpredictable, IRA CDs are low-risk cash investments.

•   CDs guarantee a fixed return.

•   With an IRA CD, there are similar tax benefits that come with a traditional IRA. Investors can enjoy tax benefits such as growing your account with pretax dollars while having your earnings accumulate tax-deferred until you reach retirement.

There are some cons associated with IRA CDs to keep in mind:

•   With an IRA CD, you have to keep your money locked away for a period of time that varies depending on the maturity date you choose. During this time, you cannot access your funds in the event you need capital.

•   If you decide to withdraw cash prior to the IRA CD’s maturity, you will incur early withdrawal penalties. After age 59 ½ there is no penalty for withdrawing cash.

•   While putting your retirement funds in an IRA CD is a safer and lower-risk option than investing in the stock market, the returns can be quite low. If you are in retirement and are concerned about the stock market’s volatility, an IRA CD could be a safer option than other securities. But if you are many years away from retirement, an IRA CD may not yield enough returns to outpace inflation over time.

Pros of IRA CDs

Cons of IRA CDs

Low-risk investment Money is locked away until maturity
Guaranteed return Penalty for early withdrawal
Tax-deferred growth Returns can be low vs. other retirement savings options

Who Should and Should Not Invest in an IRA CD?

IRA CDs are a safe way to invest money for retirement. However, they are best suited for pre-retirees who are looking for low-risk investments as they approach retirement age.

If you are many years away from retirement, an IRA CD is probably not the best option for you because they are low-risk and low-return retirement saving vehicles. In order to see growth on your investments you may need to take on some risk.

If you decide an IRA CD is the right option for you, you also must determine if you are comfortable with keeping your money stowed away for a period of time. Account holders can choose the length of maturity that best suits them.

How to Open an IRA CD

The first step is to open an IRA at a bank, brokerage, or other financial institution. Decide if a traditional, SEP, or Roth IRA is right for you. You can set up the IRA in-person or online. Once you open an IRA account, you can buy the CD.

Choose the CD that fits your minimum account requirements and length of maturity preference. Typically, the shorter the CD maturity, the lower the minimum to open the account. When considering maturity, you also should compare rates. Often, the longer the maturity, the higher the rate of return.

The Takeaway

If you’re looking to add diversification to the cash or fixed-income part of your portfolio, you might want to consider opening an IRA CD — which simply means funding a CD account within a traditional, Roth, or SEP IRA. Bear in mind that CDs typically offer very low interest rates, though, and your money might see more growth if you chose other securities, such as bonds or bond funds.

If you’re thinking about how to earn a steady rate of return on your savings, consider an account with SoFi.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What is the difference between an IRA CD and a regular CD?

A standard CD is a separate account you open at a bank or credit union. An IRA CD is where the CD is funded within the IRA itself.

Can you withdraw from an IRA CD?

With a regular CD, you withdraw the funds penalty-free when the CD matures. With an IRA CD, however, you can withdraw the funds penalty free starting at age 59½, per the rules and restrictions of the IRA.

What happens when an IRA CD matures?

Once your IRA CD matures, you’ll receive the principal plus interest. Then you can either leave the IRA CD as is or renew it. You cannot withdraw the funds from an IRA CD until age 59 ½, as noted above.

Are IRA CDs safe?

Yes, IRA CDs are considered low-risk. If you open an IRA CD with a federally insured institution, your funds can be covered up to $250,000 per depositor, per account ownership category, per insured institution.

Who offers IRA CDs?

IRA CDs can typically be found at traditional and online-only banks as well as credit unions and brokerage firms.


Photo credit: iStock/LeszekCzerwonka

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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.

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Is It Possible to Get an IRA Loan?

Should You Get an IRA Loan?

If you are wondering about getting an IRA loan, it’s important to know that it’s not possible to take a loan from an IRA or Roth IRA. Making an early withdrawal from an IRA is an option, but that can come with taxes and penalties. You can borrow money from a 401(k) plan, however, without any penalties.

Read on to learn the impact of an early withdrawal from an IRA and some other ways to find the cash for unexpected expenses.

Key Points

•   IRA loans do not exist; funds can only be withdrawn from accounts.

•   Withdrawals from traditional IRAs before age 59 1/2 incur taxes and penalties.

•   Roth IRA contributions can be withdrawn tax-free and penalty-free after five years.

•   A 60-day rollover rule allows temporary access to IRA funds without penalties, provided the money is repaid to the IRA or another qualifying retirement account.

•   Alternatives to early IRA withdrawals include family loans, credit card advances, and personal loans.

Understanding IRA Loans

Here, take a closer look at what the concept of an IRA loan actually involves.

What Is an IRA Loan?

First, a quick review of what an individual retirement account (IRA) is. It’s a savings account with tax advantages that is designed as a long-term investment vehicle for your retirement. The money that people invest in IRAs goes to a wide range of financial products, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Banks and investment companies rely on holding the funds for a long time, so lawmakers created strict rules around withdrawing money from traditional and Roth IRAs. There is usually a 10% penalty and an income tax bill.

IRA loans and Roth IRA loans are not allowed. You cannot borrow money from these accounts, but you can withdraw cash from your IRA if you have to, at a cost. When people use the expression “IRA loan,” what they may actually mean is an early IRA withdrawal.

Pros and Cons of Taking Out an IRA Loan

Here are the benefits and downsides of early withdrawal from your individual retirement account.

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Pros:

•   Access to funds when you need cash

•   Possibility of avoiding any early withdrawal penalties depending on how funds are used

•   Withdrawing cash may help you pay off high-interest debt

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Cons:

•   Withdrawing funds, plus paying taxes and possibly penalties, could take a chunk out of your retirement savings

•   By lowering the amount in your IRA, may lose out on future growth

•   May not meet your goals for retirement in terms of how much you have saved and what lifestyle you’ll enjoy

How Does an IRA Loan Work?

As noted above, you can’t take a typical loan from your IRA. The closest option is to try a work-around. The Internal Revenue Service (IRS) allows tax-free rollovers from an IRA if the funds are deposited back into the IRA or a different retirement plan or IRA within 60 days. If the funds are not rolled over in this way, you will have to pay taxes and a penalty. This 60-day rule can give you access to your IRA funds for a window of time.

Otherwise, an IRA loan amounts to an IRA withdrawal that, depending on such factors as its purpose and your age, may trigger taxes and fees.

Recommended: What Credit Score Is Required to Get a Personal Loan?

IRA Loan Eligibility

Here’s what you can and can’t do regarding withdrawing cash from traditional and Roth IRAs.

Who Is Eligible for an IRA Loan?

Here’s a closer look at the guidelines for accessing IRA funds depending on the specific type of account you hold.

Traditional IRAs: If you are 59 ½ or older, you can take money out of your traditional IRA with no penalty, but you’ll owe income taxes on the money you pull out.

Account holders of any age can withdraw funds from an IRA and roll them over into another IRA or redeposit them into the same IRA within 60 days, as noted above. This amounts to a 60-day loan, and you can do this once every 12 months. If you don’t roll over the funds within 60 days, the action will be considered a withdrawal or lump-sum cash distribution. That means paying federal and state taxes plus an additional 10% federal tax fee.

There are some exceptions that will allow you to avoid the additional 10% federal tax:

•   First-time homebuyers can withdraw $10,000 for a down payment.

•   The funds are used for higher education expenses.

•   The funds are used for the birth or adoption of a child.

•   You have become permanently disabled.

Recommended: Personal Loan Glossary

Roth IRAs: If you’re at least 59 ½ and you’ve owned your Roth IRA for five years or more, you can take tax- and penalty-free Roth withdrawals of contributions. However, if you withdraw earnings, such as dividends or interest, you might have to pay the 10% penalty and income and state tax on that portion of the withdrawal.

What are the requirements to qualify for an IRA loan?

As noted above, you can access funds from your IRA if needed, even before retirement age. However, there are several factors that can determine the impact of early withdrawal from an IRA:

•   What type of IRA you have

•   What your age is at the time of withdrawal

•   What purpose you use the withdrawal for

•   Whether you return the funds to a qualifying retirement plan

By understanding where you stand in terms of these considerations, you will know what kind of taxes and fees you may have to pay for accessing IRA funds.

Are there any restrictions or limitations on IRA loans?

There can be restrictions and limitations on IRA withdrawals or loans, if you want to call them that. Among them:

•   The age at which you access funds. If you have not yet turned 59 ½, the withdrawal will be considered early and involve additional penalties.

•   The purpose can impact how much you pay in taxes and fees. If you are applying the withdrawal to the down payment on a first home or for higher education expenses, you may not be assessed the additional 10% early withdrawal penalty if you are younger than age 59 ½.

IRA Loan vs. Other Options

There are alternatives to withdrawing funds from an IRA. The best option for you depends on how much cash you need, the taxes and penalties you might pay, and the interest and fees you might pay on the alternative. Here’s a look at some of them.

IRA Loan vs. Other Options

Now that you know how IRA loans work, consider these alternatives:

•   Family Loan: A family loan could be the best option if you can negotiate favorable terms. This route is also the most flexible but can affect family relationships if not handled well. Be sure to set expectations and draw up a contract to protect both parties. While some people may be lucky enough to score a no-interest loan, most can expect to pay for this privilege of access to cash. However, you can likely avoid closing costs and the like. And, of course, you are dodging the taxes and possible penalties involved when withdrawing from an IRA.

•   Credit Card Cash Advance: A credit card cash advance is a quick way to get funds by borrowing against the credit limit on your credit card. No hard credit inquiry is needed, so there is no effect on your credit score. You can pay small fixed monthly payments, but there will be interest that accrues daily as well as fees.

◦   However, the potentially high interest charges (often higher than the standard credit card interest rate) and fees will need to be weighed against the cost of an early withdrawal from an IRA. There may be an additional charge of up to 5% for a cash withdrawal. There may also be a flat charge for a withdrawal in addition to the percentage charge. Depending on your credit line, the amount you can withdraw may be less than your credit limit.

•   Personal Loan: If you are looking for a specific sum of money that you would like to repay over time, a personal loan could be a good choice. These usually unsecured loans can be used for almost any purpose (from affording IVF to paying for home renovation) and are often funded quickly.

◦   Current personal loan interest rates are generally much lower than for a cash advance on your credit and could offer you a better deal than paying taxes and possibly penalties on an IRA withdrawal. Also, you will not be cutting into your nest egg and lessening its opportunities for growth.

How Does an IRA Loan Differ From a 401(k) Loan?

Borrowing from your 401(k) is allowed. If your plan is amenable, you can take out as much as 50% of your savings, up to a maximum of $50,000, within 12 months. You will have to pay back the money, plus interest, within five years. However, the interest is paid back into your own account.

The advantage of a 401(k) loan is that there are no taxes or penalties. The disadvantage is that if you leave your current job, you may have to repay your loan in full. If you cannot, you’ll likely owe both taxes and a 10% penalty if you’re under 59 ½.

Benefits of Choosing an IRA Loan Over Other Financing Methods

Deciding whether to make an IRA withdrawal vs. other financing methods can require careful consideration and a bit of math. Overall, the pros of early IRA withdrawal, or an IRA loan, are:

•   If you have a Roth IRA, you can withdraw contributions (but not earnings) free of tax and penalties.

•   Early withdrawals provide emergency funds without interest and fees.

Benefits and Risks of IRA Loans

Here’s a snapshot of the pros and cons of IRA loans.

Advantages of Using an IRA Loan for Financing

As noted above, by tapping your IRA funds, you can access cash without paying interest or loan-related fees. Also, if you have a Roth IRA, your contributions are available tax- and penalty-free.

Potential Risks and Considerations of IRA Loans

While dipping into your IRA may seem like a good way to get fast cash in hand, consider the downsides carefully before doing so:

•   You will likely owe taxes and possibly early withdrawal penalties.

•   Unless you follow the 60-day rule, you cannot repay the money you withdraw, so you will have less of a nest egg for retirement.

•   If you withdraw gains from a Roth IRA, you may have to pay taxes and fees.

•   You miss out on earnings from the amount that you withdraw.

Factors to Consider Before Deciding on an IRA Loan

Before you make a withdrawal from your IRA, think through the following:

•   If you are hoping to put funds back before the 60-day cutoff, how will you make that payment?

•   Are you prepared to pay taxes and any penalties?

•   Are you comfortable reducing your nest egg and its ability to grow over time?

IRA Loan Repayment and Consequences

Lastly, strategize how you might repay an IRA loan, if that’s your plan.

How to Repay an IRA Loan

If you are taking a loan from your IRA under the 60-day rule, that is exactly how long you have to put the funds back into a qualifying account. You must repay the funds within 60 days of distribution either into the account it came out of or another acceptable retirement vehicle.

Consequences of Defaulting on an IRA Loan

If you do not repay your IRA loan or roll it into another qualifying account within the 60-day window, the funds withdrawn become taxable. In addition, you may be subject to penalty charges as well.

Impact of an IRA Loan on Retirement Savings

As noted above, an IRA withdrawal can incur taxes and penalties. In addition, it’s wise to think over the impact of an IRA loan on your retirement savings in a big-picture way.

•   You will be reducing the amount of money you have in your account to use during retirement.

•   Less money in your account means you are also decreasing the ability of that sum to generate returns.

This two-fold hit to your savings can shift your retirement savings plans, so consider this carefully, perhaps meeting with a financial advisor to gain more perspective.

The Takeaway

Typically, account holders may not take out loans from an IRA or Roth IRA. Making a withdrawal from an IRA is an option, but that likely comes with taxes and possibly a 10% early-withdrawal penalty. You may be able to take advantage of the 60-day rule, though, and repay the funds or roll them into another qualifying retirement vehicle. Alternatives to early IRA withdrawal include credit cards, borrowing from family, and 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. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Can I take a loan from my IRA?

There is no such thing as an IRA loan because you cannot pay the money back. You can withdraw funds from an IRA and roll them over into the same or another IRA within 60 days, and you can do this once every 12 months. If you don’t roll over the funds within 60 days, the action will be considered a withdrawal or lump-sum cash distribution. That means you will have to pay federal and state taxes plus possibly an additional 10% penalty.

How do I get an IRA loan?

You can’t borrow from your IRA. However, if you’re 59 ½ or older, you can request a distribution from your traditional IRA without any penalty. Since your original contributions were tax-deductible, you’ll need to pay income tax on the funds you withdraw.

If you have a Roth IRA, you can withdraw both contributions and earnings tax-free and penalty-free, but only if you are 59 ½ or older and have owned your Roth IRA for five years or more. If you withdraw earnings early, you’ll have to pay a 10% penalty and income tax on the amount you withdraw.

Lastly, you can use the 60-day rollover rule to your advantage if you can repay the borrowed money in 60 days or less and avoid paying taxes and penalties.

What is a 401(k) loan?

For a 401(k) loan, you can borrow money from your retirement account. Details can vary, but you might be able to take out up to 50% of your vested funds or $50,000 (whichever sum is less). If 50% of your vested balance is less than $10,000 you may be able to borrow up to $10,000. You will usually have to pay that back with interest within five years.


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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.


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 .

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

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Can You Use a Construction Loan to Complete Renovations?

Renovations can improve your home and increase its value. But as any seasoned homeowner will tell you, those projects can be expensive. If you can’t afford to cover the costs out of pocket, you may wonder if a construction loan is right for you. While it is an option, there are complications that people should be aware of.

We’ll take a look at construction loans, their requirements, and some alternatives to consider.

Key Points

•   Construction loans finance new home builds or major renovations, covering various costs.

•   Funds are released in stages, with interest-only payments on received amounts.

•   Lenders require a low debt-to-income ratio, high credit score, and a 20% down payment.

•   Benefits include covering all construction expenses, flexible terms, and potential savings.

•   Alternatives like personal loans and cash-out refinances offer lower interest rates and flexible repayment.

Overview of How Construction Loans Work

Construction loans finance the building of a new home or substantial renovations to a current home. They are typically short-term loans with higher interest rates, designed to cover the costs of land, plans, permits and fees, labor, materials, and closing costs. They can also provide a contingency reserve if construction goes over budget.

With a construction loan for a remodel, applicants must submit project plans and schedules along with their financial information. Once approved, they receive funding for the first phase of building only, rather than a lump sum. As construction progresses, assessments are provided to the lender so that the next round of funds can be released. Meanwhile, borrowers make interest-only payments on the funds they’ve received.

When construction is finished — and the borrower now has a home to serve as collateral — the construction loan may be converted to or paid off by a regular mortgage. The borrower then begins repaying both the principal and interest.

Recommended: Home Maintenance Checklist

Renovation Loans vs. Construction Loans: What’s the Difference?

Though renovation loans and construction loans can be used for similar purposes, there are important differences to know. Let’s take a closer look at both types of loans.

Renovation Loans

Unlike other types of home improvement loans, a renovation loan takes into account the property’s after-repair value, which is an estimation of the home’s value once the improvements are made. This can be good news for borrowers, especially those buying a fixer-upper. That’s because they may be able to secure a larger loan amount than they would with a traditional mortgage based on the home’s current value.

What’s more, renovation loans often come with lower interest rates than credit cards and unsecured personal loans.

Some common types of renovation loans include:

•   Government-sponsored loans, such as the FHA 203(k) home loan, Freddie Mac’s CHOICERenovation loan, and Fannie Mae’s HomeStyle renovation loan. Each type has its own rules and requirements.

•   A home equity loan

•   A home equity line of credit (HELOC)

•   VA renovation loans, which are available to eligible veterans and active-duty military personnel.

Construction Loans

As we mentioned, a construction loan is commonly used to pay for building a brand-new home. In some cases, the loan can be converted to a mortgage after your home is finished. However, getting one can be more challenging than securing a conventional mortgage.

Lenders generally want to see a debt-to-income ratio of 45% or lower and a high credit score, and you may be required to make a down payment of at least 20%. Depending on the type of construction loan you apply for, you may also be required to provide a detailed plan, budget, and schedule for the construction. Some lenders will also need to approve your builder.

There are different types of construction loans to consider:

•   Construction-to-permanent loans, or single-close loans, which converts to a mortgage once the project is finished. The borrower saves money on closing costs by eliminating a second loan closing.

•   Construction-only loans, or standalone construction loans, which must be paid off when the building is complete. You will need to apply for a mortgage if you don’t have the cash to do so.

•   Renovation construction loans, which are designed to cover the cost of substantial renovations on an existing home. The loan gets folded into the mortgage once the project is complete.

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Pros and Cons of Using a Renovation Loan

As you explore different home improvement loans, consider the following pros and cons of renovation loans.

Pros

•   Borrowers may have access to substantial funds that can pay for major upgrades or repairs.

•   Money can be used for a wide variety of renovation projects.

•   The loan amount is based on the home’s projected value after the repairs and renovations are complete.

•   Interest rates tend to be lower than what you’d be offered with an unsecured loan or credit card.

Cons

•   You may be required to use your home as collateral.

•   As with any loan, you’ll need to meet certain eligibility requirements, such as a good credit score, low debt-to-income ratio, and proof of income and employment.

•   A renovation loan increases your debt load, which could put a strain on your finances.

Recommended: Home Inspection Checklist

Pros and Cons of Using a Construction Loan

There are advantages and disadvantages to consider before taking out a construction loan to fund renovations.

Pros

•   Funds can be used to cover all construction expenses.

•   Borrowers can use equity from other investments as collateral.

•   Loan requirements are generally focused on the construction process instead of a borrower’s credit profile.

•   Borrowers may only need to make interest payments during construction.

•   Loan terms may be more flexible than a traditional loan.

Cons

•   Funds are released as work progresses instead of in one lump sum.

•   It can be difficult to find lenders that offer competitive rates and to qualify for them — particularly if you don’t have a flawless credit history.

•   Loans tend to be short-term and must be paid in full at the end of the term.

•   May need to provide extensive documentation on the construction process in order to get approved.

•   If construction is delayed, you may need to ask the lender for an extension on the loan. This can cause interest rates and fees to accumulate.

Alternative Ways to Finance Home Renovations

If you are planning a small construction project or renovation, there are a few financing alternatives that might be easier to access and give you more flexibility.

Personal Loans for Renovations

An unsecured personal loan can fund a renovation project or supplement other construction financing.

Personal loan interest rates are typically lower than construction loan rates, depending on your financial profile. And you can frequently choose a personal loan with a fixed interest rate.

Personal loans also offer potentially better terms. Instead of being required to pay off the loan as soon as the home is finished, you can opt for a longer repayment period. And applying for a personal loan and getting approved can be much faster and easier than for a construction loan.

The drawbacks? You won’t be able to roll your personal loan into a mortgage once your renovation or building project is finished.

And because the loan is disbursed all at once, you will have to parse out the money yourself, instead of depending on the lender to finance the build in stages.

Cash-Out Refinance for Construction Costs

A cash-out refinance is also a good financing tool, particularly if you have a lot of equity in your current home. With a cash-out refinance, you refinance your home for more than you owe and are given the difference in cash.

You can estimate your building or renovation expenses with this Home Improvement Cost Calculator. Add your estimate to what you owe on your home to get the amount of your refinance.

The Takeaway

Planning a new home or substantial renovation? There are several ways to pay for the projects. One option is a renovation loan, which lets you pay for major (and minor) renovations without having to dip into your personal savings. Another option is a construction loan, which typically covers the entirety of new construction expenses. For smaller projects, a personal loan can be a good option — and a lot less complicated.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.


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


Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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