With a purchase-money mortgage, the seller finances part or all of the property for the buyer, who usually does not qualify for traditional financing.
Keep reading to learn about the benefits and drawbacks of a purchase-money mortgage.
What Is a Purchase-Money Mortgage?
A purchase-money mortgage is also known as owner financing. The seller extends credit to the buyer to purchase the property. This can be a portion of the sales price or the full price.
In other words, the buyer borrows from the seller instead of from a traditional lender. The seller ultimately determines the interest rate, down payment, and closing costs. Both parties sign a promissory note.
They record a deed of trust or mortgage with the county. The seller usually retains title until the financed amount is paid off.
A purchase-money mortgage is a nontraditional financing method that may be needed when the buyer cannot obtain one of the other different mortgage types for purchasing the property.
The promise to pay is secured by the property, so if the buyer stops paying, the seller can foreclose and get the property back.
Not all buyers have financial situations that make it easy for them to get a conventional mortgage. Even diligent shopping for a mortgage may not help them get the home loan they need.
If a buyer has a profitable business, for example, but doesn’t have two years of tax returns to prove steady cash flow, most mortgage lenders won’t take on the risk.
Enter a purchase-money mortgage. With the right property, seller, and situation, a buyer could finance the home with a purchase-money mortgage. The seller would offer terms to the buyer — usually a higher interest rate and a short repayment term, with a balloon mortgage payment at the end — and the buyer would enter into the agreement. The seller would hold title until the loan payoff.
Buyers and sellers who work with seller financing often intend for the purchase-money mortgage to be refinanced into a traditional mortgage with a lower mortgage payment at a later date.
Types of Purchase-Money Mortgages
Purchase-money mortgages can come in several forms.
Land Contract
A land contract (also called a contract for deed) is simply a mortgage from the seller. The buyer takes possession of the property immediately and pays the seller in installments.
Land contracts are often for five years or less, ending with a balloon payment.
Lease-Purchase Agreement
In a lease-purchase agreement, the buyer agrees to rent the property for a specified amount of time and then enter into a contract to purchase the property at a price that’s the current market value or a bit higher.
For this and a lease-option agreement, the seller typically requires a substantial upfront fee, an above-market lease rate, or both. Part of the monthly rent payment goes toward the purchase price.
Lease-Option Agreement
A lease-option agreement is similar to a lease-purchase agreement in that the buyer agrees to first rent the property for a specified amount of time. But with this agreement, the buyer has the option to purchase the property instead of making a commitment to purchase it.
Benefits of Purchase-Money Mortgages for Buyers
• Buyers, including first-time homebuyers, may be able to obtain housing sooner than if they were to wait to qualify for a traditional mortgage through a lender.
• The down payment may be more flexible for a purchase-money mortgage.
• Requirements may be more flexible.
• No or low closing costs.
Benefits of Purchase-Money Mortgages for Sellers
• The seller may be able to get the full list price from a buyer who needs the seller’s help to obtain a mortgage.
• The seller may be able to make some money by acting as the lender, including asking for a down payment and a higher interest rate.
• Taxes may be lower as the amount is financed over time.
If you have the option of financing with a purchase-money mortgage, you will want to look at all the angles. It may also be useful to use a mortgage calculator tool to help you determine what a potential payment on a purchase-money mortgage might be.
Pros
Cons
Buyer may be able to obtain the home with a purchase-money mortgage when other types of financing would be denied
Buyer will not have full title until the total amount borrowed is paid off
Flexible financing allows the seller to help the buyer purchase the property
Buyer may have little negotiating power when forging the deal
Increased equity may allow buyer to refinance into a traditional mortgage at the end of the purchase-money loan term
Seller is able to determine the rate, term, and down payment
Seller can foreclose if the buyer does not meet contractual obligations
The Takeaway
If you’re able to secure financing from a seller, a purchase-money mortgage may be a good fit — if you have an exit plan in a few years. It’s smart for both buyers and sellers to know the risks and rewards of a purchase-money mortgage.
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FAQ
Who holds the title in a purchase-money mortgage?
The seller controls the legal title; the buyer gains equitable title by making payments.
Can a bank issue a purchase-money mortgage?
Yes, but it is not common. A buyer might pay for a house with a bank mortgage, cash, and a property seller mortgage. When the bank is aware of the amount financed by the seller, both the mortgage issued by the third-party lender and the seller financing are considered purchase-money mortgages.
Does a purchase-money mortgage require an appraisal?
Not if the seller does not require one. With owner financing, the seller sets the terms, which may not include an appraisal.
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You probably like your home to be clean, but when it comes down to breaking out the mop and bucket, the vacuum cleaner, the wood polish, sponges, and bleach, do you really have the time or inclination to dive in?
If you feel like groaning just reading about tidying up, it could be worthwhile to hire a cleaning person or service.
There are many factors to consider when thinking about hiring out this task, and that’s where this guide will come in handy. Read on to learn:
• What’s the difference between a cleaning person and a cleaning service?
• How much does hiring a cleaning person or service cost?
• What are the pros and cons of hiring a cleaning person vs. a cleaning service?
• What are the alternatives to hiring a cleaning person or cleaning service for your home?
What Does a Cleaning Person or Service Do?
A cleaning person or service takes care of basic tasks such as dusting, vacuuming, sweeping, mopping, disinfecting the toilets, cleaning the sinks and bathtub/shower, and taking out the garbage.
There are typically add-on services available: laundry, changing the sheets, and doing the dishes for starters. Some of these could be included in the cost depending on the cleaning person or service.
“But, I can (or should) do all that myself!” you may be thinking. In which case, you are likely wondering: Is hiring a cleaning person worth it?
If a spic-and-span home is high on your checklist for maintaining a house, a little research can help determine if a cleaning person or service is right for you. Read on for more detail which can assist you as you make your decision.
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How Much Does a House Cleaner Cost?
The cost for hiring a cleaning person (or independent contractor) will depend on where you live, the size of your home, and how often they will come, but individual cleaners typically charge between $50 and $100 an hour.
Going with an individual generally costs less than hiring a cleaning service. However, they may not offer as many guarantees as a large company.
How Much Do Cleaning Services Cost?
Full-service cleaning companies can charge between $175 and $300 per visit. You can typically get a customized quote based on the size of your home and services you want before you hire a cleaning service. Some companies may have a minimum fee per visit. Generally the more frequently a service comes, the lower the cost per cleaning.
You can also hire a service for specialized, one-time cleaning services, such as after an event or before moving out or moving into a home.
Things to Consider When Hiring a Cleaning Person or Service
When deciding if hiring a house cleaner or cleaning service is worth it, you’ll benefit from addressing a few questions about your monetary situation, schedule, and level of desired cleanliness.
Your Budget
The first step in determining if you can afford a cleaning person or service is to set up a basic budget if you don’t already have one up and running.
If you’re wondering how to make a budget, consider using the 50/30/20 rule. This means putting 50% of the household income toward necessities or musts (which typically includes housing, utilities, food, and debt); 30% towards wants (like dining out and entertainment); and 20% on saving (including retirement) and debt payments beyond the minimum.
Once you see how much cash you have coming in and going out, you’ll be better able to assess if you can afford to pay for cleaning from that 30% that covers “wants.”
A good way to decide whether hiring a house cleaner is worth it is to remember this saying: Time is money. If paying a professional $50 an hour frees you up to make $65 an hour while working, the cost might be worth it, since you’ll come out ahead financially.
Schedules (How Often Are You Home?)
If you work long hours at an office or other workplace, outsourcing your house cleaning will allow you to enjoy your time at home without having to clean. And if the cleaning person or team comes while you’re at work, you won’t have to worry about staying out of their way.
However, if you are someone who works from home, or you or your spouse are a stay-at-home parent, a cleaning person or service can potentially be disruptive.
How Often You Need Your House Cleaned
Frequency of cleaning will matter. While a service may charge less per cleaning if they come weekly vs biweekly or monthly, you’ll still likely save money by having your home cleaned less frequently.
Worth noting: Do you sometimes list your house for renters? If you rent out on Airbnb, you’ll be asked to adhere to Airbnb’s cleaning protocol standards. A cleaning crew is helpful for a quick turnaround between renters.
Cleaning Requirements
The price of a house cleaner or cleaning service can go up depending on what is required of them:
• Level of mess. Do you entertain frequently or have small children? It may take longer to clean up the aftermath. Or maybe you haven’t done a deep-clean in ages. That too may make cleaning take longer.
• Area of mess. Does the whole house always have to be cleaned? You can save money by only having the common areas and bathrooms tidied up.
• Pets. Vacuuming dog and cat hair can add many minutes to a cleaner’s timesheet.
• Are you a neat freak? A deep-clean or super detailed job will cost more than basic dusting, vacuuming, and mopping.
How Good You Are At Cleaning
If you are a disciplined and effective cleaner who loves getting your place spotless, there may be no need to hire someone. That said, there might be times you get too busy to clean or want some help tidying up before the holidays or a houseguest’s arrival.
If you’re the kind of person who ignores dust bunnies or the sight of a broom stresses you out, perhaps you should outsource household tasks and enjoy some time elsewhere.
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Cleaning Services vs Individual Cleaners: What’s the Difference?
An individual cleaning person typically costs less than a cleaning service. A cleaning person often works alone, while a cleaning service can be a crew of two, three, or more who clean simultaneously.
An independent cleaner generally keeps 100% of the earnings, while a portion of the money for a cleaning crew goes to the service provider.
There are other key differences between individual cleaners and cleaning services:
Pros of Hiring a House Cleaning Person
Here are some of the perks that can make a cleaning person worth it:
• Lower costs. An independent contractor can be less expensive than a cleaning service. Fewer workers can mean cheaper rates.
• Price flexibility. You may be able to negotiate cleaning add-ons more easily (and affordably) with an individual.
• Familiarity. The same person comes to your home every time. This can provide a sense of comfort and trust for you and your family.
• Personal recommendations. You can get referrals from someone you trust — a friend or a neighbor.
If you’re considering getting help tidying up around the house, a cleaning service can be worth it. They come with several benefits:
• Vetted employees. Full-service cleaning companies typically check their employees’ backgrounds, so you don’t have to.
• Set standards. Many companies train their employees to uphold a certain level of cleaning criteria.
• Faster service. Since cleaning services are composed of crews, a team of workers can get the job done faster than an individual house cleaner.
• Customer service. If a job isn’t up to snuff, professional companies will deal with any complaints you may have.
Cons of Hiring a House Cleaning Person
• You’ll do the vetting. The responsibility of getting references and background checks on the cleaning candidate will fall to you.
• Longer cleaning time. Since a house cleaner usually works solo, they might not be as fast as a cleaning service with multiple workers.
• Unpleasant boss duties. If your cleaning person is not meeting your expectations, it will be up to you to address the problem and, possibly, terminate the arrangement.
• Inflexible schedule. If the contractor has a lot of clients, there could be fewer timeslot options available.
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Cons of Hiring a Cleaning Service
• Higher prices. A cleaning service generally costs more than an independent maid.
• Lack of familiarity. The company could send different people every time.
• Add-ons can be costly. Since the company sets the prices, you could spend a lot for a deep-clean of the fridge. A cleaning person, on the other hand, might not charge extra if they can get the job done within their hourly time frame.
Alternatives to House Cleaners or Cleaning Services
House cleaners and cleaning services are generally the route people take when hiring help, but there are a few other options:
• Gig-based workers. Apps and online services such as Taskrabbit and Fiverr feature a variety of folks willing to do odd jobs, including house cleaning. Whether they pursue this full-time or as a side hustle, you may well find affordable options.
• College students. If you live near a campus, check the online or physical job boards. Students are generally eager to make extra dough.
• Your kids. Shelling out for an allowance can be a lot cheaper than a cleaning service.
Tips for Saving Money on Cleaning Services
There are a few things you can do to potentially reduce the cost of a cleaning person or service:
• Shop around. It’s a good idea to interview more than one house cleaner or get estimates from multiple cleaning services.
• Make the terms clear. You’ll want to clarify exactly what tasks need to be done, so you won’t get charged for any unexpected add-ons.
• Consider a trial run. It can be a good idea to try out a house cleaner or cleaning service for a month or so before committing to a long-term agreement.
• Inquire about fees. It’s a good idea to ask about any potential extra fees so you don’t hit with any surprises. Some cleaning services may tack on a processing fee if you pay with a credit card vs. direct deposit.
• Look for promotional deals. Cleaning services will occasionally run specials. They may also offer package deals and referral bonuses.
• Tidy up before they come. Keeping your house orderly in between appointments allows the hired cleaner to perform more efficiently.
If your messy home is stressing you out, a cleaning person or service can take some of the weight off your shoulders. As long as you can justify the extra expense, hiring a professional can make your home look great and improve your mood, plus leave you with more free time to enjoy your favorite pursuits.
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FAQ
Are individual house cleaners better than cleaning services?
Both are good options if you need help cleaning your house. Typically, a cleaning person can be cheaper and is someone you see regularly and can build a relationship with. A cleaning service, on the other hand, may be able to get the job done faster and may have more professional training and customer service.
Is it safe to hire a cleaning person or service?
To feel secure, it’s a good idea to get recommendations and references (and check them) for an individual cleaning person. Cleaning service companies generally vet their employees for you.
Should you hire a house cleaner if your house is not very dirty?
Whether to hire a cleaning person or not depends on how clean you want to keep your home, and how much time you are willing to personally spend on it. Even if you’re a regular duster, a house cleaner can help with larger tasks like cleaning the fridge and oven, heavy-duty vacuuming, and/or window washing.
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Starting a new business requires a good idea, customers who want your product or service, and money to get you off the ground. A personal loan to start a business can be one option for funding your business, especially if you don’t yet qualify for a small business loan.
Let’s walk through the difference between personal loans and business loans, the advantages and disadvantages of using a personal loan for business, and some alternative options to explore.
Key Points
• Personal business loans offer flexibility in spending, but it’s crucial to confirm with lenders whether they will allow you to use the loan for business purposes.
• Your personal loan interest rate is influenced by your financial history, income, and credit score, with higher credit scores leading to better rates.
• Benefits of personal loans for business include ease of qualification, faster funding than business loans, and lower interest rates than credit cards.
• Personal loans can be versatile with few spending restrictions, but they may have lower borrowing limits and shorter repayment terms and can affect your personal credit score.
• Alternatives to personal business loans include small business loans, business lines of credit, business credit cards, and merchant cash advances.
What Is a Personal Business Loan?
Personal loans for business are offered by some banks, credit unions, and online lenders. While many loans will specify what you can spend the money on — a mortgage must be used to buy a house, for example — the sum you receive from a personal loan can be used in several ways. That said, it’s important to confirm with your lender whether its personal loans can be used for business expenses, as some lenders do not allow this.
Your personal loan interest rate is based on various financial factors, including your financial history, income, and credit score. Generally, the higher a person’s credit score, the more likely they are to receive a personal loan with favorable terms and interest rates. Applicants with lower credit scores may have more difficulty qualifying for low interest rates. Lenders tend to see them as at greater risk of defaulting on their payments. To offset that risk, they might charge a higher interest rate.
Personal Business Loans vs. Small Business Loans
Borrowing money to pay for business expenses is a decision that takes some consideration. There are different reasons you might want or need a business loan, many lenders to choose from, and different lending options to compare. Some things to think about if choosing between a personal loan for business or a small business loan include:
Factor to Consider
Personal Loan for Business
Small Business Loan
Use of funds
Some lenders may not allow personal loan funds to be used for business purposes
Specifically for business purposes — cannot be used for personal use
Qualification
Personal creditworthiness determines approval, interest rate, and loan terms
Lenders will require business financials, proof of time in business, and other details, in addition to possibly taking personal credit into account
Interest rate
Depending on your creditworthiness, interest rate may be lower than other forms of credit, such as credit cards
Depending on the type of loan, interest rates on SBA loans may be lower than some personal loans
Loan amount
Up to $100,000 depending on the lender.
SBA maximum loan amount is $5 million.
Some lenders may approve working capital loans for up to several million dollars
Funding time
Depending on the lender, loan funds may be disbursed as soon as the day of approval or in up to seven days
The SBA loan timeline is between 60 and 90 days from application to disbursement.
A working capital loan from a traditional lender may be approved quickly and funded shortly after approval
Taking out personal loans for business purposes can offer several advantages over other financing options.
Ease of Qualification
If your business is brand new, it can be tricky to get a business loan and may be easier to qualify for a personal loan. Banks offer personal business loans based on your personal income and credit score. On the other hand, you’ll be asked for a lot of information during the business loan application process, including your personal and business credit score, annual business revenue and monthly profits, and your length of time in business. The longer your business has existed, the more likely you are to have a record of revenue and profit — and the more likely you are to qualify.
Faster Funding
The length of time it takes to get approved for a personal loan and receive funding will vary by lender. Online lenders are typically faster than traditional banks and credit unions. You are likely to receive funding within seven business days.
By contrast, the process for a business loan can be much slower. For example, it can take 30 to 90 days to receive funding from a Small Business Administration (SBA) loan.
Potential for Low Interest Rates
If you have strong credit, personal loans can have lower annual percentage rates (APRs) than other financing products — such as credit cards. While it can be useful to have a business credit card, you’ll pay a relatively high rate If you carry a balance from month to month. Credit cards may also have penalties and fees that personal loans may not have, such as penalty APRs that go into effect if you make a late payment, over-limit fees if you spend more than your credit limit, annual fees, and more.
Flexibility and Versatility
Personal loans have few restrictions on how you’re allowed to use the money you borrow. You can use them for anything from debt consolidation to home repairs to a veterinary bill.
Despite the potential advantages of using a personal loan to help you start your business, there are drawbacks.
Some Lenders Don’t Allow Personal Loans for Business
Some lenders place restrictions on how personal loans can be used. It’s wise to be transparent about your intention to use the personal loan for business expenses and confirm if the lender permits it.
In some cases, it may not be. However, it’s far better to be honest about how you plan to use a loan than risk breaching the loan agreement. If you end up using a loan in a prohibited way, your lender could force you to immediately repay the full amount of the loan with interest.
Lower Loan Amount Limits
Personal loans generally offer borrowing limits as low as $1,000. They can go as high as $100,000 for larger personal loans. For small businesses, this might be plenty. But if you own a larger business that needs more money, you might benefit more from a loan specifically designed to meet business financial needs. Small business loans generally have lower interest than personal loans.
Shorter Repayment Terms
Lending periods for personal loans vary. Typically, you can find loans with term lengths of 12 months to five years. Compared to some small business loans, this is a relatively short period. Consider that for SBA loans, maximum terms can be as much as 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory.
Potential to Affect Personal Credit Score and Assets
If you take out a personal loan and can’t make monthly payments, you are putting your personal credit at risk. Missed payments may harm your credit score, which can make it more difficult for you to access funding in the future.
Generally, the interest you pay on a personal loan is not tax deductible, unlike the interest paid on business loans. However, there’s an exception if you use the proceeds of a personal loan for business purposes.
However, this can get a bit tricky, as you may only deduct interest on the portion of the loan used for business expenses. So if you use any of that money to remodel the primary bathroom in your home, for example, interest on that portion can’t be deducted.
How to Get a Personal Loan for Business
Securing a personal loan for business purposes involves several key steps. The process looks like this:
1. Assess your finances: Begin by looking at your personal credit score, income, and overall financial health. This will give you insight into the likelihood of qualifying for a personal loan and the interest rates you might get.
2. Choose a lender: Look for banks, credit unions, and online lenders that offer personal loans suitable for business purposes. Make sure they allow you to use personal loan funds for business expenses. Compare interest rates, loan terms, and fees to find the best lender for your needs.
3. Prepare your documents: Gather documents like proof of income, tax returns, identification, and any business-related information required for your application.
4. Submit your application: Complete the loan application process with your chosen lender. Be honest about your intention to use the loan for business expenses. This transparency helps avoid potential issues in the future.
5. Review loan terms: Once your application is approved, carefully review the loan terms, including the interest rate, repayment schedule, and any associated fees. If everything looks good to you, accept the loan terms to move forward with the funding process.
Alternatives to Personal Business Loans
Personal loans might not be ideal for everyone and aren’t the only funding option for your small business. It may be worth considering small business loans or other types of business loans as alternatives.
Small Business Loans
Small business loans are offered through online lenders, banks, and credit unions. There are various options available, each designed for specific purposes. For example, a working capital loan is designed to help you finance the day-to-day operations of your business. An equipment loan can help you replace aging technology and buy new equipment.
SBA loans are guaranteed by the Small Business Administration, whose aim is to help small businesses start and grow. If you aren’t able to make your payments, the SBA will step in and cover up to 85% of the default loss. By reducing risk in this way, the organization helps businesses get easier access to capital.
Shopping around for the best small business loans rates is a good way to compare lenders and find the one that works best for your unique financial needs.
Business Lines of Credit
A business line of credit is revolving credit, similar to a credit card. You have a set credit limit and only pay interest on the amount you’re currently borrowing, making it a more economical option than a term loan for some business owners. As you repay the funds, they are available to borrow again.
Another advantage to a line of credit over a term loan is the ability to use a check to pay vendors who do not accept credit cards.
Business Credit Cards
Business credit cards can be useful for separating personal and business expenses. They also usually have higher credit limits than personal credit cards, which gives you more flexibility to make larger business purchases. Plus, they may offer rewards, perks, and bonuses. It’s important to keep in mind, however, that credit cards tend to have higher interest rates than other types of business financing.
A merchant cash advance (MCA) is an alternative form of financing for businesses that get revenue through credit card sales. With an MCA, a business can borrow a lump sum of money and repay the lender with a percentage of future credit card transactions. The repayment amount is larger than the advance, since the lender charges a fee. In some cases, MCA fees can significantly exceed interest rates on other types of business loans.
The Takeaway
Can you use a personal loan to start a business? Perhaps. Taking out a personal loan may be one way to fund your small business needs. However, some lenders do not allow a personal loan to be used for business purposes. It’s a good idea to explore alternatives, such as a small business loan or line of credit.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
With one simple search, see if you qualify and explore quotes for your business.
FAQ
Can a personal loan be used for business?
Yes, you can use personal loans for business if the lender allows it. It’s important to check with the lender to ensure there are no restrictions on using the loan for business expenses.
Can I write off a personal loan if used for my business?
You can typically write off the interest on a personal loan used for business purposes, but only the portion directly related to business expenses. Personal loan principal repayments are not tax-deductible.
Does the SBA offer personal loans?
No, the Small Business Administration (SBA) does not offer personal loans. The SBA provides various loan programs designed specifically to support small businesses, such as SBA 7(a) loans and SBA 504 loans.
Photo credit: iStock/fizkes
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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.
A letter of credit is a document from a bank or financial institution guaranteeing that a buyer’s payment to a seller will be made on time and for the correct amount. As part of a sales agreement, a seller may require the buyer to deliver a letter of credit before a deal takes place.
Letters of credit are often vital in international trade where the two parties involved are not yet familiar with one another. Letters of credit facilitate new trade and prompt payments.
Read on to learn more, including:
• What a letter of credit is
• How a letter of credit works
• What the different types of letters of credit are
• The pros and cons of letters of credit
• How to get a letter of credit.
What Is a Letter of Credit in Banking?
A letter of credit in banking is a document that a bank issues to a seller that guarantees payment from their customer for an order or service. The bank where the buyer’s business account is held usually assumes responsibility for the payment for the goods. However, the conditions laid out in the letter of credit must be fulfilled. If the buyer is unable to fulfill the purchase, the bank must pay the seller the purchase amount. The bank or financial institution charges the buyer a fee for guaranteeing the payment and issuing the letter.
Letters of credit are common in international trade situations because various factors can affect cross-border transactions. For example, the deal might involve different legal frameworks, a lack of familiarity between the parties involved, and geographic distance.
If you are a buyer who is planning to be involved in international trade, you will likely want to open a bank account that can provide you with a letter of credit when you need it.
How a Letter of Credit Works
When used properly, letters of credit can work to minimize credit risk and help international trade go smoothly. A vendor selling products or services overseas may want assurance that a buyer of their products or services will pay. Perhaps the buyer is new to them or just a new business, period.
So how does a letter of credit work? It serves as a guarantee from a bank that payment will be made to the vendor once the requirements are met. The letter lays out the conditions of payment, such as the amount, the timing of the payment, and the delivery specifications. The letter may help the business placing the order build their credit, too.
The bank charges the buyer a fee for issuing a letter of credit (often around 0.75% to 1.5% of the amount of the deal). It also does the due diligence to verify the buyer’s creditworthiness. The bank requires collateral or security from the buyer for the payment guarantee. In essence, the bank acts as a third party facilitating the deal.
• Commercial Letter of Credit: This is a method in which the issuing bank pays the seller directly. For a stand-by letter of credit, which is a secondary method of payment, the bank only pays the seller if the buyer cannot transfer funds.
• Revolving Letter of Credit: With this type of letter of credit, the bank guarantees payment for a number of transactions, such as a series of merchandise shipments within a set period of time.
• Traveler’s Letter of Credit: With this kind of letter, travelers can make withdrawals in a foreign country because the issuing bank guarantees to honor any withdrawals.
• Confirmed Letter of Credit: A seller using a confirmed letter of credit involves a secondary bank, typically the seller’s bank. This bank guarantees payment if the first bank fails to pay.
There is also an irrevocable letter of credit. This is a letter of credit that can’t be changed or canceled unless all parties agree.
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Letter of Credit Example
Here’s an example of a letter of credit: A bank provides commercial letters of credit and stand-by letters of credit within two weeks. The funds are secured through deposits at the bank, and the terms are renewable. These documents can help reassure parties doing business internationally with new businesses or clients who have recently started a business.
The Money Behind a Letter of Credit
So where do the payment funds for a letter of credit originate? The party paying for the goods or services typically deposits funds in advance to the bank that issues the letter of credit to cover the payment. Alternatively, the amount might be frozen in the payer’s account or the payer might borrow from the bank using a line of credit.
When Does Payment Happen?
Payment usually occurs when the seller has completed all the stipulations in the letter of credit. For example, the seller might have to deliver the goods to a specific address or onto a ship for transportation in the case of international trade. In the latter case, shipping documents would serve as proof that the requirements for payment have been fulfilled. They might then trigger the payment transaction.
What to Watch Out for
Here are some common mistakes sellers may make when relying on a letter of credit for payment.
• Failing to check all of the requirements in the letter of credit.
• Failing to understand the documents required for the deal.
• Failing to confirm whether the time limits for delivery and payment are reasonable.
• Failing to meet the time limits.
• Failing to get the necessary proof of delivery documents to the bank.
Letters of Credit Terminology
Here are some terms and phrases to know if you may be using letters of credit.
• Advising bank: This is the bank that informs the seller that the letter of credit has been completed. The advising bank is also called the notifying bank.
• Applicant: The party or buyer of products or services who applies for the letter of credit from the bank.
• Beneficiary: The party, or seller, who will receive payment. The seller usually requests a letter of credit to guarantee payment.
• Confirming bank: The bank that guarantees the payment of the required funds to the seller. If a third party is involved, the confirming bank is often the seller’s bank.
• Freight forwarder: A shipping company that provides the transportation documents to the seller.
• Intermediary: These are companies that link buyers and sellers and may use letters of credit to ensure transactions are executed.
• Issuing bank: The bank that issues the letter of credit.
• Negotiating bank: If a third party is involved, the negotiating bank works with the beneficiary and the other banks involved. They likely determine the letter of credit requirements to complete the transaction.
• Shipper: The transportation company that ships goods.
• Stand-by letter of credit: A secondary letter of credit that’s used when a deal requirement has not been met. For example, if payment does not occur within the specified timeframe, a stand-by letter of credit would then be used to help guarantee that the deal goes through.
Pros and Cons of Letters of Credit
A letter of credit provides security for both parties involved in a trade, but it can also add costs and time to business transactions.
Pros
Cons
• Reduces the risk that payment will not be made for goods or services, thereby providing security
• Allows for additional requirements to be built into a letter of credit, such as quality control and delivery stipulations
• Provides transaction security for both the buyer and the seller
• Forges new trade relationships
• Incurs bank fees for the letter of credit, typically for the buyer, which increases the cost of doing business
• Adds time by preparing a letter of credit; transactions can be delayed
• May require a separate letter of credit for each transaction
• Typically stipulates that the buyer provides collateral to the bank
How to Get a Letter of Credit
Getting a letter of credit usually requires a few steps. It’s wise to get the necessary paperwork together first. Various documents will usually be listed as requirements for a trade, such as a shipping bill, a commercial invoice, insurance documents, a certificate of origin, and a certificate of inspection.
Here are the steps typically taken to obtain a letter of credit.
1. The buyer and seller come to agreement on the sale terms and the use of a letter of credit.
2. The buyer contacts their bank where they have a checking account and requests a letter of credit and provides necessary documents.
3. The issuing bank prepares the letter based on the terms of the sales agreement and sends it to the confirming bank or advising bank, which is typically in the seller’s home country.
4. The confirming bank verifies the terms and forwards the letter to the seller.
5. The goods can then be shipped, and the exporter sends documentation to the advising or confirming bank.
6. Document verification and settlement of payment can then occur.
When to Use a Letter of Credit
A letter of credit is beneficial for sellers entering into a new trade relationship or an international trade relationship. It can provide assurance that the seller will receive payment because the issuing bank guarantees payment once the requirements have been met. Sellers may also use the guarantee of payment to borrow capital to fulfill the buyer’s order.
The Takeaway
A letter of credit is usually requested by an exporter or seller to minimize credit risk. The buyer of the goods or services applies to a bank and requests a letter of credit based on the sales agreement. This document helps guarantee that payment will be made. It can provide priceless peace of mind when conducting international trade or doing business with a new customer.
Another path to financial peace of mind: Choosing the right bank account. Whether you’re looking for a business account or a personal account, it’s wise to shop around to find the best banking fit for your needs.
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
How much does a letter of credit cost?
A typical fee for a letter of credit is typically 0.75% percent to 1.5% of the amount of the deal, but the rate will vary depending on the country and other factors.
How do you apply for a letter of credit?
Once the terms of a trade are agreed upon between the buyer and the seller, a buyer contacts their bank to request a letter of credit. They then gather the required documentation and fill out an application with that bank.
Why do you need a letter of credit?
The parties involved in a trade typically use a letter of credit to minimize risk. For the seller, a letter of credit can guarantee payment for goods once certain requirements have been met and the buyer confirms their creditworthiness as a trade partner.
Photo credit: iStock/Lesia_G
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.
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 article is not intended to be legal advice. Please consult an attorney for advice.
4.00% APY 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.
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Saving money can help you to feel more in control of your finances and your life. When you have cash stashed away, you know you are prepared for financial emergencies and can also be working toward your short-term goals (like planning a wedding) or long-term ones, like retirement.
Often, though, saving happens gradually, like a slow drip. But there are people who want to save more aggressively, or there could be a moment in your life that spurs you on to accrue as much money quickly as you can.
If you’re interested in how to aggressively save money, there are smart strategies to help you do just that. Implementing an aggressive savings budget takes a certain amount of commitment, since you may need to make some significant lifestyle changes. That can be worth it, however, if the payoff is watching your money grow faster.
What Is an Aggressive Savings Plan?
An aggressive savings plan is a blueprint for setting aside a sizable amount of your income, typically over a fairly short time period. A 30-year-old who’s hoping to retire by 40, for example, might utilize an aggressive savings plan to save and invest 50% or 60% of their take-home pay over a period of 10 years to reach their goal.
For perspective, the personal savings rate in the U.S. was 3.4%, as of June 2024. That is the percentage of disposable income that citizens are socking away, whether in a savings account or a retirement fund. So the vast majority of people aren’t saving aggressively on a regular basis. Taking an aggressive approach to savings is something you might consider only if you have a specific goal you’re interested in achieving with your money.
Why an Aggressive Savings Plan Can Be Beneficial
Following an aggressive savings budget takes financial discipline, and it may not be right for every person or every financial situation. If you can stick with an aggressive savings plan, however, there are some tangible benefits you might be able to reap.
Here’s why an aggressive savings plan can work in your favor:
• You can set aside money for large or small goals.
• You can avoid debt when you’re focused on saving vs. spending.
• It teaches you how to prioritize needs vs. wants.
Saving aggressively can become a lifestyle if you’re able to accustom yourself to spending less. But even if you only apply an aggressive savings plan for a few months, you might be surprised at just how much money you can set aside.
Whether you follow a turbocharged savings plan for a short or long time, it can definitely improve your financial status and even be a form of financial self-care, since you’re likely avoiding debt and improving your money mindset.
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Tips for Building an Aggressive Savings Plan
There’s no single strategy for how to save aggressively; instead, there are numerous steps you can take to shape your savings plan. If you’d like to stop overspending money and start saving instead, these tips can help you get your finances on the right track.
1. Paying Yourself First
“Pay yourself first” is an often-repeated piece of personal finance advice. It simply means that you should set some of your paychecks aside for saving before doing anything else. The good news is that paying yourself first is relatively easy to do.
Some of the ways you can pay yourself first include:
• Contributing part of your salary to your 401k at work
• Scheduling recurring transfers from checking to savings each payday
• Using direct deposit to route payments directly to savings and bypass checking.
Paying yourself first ensures that money makes it to savings, rather than being spent. If you’ve struggled with sticking to a savings habit, adopting this mentality can make it easier to stay the course.
2. Getting Out of Debt
Debt can be a significant obstacle to saving money. If you’re spending hundreds or even thousands of dollars paying off credit cards, student loans, or other debts each month, you might have very little left to save.
Getting rid of your debt can help to free up more money so you can follow through on an aggressive savings budget. Focusing on debt payoff also requires you to control spending habits, since the goal is to not create any new debts in the process.
If you have high-interest credit card debt, consider balance-transfer offers that charge zero percent for a period of time, giving you breathing room to pay down your balance. Or you might take out a lower interest rate personal loan to consolidate and pay off your debt.
An aggressive savings plan won’t really work if you don’t know exactly where your money is going. Keeping track of your spending is essential for making your plan work.
There are different ways to track spending, including:
• Writing purchases down by hand
• Using a spreadsheet
• Linking bank accounts to an expense tracking or budgeting app.
The method you choose isn’t as important as tracking all of your expenses regularly, including cash spending. Getting into the habit of tracking expenses can make the next step in your aggressive savings plan easier to tackle. You’ll be much more aware of where your money goes and how you might economize.
4. Utilizing a Budgeting Method
A budget is a plan for spending money each month. Making a budget each month is central to how to save aggressively, since you can decide how to allocate the money you’re earning.
In its most basic form, making a budget means adding up expenses and subtracting them from income. When you’re trying to save aggressively, the goal is to make the gap between income and expenses as wide as possible.
There’s no single way to make a budget. For example, you might try zero-based budgeting, the 50/30/20 budget method, or cash envelope budgeting. Experimenting with different types of budgets can help you to decide which method works best for you.
Also consider different tools to help you along. Your financial institution may offer budgeting tools, you can download apps, you might use a journal, or even manage your budget in an Excel spreadsheet.
5. Cutting Down Expenses
How to stop spending money is a common challenge; succeeding at it can help you save aggressively. The key is knowing how to prioritize needs over wants and looking for areas in your spending that you can reduce or eliminate.
For example, you can start by making the obvious cuts and jettison streaming services you don’t use or canceling your gym membership. But you can go a step further and look for more drastic ways to reduce expenses, such as:
• Renting out a room or taking on a roommate
• Getting rid of your car and using public transportation
• Embarking on a no-spend year
• Moving to a cheaper area.
Whether these types of saving tactics will work for you or not can depend on your situation. But allowing yourself to be creative when finding ways to cut expenses can help to bolster your aggressive savings plan.
6. Opening a High-Yield Savings Account
If you’re saving aggressively, it’s important to keep your money in a secure place where it can earn a great interest rate. The higher the rate and annual percentage yield (APY), the more your money can grow.
That’s where high-yield savings accounts come in. High-yield savings accounts can pay an interest rate and APY that’s well above the national average. For example, the typical savings account at a traditional bank pays 0.46%, as of the summer of 2024. But you might find a high-yield account at an online bank that’s paying over 4.00% or more instead.
When looking for a high-yield savings account, consider the APY you can earn. But also pay attention to things like fees, online and mobile banking access, and monthly withdrawal limits. These are important factors when sizing up the best option.
Starting a side hustle can help you to generate additional income that you can add into your aggressive savings budget. According to a recent report, 36% of Americans have at least one side hustle.
There are different types of side hustles you can try, including ones you can do online and ones you can do offline. For example, you might try your hand at freelancing if you want to make money from home or get paid to deliver groceries in your spare time. You could drive an Uber or sell crafts you make on Etsy.
The great thing about side hustles is that you can try different ways to make money to see what works best. Just remember that any earnings from side hustles or temporary work over $400 are taxable.
Grabbing dinner out can be convenient, but it can also derail your plans to save aggressively. If you’re spending $50 a week on takeout food or meals with friends, for instance, that’s $2,600 a year that you’re not saving.
Learning to plan meals and make food at home can cut that expense out of your budget. If you want to share meals with friends, consider inviting them to a potluck dinner at your house instead. That can be a great way to try new foods without having to blow your budget.
9. Saving Money Windfalls
Windfalls are any money that comes your way that you might not have been expecting. So that can include:
• Tax refunds
• Rebates
• Bonuses
• Cash-back rewards
• Financial gifts (i.e., birthday money or wedding money)
• Inheritances.
Some money windfalls may be small and add up to just a few bucks, while others might be hundreds or even thousands of dollars. It may be tempting to spend those amounts (because it feels like free money), but you can make better use of them by adding them to savings instead.
10. Investing Your Money
Investing your money is the best way to grow it through the power of compounding interest. Compounding means your interest earns interest. When you invest money in stocks, exchange-traded funds (ETFs), and other vehicles, you have a chance to earn interest at much higher rates than what you could get with a savings account, which means the compounding factor is enhanced too. (However, do remember there is risk involved; these investments aren’t FDIC-insured.)
The longer you have to invest, the more your money can grow. So if you’re not investing yet, it’s important to get started sooner rather than later. Some of the best ways to start investing include adding money to your 401k, contributing to an Individual Retirement Account (IRA), and opening a taxable brokerage account.
11. Automating Your Finances
Deciding to automate your personal finances can make saving aggressively less time-consuming, since it’s something you don’t have to actively think about. As mentioned above, you can set up automatic transfers from checking to savings each payday. What’s more, you can also automate deposits to your investment accounts and your bill payments.
Automating ensures that bills get paid on time and that the money you’ve earmarked for savings in your budget gets where it needs to go. You can set up automatic deposits and payments through your bank account; it typically takes just a few minutes.
12. Utilizing the 30-Day Rule
The 30-day rule is fairly straightforward: If you’re tempted to spend money on an unplanned purchase, impose a 30-day waiting period. Thirty days is enough time to decide if you really need to buy whatever it is you’re considering and, if you do, to find the money in your budget to pay for it without having to rely on a credit card.
Using the 30-day rule can help you to curb impulse spending, which can be a hurdle to making an aggressive savings plan work. If you decide the item is still something you want to buy, then you can make the purchase guilt-free. But you might find that what seemed like a smart buy at the time is no longer something you need.
13. Living Below Your Means
Living below your means simply means spending less than you earn each month. When you spend less than your income, you have money left over that you can add to your savings goals.
All of these aggressive savings tips outlined here can help you to get into a mindset of living below your means. When you’re focused on cutting down expenses and sticking to a budget, living on less money than you make doesn’t seem like a struggle.
The Takeaway
Saving aggressively can take some getting used to if you’ve never tried it before, but the end result can be well worth the effort. As you find your savings groove, it’s important to have the right banking tools so you can make the most of your money.
Opening the right bank account can make it easier to follow an aggressive savings plan.
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
Are there downsides to aggressive savings plans?
Saving money aggressively can mean having to make certain sacrifices in the short-term. For example, you may have to say no to dinner out with friends, vacations, or new clothes. But those temporary sacrifices can pay off if you’re able to reach your savings goal relatively quickly.
How can I save aggressively if I do not make a lot of money?
Starting a side hustle can help you to create more income so that it’s easier to save aggressively. But if that’s not an option, you can still save at an above-average rate by cutting down your expenses as much as possible and using windfalls to grow your savings whenever they come your way.
Can you aggressively save long-term?
Whether you’re able to save aggressively for the long-term can depend on how committed you are to your plan. If you have a clear reason for saving, then you may not need any added motivation to keep going. On the other hand, you may need to take a temporary break from saving as aggressively if you find yourself chafing under a strict spending regime.
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.
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