If you’re considering a small business loan, it’s important to familiarize yourself with the different types of small business loan fees. In addition to interest rates, fees can impact how much a small business loan ultimately costs.
Lenders charge fees on small business loans to cover a variety of costs, such as loan application and origination, check processing, and underwriting, and you could also face fees for late payment or prepayment. Which types of fees apply will vary depending on which lender you use and the type of loan you get.
Keep reading to learn more about the different types of small business loan fees and additional funding options available for small businesses.
Key Points
• Types of small business loan fees include application fees, origination fees, underwriting fees, and servicing fees.
• Origination fees are typically charged as a percentage of the loan and are deducted from the total loan amount.
• For Small Business Administration (SBA) loans, borrowers may be responsible for a guaranty fee, which covers the government’s guarantee of a portion of the loan.
• Some lenders charge a fee if you repay your loan early. While early repayment saves on interest, prepayment penalties can offset those savings, so it’s essential to review your loan agreement carefully.
• In addition to small business loans, businesses can acquire funding through family and friends, crowdfunding, or by using credit cards.
Why Choose a Small Business Loan?
No matter how fantastic an idea may be, in most cases, it can’t become an actual business without the working capital to get it off the ground. If you’re not yet ready to pitch investors and don’t have the personal funds to bootstrap your business, you may want to learn about how a small business loan can help you turn your business idea into a reality.
Of course, small business loans are for more than just startups. Whether you’re looking to hire more employees, purchase more equipment or inventory, or just scale your idea from your bedroom to a coworking space, small business loans can provide the capital to make it happen.
Some reasons a small business loan may be right for you include:
• You want to build business credit, potentially allowing you to qualify for larger loans in the future.
• You want to scale your business.
• You want to make your business more efficient with new equipment.
• You want to purchase more inventory.
• You want to hire and train more employees.
Before taking out a small business loan, though, it’s important to ensure you have the financial foundation to manage your loan debt.
Lenders incur certain fees when processing your application (e.g., credit checks and property appraisals). This fee covers those costs, and it will apply regardless of whether your application is approved.
Origination Fee
Lenders charge origination fees to cover their administrative costs, such as phone calls, emails, and interviews necessary to finalize a small business loan. The amount of this fee varies from lender to lender.
Check Processing Fee
If you make your loan payments via check, you may be charged a fee to cover the time and labor it takes to process a check. You may want to keep this in mind when deciding how you’ll make your loan payments.
Guaranty Fee
If you’re taking out a loan through the Small Business Administration (SBA), you’ll likely have to pay a guaranty fee. While the SBA guarantees loans, it doesn’t make loans, and thus generally assesses this SBA loan fee for its involvement.
Late Payment Fee
Like many loans, small business loans typically charge a fee when you make a late payment. You’ll want to ensure you set up a plan to make your loan payments on time to avoid this fee.
Underwriting Fee
The process of underwriting can be tedious — your lender needs to comb through your business’s finances and review market research and historical trends. The underwriting fee covers the cost of performing this task. It could either be charged as a percentage of the loan amount or a flat fee.
Prepayment Fee
Some lenders charge you for paying your loan off too early. They may do this for a variety of reasons, but one might be because they lose money in interest charges when you pay your loan principal before it’s due. This is an important fee to be aware of when mapping out your payment plan.
If these fees don’t sit well with you, there are other options to consider that may make funding your business more accessible to you.
Family and Friends
Many people start their business with family loans, which is essentially money borrowed from family and friends. Using these individuals as initial investors can help you stay out of commercial debt, meaning that you can wait to apply for a small business loan when you might need to borrow a larger sum.
However, going into business with loved ones could be a risk. It might sour the relationship if things go south.
Crowdfunding
A number of small businesses have successfully been funded through sites such as Kickstarter, GoFundMe, and Indiegogo. A great idea with a strong marketing plan could generate enough excitement and financial support to get things going.
Keep in mind that crowdfunding sites generally require a percentage of the funding received. Additionally, there could be a risk of idea theft or plagiarism by putting your idea out there early.
Credit Card
You could turn to credit cards as a quick route to getting capital for your business without a lengthy application process. However, interest rates may be high. Further, carrying significant credit card debt could potentially impact your credit score, affecting your future chances of qualifying for loans.
Small business loans can charge a variety of fees, including application fees, origination fees, underwriting fees, guaranty fees, and others. Some fees are avoidable, including bypassing check processing fees by opting for another payment method and steering clear of late fees through consistent on-time payments. Which fees will apply will ultimately depend on the lender and loan type, but fees can play a role in how much a small business loan ultimately costs.
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FAQ
What are the most common fees associated with small business loans?
Common fees include application fees, origination fees, underwriting fees, guaranty fees, and administrative fees. These charges can vary depending on the lender and loan type. It’s important to review the fee structure before committing to a loan.
How do origination fees impact the total cost of a loan?
Origination fees are typically charged as a percentage of the loan amount and are deducted from the loan proceeds. This means you’ll receive less than the total loan amount, effectively increasing the cost of borrowing.
What is a guaranty fee, and when is it applicable?
A guaranty fee is commonly associated with Small Business Administration (SBA) loans and is charged to cover the government’s guarantee of a portion of the loan. This fee is usually a percentage of the guaranteed portion and can add to the overall loan cost.
For a growing number of Americans, turning 65 no longer automatically means retirement. Between 2015 and 2025, the number of Americans 65 and older who worked increased by more than 33%, according to U.S. Bureau of Labor Statistics (BLS) data.
If you want to keep up the 9-to-5 into your golden years, there’s a wide range of options for you to explore. This is especially true if you’re a skilled senior interested in full-time employment.
Tips When Finding a Job as a Senior
There are pros and cons of working after retirement. If returning to the daily grind is right for you and your financial situation, then there are a few things you’ll want to keep top of mind:
• Weigh the pros and cons of working for a company versus freelancing or consulting.
• Think about whether you’d prefer to work from home or go into an office or to a job site.
• Read job listings carefully, paying close attention to the requirements listed.
• Remove graduation dates from your resume unless they’re fairly recent.
• Include a couple of your key accomplishments in a cover letter.
• During an interview, be sure to strategically share key career highlights from the past 10-15 years, and spotlight the ways in which you’ve kept your skills up to date.
• Move ahead with confidence!
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12 Jobs for Skilled Seniors That Pay Well
Working can help provide seniors with extra income as well as other benefits, such as connecting with coworkers and creating a sense of purpose. Take a closer look at jobs for skilled seniors that suit a variety of skills and interests.
#1: Teacher
If you have the appropriate credentials, teaching can be a rewarding job. But don’t fret if you don’t have the right credentials — you might still be able to land a position. Many high schools, career centers, and community colleges may be open to hiring experienced people to teach general interest or professional development courses. Educational organizations may also be seeking teaching assistants or tutors, both of which can be excellent jobs for skilled seniors.
#2: Pet Groomer
Have a way with four-legged friends? Consider a career as a pet groomer. The median annual wage for animal care and service workers is around $35,530 a year. You can find work in a number of settings, including grooming salons, veterinary clinics, pet stores, zoos, and animal shelters. Or you may decide to strike out on your own. The field is experiencing a boom right now. There are more than 410,000 jobs today, according to the BLS, and they are expected to grow by 11% between 2025 and 2035.
#3: Tax Preparer
Interested in becoming a tax preparer? If you have an accounting background, then this type of work may be a natural fit. That said, you don’t need to be a certified accountant. You just need to obtain a preparer tax identification number from the IRS and pass a competency exam.
#4: Real Estate Agent
You can earn a good income helping people buy and/or sell their homes or properties. But there’s another selling point to being a real estate agent: the ability to set your own schedule, as long as you can still satisfy your clients. In fact, this flexibility can be useful if you’re deciding whether you want to work part time or full time. Before you start working, you’ll need to get a license, and requirements vary by state.
#5: Bank Teller
You typically only need a high school diploma or the equivalent to qualify for a bank teller’s job, and you may be required to undergo a short period of on-the-job training. In this position, you’d handle the standard transactions at a financial institution. So if you’re comfortable handling a steady flow of cash and enjoy working with customers, this could be a job to consider.
Need help managing your own finances? A money tracker can help you keep tabs on where your money is going.
#6: Medical Biller
A medical biller works for a health care organization, such as a hospital or doctor’s office, and is responsible for appropriately billing insurance companies, managing the status of claims, and addressing problems that arise. This is one of those jobs for skilled seniors that require organization and the ability to follow through — in this case, with both patients and insurance companies.
Plenty of small businesses in the United States need help with daily administration tasks. Depending on your skills, virtual tasks could include making phone calls, managing emails, scheduling appointments, maintaining calendars, offering bookkeeping services, handling social media, and so forth. Although many virtual assistant jobs are part time, if you wanted more work, you could have multiple clients to whom you provide your services.
#8: Telework Nurse or Doctor
Telehealth services have greatly expanded since 2020, and demand for remote health care providers remains high. If you’re a recently retired nurse or doctor and are still licensed, you may want to explore a telehealth position. It could allow you to continue providing care but from the comfort of home (or a home office).
#9: Counselor
As of December 2025, approximately 40% of all Americans live in an area with a shortage of mental health care professionals, according to data from the National Center for Health Workforce Analysis. If you’re a retired counselor or therapist and are interested in working again, re-entering the field could allow you to provide much-needed services.
#10: HVAC Technicians
From installation to maintenance to repairs, HVAC pros can find themselves in great demand all year long. If you have this kind of experience or are handy and able to incorporate HVAC into your skill set, then this type of work can be a steady source of income.
Busy attorneys need plenty of help researching information, creating documentation, and contacting clients. If you have the education and experience and you’re highly organized and able to multitask, then a paralegal job may be right for you.
#12: Grant Writer
Grant writing is a specialized type of writing where you write proposals to help nonprofits and other agencies obtain funding for their programs. To succeed at grant writing, it’s important to research the requirements and deadlines of the funding, write compelling proposals to receive the grant dollars, follow up with the proposals, and write reports about them.
The Takeaway
Your golden years are what you make of them, and for some, that can mean re-entering the workforce or pursuing a new, rewarding career path. Fortunately, there are plenty of jobs for skilled seniors that suit different skills and interests and provide a source of extra income.
Take control of your finances with SoFi Coach. You can easily view all of your accounts in one convenient dashboard: bank and investment balances, current debts, spending breakdowns, and credit score. Easily set up budgets and spot upcoming bills. And get personalized insights on everyday money questions and take action with Coach chat, the AI guide that’s powered by the playbooks of SoFi Financial Planners, so its guidance comes from expert knowledge.
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FAQ
Can seniors still work full time and receive Social Security benefits?
According to the Social Security Administration, yes, if you’ve already reached your full retirement age, then you can work and earn as much as possible without a reduction in benefits. If you are under full retirement age for the whole year, then you can earn up to $24,480 in 2026 without a reduction. For income earned beyond that annual limit, your benefits would be lowered by $1 for each $2 earned.
What types of job skills are in high demand?
Generally speaking, management and leadership skills are appreciated by many employers, and these are skills seniors may have well developed over the years. It’s important to be able to effectively communicate, both verbally and in writing, and to work well with others. However, the specific skills you need may vary, depending on the job you’re applying for.
What type of work-life balance should working seniors expect?
Maintaining a work-life balance is especially important for working seniors. As you consider re-entering the workforce, you’ll want to consider your physical and mental health as well as your finances, and ensure that whatever job you take on will fit with your lifestyle. As an older adult, you may discover that you don’t have quite as much stamina as you once did, but you may also find that you have more time open in your schedule than before.
How many 65-year-olds are still working?
According to 2025 labor force data from the U.S. Bureau of Labor Statistics, about 11.8 million workers out of a total of 170.1 million were age 65 and older. That translates to roughly 7% of the total labor force.
What’s the best job for a retired person?
The best job for a retiree or senior depends on factors such as their job experience, skills, and how much flexibility they are looking for. For example, a recently retired nurse or doctor who still has an active license may want to consider a telehealth position, which would allow them to work from home.
When comparing a personal loan vs. personal line of credit, both sources of funding can be used for a variety of expenses and typically require a hard credit check during the application process. However, there are also differences: specifically, in how the loan funds are disbursed to the borrower and how the credit is repaid.
Here, learn more about a personal line of credit vs. personal loan and how to decide which option might be right for you.
Key Points
• Personal loans offer a lump sum with fixed interest and payments, ideal for large, one-time expenses.
• Personal lines of credit provide flexible, ongoing borrowing with interest rates and fees assessed.
• Responsible borrowing includes timely repayments, low credit utilization, and avoiding high debt levels.
• Consider financial needs, interest rates, fees, and credit impact when choosing between options.
• Use calculators to compare total costs and make the best financial choice.
What Is a Personal Line of Credit and How Does It Work?
A personal line of credit (PLOC) is a type of revolving credit similar to a credit card. But funds are usually accessed by writing checks provided by the lender or requesting a funds transfer to your checking account instead of by using a card.
A PLOC typically allows the borrower to withdraw funds repeatedly, up to the credit limit. Any funds that are withdrawn are subject to repayment with interest. When they are repaid, they can be accessed again up to your particular credit limit. There may be a limit on the number of years the line of credit is available.
Note: SoFi doesn’t offer unsecured personal lines of credit at this time. However, we do offer personal loans and home equity lines of credit.
Additional points to know:
• Some lenders may assess fees associated with a PLOC. There may be a maintenance charge for inactive accounts. There may also be ongoing fees, monthly or annual, even if the PLOC is being used. Additional expenses may include application fees, check processing fees, and late fees, among others. It’s important to be aware of potential fees before you sign a PLOC agreement.
• Personal lines of credit are usually unsecured, although you may be able to put up collateral to get a lower interest rate. A home equity line of credit, or HELOC, is an example of a secured line of credit. In this case, the collateral is the equity you have built up in your home.
• Typically, a PLOC will be offered by a bank or credit union, and you might be required to have another account with the lending institution to be considered for a PLOC.
• If your line of credit is unsecured, the interest rate will probably be variable, which means it could go up or down during the loan’s term, and your payments could vary. But you’ll only be charged interest on the amount you withdraw. If you’re not using any PLOC funds, you won’t be charged interest.
If you expect to have ongoing expenses or if you have a big expense (like a wedding or home renovation) but don’t know what your final budget will be, this type of borrowing might be a useful financial tool.
A PLOC also may be the right fit if you need some flexibility with your borrowing. For example, self-employed workers who know they’ll be paid by a client but aren’t sure exactly when, can tap into their line of credit to pay expenses while they wait. They can pay that money back when they receive payment from the client, and they won’t have to use high-interest credit cards or borrow from other savings to make ends meet.
Of course, there are downsides to that easy-to-access money. Here’s a closer look:
• Since unsecured lines of credit are considered by lenders to be riskier than their secured counterparts, it can be more difficult to qualify at a lower interest rate.
• Once you have access, it may be tempting to use the funds for purposes other than originally planned. Keeping in mind the intended purpose for the funds may help you stick to it and not use the funds for other purchases.
Pros and Cons of Personal Lines of Credit
Having funds that can be accessed as needed can be helpful. But there are also some drawbacks to consider. Take a look at how the pros and cons stack up for a personal line of credit.
Pros of Personal Lines of Credit
• Easy access to funds.
• Open-ended vs. one-time distribution of money.
• Minimal limits on use of funds.
• Can be useful for ongoing expenses.
Cons of Personal Lines of Credit
• May have a higher interest rate than other forms of credit.
• Typically unsecured, so may be more difficult to qualify for than other forms of credit.
• Interest rate could be variable, presenting a budgeting challenge.
How Personal Loans and Lines of Credit Are Similar
Both a personal loan and a PLOC are typically unsecured, so borrowers aren’t putting an asset at risk if they use this form of financing. Both borrowing methods also involve paying interest and, in some cases, fees. And, as noted above, the application process for a personal loan vs personal line of credit is similar and involves a hard credit check.
A personal loan is a fixed amount of money disbursed to the borrower in a lump sum. If the loan has a fixed interest rate, as is typical for personal loans, the payments are in fixed installments for the term of the loan. If the loan has a variable interest rate, the monthly payments may fluctuate as the interest rate changes in accordance with market rates.
Because personal loan interest rates are typically lower than rates for credit cards, they’re often used to pay off other debts such as home and car repairs or medical bills, or to consolidate other higher-interest debts such as credit card balances into one manageable — and potentially lower — monthly payment with a credit card consolidation loan.
Here are some more ways these loans are often used:
• A personal loan can be a helpful tool for debt consolidation. If you can qualify for a personal loan that has a lower interest rate than your other outstanding debts, you may be able to save money in the long run by consolidating those debts. In order for this financial strategy to work, it’s important to stop using the old sources of credit to avoid going deeper into debt.
• A personal loan also could be a suitable choice for paying for a wedding or home renovation. But it’s important that you feel confident about being able to repay the loan on time and in full. If you don’t responsibly manage a personal loan — or any kind of debt, for that matter — your credit can be adversely affected.
• You can apply for a secured or unsecured personal loan. A secured loan, which is backed by collateral, is typically considered less of a risk by lenders than an unsecured loan. Collateral is an asset the borrower owns — a vehicle, real estate, savings account, or other item of value. If the borrower fails to repay a secured loan, the lender has the right to take possession of the asset that was put up as collateral. An unsecured personal loan is guaranteed only by the borrower’s signature, which is why it’s sometimes called a signature loan.
Here are a few more points about how the process of getting a personal loan can work:
• An applicant’s overall creditworthiness will be considered during the approval process. Generally, an applicant with a higher credit score will qualify for a lower interest rate, and vice versa. Other personal loan requirements may include steady income and a healthy balance of debt vs. income. Applicants who struggle with a limited credit history or erratic income can consider applying for a personal loan with a co-borrower.
• Some lenders charge personal loan fees such as origination fees or prepayment penalty fees. Before signing a loan agreement, it’s important to be aware of any fees you may be charged.
Pros and Cons of Personal Loans
When you need a set amount of money for an expense, a personal loan can be a good choice. Along with the benefits of using this financial tool also come a few drawbacks to consider.
Pros of Personal Loans
• May be a good choice for large, upfront expenses.
• Unsecured personal loans may have higher interest rates than other forms of secured credit.
• May need a higher credit score to qualify for lower interest rates.
• If not used responsibly, it can add to a person’s debt load instead of alleviating it.
• May have fees.
Major Differences Between Personal Lines of Credit and Personal Loans
When you’re looking for the right source of funding for your financial needs, it can help to compare different types. Here are some specifics to consider when looking at a personal line of credit vs. personal loan:
Personal Line of Credit
Personal Loan
Typically has a fixed interest rate
More likely to have a variable interest rate
Fixed interest rate may make it easier to budget payments
Variable interest rate may present a budgeting challenge
Fixed, lump sum
Open-ended credit, up to approved limit
Interest is charged during entire loan term
Interest is charged only on withdrawn amounts
Revolving debt
Installment debt
Considering the Type of Debt
When you’re thinking about applying for a personal loan vs. line of credit, it’s important to consider the effect borrowing money can have on your credit score. If you borrow money without a repayment plan in place, you could run into trouble no matter which borrowing option you go for. But each is looked at differently by the credit bureaus.
A personal line of credit is revolving debt, which means it will factor into your credit utilization ratio — how much you owe compared to the amount of credit that’s available to you. This can count as the second most weighty factor (at 30%) toward your score.
For a FICO® Score, keeping your total credit utilization rate below 30% is recommended. That means if your credit limit is $15,000, you would use no more than $4,500.
• Using a large percentage of your available credit can have a negative effect on your credit score. And lenders may see you as a high-risk applicant because they may assume you’re close to maxing out your credit cards.
• Using a small percentage of your available credit can work in your favor. If your credit utilization ratio is low (under 10%), it signifies to potential lenders that other lenders have determined you to be a good risk, but you don’t need to use the credit that’s been extended to you.
• Having a low credit utilization rate by using just a little of your available credit could actually have a more positive effect on your credit score than not using any of it at all. Lenders generally look for signifiers of a healthy relationship with credit.
A personal loan is installment debt and isn’t considered in your credit utilization ratio. In fact, if you pay off your revolving debt with a personal loan, it potentially can lower your credit utilization ratio and have a positive effect on your credit score. A personal loan also can add some positive variety to your credit mix — something else that’s calculated into your credit score.
Before you decide to obtain a personal loan vs line of credit, it’s wise to compare lenders. Look at the annual percentage rate and whether it’s fixed or variable. You can also take into account any fees you might have to pay, including origination fees, annual fees, access fees, prepayment penalties, and late payment fees.
Estimating the total cost of the loan until it’s paid in full, including the principal loan amount, interest owed, and any fees or penalties you could potentially be charged, will help you figure out how much the loan will actually cost you.
Alternatives to Personal Loans and Lines of Credit
If you examine the difference between personal loan and line of credit and decide that neither feels like the right fit, you could consider these alternatives:
• Credit card A credit card offers flexible access to funds to pay for bills as they come. Unfortunately, credit card interest rates tend to be higher than those for personal loans. If you can find a credit card that has a low (or 0%) initial APR offer and you can be sure you’ll pay your balance off before the initial offer ends, that could be a cost-efficient alternative to a PLOC or personal loan.
• Home equity loan or home equity line of credit (HELOC) If you own your home and have some equity built up, you might be able to borrow against that equity with a home equity loan or HELOC. These options tend to have lower interest rates than either personal loans or personal lines of credit. The tradeoff is that they are secured by your home equity, so if you can’t repay what you borrow, with interest, you risk foreclosure.
• Borrow from a friend or family member This type of loan does have some advantages: It likely won’t require a credit check, and you might have a low interest rate and very flexible repayment terms. But if you don’t repay the loan as promised, a personal relationship is at stake.
• Retirement plan loan If you’ve stowed away money in a 401k, 403(b), or 457(b) retirement plan, you may be able to borrow up to $50,000 or 50% of your balance, whichever is less. You have five years to repay your loan and will need to make quarterly payments (rules are different if you use the money to buy a home). IRS guidelines govern this type of loan, so consult your tax advisor to ensure you follow the rules.
The Takeaway
Deciding when and how to borrow money can be a tough decision. Personal loans and personal lines of credit each have their pros and cons. Personal lines of credit allow you to borrow up to a credit limit, while personal loans disburse a lump sum. Interest rates, fees, and other features may vary. It’s wise to consider your needs and options carefully, reading the fine print on possible offers.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.
FAQ
Is it better to get a loan or use a line of credit?
Loans can be better suited for fixed expenses or one-time needs, while lines of credit can offer flexibility for repeated borrowing. That is the key difference between personal loan and line of credit to be aware of when making your decision, but it’s not the only one: Loans often carry lower interest rates but may involve higher upfront fees; lines of credit, on the other hand, may cost more over time due to variable rates and fees.
What are the downsides of a line of credit?
The interest rates for a personal line of credit may be higher than those charged on other sources of funding, and if the rate is variable, that can make budgeting more difficult. Also, there can be fees, such as an annual or monthly maintenance fee and transaction fees.
Does a line of credit hurt your credit score?
A line of credit can involve a hard credit pull when you apply, which can temporarily lower your credit score by several points. After that, how you manage your line of credit can determine how your credit score is impacted. Keeping your usage low and always paying on time can help build your score. Taking on too much debt and missing your payment due dates can lower your score.
What is the typical borrowing limit for a personal line of credit vs personal loan?
Generally speaking, a personal line of credit will have a lower borrowing limit than a personal loan. Some personal loan lenders allow loans of up to $50,000 or even $100,000. A PLOC might top out at $20,000. However, remember that if you borrow with a personal line of credit and then repay what you have borrowed, you can borrow again up to the limit so long as you are still in the borrowing phase of the agreement.
Can you have a personal loan and a personal line of credit at the same time?
It is sometimes possible to have a personal loan and a personal line of credit at the same time. When qualifying applicants for either of these borrowing methods, lenders consider the credit score but also the debt-to-income ratio — the level of debt relative to income. If overall debt remains healthy, a loan and line of credit can coexist. For example, if an applicant with a healthy income is making on-time payments on a modest personal loan and then wishes to add on a personal line of credit, the math could work out in their favor.
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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.
Here’s the key difference between income and net worth: Income is the amount you earn, while net worth is the total value of your assets minus any debt. When it comes to measuring your financial health, income isn’t the metric that matters. No doubt, you do want to know whether your income will help you reach your goals, but looking at your net worth can be a better measure of your overall wealth.
Here, take a look at net worth vs. income and how they factor into your financial health.
Key Points
• Income refers to earnings from various sources such as wages and dividends, whereas net worth is assets minus debts.
• Net worth provides a more comprehensive measure of your financial health than income alone.
• Increasing your income and managing your debts effectively can boost your net worth over time.
• Assets can include savings, real estate, and investments, while liabilities might consist of loans and credit balances.
• Regularly tracking both income and net worth is crucial for achieving financial goals.
Income vs Net Worth: Two Measurements of Wealth
Both income and net worth can help measure the chances of someone creating wealth. However, the difference is that income is the primary way someone builds wealth, whereas net worth measures your level of wealth. To put it another way, income is how you make money, but it doesn’t necessarily lead to creating wealth.
Looking at your net worth allows you to see the value of all your assets and liabilities at a specific point in time. It gives you a sense of your financial health in terms of whether you own more assets — such as your home, investments and cash — than liabilities (any money you owe, such as credit card debt). Your net worth also allows you to see how much of your wealth is held in assets or cash. And it offers a reference point to help you measure your progress toward your financial goals.
While income is a key aspect of your finances, net worth is typically more important. That’s because even if you have a large income, it doesn’t guarantee that you’ll generate more wealth than someone else who may have a slightly lower one. Sure, having a larger income can help you build wealth faster, but it’s all in how you handle your finances, such as the amount of money you save.
Say your friend makes $100,000 per year but has a lot of debt, leading their net worth to be $15,000. On the other hand, you make $70,000 but have invested over 10 years, to the point where your net worth is $100,000. You have more wealth and, therefore, are more likely to be financially stable than your friend.
Another instance where income doesn’t correlate with wealth is when someone is older and getting ready to retire. Their income may be lower because they’re working part time, but their wealth could be in the millions because they’ve worked for many years.
All this to say, income is important but only as important as how you use it to reach your financial goals.
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How to Calculate Income
Calculating your income doesn’t simply mean looking at the number on your paycheck. You’ll also want to factor in other sources of income, such as any government benefits, commissions, tips and dividends. Don’t forget to include irregular or occasional income sources such as cash gifts, inheritances, and even tax refunds.
Make sure that when you add these up, it’s your net income and not gross income, as that will give you a more accurate picture of what you’re bringing in. Gross income is pretax money before deductions are taken out. Net income, on the other hand, is income that has taxes and deductions taken out.
Say you have a day job that offers bonuses and commissions. You also invest in securities that provide dividends.
Here’s how you would calculate your income:
• Annual net salary: $64,350
• Annual commissions: $3,500
• Annual bonus: $2,000
• Annual dividends: $3,234
TOTAL INCOME: $73,084
You can then use this total to calculate monthly and weekly income. In this case, it’s $6,090.33 per month and $1,405.46 per week.
How to Calculate Net Worth
Calculating your net worth involves creating a net worth statement so you can see a snapshot of your assets and liabilities.
Start by looking at your assets and determining the total amount of all accounts under this category. Assets are items that have some sort of monetary value. These include:
Once you’ve calculated all of your assets, you’ll need to calculate the total amount of your liabilities. Liabilities are any debts or financial obligations you have, including:
After totaling up your assets and liabilities, subtract the latter from the former. The resulting number is your net worth. If your liabilities are greater than your assets, you have a negative net worth. The more assets you have than liabilities, the higher your net worth will be.
Example of Calculating Net Worth
As an example, say that Barbara has decided to calculate her net worth. First, she lists out her assets and liabilities:
Ideally, you’ll have a positive net worth that keeps growing over time. Here are several ways to improve your net worth.
1. Keep Track of Your Assets and Debt
Tracking your assets and debt will give you an accurate picture of where you stand. That way, you’ll be able to see your progress and what you need to improve or keep doing to grow your net worth. For instance, if you notice that your debt keeps growing, you can use this information to help you figure out why and take steps to rectify the situation.
2. Pay Off Debt
The fewer liabilities you have, the more your net worth will grow. To build your net worth, you can focus on making sure you’re making on-time payments and avoid taking out new loans if possible. If your budget allows, consider making extra payments toward loans to pay down your debt faster. Monitoring your spending can also help you free up more money to put toward debt. It may take a couple of months to identify areas of overspending, but doing so can be worth the effort.
3. Increase Your Income
Getting a higher salary will help you build wealth by paying off debt or putting money toward investment accounts. Ideally, you want to increase your income and pay off your debts as soon as you can. To increase your income, you can consider negotiating for more in your current job, looking for a new job, or starting a side hustle.
4. Invest
Sticking your cash in a savings or checking account can earn some interest. To accelerate your wealth-building journey, you may want to consider investing some of your money.
You might start investing by contributing to your employer-sponsored account (bonus if they offer a match), and then branch out to other products as you see fit.
The Takeaway
Your net worth is a snapshot of your finances at a specific point in time and will fluctuate. It’s a good measure to see whether you’re on track with your financial goals. It can also be a better indicator of your overall financial status than income. The more you track your assets and liabilities, increase your salary, and pay down your debt, the more your net worth can grow.
Take control of your finances with SoFi Coach. You can easily view all of your accounts in one convenient dashboard: bank and investment balances, current debts, spending breakdowns, and credit score. Easily set up budgets and spot upcoming bills. And get personalized insights on everyday money questions and take action with Coach chat, the AI guide that’s powered by the playbooks of SoFi Financial Planners, so its guidance comes from expert knowledge.
Meet SoFi Coach, your smart personal guide to getting your money right.
FAQ
What’s more important, income or net worth?
Income and net worth tell you different things about your finances, so which is more important depends on what information you are looking for. Income reveals how much money you earn in a year, while net worth is a better indicator of your overall wealth and financial status.
Is your annual income part of your net worth?
While your annual income contributes to your cash flow, it does not necessarily add to your net worth. The amount of your income that you put in savings, investments, or other assets, however, can grow your net worth.
What is the top 1% income in the US?
To be a top 1% earner in the U.S., you currently need to earn around $800,000 a year. However, the threshold can vary by location. In some states, such as Connecticut and Massachusetts, you need to earn over $1 million to be a top 1% earner.
How do I figure out my net worth?
To calculate your net worth, you will first need to determine your total assets, which includes your bank accounts, personal property, and retirement fund, and your total liabilities, which are your debts and other financial obligations. You can then find your net worth by subtracting your total liabilities from your total assets.
How do I calculate my real income?
To calculate your income, you’ll want to consider sources of income other than just your paycheck, such as government benefits, commissions, tips, gifts, and tax refunds. Adding up these numbers will determine your net income. Net income factors in taxes and deductions, giving you a more accurate idea of what you are making than gross income, which is the pretax amount.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
If you’re a consumer in the United States who has a credit history, then you probably have a credit score. More than one, in fact.
FICO® Scores are far and away the most widely used, as 90% of lenders rely on them to assess a borrower’s creditworthiness. That said, there’s no single credit score that matters the most. Lenders can and do use a variety of credit scores to determine whether to approve your application for credit and what terms to offer you. Whether you’re looking to make a major purchase or focused on building up your credit profile, it’s a good idea to understand the different types of credit scores out there and how to keep tabs on yours.
Key Points
• FICO Scores are preferred by 90% of lenders, while VantageScores® are often free on online platforms.
• Payment history significantly affects credit scores, comprising 35% of FICO Scores.
• Credit utilization, making up 30% of FICO Scores, should remain below 30%.
• Consumers can check scores via credit card statements, free websites, or credit bureaus.
• Regular credit report reviews help you maintain financial health by catching and correcting inaccuracies.
Types of Credit Scores
You may have noticed that your credit score varies depending on which website you visit. That’s perfectly normal. As mentioned, anyone with a credit history probably has more than one score.
One reason for this is that the three main credit bureaus — Equifax®, Experian®, and TransUnion® — may each receive slightly different information from lenders. As a result, your score could vary by bureau.
In addition, there are multiple different ways to calculate a credit score based on the information available. That’s why there’s sometimes a gap between your VantageScore vs. FICO scores.
This can be an important difference to understand, since VantageScores are often the credit scores available for free through online platforms. You may sometimes see one credit score (your VantageScore) when you get a free credit report but then be surprised to learn when you apply for a credit card or loan that your FICO Score is different.
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Generally speaking, your FICO Score is calculated based on the following factors and their relative weights:
• Payment history (35%): This reflects how often you’ve made on-time payments on your debt. Late or missed payments or accounts sent to collections can negatively impact your score.
• Amounts owed (30%): This is your credit utilization ratio, or the amount of available credit that you’re using. Ideally, the lower the better, but aim to keep this ratio below 30%, which is when it can start to significantly impact your score.
• Length of credit history (15%): This looks at the average length of your credit accounts. Typically, a longer history is a sign to lenders that you have more experience successfully managing your debt.
• New credit requests (10%): When you open a credit account, the lender may do a “hard” credit inquiry, which could cause your score to temporarily drop.
• Credit mix (10%): This refers to the mix of credit types in your portfolio, which may include credit cards, car loans, or other types of credit.
How Experian Works
As one of the three main credit reporting bureaus in the U.S., Experian collects information about your credit accounts and payment history and includes those details in your Experian credit report.
The bureau does make it possible for you to access your FICO Score for free, though it also offers a paid membership that provides credit score monitoring for all three bureaus.
How Equifax Works
Equifax is another U.S. credit reporting agency that offers similar services to Experian.
Again, while you’ll likely have a credit report from both Equifax and Experian, the scores may differ slightly based on the information each bureau has collected. It’s worth noting that Equifax also allows you monthly access to your VantageScore credit score based on the agency’s data.
Which Credit Score Bureau Is Best?
There’s no one “best” credit score bureau. All three bureaus collect consumer information and produce credit scores.
When you want to look at your credit report, it’s a good idea to request a copy from each of the bureaus. That’s because lenders may choose to pull your credit report from any one — or all — of them. By checking all three scores, you can be aware of negative information that affects your credit score and have a chance to correct any inaccuracies you see.
You have several options when it comes to accessing your credit score. You may be able to see it on your credit card statements or when you bank online. You can use free credit score websites or purchase your score from a credit bureau.
MyFICO offers a free service that allows you to check your FICO Score and receive your Equifax credit report each month. You can also pay for a plan that includes three-bureau credit report access, identity theft insurance, and more.
Another avenue to consider: A spending app, which often offers credit scores. Unless otherwise indicated, you’ll likely be seeing your VantageScore credit score.
Remember, credit scores update about once a month, or roughly every 30-45 days for FICO Scores, so it’s a good idea to check yours every so often.
How Can You Obtain Your Credit Reports?
While your three-digit score is a great way to see how your credit is faring, the best way to fully understand everything in your credit history is to read the full credit report. If you see any information that looks suspicious or incorrect, you can file a dispute directly with the credit bureau to have it removed.
Every American is entitled by law to pull their credit reports from all three bureaus for free once a week via AnnualCreditReport.
What Is a Good Credit Score Range?
FICO Scores range from a low of 300 to a maximum of 850. (That’s right: The starting credit score is not zero.) Here’s how FICO categorizes scores:
One great way to build your credit is to try to lower your overall credit card utilization. This means paying down your debt, particularly balances on revolving debt. And because on-time payments count for such a heavy part of the score, keeping up with your bills each and every month can also be a big help.
Finally, try not to sweat every fluctuation. Sometimes, filing a dispute or multiple hard inquiries in a short time frame can ding your score, but those dips tend to be temporary.
The Takeaway
If you have a credit history, then you likely have more than one credit score. So which credit score matters the most? Short answer: whatever score the lender uses when considering your application for credit. Generally, FICO Scores are used in most decisions, though each lender has its own policies around which scoring model and version to use.
Regardless of the scoring model, staying on top of your bills, paying down debt, and regularly reviewing your credit report can help ensure you’re on firm financial footing.
Take control of your finances with SoFi Coach. You can easily view all of your accounts in one convenient dashboard: bank and investment balances, current debts, spending breakdowns, and credit score. Easily set up budgets and spot upcoming bills. And get personalized insights on everyday money questions and take action with Coach chat, the AI guide that’s powered by the playbooks of SoFi Financial Planners, so its guidance comes from expert knowledge.
Meet SoFi Coach, your smart personal guide to getting your money right.
FAQ
Is FICO or TransUnion more accurate?
FICO and TransUnion serve different purposes. FICO is a credit scoring model that uses a proprietary algorithm to calculate credit scores. TransUnion is one of the three major credit reporting bureaus in the United States that collects credit information about consumers from lenders and creates credit reports.
Do lenders look at FICO or TransUnion?
What a lender reviews — whether it’s just your credit score (like your FICO Score) or your complete credit report (like one from TransUnion) — usually depends on the type of credit you’re applying for. For smaller lines of credit, such as a credit card, they may only check your score. But for larger loans, such as a mortgage, they’re more likely to dig into your full credit history.
Why is my FICO score 100 points lower than Credit Karma?
Credit Karma provides its users free access to their VantageScore, which is calculated using a different algorithm than the FICO Score. If your score on Credit Karma is different from your FICO Score, it’s likely because of the different calculations.
What is a good FICO score?
According to FICO, a “good” credit score falls between 670 and 739. Credit between 740 and 799 is considered “very good,” while credit scores of 800 and above are considered “exceptional.”
Do lenders use FICO or Vantage?
The majority of U.S. lenders use FICO Scores to assess a potential borrower’s creditworthiness. However, a VantageScore is what you’re more likely to see on many web platforms that offer free credit scores.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
