Comparing Personal Loans vs Business Loans

Comparing Personal Loans vs Business Loans

A business loan might seem the natural choice if you’re looking for additional funding for your small business. But a personal loan is another popular lending option that you also may be able to use for business purposes — or to free up your finances so you can spend more of your money on growing your business.

Because there are pros and cons to both types of financing, it’s important to understand their differences and how a business loan vs. a personal loan might work for you.

What Is a Personal Loan?

A personal loan is a source of financing that a borrower typically can use for just about anything. (Although you may need to get approval from your lender if you plan to use the money directly for your business.)

This type of loan is typically unsecured, with the borrower agreeing to pay back the full amount, plus interest, in fixed monthly payments within a predetermined time frame. Some lenders also offer secured personal loans, however, and some offer personal loans with variable interest rates.

How Personal Loans Work

When you apply for a personal loan, you can expect the lender to review your personal financial information — including your credit score, credit reports, and income — to determine your eligibility. In general, the better your credit, the better your chances of receiving a lower interest rate.

Personal loan amounts vary, but some lenders offer personal loans for as much as $100,000.

Although most personal loans have shorter repayment terms, the length of a loan can vary from a few months to several years.

What is a Business Loan?

A business loan is a type of financing used specifically to pay for business expenses. It could be used to purchase equipment or inventory, for example, or to fund a new project.

There are many kinds of small business loans available — with different rates and repayment terms — including Small Business Administration (SBA) loans, equipment loans, micro loans, and more. Rates, terms, and loan requirements also can vary significantly depending on the lender.

How Business Loans Work

Applying for a business loan tends to be more complicated than getting a personal loan. For one thing, you’ll likely have to submit more paperwork to back up your application, including your business’s financial statements and an up-to-date business plan. The lender also will want to review your personal and business credit scores. And you may have to be more specific about what the loan will be used for than you would with a personal loan.

If your business is brand new, lenders may be reluctant to give you a business loan. Some lenders might ask you to put up some type of collateral to qualify.

Differences Between Business and Personal Loans

There are several factors you may want to evaluate if you’re trying to decide between a personal loan vs. a business loan, including the loan costs, how you plan to use the money, and how much you hope to borrow. Here’s a look at a few basic differences.

Cost Differences Between Business and Personal Loans

Whether you’re considering applying for a business loan or a personal loan to use for your business, it’s important to be clear about how much it could cost you upfront and over the life of the loan.

Interest Rates

Typically, interest rates for business loans are lower than for personal loans, but the rates for both can vary depending on the type of loan, the lender you choose, and your qualifications as a borrower.


Fees also can affect the upfront and overall cost of both personal and business loans, so it’s a good idea to be clear on what you’re paying. Some of the more common fees you might see with both types of loans include origination, application, packaging, and underwriting fees, and late payment and prepayment penalties.

Some fees may be subtracted from the loan amount before the borrower receives the money. But fees also may be folded into a loan’s annual percentage rate (APR) instead, which can increase the monthly payment.

Down Payment

For a larger business loan — a substantial SBA loan or commercial real estate loan, for example — you could be required to come up with a down payment. This amount can add to your upfront cost, but just as with a mortgage or car loan, a larger down payment can help you save money over the long term, because you’ll pay less in interest.

Whether you’ll need a down payment, and the amount required, may depend on your individual and business creditworthiness.

Different Uses for Business and Personal Loans

One of the biggest differences between business vs. personal loans is the way borrowers can use them.

A business loan can be used to finance direct business costs, such as paying for supplies, marketing, a new piece of equipment, business debt consolidation, or a business property. But it typically can’t be used for indirect business costs, which means a borrower can’t pay off personal debts with the money or buy personal property with it.

Some business loans have a very specific purpose, and the borrowed money must be used for that purpose. For example, if you get an equipment loan, you must buy equipment with it. Or, if you get a business car loan, you must buy a business car with the money.

Because you may be able to use the influx of cash for both business and personal expenses, a personal loan can give a borrower more flexibility. But personal loans are typically smaller than business loans, and they generally come with a shorter repayment term. It can be helpful to have a clear intent for how the money will be spent and to keep separate records for business and personal expenses.

It’s also important to note that some lenders put restrictions on how personal loans can be used, so you should read the fine print before applying and share your plans with the lender if asked.

Differences When Applying for Business and Personal Loans

The criteria lenders look at can be very different when approving a small business loan vs. a personal loan. Here’s what you can expect during the application process.

Applying for a Personal Loan

When you apply for a personal loan, the application and approval process is all about your personal creditworthiness. Lenders typically will review a borrower’s credit scores, credit reports, and income when determining the interest rate, loan amount, and repayment term of a personal loan.

Generally, you can expect to be asked for a government-issued photo ID, your Social Security number, and/or some other proof of identity. You also may be asked for proof of your current address. And the lender will want to verify your income.

Applying for a Business Loan

When you apply for a business loan, your personal finances still will be a factor, but the loan underwriters also will evaluate things like your business’s cash flow, how long you’ve been in business, your profitability, the exact purpose of the loan, trends in your industry, your business credit score, and more.

Besides your own financial information, the lender may ask for a current profit-and-loss statement, a cash-flow statement, recent bank statements and tax returns for the business, your business license and a business plan, and any other current loan documents or lease agreements you might have.

You also will have to provide information about your collateral if you are applying for a secured loan.

Structural Differences in Business and Personal Loans

Knowing the differences in how personal loans vs. business loans are structured could help you decide which is right for you and your business. A few factors that might affect your choice include:

Loan Amount

A business loan may be more difficult to apply for and get than a personal loan, especially if your business is a startup or only a few years old. But if you can qualify, you may be able to borrow more money with a business loan. While personal loan amounts typically top out at $50,000 to $100,000, some SBA loans can go as high as $5 million.

Loan Length

You’ll likely find personal and business loans with both short and long repayment terms. But generally, personal loans have shorter terms (typically a few months to a few years), while some business loan repayment periods can be 20 years or more.

Tax Advantages

Because a business loan is specifically earmarked for business expenses, deducting the interest you pay on the loan should be pretty straightforward when filing income taxes. With a personal loan, it might get a little more complicated. If you use the borrowed money only for business costs, you may be able to deduct the interest you paid. But if you use the loan for both business and personal expenses, you can deduct only the percentage of the interest that was used for qualifying business costs. And you should be prepared to itemize deductions, documenting exactly how you spent the money. Your financial advisor or tax preparer can help you determine what’s appropriate.


Along with the traditional banking services you might expect to get with any type of loan, a business loan also may come with operational support and online tools that can be useful for owners and entrepreneurs.


When you’re deciding between a personal vs. business loan, it’s also a good idea to think about what could happen if, at some point, the loan can’t be repaid. If your business defaults and you have a personal loan, you (and your cosigner, if you have one) could be held responsible for the debt. You could lose your collateral (if it’s a secured loan) or damage your personal credit.

If your business defaults and it’s a business loan, the impact to your personal credit would depend on how the loan is set up. If you’re listed as a sole proprietor or signed a personal guarantee, it’s possible you could be sued, your personal and/or business credit scores could take a hit, and your personal and business assets could be at risk. If your business is set up as a distinct legal entity, on the other hand, your personal credit score might not be affected — but your business credit score could suffer. And it could be more difficult for you to take out a business loan in the future.

Structural Differences in Business and Personal Loans

Business Loans Personal Loans
Loan Amount Typically come in larger amounts (up to $5 million). Generally are limited to smaller amounts (up to $100,000).
Loan Length Usually have longer repayment periods (up to 20 years or more). Generally have shorter terms (a few months to a few years).
Tax Advantages Interest paid on a business loan is usually tax deductible. Interest paid on a personal loan used for business expenses may be tax deductible.
Support Lenders may offer operational support and online business tools to borrowers with business loans. Lenders may offer more personal types of support to borrowers with personal loans.
Risk Defaulting on a business loan could affect the borrower’s business credit score or business and personal credit scores (based on how the loan is structured). Defaulting on a personal loan could affect the borrower’s personal credit score.

Pros and Cons of Business Loans

There are advantages and disadvantages to keep in mind when deciding whether to apply for a business loan. A business loan can be more difficult to get than a personal loan, especially if the business is new or still struggling to become profitable. But if you qualify for a business loan, you may be able to borrow a larger amount of money and get a longer repayment term. It also could make it easier to separate your business and personal finances. And there could be fewer personal consequences if the business defaults on the loan.

Pros of Business Loans

Cons of Business Loans

Borrowers may qualify for larger amounts than personal loans offer. Applying can require more time and effort.
Longer loan terms available. Qualifying can be difficult.
Interest rates may be lower. Collateral and/or a down payment may be required.
Interest is usually tax deductible. Loan must be used for business purposes only.
Lenders may offer more business-oriented support. New businesses may pay higher interest rates.
Debt may be the responsibility of the business, not the individual (depending on loan structure). Responsibility for the debt could still land on individual borrowers.

Pros and Cons of Personal Loans

Though personal loans can offer borrowers more flexibility than business loans and they’re generally easier to qualify for, they can have both advantages and disadvantages when used for business. One major hurdle may be tracking whether the funds were used for business or personal expenses, which can be crucial, especially for income taxes.

Pros of Personal Loans

Cons of Personal Loans

Application process is usually quick and easy. Lending limits may be lower than business loans.
Qualifying can be less challenging than with a business loan because it’s based on personal creditworthiness. Borrower doesn’t build business credit with on-time payments.
Can use funds for both personal and business expenses (unless there are lender restrictions). Defaulting can affect personal credit score/finances.
Most personal loans are unsecured. Interest rates are generally higher than for a business loan.
Interest may be tax deductible (when funds are used for business). Shorter loan terms than business loans typically offer.

Is a Business or Personal Loan Right for You?

Choosing between a personal loan and a business loan can be tough. You may want to do some online research, compare rates and terms, and/or ask a financial professional or business mentor for advice before moving forward with this important decision. Here are some things to think about as you look for a loan that’s a good fit for your personal and professional goals.

A business loan may make sense if:

•   You want to keep personal and business expenditures separate.

•   You’ve been successfully running your business for a while.

•   You need more money than you can get with a personal loan.

•   You hope to build your business credit.

•   You want to limit your liability.

A personal loan may make sense if:

•   Your goal is to grow your startup or new business.

•   You plan to use the money for both business and personal expenses.

•   You can find a personal loan with a lower interest rate than a comparable business loan, and the lender approves the loan for business expenses.

•   You want to get the money as quickly as possible.

•   You don’t want to secure the loan with collateral.

•   You feel confident about your personal ability to repay the loan.

The Takeaway

Whether you’re a longtime business owner or a budding entrepreneur, there’s no one-size-fits-all solution to finding financing for your business. But there are several factors that can help you determine whether a personal loan or a business loan is a better fit for your needs.

Comparing lenders and their current loan offers can be a good place to start. Think about how much you hope to borrow, the monthly payment you can afford, and what you plan to use the money for. And as you move forward, keep in mind the impact (good or bad) the loan might have on your personal and business credit scores and the future of your business.

SoFi Personal Loans are easy to apply for, offer competitive interest rates, and have loan terms to fit a variety of budgets.

Need some cash to build your business? Learn more about personal loans from SoFi.


Are business loans more expensive than personal loans?

Business loans typically have lower interest rates than personal loans. Still, it’s probably worth comparing both types of loans and the rates lenders are willing to offer you and/or your business before making a final decision between the two.

Is it illegal to use personal loans for business?

Most personal loans can be used for just about anything. Your lender may not even ask how you intend to spend the money. But it’s a good idea to check the lending agreement for any restrictions. And if the lender wants to know the purpose of the loan, you should be honest about your intentions.

Are startup loans personal loans?

There are a few different options for funding a startup, including SBA loans, family loans, or crowdfunding platforms. But if you have good credit and are confident you can make the monthly payments, taking out a personal loan could be an effective strategy for funding a startup.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see

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.

Photo credit: iStock/MicroStockHub

Read more
Can I Use a Personal Checking Account for Business?

Can I Use a Personal Checking Account for Business?

If you’re a busy small business owner who’s wondering if it’s OK to use your personal checking account for your business, the answer is yes. Probably. At least for a little while.

But you may find there are complications and risks involved if you mix your personal and business funds in one account for very long. It can make record-keeping a challenge, for one thing, especially when it comes to doing taxes. And you may be able to better protect yourself legally if you keep your business and personal funds separate. Let’s take a look at:

•   The features of business checking accounts and personal checking accounts

•   The differences between these two types of bank accounts

•   The risks of using your personal bank account for business

•   The advantages of having a separate business bank account

Let’s start learning!

What Is a Business Checking Account?

A business checking account is a separate bank account intended to manage financial transactions related to your business, including making deposits and withdrawals, paying bills, and transferring money. Some expenses you might use your business account for include:

•   Office equipment and supplies

•   Rent and utilities

•   Transportation costs (gas, parking, tolls, or public transportation expenses)

•   Car payments and insurance (if you have a car you use for business)

•   Consulting and marketing costs

•   Paying employees (if you have any)

•   Tax payments and insurance premiums

What Is a Personal Checking Account?

A personal checking account is designed for managing an individual or couple’s finances. It can be used for depositing and withdrawing money, paying bills, and transferring money to family members. (Wondering the difference between a personal checking account vs a savings account? The latter usually pays more interest, may have higher minimum deposits, often doesn’t provide checks or a debit card, and in some cases may have transaction limits.)

It may be tempting, especially as a new business owner or sole proprietor, to think, “Can I use my personal account for business?” and proceed to buy a laptop, office supplies, or new business cards with it. But commingling business and personal funds can get confusing. Having to sort things out can make bookkeeping a major headache and cause problems when it’s time to claim business-related tax deductions.

What’s the Difference Between Business and Personal Checking?

There may be some important differences in how a bank sets up its business and personal checking accounts, including:


The documentation required to sign up for a business account may vary a bit from what you’d need for a personal account. For example, depending on how your business is structured, along with an Employer Identification Number (EIN), Social Security number, and photo identification, you may have to provide a business license, LLC agreement, articles of incorporation, or a Doing Business As (DBA) certificate.


Coming up with enough money to open a business account may not be as daunting as you think. The amount it takes to get started varies by bank, but many require only a $25, $50, or $100 deposit to get started. However, banks generally require a higher minimum balance for a business account if you want to avoid maintenance and other fees.

Transaction Fees

You also may see a transaction fee added to your costs if you go over a maximum number of transactions for the month in a business account. The number of free transactions you’re allowed typically is based on your average monthly balance. If you expect your business to have multiple banking transactions each month, that’s a cost you’d want to consider.

Premium Benefits

Banks generally offer the same protections and benefits to business accounts as they provide for personal accounts, including round-the-clock fraud monitoring, account alerts, and liability protection for unauthorized transactions. But there may be additional business-specific perks available for business accounts — especially larger accounts. Check with your prospective business bank to find out more.

Debit Cards

With a personal account, you’ll likely receive a debit card for your personal use (and one for a joint account holder, if you have one). With certain business accounts, you also may be allowed to get debit cards for your employees so they can make purchases or ATM withdrawals on behalf of the business.

Credit Card Payments

If your business account is a “merchant account,” you may be able to take debit and credit card payments from clients or customers. This requires a different kind of business account, however, rather than a typical business checking account, so inquire at your bank.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!

Can I Use My Regular Checking Account for Business if I’m a Sole Proprietor?

If your small business is a sole proprietorship, you can legally operate using only your personal bank account. But you may want to check your account’s terms and conditions to be sure your bank allows you to use a personal account for business transactions. You may have to open a separate account if you’re asking customers to make payments to a company name that’s different from your own.

Can I Use My Personal Checking Account for Business if I Have an LLC or Corporation?

Yes, it may be tempting to use your personal checking account if you operate your business as a limited liability company (LLC) or corporation. But take note: You are legally required to separate your personal and company finances. You could use a separate personal account to establish that split, or you may want to consider the benefits of using a business account instead. (If you’re applying as an LLC or corporation, some banks may require that you use a designated business account.) So in this case, you likely do want to have that separate business account to stay on the right side of the law.

Risks of Using a Personal Checking Account for Business

Using your personal checking account may seem like the easiest way to handle business transactions — especially if your business is small or you’re just starting out. But there are risks involved, including:

Tax-Related Liabilities

One of the factors the IRS uses to distinguish between a hobby and business activities is whether you carry on the activity in a businesslike manner and “maintain complete and accurate books and records.” It’s critical for business owners who claim business income and deductions on their income taxes to keep their company’s financial transactions separate from their personal transactions. It can be much harder to do that — and prove that you’re doing it — if you’re working out of one account. It can be close to impossible to reconstruct what you were paying for and when if you ever have to account for past business spending out of your personal account.

Business-Related Liabilities

You can form an LLC or corporation in an effort to protect your personal assets from business-related liabilities. But if you mix business and personal funds in one account and a court decides you aren’t actually treating your business as a separate entity, you still may be at risk.

Loss of Credibility

If you’re hoping to grow your business, not having a business-only bank account could hurt your potential. Some clients and investors may be reluctant to make payments to a personal bank account — especially if your business has a different name. It also may be challenging to apply for a small business loan if you haven’t established a professional relationship with your bank. And if you have to show paperwork to set up a client, investor, or lending arrangement, having business-only bank statements could be a lot less confusing (and, um, personal).

Benefits of Using a Business Checking Account for Business

Using a business checking account may not be a legal requirement in all situations, but it could have benefits for you and your business, including:

Simplified Record-Keeping

Unless you’re a meticulous record-keeper, it can be difficult to keep business and personal finances separate. Maintaining separate bank accounts could prevent costly errors, keep you out of trouble with the IRS, and make your life as the company bookkeeper a lot less complicated.

Tracking Performance

If you use small business bookkeeping software, you may be able to link it with your business bank account to quickly check your cash flow, monitor transactions, build your budget, and create financial projections. That won’t be possible if your business transactions are mixed with your personal transactions, however.

Building Legitimacy

Using a business account for your transactions could help clients, vendors, and others you deal with think of you as a legitimate businessperson instead of someone with a side hustle. (Have you ever heard the expression “dress for the job you want”? It holds true for banking, too. Having a separate business account could help you present yourself as a serious professional.)

Building a Brand

Growing your brand might take more than just your sparkling personality, business savvy, and an irresistible Instagram feed. You may need money, and that means convincing lenders that you’re a good risk. A well-managed separate business bank account can help you build a relationship with your bank and a reputation for creditworthiness.

The Takeaway

Using separate accounts for your personal and business finances could make sense — even if you’re a new business or a sole proprietor. It can make record-keeping easier for tax preparation and other business purposes and give your business added credibility with customers, vendors, and lenders. In some cases (LLCs, we’re talking to you!), it’s legally required, so don’t overlook this important step in building your business.

While we’re on the money topic, how are your personal accounts doing lately? If you’d like simpler and more reward-rich banking, take a look at SoFi Checking and Savings® . We’re currently offering a 1.25% APY to customers who sign up for an online bank account with direct deposit. That’s a whopping 41 times the average rate right now. More benefits: SoFi doesn’t charge overdraft, minimum balance, or monthly fees, and SoFi members have access to free tools that can help with budgeting and tracking their money as they work toward their goals.

Check out everything SoFi Checking and Savings has to offer.


Can I use a separate personal checking account for my business?

If you use a second personal account to separate your funds, you may lose out on some business-specific tools and perks that are offered exclusively through business accounts. If you are not legally required to have a business account, you might opt for a separate personal account, you may receive other benefits — such as a higher interest rate or lower fees. Either way, you’d be accomplishing the primary goal of dividing your personal and business funds.

Can I transfer money from my personal account to my LLC?

Yes, you can transfer money from your own account to the LLC’s account. It‘s important, though, to keep clear documentation of the transaction.

Do I need a business bank account if I’m self-employed?

It isn’t a legal requirement, but you may want to separate business and personal funds to simplify your record-keeping and keep transactions separate for income-tax preparation and other accounting purposes.

Photo credit: iStock/JNemchinova

SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.
Any SoFi member who receives $1,000 or more in qualifying direct deposits into their SoFi Money account over the preceding 30 days will be eligible for Overdraft Coverage. Overdraft coverage only applies to SoFi Money accounts and is currently unavailable for Samsung Money by SoFi accounts. Members with a prior history of non-repayment of negative balances for SoFi Money are also ineligible for Overdraft Coverage.

Read more
What Are the Different Types of Income?

7 Types of Income: All You Need to Know

You can make money in all sorts of ways. Perhaps you collect a paycheck every other week, or do freelance work that flows into your checking account. Or maybe you have a rental property that keeps rent rolling in, stocks that are throwing off dividends, or a savings account that is earning a bit of interest.

All of these are different sources of income. Here, we’ll take a look at seven types of income and how they might fit into your financial life. It will also give you a better picture of the ways that money can find its way to you, which is good money-smart knowledge to have.

What Is Income?

Let’s get the basics down. Simply put, income is money that a person or business earns in return for labor, providing a product or service, or returns on investments. Individuals also often receive income from a pension, a government benefit, or a gift. Most income is taxable, but some is tax-exempt from federal or state taxes.
Another way to think about income types is whether it is active (or earned) or passive (or unearned). Active or earned income is just what it sounds like: money that you work for, whether you are providing goods or a service.

Other kinds of income may be referred to as passive income or unearned income because you are not actively doing anything to get the money. For instance, if you have a certificate of deposit (CD) that earns you interest, that is passive income. Government benefits, capital gains, rental income, royalties, and more are also considered passive income. (We’ll go through these variations in more detail in a minute.)

People who are paid a salary may tend to think that their annual paycheck earnings are their income, but in truth, it’s common for many people to have multiple income streams. Granted, your salary may be by far the largest stream of income, but when considering your overall financial picture, don’t forget to think about the other ways that money comes to you.

Different Types of Income

Now that you know the answer to “What is income?” question, let’s look at the various kinds of Income is usually categorized as seven different types of income (though these may also be called income streams). Let’s go through them one by one.

1. Earned Income

Earned income is the money you earn for work you do, either in a job or self-employed. Earned income includes wages, salaries, tips, and bonuses.

Earnings are taxed at varying rates by the federal and state governments. Taxes may be withheld by your employer. Self-employed workers often pay quarterly and annual taxes directly to the government. Low-income workers may be eligible for the earned income tax credit.

2. Business Income

Next up: What is business income? This is a term often used in tax reporting; you may sometimes also hear it referred to as profit income. It basically means income received for any products or services your business provides. It is usually considered ordinary income for tax purposes.

Expenses and losses associated with the business can be used to offset business income. Business income can be taxed under different rules, depending on what type of business structure is used, such as sole proprietorship, partnership, corporation, etc.

3. Interest Income

When you invest in various types of interest-bearing financial vehicles, the return is considered interest income. Retirees often rely on interest income to fund their retirement. You can earn interest from a variety of sources including:

•   Certificates of Deposit (CDs)

•   Government bonds

•   Treasury bonds and notes

•   Treasury bills (T-bills)

•   Corporate bonds

•   Interest-bearing checking accounts

•   Savings accounts

In most cases, interest income is taxed as ordinary income. Some types of interest are fully taxable, while other forms (such as interest from Treasury bonds) are sometimes partially taxable. Worth noting: Money-market funds distributions may seem like interest, but they are usually considered dividends.

4. Dividend Income

Some companies pay stockholders dividends as a way of sharing profits. These are usually regular cash payments that investors can take as income or reinvest in the stock. Dividend income is one of the most common ways investors can make money from stocks.

Dividends from stocks held in a taxable brokerage account are considered taxable income. These funds will be taxed at your regular income-tax rate or as a long-term capital gain. By contrast, dividends that are paid from a stock held inside a tax-advantaged savings account such as an IRA or 401(k) are not taxed.

5. Rental Income

Just as it sounds, rental income is income earned from rental payments on property you own. This could be as straightforward as renting a room in your house or as complicated as owning a multi-unit building with several tenants.

Rental income can provide a steady stream of payments that may enhance your livelihood or even be your main income. When your rental property increases in value, you may also gain from that appreciation and increase in equity. In addition, rental income qualifies for several tax advantages, including taking depreciation and some expense write-offs.

But there are downsides. Owning a rental property isn’t for the faint of heart. Unreliable tenants, decreasing property values, the cost of maintaining and repairing properties, as well as fees for rental property managers can all take a bite out of your rental income stream.

6. Capital Gains

Another important income stream can come from capital gains. You incur a capital gain when you sell an asset for more than what you originally paid for it. For the purposes of capital gains, an asset usually means an investment security such as a stock or bond. But it can also encompass possessions such as real estate, vehicles, or boats. You calculate a capital gain by subtracting the price you paid from the sale price.

There is another key point to know on this topic: Two types of capital gains are possible — short-term and long-term.

•   Short-term capital gains are realized on assets you’ve held for one year or less.

•   Long-term capital gains are earned on assets held for more than a year.

The tax consequences are different for each type of capital gain. Short-term gains are taxed as ordinary income, while long-term capital gains are taxed at a lower rate depending on income. Most taxpayers pay 15% on long-term capital gains.

Keep in mind, that capital losses can happen too. That’s when a capital asset is sold for less than the purchase price. While it’s never pleasant to experience losses, there can be a small silver lining in this case. Many times capital losses can be taken as a tax deduction against current and/or future capital gains.

7. Royalty Income

Royalty income comes from an agreement allowing someone to use your property. These payments can come from the use of patents, copyrighted work, franchises, and more. Let’s consider an example or two. Inventors who sell their creations to a third party may receive royalties on the revenue their inventions generate. Celebrities often allow their name to be used to promote a product for royalty payments. Oil and gas companies pay landowners royalties to extract natural resources from their property. The market for music royalties has been particularly lucrative in recent years with the proliferation of music streaming services.

Royalty payments are often a percentage of the revenues earned from the other party using the property. Many things impact how much royalty is paid, including exclusivity, the competition, and market demand. How royalty payments are taxed can also vary, depending on the type of agreement.

Now that we’ve reviewed the seven different types of income, you may be wondering, “What about residual income?” That’s a term that doesn’t actually describe money that’s heading your way. Instead, think of that as the amount of your income left over after you’ve paid your financial obligations. It’s similar to discretionary income. Sorry, not another way to enrich your bank account!

The Takeaway

Understanding the seven general income streams can help you make the most of income opportunities in your financial planning. Earning income from any of these sources can add stability to your finances and help achieve long-term goals such as saving for retirement. Because some types of income have unique tax treatments, it can be important to check with your tax advisor about any tax consequences income will bring to your financial picture.

Aside from earned income, it’s likely that interest is the kind of income most people receive. And seeking out the best possible interest rate can be a very nice way to enhance your money. That’s why SoFi’s high yield banking is proud to offer a hyper-competitive rate of 1.25% APY when you open an account with direct deposit. What’s more, we don’t eat away at your funds with fees: SoFi doesn’t charge eligible accounts any monthly, minimum balance, or overdraft fees.

Let SoFi show you the smarter way to bank.

Photo credit: iStock/Selcuk1

SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.
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.

Read more
What Is a Merchant Bank Account? How It Works

Guide to Merchant Bank Accounts

If you run a business, you may well need a merchant bank account, which is an account that allows you to make and accept credit cards and other forms of electronic payment. That’s because for those who are merchants today, the once-popular forms of payment, such as cash and checks, are often replaced by newer, seamless options. To keep pace and facilitate your business, you need to adapt and adopt the latest technologies.

But even if you are convinced that you need a merchant bank account, you may wonder:

•   What exactly are merchant bank accounts?

•   How do they work?

•   When and why might you need one?

•   What does an application involve?

This guide will answer these questions and much more.

What is a Merchant Account?

As the name suggests, a merchant account is a specific type of business account, designed for those who sell products and/or services. This kind of account allows a company to accept credit cards and other forms of electronic payments when a customer is making a purchase. It differs from a basic business account in that the bank gets deeply involved in the payments. In fact, every single dollar that flows through their system on behalf of their client (the merchant) could wind up being charged back, which might mean the bank is responsible for refunds. So as you can see, it’s not at all your usual business account.

Recommended: How to Set Up and Use a Business Bank Account

How Do Merchant Accounts Work?

Let’s take a closer look at how merchant business accounts actually work. If a business wants to accept credit cards, debit cards, and/or electronic forms of payment, they must first apply to open an account with a bank that provides merchant services. When they get accepted by that merchant bank, they can begin their transactions. Among merchant banks, fees for conducting these transactions will vary, so it’s wise to comparison-shop before you decide which financial institution is your first choice.

Here’s a bit more detail on how merchant accounts actually work. Let’s say that Retailer A has chosen a merchant bank, been approved, and now accepts credit and debit cards in their store. When customers at Retailer A’s store use credit cards and other electronic payment forms to make their purchases, the dollar amounts of these purchases are credited to the retailer’s merchant account.

Funds may sit tight for a day or two while processing takes place. Once this is completed, the merchant services provider may place those funds into Retailer A’s bank account, making them available for the retailer to use. Processing fees are usually deducted from the amount deposited, which is how the merchant bank gets paid for their services.

Typically, the bank takes a per-transaction fee and the network processing the payment also gets a cut. A wide range of fees is possible, from 0.5% to 5.0% of the transaction, plus an additional 20 or 30 cents per transaction.

Documents Required for Opening a Merchant Account

If you decide that a merchant account is right for you, you’ll need to apply for one. You may be asked to provide the following pieces of information:

•   A completed application form that includes:

◦   Business name, contact information, and tax ID (EIN)

◦   Bank account information and a voided check to provide the account number and routing number

◦   Estimated monthly processing volume

◦   Authorized signer information

•   Valid IDs, such as a driver’s license and passport for each of the business owners

•   Current utility bill to verify the business address

•   Business banking statements (perhaps three months’ worth)

•   Credit card processing statements (perhaps three months’ worth) if the business has been using another merchant bank

Specifics can vary, so ask the merchant bank of choice what they require.

Merchant Acquiring Bank Services

If you are pursuing a merchant bank account, you are likely to hear the term “merchant acquiring bank,” “acquiring bank,” or “acquirer.” In all these cases, this language refers to the bank that is going to approve your account and handle the payment acceptance and processing. So an acquiring bank (or “acquirer”) is the financial institution that processes a business’s credit and debit card payments. In other words, these are the services being provided by a merchant bank.

How Merchant Transaction Processing Works

Curious about how these merchant bank accounts operate? Here’s a behind-the-scenes look at what happens as transactions are processed, step by step.

1.    The acquirer receives details about credit and debit card transactions from the merchant (Retailer A). This information is then sent to the card issuers—the financial institutions that issue credit cards to consumers — for authorization.

2.    Once that’s received, the credit card processing can continue.

3.    The acquirer will then typically forward funds to the merchant’s (Retailer A’s) business bank account according to the terms of their agreement. In other words, an acquirer facilitates this payment process.

4.   The bank that issued a credit card to a consumer, as part of this process, will add the charges made by an individual to their credit card balance.

Those steps give you an idea of how the process flows for transactions in a merchant bank account.

What is Underwriting for a Merchant Account?

When you apply to open a merchant bank account, the process is considerably different than opening, say, a business bank account or personal checking account. Underwriting is part of the process. This process occurs when an acquirer reviews the application of a merchant/retailer who wants to accept credit and debit payments and so needs a merchant bank. The underwriter reviews the risks involved if they were to serve as a merchant bank for that retailer (which can involve their being on the hook for refunds for a period of time). They want to delve into your business to know that you are worth their taking on the risk of being your merchant bank. Once they’ve assessed a variety of factors and indicators, they then determines whether or not to approve your application.

Do I Need a Business Bank Account?

If you’re thinking about applying for a merchant bank account, you will also need a business bank account. Here’s why: That’s where the merchant bank can deposit your funds from electronic payments. This holds true even if you are a sole proprietor. In other words, you’ll need a merchant checking account that’s separate from a personal account. Hopefully, that account will grow along with your business’ value.

Ask your bank of choice about opening a business account, including about the documentation you’ll need to give them. Expect to provide them with an employer identification number (EIN).

Do I Need a Business License?

As you consider a merchant bank account, you may wonder if you need a business license, and the answer is usually yes. While there may be exceptions, you will likely need a business license for other reasons on your professional journey. So it can make sense to explore business structure options at your soonest opportunity. You might look into whether your business should be an LLC or if you should becoming incorporated.

If you’re just starting a business, you’ll probably want to delve into such matters as small business startup costs and small business loan fees, as well as debt financing. Educating yourself about the finances of running a business is an important step beyond getting your accounts and payments established.

Accepting Different Types of Payments

Merchant bank accounts are an important partner for businesses today. A key benefit of having a merchant bank account is that it makes it much easier for customers to transact with you, both in person and online. Nowadays, fewer people walk around with cash in their pockets or a checkbook in a wallet or purse. Allowing them to swipe a plastic card or enter their card numbers online can significantly expand the number of people who can shop with your business.

How Long Does It Take to Set Up a Merchant Account?

If you’re wondering how long it takes to set up a merchant bank account, the answer is honestly a not so helpful “It depends.” Situations differ — and so can timelines. That said, if everything on a retailer’s application is complete and acceptable to the merchant bank, the process can be quite fast. You might get up and running in perhaps just a day.

What is PCI Compliance?

As you embark on your pursuit of a merchant bank account, you will probably encounter the initials PCI. Short for “payment card industry,” PCI compliance is required by credit card companies to ensure that electronic transactions are secure, operationally and technically. PCI standards. There are a variety of standards these businesses must adhere to in order to keep their business safe. If you are operating a business, you will probably see assurances of PCI compliance in your communications with credit card companies, reassuring you that they are following these guidelines.

Other Considerations for Merchant Accounts

Before we wrap up, let’s mention a few other terms and considerations you are likely to learn about as you pursue a merchant bank account. The industry uses the term “payments processor” in more than one way. Here’s a little intel to keep in mind:

•   An issuer processor focuses on helping banks to issue credit and debit cards to consumers and otherwise manage that process.

•   An acquiring processor, however, addresses the issues we’ve discussed above. An acquiring process also deals with customer requests for information about transactions, disputes made about them, and chargebacks.

Knowing the difference between these terms can be helpful as you understand how merchant banks conduct business.

The Takeaway

By exploring the questions “What is a merchant bank account?” and “How do merchant accounts work?” you’ll gain an understanding of what is involved if you are a business owner accepting credit card and online payments. These merchant accounts facilitate the handling and processing of payments so your company can thrive.

But business bank accounts aren’t the only ones to study. If you’re curious about just how good your personal accounts could be, take a look at what online banking with SoFi offers. If you join and set up direct deposit, you’ll earn a terrific 1.25% APY, plus you’ll have access to your paycheck up to two days early, and you won’t pay any account fees, whether minimum-balance, monthly, or overdraft.

Bank better with SoFi.


Is a merchant account the same as a bank account?

A merchant account is a very specific type of business bank account. It allows a business to accept credit cards and other forms of electronic payments when selling products and services to consumers.

What is a merchant service account?

Merchant service accounts are a specific type of business account. They are used by business owners who want to accept credit cards and other electronic payment forms at their company. Businesses that will only accept cash and checks would not need this type of account.

Photo credit: iStock/gece33

SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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.

Read more
Protecting Your Money From Inflation

How to Protect Yourself From Inflation

Inflation has been squeezing — and infuriating — U.S. consumers for a long time now.

What began as an annoyance (an extra pinch at the gas pump and the grocery store) has turned into a painful reminder that budgeting and saving may be even more important than anyone ever thought. And without a plan to deal with inflation’s effects — day to day and over time — your dollars can lose purchasing power.

The good news is that it’s never too late to consider strategies that could protect your money from inflation, while also keeping in mind your personal financial situation, your goals, and your tolerance for risk.

So here, we’ll take a look at:

•   What inflation is

•   How to prepare for it

•   Steps to take that will help maximize your money

Read on for intel on how to protect your money and yourself from inflation.

What Is Inflation?

Wondering what inflation is exactly? In basic terms, inflation means prices are rising and your purchasing power is declining. You can’t get the goods and services you’re used to buying without paying more for them. And if your income doesn’t increase to match those higher prices — because you can’t get a pay raise that keeps up, or you’re a retiree on a fixed income — it can really impact your lifestyle.

The U.S. has been on a months-long run of record-setting inflation since the start of the coronavirus pandemic. And according to the U.S. Department of Labor Statistics, it’s the costs most people can’t avoid — like food, gas, and rent — that are driving the continued increase in the Consumer Price Index (the most commonly used measure of inflation).

It’s true that there are common causes of inflation and escalating prices aren’t uncommon, but what is happening right now is undoubtedly intense. Rates are hitting the highest numbers the U.S. has seen since the early 1980s, which means it’s the first time many consumers here have experienced inflation at this level. But even a low inflation rate can erode purchasing power over the long haul. For example, according to the U.S. Inflation Calculator, if you purchased an item for $100 in 2000, that same item would have cost $150.30 in 2020 — before inflation soared. The dollar had an average inflation rate of 2.06% per year in the two decades between 2000 and 2020, producing a cumulative price increase of a whopping 50.30%.

That’s why preparing for inflation can be an important consideration for every consumer, whether you consider yourself a saver, a spender, an investor, or (like most people) you’re a mix of all three.

Recommended: Is Inflation a Good or Bad Thing for Consumers?

Preparing for Inflation

Needless to say, stuffing your money into a mattress or cookie jar probably isn’t the best strategy for protecting your hard-earned dollars.

Not only is an FDIC-insured savings account generally considered a safer place to keep your funds, but you also can earn interest on your money until you need it. Perhaps you’re saving for a down payment on a car or home, a wedding or vacation, or maybe for an unexpected expense.

Although most savings accounts pay minimal interest — usually not enough to counteract even low inflation rates — you’re at least earning something. And if you take time to occasionally review the interest rates various financial institutions are offering, you may be able to improve on what you’re currently getting.

For example, online financial institutions are more likely to offer high-yield savings accounts than traditional brick-and-mortar banks. So if you’re comfortable with the idea of electronic banking, you may find a significantly higher annual percentage yield (APY). You also might be able to reduce or eliminate some of the fees you’re paying, which can boost your savings as well.

If the Federal Reserve continues to raise its benchmark interest rate in an effort to combat inflation, as it has indicated it will, you may see the rate on your current savings account slowly increase. But if it doesn’t, or if you don’t want to wait around for that to happen, it may make sense to start shopping for a smarter way to save right now.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!

6 Ways to Protect Yourself from Inflation

Taking the time to reassess the potential earnings from your savings account can be an important step in offsetting inflation’s impact on your bottom line. But there are other strategies you also may want to consider. Here are steps that can help you protect yourself from inflation.

1. Buying vs. Renting a Home

It might be hard to believe when the housing market is this hot and prices are this high, but homeownership actually may help protect you from inflation.

If you’re a renter, you’re probably at the mercy of your landlord when it comes to how much your monthly payment could go up when it’s time to renew your lease. And during an inflationary period, your landlord may decide to raise your rent to reflect higher prices. If you decide to move, your new lease also could reflect the high inflation rate. Plus you’ll have to go through the hassle of finding a new place and moving.

If you buy a house, on the other hand, you’re more likely to have a fixed monthly payment that’s locked in for the life of your mortgage. Another benefit: The value of the home you own may increase along with inflation. And if you hang onto your home until it’s paid off, you won’t have to worry about what housing prices (renting or owning) might look like in the future.

2. Financing Your Home

Especially if you’re a first-time homebuyer, you might feel more than a little overwhelmed thinking about signing off on a 30-year fixed-rate mortgage for, let’s say, $350,000.

It might help to take a deep breath and think about this: According to the U.S. Inflation Calculator, $350,000 in today’s dollars is equal to about $173,000 in 1992 dollars. Thirty years ago, somebody thought $173,000 was a crazy-high amount of money for a house. Now, it sounds like a bargain. It often takes us by surprise how prices (and salaries) do rise over the years.

If you’re borrowing money for 30 years (the most common mortgage term) at a competitive interest rate — and you aren’t paying more than the home’s appraised value — inflation could work for you. That’s because the value of money, including debt, declines as the inflation rate rises. So the inflation-adjusted value of your mortgage payments goes down as inflation and your property value go up.

3. Preparing Ahead of Time

If you have the room and a knack for bargain-hunting, it may make sense to build up a supply of the kinds of goods that could be affected by inflationary prices. This is especially those items that are often linked to shortages.

Unfortunately, it isn’t really feasible for most folks to stockpile gasoline. But your backup supply might include canned goods, baby food, paper towels, toilet paper, and other necessities that you find on sale or can buy for less in bulk.

Keep in mind, though, that if you pay for those goods with a high-interest credit card and you don’t pay off the balance each month, you might not see any savings. (Which is another good reason to keep some money stashed in your checking and savings account to pay for such purchases.)

4. Buying Durable Products for the Long Term

The price of durable goods (products that typically last at least three years) also can be affected by shortages and increased consumer demand.

If you need a new car, for example, and prices seem high for the make or model you want, it may be tempting to purchase a lower-quality replacement. Keep in mind, though, that over the long term, you could end up spending more on repairs than you would have if you bought the better brand. Or the less expensive make may not last as long as a better car would have.

You may find it’s a smarter strategy to get an auto loan and invest in the higher-priced car from the start.

5. Sticking to a Budget

A household budget can be a helpful tool any time, but it could be particularly useful when prices are soaring.

Even if you already have a budget, you may want to reevaluate your spending in categories that are or could be vulnerable to inflation, such as food, transportation, healthcare, and utilities. And you may have to look for categories you can spend less on (at least temporarily), such as entertainment, dining out, clothing, and vacations.

If you’ve put most of your bills on autopay, you also can check for “expense creep” on things like cable and wifi, subscription services, and utilities.

Sticking to a budget could help you avoid touching your emergency savings when times are tight—or, worse, overusing high-interest credit cards.

6. Investing Your Money

Once you’ve established a savings account (hopefully a high-interest one) for your emergency fund and other short-term expenses, you may want to look at investing as another strategy to combat inflation.

Though it carries more risk than keeping your money in a high-yield savings account, investing in stocks, mutual funds, or exchange-traded funds (ETFs) can help you grow your money for the future.

Once again, let’s go back 30 years to get some perspective. According to’s S&P 500 data calculator, if you had invested $100 in the S&P 500 at the beginning of 1992, you’d come out with about $1,974.20 at the end of 2022 (assuming you reinvested all dividends). That’s a return on investment of 1,874.20%, or 10.42% per year. Even after adjusting for inflation, you’d be looking at a 7.87% return per year — which is better than most alternatives. Which all goes to say that investing may be a very good hedge against inflation.

The Takeaway

To younger consumers, today’s high inflation may seem like a new phenomenon. But inflation always has been — and always will be — a challenge.

While you probably can’t avoid inflation completely, with proactive planning, you may be able to blunt its impact on your day-to-day and long-term finances. If you haven’t already, you may want to review your savings, spending, and investing strategies to be sure you’re getting the most you can for your money.

For example, the SoFi Checking and Savings no-fee bank account is currently offering a 1.25% APY to customers who sign up for direct deposit. That’s at least twice what many high-yield accounts are offering customers right now. Another plus: SoFi doesn’t charge overdraft, minimum balance, or monthly fees. And SoFi members have access to free tools that can help with budgeting and managing their money as they work toward their savings goals.

Check out everything a new SoFi Checking and Savings® has to offer today.


What is the best way to protect against inflation?

The best approach may be to prepare for the worst while hoping it doesn’t happen. This means finding ways to get the most for your money as a saver (perhaps with a savings account that pays more in interest), spender (adopting a budget and savvy buying tactics), and investor (with investments that keep growing your money over time).

Where should I put my money to combat inflation?

You may want to start by shopping for a savings account that offers a higher APY and/or lower fees. That way, you won’t be slowly losing money as your cash sits in the bank. Another option is to invest it, which is riskier but may yield you a higher return.

How can I prepare for hyperinflation?

You can use many of the same tactics to protect against runaway or hyperinflation as you would for high inflation. You might decide to stockpile goods now, while your money has value, for example. You may choose to buy a car or make another important purchase sooner rather than later. You also can evaluate what expenditures are “needs” vs. “wants” and budget appropriately. Also try not to panic — which can lead to poor decision-making.

Photo credit: iStock/akinbostanci

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at

Read more
TLS 1.2 Encrypted
Equal Housing Lender