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Multi-level marketing businesses— also called direct sales, direct marketing, or network marketing — are legitimate enterprises that involve selling products or services to a network of peers (i.e., friends and family) and recruiting more salespeople.

The problem? According to the Federal Trade Commission (FTC), many illegal pyramid schemes disguise themselves as legal multi-level marketing (MLM) companies. Even legal MLMs can be bad news; most people make little or no money with MLMs, and some even lose money.

Read on to learn:

•   What’s an MLM?

•   What are the differences between MLMs and pyramid schemes?

•   How can you avoid multi-level marketing companies?

What Is a Multi-Level Marketing (MLM) Company?

A multi-level marketing business, or MLM for short, is a legitimate business that sells products and services through independent distributors. These companies rely on such distributors to sell to networks of peers, typically friends and families. The distributors, often called “participants” and “contractors,” must also recruit new distributors for the program.

The companies are found in a variety of categories. They might be selling supplements, personal-care products, kitchen utensils, or any other number of items.

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How Do Multi-Level Marketing Companies Work?

What is an MLM company, and how does it operate? In a multi-level marketing business, distributors must first buy the products wholesale from the company. They then make commissions off the products that they sell at retail prices.

Distributors also earn a commission from their recruits’ sales, which incentivizes distributors to recruit more people into the business. Those at the top of the company, with multiple levels of distributors beneath them, thus earn the most money without even needing to purchase more products to sell.

Multi-Level Marketing vs. Pyramid Schemes: What’s the Difference?

Though sometimes questionable, multi-level marketing programs are legal. Pyramid schemes, however, are illegal types of money scams. Unfortunately, many pyramid schemes disguise themselves as legitimate MLMs. Here are key differences:

•   Pyramid schemes are more focused on recruiting than actually selling the products. While MLMs do ask you to recruit more distributors, the focus is on sales.

•   Pyramid schemes may also require distributors to buy more products at regular intervals, even if they have not sold all the products they already have. Sometimes, in a pyramid scheme, you have to buy more products just to get paid or earn a bonus. This is a major red flag.

In the end, most people who are swindled into pyramid schemes run out of money, are stuck with products that they can’t sell, and quit — meaning they lose everything they invested in the business.

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Real-Life Examples of Multi-Level Marketing Companies

Some products marketed and sold through network marketing companies are from legitimate MLM businesses — and you can feel comfortable purchasing them. In other cases, recognizable products can emerge from pyramid schemes.

Here are some real-life examples of legal, established MLMs. You may be surprised to learn that what is an MLM can be a familiar and trusted brand:

•   Amway

•   Avon

•   Herbalife

•   Vorwerk

•   Mary Kay

•   Infinitus

•   Perfect

•   Quanjian

•   Natura

•   Tupperware

•   Nu Skin

•   Primerica.

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Why Is Multi-Level Marketing Legal?

Multi-level marketing businesses must adhere to strict FTC guidelines to be considered legal. The FTC regularly goes after suspicious MLM companies that may actually be pyramid schemes.

Though sometimes seemingly predatory, MLM is just a form of direct sales. When adhering to FTC guidelines, these businesses aren’t breaking any laws.

Recommended: What’s a Pump-and-Dump Scheme?

What Is the 70% Rule?

Though not technically a law, the 70% rule is a common term in MLM discussions. It arose in a 1979 case against Amway.

In analyzing the business structure of Amway, the FTC determined that, because Amway required distributors to sell at least 70% of the products they bought in a given month to earn a bonus, Amway was attempting to operate as a legitimate MLM. Their business model involved profited from sales, not shady recruiting tactics.

Now, the 70% rule is a loose term that means an MLM is focused on sales, rather than requiring distributors to buy more products or recruit more people to earn bonuses. The trouble with this rule is that it is difficult to enforce: MLMs typically trust their distributors to tell the truth about how much product they’ve sold but cannot always verify the numbers.

Are the Products That MLMs Sell Legitimate?

The products and services that MLMs and even pyramid schemes sell can be completely legitimate. Just think of that trusty Tupperware in your kitchen cabinet or your favorite lipstick from Mary Kay.

But even if a product is good, the distributor requirements of a legitimate MLM or shady pyramid scheme can still cause the seller to lose money.

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Can You Create Financial Freedom by Joining an MLM?

Multi-level marketing companies require a lot of entrepreneurial hustle from distributors to make money. As contracted sellers, distributors don’t earn a salary but instead make commissions.

While someone with a true sales spirit may make some money in an MLM, most do not make enough money to achieve any kind of financial freedom without another source of income. In fact, the FTC says some people even lose money from legitimate MLMs.

Pyramid schemes are worse, having left some people in economic ruin.

Tips for Recognizing Predatory MLMs and Pyramid Schemes

While MLMs are legitimate, they may not be worth the effort and could also cause you to lose money. Illegal pyramid schemes, however, are usually designed to hurt the low-level distributor.

So how can you spot a predatory MLM or pyramid scheme? Here are a few warning signs:

•   Hyperbolic claims of excess income: If a brand promoter is promising outlandish amounts of income — even saying you can quit your day job and retire early — that’s typically a red flag.

•   “Act fast” pressure: You should be able to think about any financial decision and be given the time to talk it over with friends and family. Brand promoters of pyramid schemes and predatory MLMs may use high-pressure tactics, like telling you that you must act now or you’ll lose out on the opportunity.

•   An emphasis on recruiting: In a true MLM where you at least have the potential to earn money, the emphasis should be on sales. If during initial conversations with a promoter, the emphasis is on recruiting other members, this is likely an indicator of a pyramid scheme.

Recommended: How to Verify a Check

Tips for Avoiding Predatory MLMs and Pyramid Schemes

The first step to avoiding a shady MLM or full-on pyramid scheme and protecting your finances is recognizing them when you see them.

Here’s what you can distinguish what are MLMs from pyramid schemes and avoid the latter:

•   Researching the company: Take the time to conduct research online. The FTC recommends googling the name of the company with terms like “scam” or “complaint” and then analyzing the results. The FTC even suggests reaching out to your state attorney general to inquire about complaints for a specific company. Uncovering evidence of lawsuits during your research is often a tell-tale sign.

•   Analyzing the products: Legitimate MLMs can sell good products. Pyramid schemes might even have products that you recognize. But if any company has poor-quality products that they expect you to sell, there’s a good chance it’s a pyramid scheme. Watch for products that are priced too high, claim to have “miracle” ingredients, or “guarantee” results.

•   Asking good questions: If the promoter is unwilling to answer very basic questions, like how refunds work or what happens if you can’t sell the product, they are likely hiding something.

•   Not making decisions in a vacuum: It’s a good idea to discuss all major financial and business decisions with a trusted friend or family member. If you have paperwork for an MLM that you’re unsure about, you can even have a personal accountant or lawyer review it before you sign.

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The Takeaway

Multi-level marketing companies are legitimate and legal direct-sales businesses, but they rarely enable a distributor to make good money; some distributors may even lose money. Pyramid schemes are typically disguised as MLMs and can lead to financial ruin. Such schemes are illegal. In general, it’s a good idea to avoid any kind of MLM company if you are unsure of their trustworthiness.

Looking for other ways to grow your finances? Open an online banking account with SoFi to take advantage of our super competitive APY and the fact that we don’t charge account fees, which can help your money grow faster.

FAQ

Is it legal to join an MLM?

Yes, it is legal to join an MLM. However, very few people earn enough money from multi-level marketing companies to make them worth the effort. In fact, some people lose money in MLMs.

What makes an MLM illegal?

MLMs are legal, but pyramid schemes are not. Pyramid schemes often disguise themselves as legitimate MLMs. However, with pyramid schemes, the emphasis is on recruiting new members and forcing distributors to buy more products, rather than focusing on empowering distributors to successfully sell to customers.

Are MLMs the same as pyramid schemes?

No, MLMs are not the same as pyramid schemes, but pyramid schemes often disguise themselves as MLMs. Multi-level marketing companies are legitimate businesses that require distributors to buy products and earn commissions by selling them to a network of peers. Pyramid schemes are more focused on recruiting new distributors and forcing them to buy products than empowering distributors to sell the products.

Photo credit: iStock/Makhbubakhon Ismatova

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SOBK0822005

When your home energy usage peaks in the summer and winter, you could be surprised by a higher energy bill — and might have to scramble to cover the cost. Signing up for budget billing with your utility providers can eliminate these unexpected cost surges and make it easier for you to plan your monthly expenses.

But what exactly does budget billing mean, and is it right for everyone? Here, you’ll learn:

•   What is budget billing?

•   How does budget billing work on a monthly basis?

•   What are the pros and cons of budget billing?

•   Does budget billing save you money?

•   Can you start budget billing on your own, without the utility provider’s help?

What Is Budget Billing?

Budget billing is an alternative, optional payment program for utilities like gas and electric. By opting into budget billing, you will pay the same predictable amount each billing cycle, regardless of how much or how little energy you actually used.

With budget billing, you can avoid the roller coaster-like highs and lows of utility billing — where costs skyrocket during sweltering summers and frigid winters. For many, this makes building a monthly budget much easier.

To opt into budget billing, call your utility provider or check out the website for information about what is available.

Recommended: How to Organize Your Bills

How Does Budget Billing Work?

Energy prices and usage fluctuate throughout the year. This can make it difficult to anticipate what your gas and electric bills will be each month. Depending on where you live and how harsh the seasons are, you might be in for a surprise on a few bills each year.

Budget billing eliminates those bill fluctuations. Instead, your utility provider analyzes past energy usage for your residence (usually over the prior 12 or 24 months) to estimate an annual total. The company then divides that total into 12 identical payments for the upcoming year.

Of course, it’s unlikely that your energy consumption will be exactly the same as it was the previous year. And with increased inflation and unpredictable weather events, the price of electricity and natural gas could increase over time. To account for this, your utility provider will track your actual energy usage throughout the year and calculate what you would owe (sometimes called a “true-up amount”).

•   If you overpaid for the year, the provider will issue you a credit on an upcoming bill.

•   If you underpaid for the year, you’ll have to pay the outstanding balance.

Either way, the utility provider will use this year’s worth of data to calculate a new monthly payment for the year ahead.

Note: While annual plans are common for budget billing, some providers may also offer a quarterly (three-month) plan.

Recommended: Automating Your Finances

Does Budget Billing Save You Money?

Budget billing does not save money on utility bills. Instead, it just makes your monthly payments more predictable. Some months, you will likely pay less than what you actually owe. In others, you could be paying more than what you would owe.

Having a predictable line-item budget may make it easier for you to handle other monthly expenses or keep you from needing to dip into your emergency fund to cover an especially high energy bill.

Advantages of Budget Billing

So what are the pros of budget billing? For many families, budget billing can add some stability to their finances. Here’s how it may help you out:

Easier Budget Management

Not knowing how much you’ll owe your utility providers each month can make it tough to build a budget. With predictable bills, you’ll know how much money to set aside each month for utilities. You’ll also know how much is left for other expenses, as well as for savings and retirement contributions, debt repayments, and investments.

Less Financial Stress

If seeing an unusually high total on an email statement or paper bill can send you into a panic, you may appreciate the stability afforded by budget billing. Budget billing won’t save you money, but when you know what to expect each month, you might rest a little easier.

Reducing Late Payment Penalties

If you receive a high energy bill that you can’t afford to pay, you may have to take on unwanted credit card debt with a high interest rate, dip into emergency savings, or even just pay the bill late. The latter could result in late payment penalties.

With budget billing, you won’t have to worry about a spike in your monthly energy bills. This may help you avoid late payments altogether.

Drawbacks of Budget Billing

As helpful as budget billing can be for some families, there are also some cons to consider:

Potential Fees

Some utility providers charge a fee to enroll in budget billing. On top of the startup fee, the provider may charge ongoing fees for the service. If that’s the case, budget billing will actually cost you more money than a traditional billing program. It’s a good idea to ask about fees before signing up for any new program.

Recommended: Can You Change the Due Date of Your Bills?

Chance You Could Underpay

At the end of the program — usually a year after it kicks off — the gas or electric company will calculate what you actually owed for the year, based on your energy consumption. If you overpaid, you’ll get a credit on a future bill (nice!).

But if you didn’t pay enough each month, you’ll owe whatever remains. If it’s a sizable amount, you may have to rely on a credit card to cover other expenses or take money out of savings to pay off the bill. Many people enroll in budget billing to avoid such surprises to begin with, so this can be counter-productive.

Complacency

When you’re on a budget billing plan, you might get used to a low electric bill in the summer and be tempted to blast the AC. Similarly in the winter, it could be tempting to get all toasty by cranking up the heat. You won’t feel the financial repercussions of those decisions until much later, when your provider calculates your true-up amount and determines that you owe more money.

If you don’t think you can be responsible with energy consumption without the threat of a high bill looming over you each month, budget billing may not be the right fit for you.

Recommended: How to Pay Bills with a Credit Card

What Happens If You Are Billed Incorrectly?

Mistakes can happen. When you opt in to budget billing, it’s a good idea to read the agreement and understand how your monthly total is calculated. You want to be sure you understand how bill pay works. Even if you have your bill set to autopay, you may want to review your statement each month to ensure it’s what you expected. If it’s not, you can call your utility provider to discuss.

Recommended: Pros and Cons of Automatic Bill Payment

Can You Make Your Own Budget Billing System?

You don’t have to opt into a utility provider’s system to take advantage of budget billing. In fact, you can make your own budget billing system if you’re willing to do some math.

Just analyze what you spent on utilities over the previous 12 months to figure out an average monthly total. Use this amount when building your monthly budget.

If your first bill comes in and is less than your monthly budgeted amount, pay the bill and hang on to the leftover funds. Stash them somewhere safe, where you won’t spend them. When your bill is eventually higher than what you’ve budgeted, you can dip into that leftover money to cover the difference.

By handling budget billing yourself, you can avoid any potential fees the utility provider might have charged you. Plus, you can store leftover budgeted funds in a high-interest savings account. While this approach requires discipline, it can be well worth the effort.

Alternatives to Budget Billing

Budget billing may not be for everyone. Some alternatives include:

•   Traditional bill programs: You’ll pay what you owe each month, but that means some bills might be high in the summer and winter. In other months, you may enjoy lower-than-average bill totals.

•   DIY budget billing: If you don’t mind doing some math to figure out an average monthly payment, you may be able to do budget billing without the fees and hassle of going through a provider. You’ll still pay what you owe each month, but by planning ahead and setting money aside in savings, you can make a more predictable budget.

•   Low Income Home Energy Assistance Program (LIHEAP): Depending on your income level, you may qualify for government assistance with your home energy bills. Qualifying for the program does not guarantee assistance; roughly 20% of households that qualify actually receive help through LIHEAP.

Recommended: What to Do If You’re Bad With Money

The Takeaway

Budget billing allows utility customers to pay a set amount each month for electricity and gas, based on past usage patterns. You won’t save any money with budget billing, but it can make monthly budgeting more predictable. Before enrolling in a budget billing program, it’s a good idea to review the pros and cons and understand how it can affect your finances each year.

3 Money Tips

1.    Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. Online banks are more likely than brick-and-mortar banks to offer you the best rates.

2.    An emergency fund or rainy day fund is an important financial safety net. Aim to have at least three to six months’ worth of basic living expenses saved in case you get a major unexpected bill or lose income.

3.    If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.

FAQ

Do all utility companies offer budget billing?

Not every utility company offers budget billing. Your state may have a network of regulated electric and gas providers that are required to offer this program, but unregulated suppliers may not offer budget billing.

Am I better off budget billing or not?

Budget billing can be helpful if you like a predictable utility bill each month. Knowing what you’ll spend may make it easier to budget for other expenses. However, budget billing does have its drawbacks, especially if the utility provider charges a fee for the service.

Can I budget bill for other areas of my budget besides utilities?

Outside of utilities, most recurring monthly bills are predictable — rent or mortgage, internet, phone, student loan payments, etc. But if you like the predictability offered by budget billing for utilities, you might benefit from creating your own budget billing program for other unpredictable monthly totals, like groceries and fuel for your car. To do so, just calculate your expenses from the last year and divide by 12 to determine your average monthly total. You may want to account for inflation when estimating expenses like food and gas.

Photo credit: iStock/Milan_Jovic

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. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOBK0822019

Not all methods of getting paid are the same. Taking a paper check to the bank can be time-consuming, not to mention you also have to wait a few days for it to clear before withdrawing funds. Direct deposit is a popular option that simplifies the process of getting paid.

With direct deposit, you can schedule payments to be added to your bank account automatically. Depending on where you maintain a checking and savings account, it may be possible to get paid up to two days early with direct deposit. Plus there’s no running to a bank branch or ATM to deposit an old-school paper check.

Understanding the benefits of direct deposit can help you decide if it’s worth taking advantage of this banking feature. Read on to get the full story, including:

•   What is direct deposit?

•   What are the benefits of direct deposit?

•   Are there any disadvantages to direct deposit?

•   How can you set up direct deposit?

What Is Direct Deposit?

What is a direct deposit? In simple terms, direct deposit is a service that allows money to be deposited directly into bank accounts, without requiring a paper check. You may be eligible to set up direct deposit of paychecks and other payments, including:

•   Federal and state tax refunds

•   Government benefits, such as Social Security payments

•   Court-ordered child support payments (when garnished from the payer’s wages)

•   Travel and expense reimbursements from your employer

•   Pension plan benefit payments

•   Annuity payments

•   Dividend payments from stocks or other investments

You may not have access to direct deposit if your employer doesn’t offer it or if you don’t receive any of the other types of payments listed above. It’s also possible to miss out on the benefits of direct deposit if you don’t have a bank account and rely on alternative banking products and services, such as prepaid debit cards, to pay bills and cover expenses.

Recommended: Do Bank Transactions Process Through the Holidays?

10 Direct Deposit Benefits to Know

The main advantages of direct deposit center on convenience and flexibility. If you’re not enrolled in direct deposit yet, here are some of the main benefits you may be missing out on.

1. Get Paid Early

One of the main benefits of direct deposit is the ability to collect your paychecks early. Direct deposits may hit your account one to two business days ahead of your regular pay date. In terms of how long you’ll have to wait for the payment to clear, the average time for direct deposit varies. Some banks can make funds available the same day they’re deposited.

2. Skip the Branch

In addition to getting an early paycheck, direct deposit allows you to avoid the time and energy of visiting a bank to deposit a paper check. Going to a bank to deposit checks can be inconvenient if you’re trying to squeeze it in on your lunch break or scrambling to get to a branch before it closes at the end of the work day.

3. Easy Setup

Enrolling in direct deposit is usually as simple as filling out a form and passing it along to the appropriate payer, which may be your employer or a government agency. You’ll need to provide your personal information as well as your bank account information.

You may only need to have your bank account number and routing number to set up direct deposit. In some cases, you might be asked for a voided check to verify your account details.

What is a voided check for direct deposit? It’s simply a blank check that has “VOID” written across the front. You won’t sign this check or make it out to anyone. It’s only used as physical evidence of your bank account information.

4. Get Paid Anywhere

If you’re used to picking up paper checks from your employer, direct deposit eliminates the need for that in-person presence. That means you can still get paid if you’re on vacation, out sick, or traveling for work on payday. The money goes straight to your bank account, so you don’t have to worry about delays if you need to schedule bill payments or cover expenses.

5. No Risk for Stolen or Lost Checks

Getting a paper paycheck can be problematic if you misplace it or, worse still, someone steals it. In either case, you’d have to ask your employer to cancel the original check and issue a new one. That could result in a delay in getting paid. With direct deposit, you don’t have to worry about losing a check or having it stolen since there’s no piece of paper changing hands.

6. Control Where Your Money Goes

One nice benefit of direct deposit is that you can decide where to send the money. For example, if you’d like to save $100 out of every paycheck, you can ask your employer to send that amount to your savings account via direct deposit and put the rest in your checking account. That’s an easy way to pay yourself first and build savings automatically.

7. No Check Cashing Fees

Check cashing fees can take a bite out of any payments you receive. If you’re tired of paying steep fees for check cashing services, that could be a great reason to open a bank account and set up direct deposit. You can get paid without having to go through a third-party company or hand over part of your earnings in fees.

8. Avoid Bank Fees

Some banks charge a monthly maintenance fee for checking and savings accounts. They may waive that fee when you set up qualifying direct deposits. If you’d like to reduce what you pay in fees without switching to another bank, enrolling in direct deposit could be a simple way to cut costs and save money.

9. Simplify Multiple Deposits

As mentioned, you can use direct deposit to receive many different types of payments. If you have income from multiple sources, then managing multiple paper checks could be a headache. Having those funds added to your account through direct deposit can streamline the way you track incoming payments.

10. Easier Budgeting

Direct deposit can also take the stress out of budgeting. If you know when your payments will be deposited and when you can expect them to clear, that can eliminate the guesswork of timing bill payments. You can plan out your budget by paycheck or by the month, using your direct deposit schedule as a guide.

Are There Any Disadvantages to Direct Deposit?

If there’s a disadvantage or downside to direct deposit it’s that not everyone is eligible to enroll. If your employer insists on paper checks, then you may not be able to take advantage of the benefits of direct deposit. You can, however, still use direct deposit to receive other types of payments.

One other thing to keep in mind is that it may take a few pay cycles to get your direct deposit going. So if you enroll on the first of the month, for example, you may not see any direct deposits until the first of the following month. That means you’ll still need to deposit paper checks at the bank in the meantime.

Another possible issue is, as mentioned above, if you don’t have a conventional bank account, you won’t be able to sign up for the service.

Also, some people may prefer to get a paper check, with the pay stub attached, so they can immediately review earnings and deductions rather than look up that info online. There may be some people as well who don’t feel comfortable sharing their banking information with an employer or other business. For them, direct deposit may not be a good fit.

How to Enroll in Direct Deposit

The process for enrolling in direct deposit can vary, based on where you’re trying to set up the payments. Generally, you’ll need to fill out a direct deposit form in person or online and tell the payer where you want the money to go.

The payer will verify your bank account information and personal information to get the direct deposit process started. You can also specify whether you want your payments to be split across multiple accounts. Keep in mind that you may be asked for a voided check or deposit slip to complete the process.

The Takeaway

Enrolling in direct deposit can make your financial life easier since it means spending less time on banking, getting faster access to your funds, and being able to be paid, wherever you may be. If you’re not enrolled in direct deposit yet, it may be worth asking your employer about whether it’s an option.

You might also consider opening a new Checking and Savings account to receive direct deposit payments. With SoFi, qualifying accounts can get paycheck access up to two days early. You’ll also enjoy other perks, like no account fees and a competitive APY on balances. Plus, our Checking and Savings account lets you spend and save in one convenient place.

FAQ

Does direct deposit work on holidays?

Typically, banks do not process transactions on holidays. However, if you’re enrolled in direct deposit, your employer may schedule your payment to arrive a day before the holiday so there are no delays in receiving your pay.

What happens if my direct deposit goes to the wrong account?

If you’re sending a direct deposit to a closed account, then the bank may reject the transaction and return the payment to the payer. If you’re depositing money into an account that’s open but it’s the wrong account, you’ll have to contact the bank to ask about possible solutions. You may be able to withdraw money or transfer it to the proper account if both accounts belong to you. However, if you accidentally deposit money into the wrong account then the bank may leave it to the account owner to return it to you.

How long can a bank hold direct deposit?

Banks can vary in how long they hold direct deposits before releasing the funds to you. Depending on the bank, the holding period may be anywhere from one to seven business days.

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

SOBK1122007

If you’re tackling school debt and looking for ways to maximize your tax refund, one avenue to consider is the student loan interest deduction. This benefit allows you to take a tax deduction for the interest you paid on student loans that you took out for yourself, your spouse, or your dependents. The deduction can lower how much of your income is taxed, which could result in a lower overall tax bill.

However, there’s a limit to how much you can deduct each tax year, and you must meet certain criteria in order to get the deduction. Let’s look at how the student loan interest deduction works and how to qualify for it.

Are Student Loan Payments Deductible?

Typically, when you repay a student loan, your monthly payment goes toward the original amount you borrowed plus origination fees (the loan principal) and the amount a lender charges you to borrow it (interest). With the student loan interest deduction, you are only allowed to deduct the amount you paid in interest, not the full amount of the loan payment.

Is Student Loan Interest Deductible?

The student loan interest deductible allows you to subtract up to $2,500 or the total amount of interest paid on student loans — whichever is lower — from your taxable income. Private and federal loans may qualify for this benefit. The deduction is considered “above the line,” which means you don’t have to itemize your taxes to take advantage of it.

Note that there are income phaseouts based on your modified adjusted gross income (MAGI). A borrower can claim the full credit if their MAGI is $80,000 or less ($160,000 or less if you’re filing jointly). The deduction is gradually reduced if your MAGI falls between $80,000 and $90,000 ($160,000 and $180,000 if you’re filing jointly). The deduction is eliminated for borrowers with a MAGI of more than $90,000 ($180,000 or more if you’re filing jointly).


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Who Can Deduct Student Loan Interest?

Not everyone is able to claim the student loan interest deduction. In order to be eligible for it, you must meet certain criteria:

•   You paid interest on a qualified student loan for you, your spouse, or your dependents in the previous tax year. (A qualified student loan is a loan taken out to pay for qualified education expenses like tuition, housing, books, and supplies. The loan must be used within a “reasonable period” after it’s taken out.)

•   You’re legally required to pay interest on a qualified student loan.

•   Your MAGI in the 2023 tax year is less than $90,000 (or less than $180,000 if you’re filing jointly).

•   Your filing status is anything except married filing separately.

•   If you’re filing taxes jointly, neither you nor your spouse can be claimed as a dependent on someone else’s tax return.

Your eligibility may be impacted if your employer made payments on your student loans as part of a work benefit.

What to Know About the Student Loan Interest Deduction Form

If you pay $600 or more in interest on qualified student loans during a tax year, your loan servicer should send you IRS Form 1098-E. This student loan tax form is usually sent out around the end of January.

If you don’t receive a 1098-E form, you should be able to download it from your loan servicer’s website. To find out who your loan servicer is, log on to the Federal Student Aid website, and the information will be listed in your dashboard. You can also call the Federal Student Aid Information Center at 800-433-3243.

Keep in mind that if you didn’t make payments on your federal student loans because of the Covid-related payment pause — or if you didn’t pay $600 in interest during the tax year — you may not get a 1098-E form. However, you can contact your servicer to find out how much interest you paid during the year if you’re planning to report it on your taxes.

Recommended: How Student Loans Could Impact Your Taxes

Additional Education Tax Breaks

The student loan interest deduction isn’t the only benefit worth knowing about. You may also want to see if you qualify for certain education tax credits, which represent a dollar-for-dollar reduction in your overall tax burden. They can directly lower the tax amount you owe. Here are two to consider.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a credit for tuition and other qualified educational expenses paid during the first four years of a student’s college education. The credit is worth up to $2,500 per eligible student. Once your tax bill hits zero, you could earn 40% of whatever remains (up to $1,000) as a tax refund.

You must meet certain requirements in order to qualify for the AOTC. You must:

•   Pursue a degree or other recognized education credential

•   Be enrolled at least half time for at least one academic period beginning in the tax year

•   Have no felony drug convictions at the end of the tax year

•   Haven’t claimed the AOTC for more than four tax years

As with the student loan interest deduction, your income matters. To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less if you’re filing jointly) in the 2023 tax year. The credit amount begins to decrease if your MAGI falls between $80,000 and $90,000 (over $160,000 but less than $180,000 if you’re filing jointly). The credit is eliminated if your MAGI is over $90,000 ($180,000 if you’re filing jointly).

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) works a little differently. The credit is worth 20% of the first $10,000 of qualified educational expenses, or a maximum of $2,000 per year. Unlike the AOTC, which only applies to the first four years of a student’s college education, the LLC includes undergraduate, graduate, and professional schools, and courses needed to acquire job skills. There’s no limit to the number of years you can claim it.

However, the LLC has a lower income limit, which means it could be more difficult to qualify for. For instance, in 2022, the credit amount gradually decreased if your MAGI fell between $80,000 and $90,000 ($160,000 and $180,000 if you filed jointly) in the 2022 tax year. The credit was eliminated if your MAGI is $90,000 or more ($180,000 or more if you filed jointly).

Strategies to Lower Monthly Student Loan Payments

Borrowers looking to save beyond tax time may want to explore ways to lower their monthly student loan payments.

One option to consider is a Direct Consolidation Loan. This loan is offered through the Department of Education and lets you combine different federal student federal loans into a single loan, resulting in one monthly payment. It can also lower your monthly payment amount, allow you to switch from a variable to a fixed interest rate, and help set up loans that are eligible for forgiveness.

Another strategy to think about is refinancing your student loans with a private lender, resulting in one new loan, hopefully with a lower interest rate. Just realize that if you refinance a federal student loan, you will lose access to federal protections and programs, such as the Covid-related payment pause, the Public Service Loan Forgiveness program, and income-driven repayment plans. And if you’re refinancing to get a lower monthly payment, know that you may pay more interest over the life of the loan if you refinance with an extended term.

Recommended: 7 Tips to Lower Your Student Loan Payments

The Takeaway

The student loan interest deduction can lower how much of your income is taxed, which could result in a lower overall tax bill. Depending on your income, you can deduct up to $2,500 of the interest paid on your loans. If you earn more than $90,000 a year (or $180,000 if you’re filing jointly), you are not eligible. Education tax credits, like the American Opportunity Tax Credit and the Lifetime Learning Credit, could also help lower your tax bill. Like the student loan interest deduction, you must meet certain criteria to be eligible.

There are different strategies that may help you lower your monthly payments so you can save outside of tax time. A Direct Consolidation Loan, for example, lets you combine multiple federal loans into a single loan and switch from a variable to a fixed interest rate.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.