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A credit score is one factor used in a lender’s assessment of your creditworthiness when you apply for a lending product, such as a loan, line of credit, or credit card. It can also be a factor in lease approval, new utilities setup, and insurance rates. You can have more than one credit score, depending on what credit scoring model a lender uses.

One type of credit scoring model is the FICO® Score, which is used by 90% of top lenders in the U.S. Since it’s such a widely used determiner, consumers are wise to pay close attention to their own score.

What Is a Credit Score?

Consumers often use the words “credit score” to refer to FICO credit scores, but a credit score could be one of several scores. Generally speaking, credit scores are created with a mathematical formula that weighs different financial behaviors to arrive at a three-digit score that summarizes a consumer’s creditworthiness. Each of your credit scores depends on the formula used to calculate it and they may vary depending on which information about you was pulled into the formula and how different behaviors, such as your bill-paying history and unpaid debt level, were weighted.

What Is a FICO Score?

Let’s look specifically at the FICO Score, since it is so often used by lenders. The FICO Score is a trademark of the Fair Isaac Corporation. It was the first widely used, commercially available score of its type. FICO Scores, like other credit scores, compress a person’s credit history into one algorithmically determined score.

Because FICO Scores (and other credit scores) are based on analytics rather than human biases, the intention is to make it easier for lenders to make fair lending decisions.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options.

What Is the FICO Score Range?

FICO’s base range is 300 to 850: The higher the score, the lower the lending risk a lender might consider you to be. The FICO Score is divided in this way:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

Recommended: What Is Considered a Bad Credit Score?

How Is a FICO Score Calculated?

There are five main components of what affects a FICO Score, each having a different weight in the calculation:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

About two-thirds of your base FICO Score depends on managing the amount of debt you have and making your monthly payments on time. Each of the three major credit bureaus — Experian®, Equifax®, and TransUnion® — supply information for the calculation of your credit score, so it can vary slightly even if your creditworthiness doesn’t fluctuate.

The base FICO Score range may not be the range used in all credit and lending decisions. There are also industry-specific scores, such as one specifically for auto loans (FICO Auto Scores), others for credit card applications (FICO Bankcard Scores), and multiple FICO Scores used by mortgage lenders. There is also an UltraFICO Score for consumers with limited credit histories that factors other banking behaviors into the tabulation.

Industry-specific FICO Scores range from 250 to 900, compared to the 300 to 850 range for base scores.

What Is a Good FICO Score?

Strictly referencing the base FICO Score range, a “good” score is between 670 and 739 on the overall scale of 300 to 850.

But what’s considered acceptable for credit approval might vary from lender to lender. Each lender has its own requirements for credit approval, interest rates, and loan terms, and may assign its own acceptable ranges. Lenders may also use factors other than a credit score to determine these things.

Recommended: Average Personal Loan Interest Rates & What Affects Them

Why Is a FICO Score Important? What Is a FICO Score Used For?

As mentioned above, the FICO Score is used by 90% of top lenders in the U.S. When a consumer applies for a loan or other type of credit, the lender will look at their credit report and credit score. If there are negative entries on the credit report, which may be reflected in a decreased FICO Score, the applicant may not have a chance to explain those to the lender. Especially in mortgage lending decisions, the lender may have a firm FICO Score requirement, and even one point below the acceptable number could result in a denial.

But what if you’re not applying for credit in the traditional sense? Your FICO Score is still an important number to pay attention to because it’s used in other financial decisions.

•   Renting an apartment. Landlords and leasing agents generally run a credit check during a lease application process. They may or may not look at the applicant’s actual credit score — landlords have a lot of flexibility in how they make leasing decisions — but they do tend to look at the applicant’s credit history and how much debt they have in relation to their income. Both of these factors go into a FICO Score calculation.

A few late payments here and there may not affect your ability to rent an apartment, but a high debt-to-income ratio may. If you have a lot of income going toward debt payments, the landlord may be concerned that you won’t have enough income to pay your rent.

•   Insurance. One of the industry-specific FICO Scores is formulated for the insurance industry (think auto insurance and property insurance). Insurers will typically look at more than just a person’s FICO Insurance Score, but it is one factor that goes in determining qualification for insurance and at what rate. The assumption is that a person who is financially responsible will also take more care when it comes to their home and car.

•   Utilities. You may not think of a utility bill as a debt, but since utilities like gas, electric, and phone are billed in arrears, they technically are a form of debt. (“Billed in arrears” means that you are billed for services you have already used.) Utility companies want to make sure that you will be able to pay your monthly bill, so they may run a credit check, which may or may not include looking at your FICO Score.

Recommended: What Credit Score Is Needed to Rent an Apartment?

What Affects Your FICO Score?

We briefly touched on how a FICO Score is calculated, but what goes into those different categories? Let’s look at those in more detail.

Payment History (35%)

Do you tend to pay your bills on time or do you have a history of late or missed payments? “Payment history makes a bigger impact on a person’s credit score than anything else — 35%,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “So the most important rule of credit is this: Don’t miss payments. Timely payments are crucial, and making at least the minimum payment on a revolving credit line can make a positive impact on a person’s credit score.”

Both installment (personal loans, mortgage loans, and student loans, for example) and revolving credit such as credit cards can affect your payment history. Since it’s such an important factor, how can you make sure it’s a positive one for you?

•   Making payments on time, every time, is the best way to make sure your payment history is a positive one. Having a regular routine for paying bills is a good way to accomplish this.

•   Automating your payments may help you make at least the minimum payment on credit accounts.

•   Checking your credit report regularly for errors or discrepancies can help catch things that might have a negative effect on your FICO Score if left uncorrected. You can get a free credit report from each of the three credit bureaus once per year at AnnualCreditReport.com.

Amounts Owed (30%)

The amount of debt you owe in relation to the amount of debt available to you via your various lines of credit is called your credit utilization ratio, and it’s the second-most important factor in the calculation of your FICO Score. Having debt isn’t at issue in this factor, but using most of your available debt is seen as relying on credit to meet your financial obligations.

Credit utilization is based on revolving debt, not installment debt. If you’re keeping your credit card balance well below your credit limit, it’s a good indicator that you’re not overspending. If you have more than one credit card, consider the percentage of available credit you’re using on each of them. If one has a higher credit utilization than the others, it might be a good idea to use that one less often if you’re trying to positively impact your FICO Score.

Length of Credit History (15%)

This factor’s percentage may not be as high as the previous two, but don’t underestimate its importance. As with payment history, lenders tend to look at a person’s credit history as predictive of their credit future. If there is no credit history or short credit history, a lender doesn’t have much information on which to base a lending decision.

Since the amount you owe is such an important factor in your FICO Score, you might think that paying off and closing credit accounts would have a positive effect on your score. But that might not be the best strategy.

Revolving accounts like credit cards can be a useful tool in your financial toolbox if used responsibly. A credit card account with a low balance and good payment history that has been part of your credit report for many years can be an indicator that you are able to maintain credit in a responsible manner.

Installment loans like personal loans are meant to be paid off in a certain amount of time. The account will remain on your credit report for 10 years after it’s paid off.

Paying off a personal loan is certainly a positive thing, but paying off a personal loan early could cause the account to stop having that positive effect earlier than it otherwise would.

Credit Mix (10%)

Having multiple types of credit can have a positive effect on your FICO Score. Being responsible with both revolving and installment credit accounts shows lenders that you can successfully manage debt.

•   Revolving accounts are those that are open-ended, such as a credit card. You can borrow money up to your credit limit, repay it, and borrow it again. As long as you’re conforming to the terms of the credit agreement, the account is likely to have a positive effect on your credit report and, therefore, your FICO Score.

•   Installment accounts are closed-ended. There is a certain amount of credit extended to you and you receive that money in a lump sum. It’s repaid in regular installments over a set period of time. If you need additional funds, you must take out another loan. A personal loan is one example of an installment loan.

Credit mix won’t make or break your ability to qualify for a loan, but having different types of debt indicates to lenders that you’re likely to be a good lending risk.

New Credit (10%)

Though lenders like to see that a person has been extended credit in the past, too much new credit in a short amount of time can be a red flag.

When you apply for a loan or other type of credit, the lender will typically look at your credit report. This is called a credit inquiry and can be a hard inquiry or a soft inquiry. A soft inquiry may be made by a lender to pre-qualify someone for credit or by a landlord for a lease approval, for example.

During a formal application process, a lender might make a hard inquiry into your credit report, which can affect your credit score. FICO Scores take into account hard inquiries from the last 12 months in your credit score calculation, but a hard inquiry will remain on your credit report for two years.

💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

FICO Score vs. Credit Score

As we’ve seen, these two terms — FICO Scores and credit scores — are often used interchangeably. More accurately, though, is that a FICO Score is one type of credit score, the one often used by lenders when making their decisions. There are multiple types of credit scores, each of them using analytics to create a rating that illustrates a person’s creditworthiness. One of the more commonly used alternatives to the FICO Score is the VantageScore®.

FICO Score vs. VantageScore

You won’t always know which credit score a lender is using to assess your qualifications as a borrower. But if it isn’t a FICO Score there is a good chance it’s the VantageScore. (Some lenders feed both FICO and VantageScores into their own proprietary scoring tool.) The VantageScore was created by the three nationwide credit reporting agencies — Equifax, Experian and TransUnion. Like the FICO Score, it has a range of 300 to 850. The formula for computing a VantageScore is slightly different from that for a FICO Score, but working to polish one will likely have a positive effect on the other.

How to Positively Impact Your FICO Score

Good credit hygiene can have a beneficial effect on your FICO Score that spills over into other types of credit scores as well. As you think about what affects FICO Score, here are some steps to take:

•   Check your credit reports. Request corrections for any errors you find (they do occasionally happen). You can

•   Pay your bills on time. Set up automatic payments from your bank account to make sure nothing slips through the cracks.

•   Avoid maxing out credit cards or lines of credit. If you tend to use one card to the max, put it on ice for a while and reach for a different card, if you have one. Or request a larger credit limit on the card you tend to overuse — assuming, that is, that you are keeping up with your payments.

•   Diversify your credit mix. If you use credit cards for everything, even cash advances, consider a personal loan the next time you need a larger sum for a significant expense. Personal loans often have lower interest rates than credit cards anyway.

The Takeaway

Your FICO Score is affected by how you manage your personal finances, whether that’s a personal loan, line of credit, credit card, or other type of credit product. Although it’s not the only credit score lenders use, it is the one used in the majority of lending decisions in the U.S. Personal loans are one financial tool that can be used to add some variety to your credit mix. If managed responsibly with regular, on-time payments, your FICO Score could be positively affected by having an installment loan like this in the mix.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is a FICO score the same as a credit score?

It’s common to wonder what is a FICO Score vs. a credit score. The two are not the same thing, although a FICO Score is one of the most commonly used types of credit score. Each type of credit score has its own distinctive scoring model. They all aim to distill a consumer’s financial behavior into a number that lenders factor into their decision about whether to loan to the consumer.

What is considered a good FICO Score?

A “good” FICO Score falls between 670 and 739 on a FICO Score range that runs from 300 to 850.

Why do I have multiple credit scores?

Everyone has multiple credit scores because there are different data analytics firms and agencies that compile information about consumers’ credit history. Within many of these organizations, there are also different types of credit reports for different purposes. There are FICO Scores, for example, that are tailored to auto loans and insurance industry needs.

Does checking your credit score lower it?

Checking your credit score — even doing so multiple times — will not damage it. Requesting a copy of a credit report will also not damage your credit score.

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

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Generally speaking, the better your credit score, the better your potential loan rates and offers may be. The reason is that your credit score tells lenders how much risk you pose as a borrower. A good credit score may qualify you for what’s known as a prime loan.

Read on to learn what a prime loan is and how it works.

Understanding a Prime Loan

To understand a prime loan, it can help to understand the prime rate. Banks establish the prime rate as the interest rate they give to their most creditworthy customers, generally large corporations that borrow and repay loans on a regular basis. The rate is based on the federal funds rate set by the Federal Reserve.

The prime rate is a critical financial benchmark. Banks and other lenders typically use it to set interest rates for their various consumer products, including credit cards, personal loans, personal lines of credit, auto loans, and home loans. Lenders use the prime rate as a baseline, then add a margin on top of the prime rate to determine a loan’s interest rate. How much more a borrower pays above the prime rate depends on their creditworthiness.

Many loans are based on the prime rate, so it can be a good rate to track if you’re in the market for any type of lending product. For example, if you’re considering a fixed-rate mortgage or personal loan, and the prime rate is currently low, you may be able to lock in a lower rate for the life of your loan. If you’re considering variable-rate debt, such as a credit card or home equity line of credit, your rate might start low but go up if market rates rise. If market rates decline, on the other hand, your rate could go down.

Prime Loan Borrowers

Lenders use the term “prime” to refer to high quality in the consumer lending market — including borrowers, loans, and rates. Prime loans generally have competitive interest rates and are available to borrowers who have a low default risk and good or better credit scores. The opposite of prime is subprime, a term for riskier loans with a higher interest rate.

According to the Consumer Finance Protection Bureau, borrowers with a credit score of 660-719 are generally considered prime borrowers. Those with scores above 720 are considered super-prime borrowers and receive even more favorable interest rates.

Here are the five credit score categories for borrowers:

Knowing your credit score can help you assess which category you belong to.

Prime Loan Rates

As of February 2026, the prime rate is 6.75%, according to The Wall Street Journal (WSJ)’s Money Rates table, which aggregates prime rates charged throughout the U.S. and in other countries. The prime rate is typically three percentage points higher than the federal funds rate set by the Federal Reserve.

Each bank has the ability to set its own prime rate, but most base it on the national average listed under the WSJ prime rate.

Prime rates for consumer loans, however, aren’t the same as the prime rate for a bank’s top corporate customers. Since consumers generally do not have the same resources as large companies, banks typically charge individuals the prime rate plus a surcharge based on the product type they want and their qualifications as a borrower. For example, a credit card interest rate might be the prime rate plus 12%.

How Does the Prime Loan Rate Affect You?

The prime loan rate affects everyone. From buying a car to buying a house to opening a credit card, the benchmark prime loan rate influences how much interest you pay. You may be more vulnerable to prime loan rate fluctuations if you have a lot of variable interest loans, such as credit card debt. As the prime rate climbs, so too might the annual percentage rate (APR) of your cards. When you see a prime rate hike, it can mean that your APR will quickly rise as well.

When the prime rate falls, some people take the opportunity to refinance their mortgage or loan, such as a personal loan or an auto loan, to lock in a lower rate.

Because the prime rate affects credit cards, some people who carry a high credit card balance and have good credit may consider using a personal loan to consolidate their credit card debt. This is one popular use of personal loans and can potentially help you save money on interest, depending on the rate.

What Is the Difference Between a Prime Loan and a Subprime Loan?

Prime rates for consumer lending products are what lenders charge individual borrowers with good or better credit scores. Borrowers with lower credit scores are considered subprime borrowers and can apply for subprime lending with higher (or subprime) rates. Here’s a closer look at the differences between prime and subprime loans.

Interest Rates

Interest rates are one of the most obvious differences between a prime and a subprime loan. But even within the prime lending category, there may be subcategories that receive different interest rate offers. For example, a prime borrower with a credit score near super-prime territory may receive more favorable rates than a borrower whose credit is close to subprime.

Recommended: 8 Reasons Why Good Credit Is So Important

Repayment Periods

A subprime borrower may also have fewer options when it comes to repayment periods. They may have a longer repayment period at a higher interest rate than a prime borrower.

Down Payments

A prime borrower may have a low, or no, down payment requirement for a loan. But subprime borrowers may have to make a substantial down payment to qualify for a loan. This is especially true for loans like car loans or mortgages.

Loan Amounts

Prime borrowers may have access to greater loan amounts than subprime borrowers. For instance, prime applicants can often borrow $20,000 or more, whereas subprime applicants may max out at $6,000 or $8,000.

Fees

Non-prime borrowers may have to pay more in loan fees than a prime borrower. This may be due to the types of loans they can access. If they can’t get a loan from a traditional bank, a subprime borrower may seek Payday loans or other loans that come with sky-high interest rates and fees.

What Do You Need to Qualify for a Prime Loan?

You generally need a credit score of 660 or higher to qualify for a prime loan. If your score is 720 or above, you may qualify for a super-prime loan. That said, a lender will typically look at more than your credit score to determine whether you qualify for a prime or better loan. Other factors that can impact your loan rates and terms include your income, employment status, and how much debt you currently carry.

Recommended: Debt-to-Income Ratio (DTI): How to Calculate It

The Takeaway

The prime rate is out of your control. But you do have some control over the interest rate you’ll pay for a loan. One key factor is your credit score. If you’re not currently considered a prime borrower, building your credit before you apply for new credit can help you qualify for the most competitive loan options, whether you’re researching mortgages, credit cards, or personal loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What does “prime” mean in loans?

The term “prime” is used in consumer lending to refer to high-quality borrowers, loans, and rates. Prime loans generally have competitive interest rates and are offered to borrowers who have a low default risk and good or better credit scores. The opposite of prime is subprime, a term for riskier loans with a higher interest rate.

Is there a difference between prime loans and subprime loans?

Yes. Prime loans come with competitive interest rates and favorable terms and are generally offered to people whose credit scores are in the 660 to 719 range. (Borrowers with credit scores above that are considered super-prime borrowers and may be given even better rates and terms.) Borrowers with lower credit scores are considered subprime borrowers and may only be able to access loans with high interest rates and less favorable terms.

What is the current loan prime rate?

As of February 2026, the prime rate is 6.75%, according to WSJ’s Money Rates table. The majority of banks use the WSJ rate to determine their own prime rates.

Photo credit: iStock/Imagesrouges

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

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When researching personal loans, you may see the terms annual percentage rate (APR) and interest rate used interchangeably. However, they are not the same thing. The interest rate refers to the cost of borrowing money, expressed as a percentage of the principal amount, but it doesn’t include any fees or charges.

APR, on the other hand, includes not only the interest rate but also other fees and charges you may incur when borrowing money. This makes the APR more important to look at than the interest rate.

Read on for a closer look at APR vs. interest rate and what it means when these two numbers are different and when they are the same.

What Is Interest?

Interest is the cost you pay for the privilege of taking out a loan — the money you’ll owe along with the principal, or the amount of money you’re borrowing.

Interest is expressed as a rate: a percentage that indicates what proportion of the principal you’ll pay on top of the principal itself. Interest may be simple — charged only against the principal balance — or compound — charged against both the principal balance and the accrued interest. Typically, personal loan rates are an expression of simple interest.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options.

Loan APR vs Interest Rate

So what’s the difference between an APR vs. an interest rate?

APR specifically designates how much you’ll spend, as a proportion of the principal, over the course of one year. It also includes any additional charges on top of interest, such as origination or processing fees, which a straight interest rate does not.

In other words, APR is a specific type of interest rate expression — one that’s more inclusive of additional costs.

Why Is My Personal Loan APR Different Than the Interest Rate?

If your personal loan’s APR differs from its interest rate, it means there are additional fees, such as origination fees, included in the total amount you’re being charged. If there were no fees, the APR and interest rate would be identical.

How Important Is APR vs Interest Rate?

When shopping around for loans, the APR is generally more important than the interest rate because the APR reflects the true cost of the loan — it accounts for interest as well as any fees tacked on by the lender. Looking at the APR also allows you to compare two loan offers apples to apples. One loan may have a lower interest rate than another loan, but if the lender tacks on high fees, then it may not actually be the better deal.

APR vs Interest Rate on Revolving Credit Accounts

Personal loans aren’t the only financial products that involve an APR and interest rate. Revolving credit accounts — including credit cards — also have interest rates expressed as APR. However, with credit cards, these two rates are the same: APR is just the interest rate, and the terms can be used interchangeably.

Credit card issuers may charge other fees, such as cash advance fees, late fees, or balance transfer fees, as applicable to individual usage. But it’s impossible to predict the type or amount of fees that might be charged to any one cardholder.

Although these two expressions are the same, it’s important to understand that the interest rate on credit cards and other revolving credit accounts is usually compound interest, which is why it can be so easy to spiral into credit card debt. When interest is charged on the interest you’ve already accrued, the total goes up quickly.

A single credit card account can have multiple APRs, depending on how the credit is used.

•   Purchase APR is applied to general purchases.

•   Cash advance APR is the rate charged for cash advances made to the cardholder.

•   Balance transfer APR may begin as a low or zero promotional rate, but it increases after the introductory period ends.

•   Penalty APR may be charged if a payment is late by a predetermined number of days.

💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

What Is a Good Interest Rate for a Personal Loan?

The interest rate on your personal loan — or on any financial product — will vary based on a wide variety of factors, including your personal financial history (such as your credit score and income), the lender you choose, how big the loan is, and whether or not it’s secured with collateral.

The average APR personal loan rate is currently about 12.00%. However, the rate you receive could be higher or lower, depending on your financial situation and the lender you choose.

Getting a Good APR on a Personal Loan

To get the best rate on your personal loan, there are some financial factors you can influence over time. Here are some action items to consider.

Building Your Credit Score

It’s been said before, but it’s true: The higher your credit score, the better your chances of achieving favorable loan terms and lower interest rates — not to mention qualifying for the loan at all. While there are loans out there for borrowers with bad credit and fair credit, building your credit profile can make borrowing money more affordable.

Paying Down Your Debts

One way you may be able to build your credit is to pay down your debts. Paying down debt can also improve your chances of being approved for a loan because lenders look at your debt-to-income ratio when determining your eligibility for a loan. What’s more, paying down debt can make keeping up with your monthly loan payments a lot easier, since you’ll have more leeway in your budget.

Being Careful When Applying for Credit

Applying for too much credit at once can be a red flag for lenders and reduce your credit score, so if you’re getting ready to apply for a personal loan, auto loan, or mortgage, try to limit how many times you’re having your credit score pulled. Typically, prequalifying for a loan involves a soft credit pull, which won’t impact your credit.

While credit scoring models do allow for rate shopping, it’s still a good idea to compare multiple lenders over a limited amount of time — 14 days is recommended — to find the lender that works best for your financial needs. If done in a short window of time, multiple hard credit pulls for the same type of loan will count as just one.

Recommended: Soft vs Hard Credit Inquiry

The Takeaway

Personal loans and other financial lending products come at a cost: interest. That’s the amount you’ll pay on top of repaying the principal balance itself. Interest is expressed in a percentage rate, most commonly APR, which includes both the interest and any other fees that can increase the cost of the loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Why is my personal loan APR different than the interest rate?

If the annual percentage rate (APR on your personal loan is different from the interest rate, it means the lender is charging additional fees, such as origination fees or others. No fees mean that the two rates will be the same.

How important is APR vs interest rate?

The annual percentage rate (APR is generally the more important figure to look at, since it includes additional costs incurred in getting the loan, such as fees. The APR will give you a more holistic picture of the price of the loan product.

What is a good APR and interest rate for a personal loan?

Personal loan interest rates vary widely but currently average around 12% APR. Depending on your personal financial history, the type and amount of the loan you’re borrowing, and your lender, the rate you receive could be higher or lower.

Photo credit: iStock/Charday Penn

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

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Although the 30-year fixed-rate mortgage dominates the U.S. landscape, the adjustable-rate mortgage (ARM) gains some steam when homebuyers are feeling the pinch of high mortgage rates or house prices.

Because the initial ARM rate is usually lower than that of a fixed-rate loan, buyers who expect to sell within a few years are sometimes attracted to the low rates and payments.

Taking a closer look at each type of mortgage will help you decide whether a fixed-rate or adjustable-rate mortgage works better for your particular situation.

Adjustable-Rate Mortgage Loans

In a nutshell: lower initial rate, more risk.

In most cases, an ARM rate will be fixed for three, five, seven, or 10 years and then periodically adjust.

ARMs are labeled with numbers that delineate the length of the introductory fixed phase and the frequency of rate adjustments afterward. The 5/1 ARM, for example, has a low five-year introductory rate that can then change every year for the remainder of the loan.

If you see a 7/6 or 10/6 ARM, that means the rate on the home loan can adjust every six months after the introductory period.

Pros of Adjustable-Rate Mortgage Loans

A five- or seven-year ARM tends to have an introductory rate that’s lower than that of a 30-year fixed-rate conventional loan. A three-year ARM rate may be much lower.

So, during periods of elevated mortgage rates, ARMs offer a great option for borrowers to save money before the initial rate adjustment.

That includes first-time homebuyers who are looking for lower initial rates and monthly payments and who understand that their rate will likely rise if they keep the loan.

ARMs have caps on how much the rate can increase or decrease. There is usually an initial cap, a periodic adjustment cap, and a lifetime cap. More and more of the loans have rates tied to a new index, the Secured Overnight Financing Rate (SOFR). For those, the rate may go up or down a maximum of one percentage point every six months (which is why you see a 7/6 and so on) after an initial adjustment, which could be two or five percentage points, with a 5% lifetime cap.

Cons of Adjustable-Rate Mortgage Loans

ARMs provide less stability than fixed-rate mortgages. After the initial fixed-rate period, there’s no certainty about how much monthly payments will increase or decrease.

Most ARMs are fully amortizing mortgages, but if you choose an interest-only loan, you won’t be paying down any principal for years.

Fans of ARMs point out that buyers can refinance the loan before the initial rate adjustment — to a fixed-rate loan or to another adjustable-rate mortgage — betting that rates will be lower then. But that’s a risk.

Fixed-Rate Mortgage Loans

In a nutshell: long-term predictability.

A fixed-rate mortgage has an interest rate that stays the same for the life of the loan, regardless of changes in the broader economy.

Pros of Fixed-Rate Mortgage Loans

Fixed-rate mortgages offer greater stability and predictability over the long term compared with adjustable-rate loans.

The National Association of Realtors® puts the average homeowner tenure at 15 years, while Redfin found that the typical homeowner spends almost 12 years in their home. Older homeowners may stay longer. So if you’re not planning on moving within a few years, it may be comforting to lock in your rate. You can refinance later if rates decrease.

Cons of Fixed-Rate Mortgage Loans

The 30-year fixed-rate home loan has a higher average interest rate than most ARM introductory rates.

Small differences in interest rates can add up. Use a mortgage calculator to see for yourself.

Then again, lifetime rate caps on most ARMs are five percentage points above the introductory rate.

Lay the Groundwork for a Mortgage

Do you know how much house you can afford?

You can get an idea by pre-qualifying with lenders and using a home affordability calculator.

Then there’s preapproval for a mortgage, which requires a credit check and provides a specific amount that you can tentatively borrow.

Think about which lender will offer you the best loan options and the most competitive rates.

Think About How Long You May Keep the House

How long are you planning on staying in your home? If you envision a short term, an ARM might make sense.

If the rates you see are close to those of a fixed-rate mortgage, you might go with predictability.

Consider How Quickly You May Want to Pay Off Your Mortgage

If you go the traditional route, should you choose a 15-year or 30-year mortgage?

Generally, the shorter the mortgage term, the lower the rate. Those who can afford to make a high monthly payment sometimes take out 10-year loans.

Even if you initially take out a mortgage for a certain number of years, you have the option to pay off the mortgage early.

Understand How Your Adjustable Rate Would Work

If you’re seriously considering an ARM, you’ll want to understand the rate caps and adjustments.

If your rate reached the maximum, would you still be able to afford the payments?

It doesn’t hurt to get loan estimates for both fixed-rate mortgages and ARMs when shopping for a mortgage. After finding out the loan details, you may decide that an ARM is right for you. If you aren’t comfortable with the terms, you might opt for a fixed rate.

The Takeaway

If you’re looking for a mortgage, consider how long you might stay in your new home and whether you’ll want to refinance in the coming years. Weigh the pros and cons of an adjustable-rate loan and a fixed-rate loan to decide what is optimal for your situation.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Can an adjustable-rate mortgage go down?

Yes, when interest rates fall at the time of the scheduled rate adjustment, an ARM can adjust down. However, there is usually a floor below which the rate will not fall.

Why would someone choose a fixed-rate mortgage over an adjustable-rate one?

Borrowers are often attracted by the predictability of a fixed-rate mortgage, even though the initial interest rate for an adjustable loan might be lower. The ARM may feel riskier, as rates can rise after the initial rate period.

Can I pay off a 30-year mortgage early?

Yes. You could do this by making one lump-sum payment or extra payments and ensuring that the payments are only applied to the principal. Check whether your lender imposes an early payoff penalty.

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q126-126

When someone applies for a personal loan, there are many moving parts and people involved. While each lending institution has its own process, loan applicants can expect to meet with a loan officer, a loan processor, or an underwriter.

There’s some overlap in these roles, so let’s take a closer look at what each role involves.

What Is a Personal Loan Officer?

A loan officer evaluates loan applications and determines whether or not to recommend them for approval. A personal loan officer is a specific type of loan officer who focuses on personal loans. Personal loan officers are generally employed by credit unions, banks, and financial institutions.

Generally, a personal loan officer takes on the following job responsibilities,:

•   Contacting potential borrowers to see if they need a loan

•   Working with loan applicants to gather information required for the application

•   Walking applicants through the different loan types available to them and their unique terms

•   Collecting, verifying, and reviewing an applicant’s financial information (e.g., credit score, income, and other factors)

•   Reviewing any loan agreements to confirm they are in compliance with all state and federal regulations

•   Approving loan applications or passing them on to management for a final decision

A major part of a personal loan officer’s responsibilities happens during the underwriting process. This process is used to determine if an applicant qualifies for the loan they are applying for. Once a loan officer collects and verifies all of the necessary personal and financial information about an applicant and any corresponding documents, the loan officer assesses the applicant’s need for a loan, the loan amount requested, and their ability to repay it on time.

A loan applicant working with a loan officer can turn to them about any questions they have about what a personal loan is or about the application process. A personal loan is a type of consumer loan, and consumer loan officers may use a fully automated underwriting process using software, or they may complete it themselves (which is more often the case with smaller banks and credit unions).

💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

What Is a Personal Loan Processor?

A personal loan processor, also known as a loan interviewer or loan clerk, is responsible for interviewing applicants and other necessary parties to obtain and verify the financial and personal information required to finish the personal loan application. Once the applicant is approved for the loan, the personal loan officer prepares any documents required for the appraisal and the closing of the personal loan.

Recommended: Personal Loan Calculator

What Does a Personal Loan Processor Do?

The personal loan processor serves as a liaison between the financial institution issuing the loan and the applicant to make sure that qualified applicants can secure a loan in a timely manner. The loan processor can also help applicants decide which loan product suits their financial needs and goals. For example, if an applicant is experiencing financial hardship, the loan processor can help them set up debt payment plans.

Reviews Your Application

A loan processor receives, collects, distributes, and evaluates applicant information required to complete the loan application.

Verifies Your Information

Personal loan officers are tasked with interviewing applicants and other necessary parties in order to verify any financial and personal information that must be evaluated during the application process.

Requests Documents

As a part of the verification process, they also request and collect any necessary documents from the applicant. They are also responsible for preparing any documents required for the appraisal and closing process.

Obtains Third-Party Reports

In addition to collecting documentation from the applicant, the personal loan processor works with third parties to obtain any necessary documents and reports, such as the applicant’s credit report.

Is a Personal Loan Processor the Same as an Underwriter?

While there is some overlap between what a personal loan processor and an underwriter do, these are two different roles. A loan underwriter is a specialized loan officer who focuses on evaluating how creditworthy an applicant is by collecting and evaluating an applicant’s financial information. Typically, they then use loan underwriting software to make an approval or denial recommendation.

A loan processor also reviews how eligible an applicant is for a loan by collecting and verifying important information and documents, but they don’t use underwriting software to make a decision. The underwriter has the ability to approve or deny an applicant.

Is a Loan Officer or Loan Processor Responsible for Your Personal Loan Approval?

When it comes to a loan processor vs. a loan officer, loan officers have the ability to reject or deny a loan application, while loan processors can make a recommendation for whether or not an applicant should receive a loan.

💡 Quick Tip: With lower fixed interest rates on loans of $5K to $100K, a SoFi personal loan for credit card debt can substantially decrease your monthly bills.

When Does a Personal Loan Processor or Officer Get Involved?

When someone applies for a personal loan, they’ll connect with a personal loan processor or officer when they submit their initial application. Either one can start the process of collecting personal and financial information and supporting documentation from the applicant.

What Happens During Personal Loan Processing?

During the personal loan processing stage, the applicant works with the personal loan processor to provide them with any personal information, financial information, or documentation that the personal loan processor needs to finish their application.

Recommended: A Guide to Unsecured Personal Loans

Getting Approved for a Personal Loan

Getting approved for a personal loan requires going through the underwriting process, which assesses how qualified a loan applicant is. Some firms use underwriting software to make a decision, whereas others make the decision without the aid of software.

The Takeaway

When comparing a loan officer vs. a loan processor, it’s clear that both loan processors and loan officers play an important role in the personal loan application process. Their roles often overlap, and where they work determines the exact role they take on.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is a personal loan processor the same as an underwriter?

No, a personal loan processor is not the same as an underwriter, although they share similar responsibilities. A loan underwriter determines whether or not an applicant is creditworthy. A loan processor collects and verifies any personal and financial information required to complete loan applications.

What does a personal loan processor do?

A personal loan processor works with personal loan applicants to gather the information and documents needed to complete their applications. A personal loan processor also prepares appraisal and closing documents.

When does a personal loan processor or officer get involved?

A personal loan processor or officer gets involved once a consumer starts the application process. They can help guide the applicant through that process.

Photo credit: iStock/Delmaine Donson

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

SOPL-Q126-030