A Roth IRA is a retirement account for people who want to make after-tax contributions. The trade-off for paying taxes upfront is that when you retire, all of your withdrawals will be tax free, including the earnings and other gains in your account.

Terminology Archives

Q: How much can I put in my Roth IRA monthly?

For tax years 2024 and 2025, the maximum you can deposit in a Roth or traditional IRA is $7,000, or $8,000 if you’re over 50. How you divide that per month is up to you. But you cannot contribute more than the annual limit.

Dec

2025

Roth IRA Explained

By AJ Smith | Budgeting & Goals, invest, Terminology | No Comments

Table of Contents

What Is a Roth IRA and How Does It Work?
Roth IRA Contributions
Tax Treatment
Contribution Limits
Tax-Free Withdrawals
Advantages of a Roth IRA
Disadvantages of a Roth IRA
Roth IRA Withdrawal Rules
Roth IRA Investments
Is a Roth IRA Right for You?
FAQ

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars and then withdraw your money tax-free in retirement. A Roth IRA is different from a traditional IRA in which you contribute pre-tax dollars but owe tax on the money you withdraw in retirement.

A Roth IRA can be a valuable way to help save for retirement over the long-term with the potential for tax-free growth. Read on to learn how Roth IRAs work, the rules about contributions and withdrawals, and how to determine whether a Roth IRA is right for you — just think of it as Roth IRA information for beginners and non-beginners alike.

Key Points

• A Roth IRA is a retirement savings account that offers tax-free growth and tax-free withdrawals in retirement.

• Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals are not subject to income tax.

• Roth IRAs have income limits for eligibility, and contribution limits that vary based on age and income.

• Unlike traditional IRAs, Roth IRAs do not entail required minimum distributions (RMDs) during the account holder’s lifetime.

• Roth IRAs can be a valuable tool for long-term retirement savings, especially for individuals who expect to be in a higher tax bracket in the future.

What Is a Roth IRA?

A Roth IRA is a retirement account that provides individuals with a way to save on their own for their golden years.

You can open a Roth IRA at most banks, online banks, or brokerages. Once you’ve set up your Roth account, you can start making contributions to it. Then you can invest those contributions in the investment vehicles offered by the bank or brokerage where you have your account.

What differentiates a Roth IRA from a traditional IRA is that you make after-tax contributions to a Roth. Because you pay the taxes upfront, the earnings in a Roth grow tax free. When you retire, the withdrawals you take from your Roth will also be tax free, including the earnings in the account.

With a traditional IRA, you make pre-tax contributions to the account, which you can deduct from your income tax, but you pay taxes on the money, including the earnings, when you withdraw it in retirement.

Roth IRA Contributions

There are several rules regarding Roth IRA contributions, and it’s important to be aware of them. First, to contribute to a Roth IRA, you must have earned income. If you don’t earn income for a certain year, you can’t contribute to your Roth that year.

Second, Roth IRAs have annual contribution limits (see more on that below). If you earn less than the Roth IRA contribution limit for the year, you can only deposit up to the amount of money you made. For instance, if you earn $5,000 in 2025, that is the maximum amount you can contribute to your Roth IRA for that year.

In addition, there are income restrictions regarding Roth IRA contributions.

In 2025, single filers with a modified adjusted gross income (MAGI) of:

• less than $150,000 can contribute the full amount to a Roth

• $150,000 to $165,000 to contribute a reduced amount

• $165,000 or more can’t contribute to a Roth

In 2025, married filers with a MAGI of:

• less than $236,000 can contribute the full amount to a Roth

• $236,000 to $246,000 can contribute a reduced amount

• $246,000 or more can’t contribute to a Roth

In 2026, single filers with a MAGI of:

• less than $153,000 can contribute the full amount to a Roth

• $153,000 to $168,000 can contribute a reduced amount

• $168,000 or more can’t contribute to a Roth

In 2026, married joint filers with a MAGI of:

• less than $242,000 can contribute the full amount

• $242,000 to $252,000 can contribute a reduced amount

• $252,000 or more can’t contribute to a Roth.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Tax Treatment

Contributions to a Roth IRA are made with after-tax dollars — meaning you pay taxes on the money before contributing it to your Roth. You can’t take your contributions as income tax deductions as you can with a traditional IRA, but you can withdraw your contributions at any time with no taxes or penalties. Once you reach age 59 ½ or older, you can withdraw your earnings, along with your contributions, tax-free.

If you expect to be in a higher tax bracket in retirement, or if you want to maximize your savings in retirement and not have to pay taxes on your withdrawals then, a Roth IRA may make sense for you.

Contribution Limits

As mentioned, Roth IRAs have annual contribution limits, which are the same as traditional IRA contribution limits.

For 2025, the annual IRA contribution limit is $7,000 for individuals under age 50, and $8,000 for those 50 and up. The extra $1,000 is called a catch-up contribution for those closer to retirement. For 2026, the contribution limit is $7,500 for those under age 50, and $8,600 for those 50 and up, including a $1,100 catch-up contribution.

Remember that you can only contribute earned income to a Roth IRA. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.

Calculate your IRA contributions.

Get a head start on retirement planning with SoFi’s 2024 IRA contribution calculator.

Tax-Free Withdrawals

As noted, you can make withdrawals, including earnings, tax-free from a Roth once you reach age 59 ½. And you can withdraw contributions tax-free at any time. However, there are some specific Roth IRA withdrawal rules to know about so that you can make the most of your IRA.

Qualified Distributions

Since you’ve already paid taxes on the money you contribute to your Roth IRA, you can withdraw contributions at any time without paying taxes or a 10% early withdrawal penalty. But you cannot withdraw earnings tax- and penalty-free until you reach age 59 ½.

For example, if you’re age 45 and you’ve contributed $25,000 to a Roth through your online brokerage over the last five years, and your investments have seen a 10% gain (or $2,500), you would have $27,500 in the account. But you could only withdraw up to $25,000 of your contributions tax-free, and not the $2,500 in earnings.

The 5-Year Rule

According to the 5-year rule, you can withdraw Roth IRA account earnings without owing tax or a penalty, as long as it has been five years or more since you first funded the account, and you are 59 ½ or older.

The 5-year rule applies to everyone, no matter how old they are when they want to withdraw earnings from a Roth. For example, even if you start funding a Roth when you’re 60, you still have to wait five years to take qualified withdrawals.

Non-Qualified Withdrawals

Non-qualified withdrawals of earnings from a Roth IRA depends on your age and how long you’ve been funding the account.

• If you meet the 5-year rule, but you’re under age 59 ½, you’ll owe taxes and a 10% penalty on any earnings you withdraw, except in certain cases, as noted below.

• If you don’t meet the 5-year rule, meaning you haven’t had the account for five years, and if you’re less than 59 ½ years old, in most cases you will also owe taxes and a 10% penalty.

Exceptions

You can take an early or non-qualified withdrawal prior to 59 ½ without paying a penalty or taxes in certain circumstances, including:

• For a first home. You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.

• Disability. You can withdraw money if you qualify as disabled.

• Death. Your heirs or estate can withdraw money if you die.

Additionally you may be able to avoid the 10% penalty (although you’ll still generally have to pay income taxes) if you withdraw earnings for such things as:

• Medical expenses. Specifically, those that exceed 7.5% of your adjusted gross income.

• Medical insurance premiums. This applies to health insurance premiums you pay for yourself during a time in which you’re unemployed.

• Qualified higher education expenses. This includes expenses like college tuition and fees.

Advantages of a Roth IRA

Depending on an individual’s income and circumstances, a Roth IRA has a number of advantages.

• No age restriction on contributions. Roth IRA account holders can make contributions at any age as long as they have earned income for the year.

^* You can fund a Roth and a 401(k). Funding a 401(k) and a traditional IRA can sometimes be tricky, because they’re both tax-deferred accounts. But a Roth IRA is after-tax, so you can contribute to a Roth and a 401(k) at the same time and stick to the contribution limits for each account.

• Early withdrawal option. With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time without tax or penalties (but not earnings). In contrast, withdrawals from a traditional IRA before age 59 ½ may be subject to a 10% penalty.

• Qualified Roth withdrawals are tax-free. Investors who have had the Roth for five years or more, and are at least 59 ½, are eligible to take tax- and penalty-free withdrawals of contributions and earnings.

• No required minimum distributions (RMDs). Unlike traditional IRAs, which require account holders to start withdrawing money at age 73, Roth IRAs do not have RMDs. That means an individual can withdraw the money as needed without fear of triggering a penalty.

Disadvantages of a Roth IRA

Roth IRAs also have some disadvantages to consider. These include:

• No tax deduction for contributions. A primary disadvantage of a Roth IRA is that your contributions are not tax deductible, as they are with a traditional IRA and other tax-deferred accounts like a 401(k).

• Higher earners often can’t contribute to a Roth. Individuals with a higher MAGI are generally excluded from Roth IRA accounts, unless they do what’s known as a backdoor Roth or a Roth conversion.

• The 5-year rule applies. The 5-year rule can make withdrawals more complicated for investors who open a Roth later in life. If you open a Roth or do a Roth conversion at age 60, for example, you must generally wait five years to take qualified withdrawals of contributions and earnings or face a penalty.

• Low annual contribution limit. The maximum amount you can contribute to a Roth IRA each year is low compared to other retirement accounts like a SEP IRA or 401(k). But, as noted above, you can combine saving in a 401(k) with saving in a Roth IRA.

Roth IRA Investments

How does a Roth IRA make money? Once you contribute money to your IRA account you can invest those funds in different assets such as mutual funds, exchange-traded funds (ETFs), stocks, and bonds. Depending on how those investments perform, you may earn money on them (however, no investment is guaranteed to earn money). And if you leave your earnings in the account, you can potentially earn money on your earnings through a process called compounding returns, in which your money keeps earning money for you.

To choose investments for your Roth IRA, consider your financial circumstances, goals, timeframe (when you will need the money), and risk tolerance level. That way you can determine which investment options are best for your situation.

Is a Roth IRA Right for You?

How do you know whether you should contribute to a Roth IRA? This checklist may help you decide.

• You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401(k) plan, or if you do have a 401(k) plan but you’ve already maxed out your contribution to it. You can fund both a Roth IRA and an employer-sponsored plan.

• Because Roth contributions are taxed immediately, rather than in retirement, using a Roth IRA can make sense if you are in a lower tax bracket currently. It may also make sense to open a Roth IRA if you expect your tax bracket to be higher in retirement than it is today.

• Individuals who are in the beginning of their careers and earning less might consider contributing to a Roth IRA now, since they might not qualify under the income limits later in life.

• A Roth IRA may be helpful if you think you’ll work past the traditional retirement age, as long as your income falls within the limits. Since there is no age limit for opening a Roth and RMDs are not required, your money can potentially grow tax-free for a long period of time.

The Takeaway

A Roth IRA can be a valuable tool to help save for retirement. With a Roth, your earnings grow tax-free, and you can make qualified withdrawals tax-free. Plus, you can withdraw your contributions at any time with no taxes or penalties and you don’t have to take required minimum distributions (RMDs).

That said, not everyone is eligible to fund a Roth IRA. You need to have earned income, and your modified adjusted gross income cannot exceed certain limits. You must fund your Roth for at least five years and be 59 ½ or older in order to make qualified withdrawals of earnings. Otherwise, you would likely owe taxes on any earnings you withdraw, and possibly a penalty.

Still, the primary advantage of a Roth IRA — being able to have an income stream in retirement that’s tax-free — may outweigh the restrictions.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

FAQ

Are Roth IRAs insured?

If your Roth IRA is held at an FDIC-insured bank and is invested in bank products like certificates of deposit (CDs) or money market account, those deposits are insured up to $250,000 per depositor, per institution. On the other hand, if your Roth IRA is with a brokerage that’s a member of the Securities Investor Protection Corporation (SIPC), and the brokerage fails, the SIPC provides protection up to $500,000, which includes a $250,000 limit for cash. It’s very important to note that neither FDIC or SIPC insurance protects against market losses; they only cover losses due to institutional failures or insolvency.

How much can I put in my Roth IRA monthly?

For tax year 2025, the maximum you can deposit in a Roth or traditional IRA is $7,000, or $8,000 if you’re over 50. For tax year 2026, the maximum you can contribute is $7,500, or $8,600 if you’re age 50 or older. How you divide that per month is up to you. But you cannot contribute more than the annual limit.

I opened a Roth IRA — now what?

After you open a Roth IRA, you can make contributions up to the annual limit. Then you can invest those contributions in assets offered by your IRA provider. Typically you can choose from such investment vehicles as mutual funds, exchange-traded funds, stocks and bonds.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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CN-Q425-3236452-07

Dec

2025

What Is an IRA?

By Pam O’Brien | Growing Wealth, invest, Investing, Terminology | No Comments

Table of Contents

What Is an IRA?
What Are the Different Types of IRA Accounts?
How to Open an IRA
Benefits of Opening an IRA
Which Type of IRA Works for You?
How Much Should You Contribute to an IRA?
How Can You Use IRA Funds?
FAQ

What Is an IRA?

An individual retirement account, or IRA, is a retirement savings account that has certain tax advantages. Brian Walsh is a CFP® at SoFi — he says “The tax advantage part is important because it allows your money to grow a little bit more efficiently, especially over a long period of time.” An IRA allows individuals to save for retirement over the long-term.

There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both types generally let you contribute the same amount annually (more on that below). One key difference is the way the two accounts are taxed: With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement.

For those planning for their future, IRAs are worth learning more about—and potentially investing in. Read on to learn more about the different types of IRAs, which one might be right for you, and how to open an individual retirement account.

Key Points

• An IRA is a retirement savings account that offers tax advantages and allows individuals to save for retirement over the long-term.

• There are different types of IRAs, including traditional and Roth IRAs, each with its own tax treatment and contribution limits.

• Traditional IRAs allow for pre-tax contributions and tax-deferred growth, while Roth IRAs involve after-tax contributions and tax-free withdrawals in retirement.

• Other types of IRAs include SEP IRAs for small business owners and self-employed individuals, and SIMPLE IRAs for employees and employers of small businesses.

• Opening an IRA provides individuals with the opportunity to save for retirement, supplement existing retirement plans, and potentially benefit from tax advantages.

What Are the Different Types of IRA Accounts?

There are several types of IRAs, including traditional and Roth IRAs. Since it is possible to have multiple IRAs, an individual who works for themselves or owns a small business might also establish a SEP IRA (Simplified Employee Pension) or SIMPLE IRA (Savings Incentive Match Plan for Employees). Just be aware that you cannot exceed the total contribution limits across all the IRAs you hold.

Here is an overview of some different types of IRAs:

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Traditional IRA

A traditional IRA is a retirement account that allows individuals to make pre-tax contributions. Money inside a traditional IRA grows tax-deferred, and it’s subject to income tax when it’s withdrawn.

Contributions to a traditional IRA are typically tax-deductible because they can lower an individual’s taxable income in the year they contribute.

Traditional IRAs have contribution limits. In 2025, individuals can contribute up to $7,000 per year, with an additional catch-up contribution of $1,000 for those aged 50 and up. In 2026, individuals can contribute up to $7,500, with an additional catch-up of $1,100.

When individuals reach age 73 (for those who turn 72 after December 31, 2022), they must start taking required minimum distributions (RMDs) from a traditional IRA. RMDs are generally calculated by taking the IRA account balance and dividing it by a life expectancy factor determined by the IRS.

Saving for retirement with an IRA means that an individual is, essentially, saving money until they reach at least age 59 ½. Withdrawals from a traditional IRA taken before that time are typically subject to income tax and a 10% early withdrawal penalty. There are some exemptions to this rule, however — such as using a set amount of IRA funds to buy a first house or pay a medical insurance premium after an individual loses their job.

Calculate your IRA contributions.

Discover how much you can put into an IRA in 2024 using SoFi’s IRA contribution calculator.

Roth IRA

Unlike a traditional IRA, contributions to a Roth IRA are made with after-tax dollars, and contributions are not tax-deductible. The money can grow tax-free in the Roth IRA account. Withdrawals made after age 59 ½ are tax-free, as long as the account has been open for at least five years.

Roth IRAs are subject to the same contribution limits as traditional IRAs — up to $7,000 in 2025, and $7,500 in 2026, with an additional catch-up contribution for those aged 50 and older. However, the amount an individual can contribute may be limited based on their tax filing status and income levels.

For 2025, married couples filing jointly can contribute only a partial amount to a Roth if their modified adjusted gross income (MAGI) is $236,000 or more. If their MAGI $246,000 or more, they cannot contribute to a Roth at all. For single filers, those whose MAGI is $150,000 or more can make a reduced contribution to a Roth, and those whose MAGI is $165,000 or more cannot contribute.

For 2026, married couples filing jointly can contribute only a partial amount to a Roth IRA if their MAGI is $242,000 or more. If their MAGI is $252,000 or more, they can’t contribute at all. Single filers with a MAGI of $153,000 or more can contribute a reduced amount to a Roth, and they cannot contribute to a Roth at all if their MAGI is $168,000 or more.

Individuals with Roth IRAs are not required to take RMDs. Additionally, Roth withdrawal rules are a bit more flexible than those for a traditional IRA. Individuals can withdraw contributions to their Roth IRAs at any time without having to pay income tax or a penalty fee. However, they may be subject to taxes and a 10% penalty on earnings they withdraw before age 59 ½.

SEP IRA

A simplified employee pension (SEP IRA) provides small business owners and self-employed people with a way to contribute to their employees’ or their own retirement plans. Contribution limits are significantly larger than those for traditional and Roth IRAs.

Only an employer (or self-employed person) can contribute to a SEP IRA. In 2025, employers can contribute up to 25% of their employees’ compensations or $70,000 a year, whichever is less. The amount of employee compensation that can be used to calculate the 25% is limited to $350,000.

In 2026, employers can contribute up to 25% of their employees’ compensation or $72,000, whichever is less. The maximum amount of employee compensation used to calculate the 25% is $360,000.

If an individual is the owner of the business and contributes a certain percentage of their compensation to their own SEP IRA —for example, 15%— the amount they contribute to their employees’ plans must be the same proportion of the employees’ salary (in other words, also 15% or whatever percentage they contributed).

When it comes to RMDs and early withdrawal penalties, SEP IRAs follow the same rules as traditional IRAs. However, in certain situations, the early withdrawal penalty may be waived.

SIMPLE IRA

A Savings Incentive Match Plan for employees, or SIMPLE IRA, is a traditional IRA that both employees and employers can contribute to. These plans are, typically, available to any small business with 100 employees or fewer.

Employers are required to contribute to the plan each year by making a 3% matching contribution, or a 2% nonelective contribution, which must be made even if the employee doesn’t contribute anything to the account. This 2% contribution is calculated on no more than $350,000 of an employee’s compensation in 2025, and $360,000 in 2026.

Employees can contribute up to $16,500 to their SIMPLE IRA in 2025, and they can also make catch-up contributions of $3,500 at age 50 or older, if their plan allows it. In 2026, they can contribute up to $17,000, plus catch-up contributions of $4,000 if they are 50 and up. Individuals ages 60 to 63 can contribute a higher catch-up of $5,250 in 2025 and 2026, thanks to SECURE 2.0.

SIMPLE plans have RMDs, and early withdrawals are subject to income tax and a 10% penalty. The early withdrawal penalty increases to 25% for withdrawals made during the first two years of participation in a plan. (There are, however, certain exemptions recognized by the IRS.)

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

How to Open an IRA

Benefits of Opening an IRA

The main advantage of opening an IRA is that you are saving money for your future. Investing in retirement is an important financial move at any age. Beyond that, here are some other benefits of opening an IRA:

• Anyone who earns income can open an IRA. It’s a good option if you don’t have access to an employee-sponsored plan, such as a 401(k) or a 403(b).

• An IRA can supplement an employee plan. You could open an IRA to supplement your retirement plan at work, especially if you’ve already contributed the annual maximum.

• An IRA might be a good rollover vehicle. If you’re leaving your job, you could roll over funds from a 401(k) or 403(b) into an IRA. That may give you access to more investment options—not to mention consolidating your accounts in one place.

• A SEP IRA might be helpful if you’re self-employed. A SEP IRA may allow you to contribute more each year than you could to a Roth or Traditional IRA, depending on how much you earn.

Which Type of IRA Works for You?

There are many different types of IRAs and deciding which one is better for your particular financial situation will depend on your individual circumstances and future plans. Here are some questions to ask yourself when deciding between different types of IRAs:

• Thinking ahead, what do you expect your tax income bracket to look like at retirement? If you think you’ll be in a lower bracket when you retire, it might make more sense to invest in a traditional IRA, since you’ll pay more in taxes today than you would when you withdraw the money later.

• Will you likely be in a higher tax bracket at retirement? That can easily happen as your career and income grow and if you experience lifestyle inflation. In that case, a Roth IRA might give you the opportunity to save on taxes in the long run.

• Do you prefer not to take RMDs starting at age 73? If so, a Roth IRA might be a better option for you.

• Is your income high enough to prevent you from contributing the full amount (or at all) to a Roth IRA? In that case, you may want to consider a traditional IRA.

How Much Should You Contribute to an IRA?

If you can afford it, you could contribute up to the maximum limit to your IRA every year (including catch-up contributions if you qualify). Otherwise, it generally makes sense to contribute as much as you can, on a regular basis, so that it becomes a habit.

Until you’re on track for retirement, many financial professionals recommend prioritizing IRA contributions over other big expenses, like saving for a down payment on a first or second home, or for your kids’ college education.

Any money you put into an IRA has the opportunity to grow over time. Of course, everyone’s circumstances are different, so for specifics unique to your situation, it might help to talk to a financial advisor and/or a tax advisor.

How Can You Use IRA Funds?

Early withdrawals of your IRA funds, prior to the age of 59 ½, can trigger a 10% penalty tax. However, there are exceptions that may allow an individual to use their IRA funds before hitting the age of eligibility and without facing the 10% penalty, according to IRS rules. Just keep in mind that early withdrawals are generally considered a last resort after all other options have been exhausted since you don’t want to dip into your retirement funds unless absolutely necessary.

IRA withdrawal exceptions include:

• Permanent disability

• Higher education expenses

• Certain out-of-pocket medical expenses totaling more than 10% of adjusted gross income

• Qualified first-time homebuyers up to $10,000

• Health insurance premiums while unemployed

• IRS levy of the plan

• Qualified military reservist called to active duty

• Death of the IRA’s owner

The Takeaway

IRAs offer individuals an opportunity to save money for retirement in a tax-advantaged plan. There are several different IRAs to choose from to help you find an account that suits your needs and goals.

There are multiple options for opening an IRA, including online brokers and robo-advisors. With an online broker, you choose the investment assets for your IRA. A robo-advisor is an automated investment platform that picks investments for you based on your financial goals, risk tolerance, and investing time frame. Whichever option you choose, you decide on a financial institution, pick the type of IRA you want, and set up your account.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

How is an IRA different from a 401(k)?

While IRAs and 401(k)s are both tax-advantaged ways to save money for retirement, a 401(k) is an employer-sponsored plan that is offered through the workplace, and an IRA is an account you can open on your own.

What’s the difference between a Roth IRA and a Traditional IRA?

The biggest difference between a traditional IRA vs. Roth IRA is how and when your money is taxed. With a traditional IRA, you get a tax deduction when you make contributions. Your contributions are made with pre-tax dollars, and when you withdraw money in retirement, the funds are taxed.

With a Roth IRA, you make contributions with after-tax dollars. You don’t get a tax deduction upfront when you contribute, but your money grows tax-free. When you withdraw the money in retirement, you won’t pay taxes on the withdrawals.

When should I make IRA contributions?

One simple way to fund your IRA is to set up automatic contributions at regular intervals that puts money from your bank account directly into your IRA. You could contribute monthly or several times a year—the frequency is up to you. Some people contribute once annually, after they receive a year-end bonus, for example.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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CN-Q425-3236452-09

Nov

2025

A colorful rendering of the phrase, Rule of 72, with decorative images suggesting market returns.

The Rule of 72: Understanding Its Significance in Investing

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology | Comments Off

Table of Contents

What Is the Rule of 72?
The Formula and Calculation of the Rule of 72
Applying the Rule of 72 in Investment Planning
Accuracy and Limitations of the Rule of 72
Comparisons and Variations on the Rule
FAQ

The Rule of 72 is a basic equation that investors can use to estimate how long it might take for a given amount of money to double, given a specific rate of return. The formula involves dividing 72 by the interest or return rate.

For example, a $50,000 investment that’s earning roughly 9% per year could double in about eight years (72 / 9 = 8).

The Rule of 72 can be used in cases that are based on compound returns, or compound interest. As such it can also be used to calculate how long it might take to pay down a certain amount of debt, and to gauge the impact of inflation over time.

The Rule of 72, like similar shortcuts, is meant to provide a ballpark estimate that investors can use when making their financial projections. The actual time it takes for your money to double can vary, depending on numerous factors.

Key Points

• The Rule of 72 is a simple equation that can help investors estimate how long it will take for their money to double.

• It’s calculated by dividing 72 by the annual return rate.

• This rule can also help people assess how long it might take to pay down debt or to gauge the impact of inflation on money’s value.

• While not perfectly accurate, the Rule of 72 provides a useful ballpark estimate, especially for interest rates between 6% and 10%.

• The accuracy of the Rule of 72 can be adjusted by adding or subtracting one from 72 for every three points the return rate deviates from 8%.

What Is the Rule of 72?

The Rule of 72 helps investors understand how different types of investments might figure into their investment plans. The basic formula for the rule is:

Number of years to double an investment = 72 / Expected rate of return

The expected rate of return on an investment will naturally vary over time, and will depend on the type of investment. The Rule of 72 is a way to plug in a hypothetical return rate or annual interest rate for an investment like a stock, bond, or mutual fund.

For example, consider someone who is investing online has $10,000 in an investment that may provide a possible 6% rate of return. That investment could theoretically double in about 12 years (72 / 6 = 12). So, approximately 12 years after making an initial investment, given a potential 6% annual return, the investor would have $20,000. Again, returns are effectively compounded with this formula.

Notice that when making this calculation, investors divide by 6, not 6% or 0.06. (Dividing by 0.06 would indicate 1,200 years to double the investment, an outlandishly long time.)

This shorthand allows investors to quickly compare investments and understand whether a potential rate of return will help them meet their financial goals within a desired time horizon. For example, a bond typically offers a fixed rate of return, which could be compared to the hypothetical return of an equity investment — which might be higher, but could be less reliable.

Who Came Up with the Rule of 72?

The Rule of 72 is not new. In fact, it dates back to the late 1400s, when it was referenced in a mathematics book by Luca Pacioli. The Rule itself, though, could date even further back. Albert Einstein is often credited with its invention, although it’s not his original concept.

The Formula and Calculation of the Rule of 72

The Rule of 72 is a shortened version of a logarithmic equation that involves complex functions you would need a scientific calculator to calculate. That formula looks like this:

T = ln(2) / ln(1 + r / 100)

In this equation, T equals time to double, ln is the natural log function, and r is the compounded interest rate.

This calculation is too complicated for the average investor to perform on the fly, and it turns out 72 divided by r is a close approximation that works especially well for lower rates of return. The higher the rate of return — as the rate nears 100% — the less accurate the Rule of 72 gets.

Example of the Rule of 72 Calculation

The Rule of 72 can help investors figure out helpful information. For one, it can help them compare different types of investments that offer different rates of returns.

For example, an investor has $25,000 to invest when they open an IRA, and they plan to retire in 20 years. In order to meet a certain retirement goal, that investor needs to at least double their money to $50,000 in that time period.

The same investor is considering two investment options: One offers a 3% return and one offers a 4% return. Using the Rule of 72 the investor can quickly see that at 3% the investment could double in 24 years (72 / 3 = 24), four years past their retirement date. The investment with a 4% return could double their money in 18 years (72 / 4 = 18), giving them two years of leeway before they retire.

The investor can see that when choosing between the two options, the 4% rate of return may help them reach their financial goals, while the 3% return might leave them short.

Applying the Rule of 72 in Investment Planning

There are numerous instances in which the Rule of 72 can be applied to investment planning. But it’s also important to understand a bit about how simple and compound growth occur, and how they can come into play when using the Rule of 72 to make projections.

Simple growth, like simple interest, is when the rate of return applies only to the principal amount. A $1,000 investment that earns a 5% simple rate of return would earn $50 per year.

Compound growth is more common for long-term investments; this is when the rate of return applies to the principal investment plus all earnings from previous periods. In other words, an investor earns a return on their returns.

Example of Compound Returns

To get an idea of the power of compound interest it might help to explore a compound interest calculator, which allows users to input principal, the rate or return or interest rate, and the compounding period.

For example, imagine that an individual invests that same $1,000 at a 5% rate for 10 years with the gains compounding monthly. At the end of the investment period, they will have made more than $674, without making any additional investments.

That fact is important to consider when conceptualizing the Rule of 72, because compound interest plays a big role in helping an investment double in value within a given time frame. Here, the Rule of 72 indicates that the investor’s initial $1,000 would double in about 14.4 years (72 / 5 = 14.4 ).

Recommended: Stock Market Basics

Practical Uses in Financial Projections

Higher returns are often correlated with higher risk. So the Rule of 72 can help investors gauge whether their risk tolerance — or their expected return on investment — is high enough to get them to their goal, without undue risk exposure. Depending on what their time horizon is, investors can evaluate whether they need to bump up their risk tolerance and choose investments that may offer higher returns.

By the same token, this rule can help investors understand if their time horizon is long enough at a certain rate of return. For example, the investor in the above example is already invested in the instrument that offers 3%.

The Rule of 72 can indicate that they may need to rethink their timeline for when they will retire, pushing it past 20 years. Alternatively, for those interested in self-directed investing, they could sell their current investments and buy a new investment that might offer a higher rate of return.

It’s also important to understand that the Rule of 72 does not take into account additional savings that may be made to the principal investment. So if it becomes clear that the goal won’t be met at the current savings rate, an investor will be able to consider how much extra money to set aside to help reach the goal.

Estimating Investment Doubling Times

Using the Rule of 72 to estimate investment doubling times can be a little tricky, and perhaps inaccurate, unless an investor has a clear idea of what the expected rate of return for an investment will be. For instance, it may be very difficult to get an idea of an expected return for a particularly volatile stock. As such, investors may want to proceed with caution when using it to calculate investment doubling times.

Application in Stock Market Investments

As mentioned, stock market returns can’t be predicted. But an investor could use the historic rate of return for the S&P 500 to try and get a sense of an expected return for the market at large – which can help when applying the Rule of 72 to index funds or other broad investments.

By contrast, bonds typically offer a fixed rate of return, making it easier to use the Rule of 72 effectively.

For example, if a traditional IRA, Roth IRA, or 401(k) plan includes investments that offer a potential 6% return, the investment will double in 12 years. Again, that’s an estimate, but it gives investors a ballpark figure to work with.

Use During Periods of Inflation

Money loses value during bouts of inflation, which means that the Rule of 72 can be used to determine how long it’ll take a dollar’s value to fall by half — the opposite of doubling in value. If inflation holds steady at 5%, the purchasing power of a dollar will be cut in half in about 14.4 years.

Accuracy and Limitations of the Rule of 72

The Rule of 72 has its place in the investing lexicon, but there are some things about its accuracy and overall limitations to take into consideration.

Is the Rule of 72 Accurate?

Perhaps the most important thing to keep in mind about the Rule of 72’s accuracy is that it’s a derivation of a larger, more complex operation, and therefore, is something of an estimate. It’s not perfectly accurate, but will get you more of a ballpark figure that can help you make investing decisions.

Situations Where the Rule is Most Accurate

The Rule of 72 is only an approximation and depending on what you’re trying to understand there are a few variations of the rule that can make this estimate more accurate.

The rule of 72 is most accurate at 8%, and beyond that at a range between 6% and 10%. You can, however, adjust the rule to make it more accurate outside the 6% to 10% window.

The general rule to make the calculation more accurate is to adjust the rule by one for every three points the interest rate differs from 8% in either direction. So, for an interest rate of 11%, individuals should adjust from 72 to 73. In the other direction, if the interest rate is 5%, individuals should adjust 72 to 71.

Comparisons and Variations on the Rule

There are a few alternatives or variations of the Rule of 72, too, such as the Rule of 73, Rule of 69.3, and Rule of 69.

Rule of 72 vs. Rule of 73

The basic difference between the Rule of 72 and the Rule of 73 is that it’s used to estimate the time it takes for an investment’s value to double if the rate of return is above 10%. The Rule of 73 is only a slight tweak to the rule of 72, using different figures in the calculation.

Rules of 72, 69.3, and 69

Similarly to the Rule of 73, some people prefer to use the Rule of 69.3, especially when interest compounds daily, to get a more accurate result. That number is derived from the complete equation ln(2) / ln(1 + r / 100). When plugged into a calculator by itself, ln(2) results in a number that’s approximately 0.693147.

The Takeaway

The Rule of 72 is one of a few simple formulas investors can use to evaluate when a given investment might double in value. The advantage of these formulas is that they can be applied quickly, without using a calculator. And because the Rule of 72 generally can apply to any situation that involves the compounding of returns, interest, or inflation, investors can use it in various circumstances.

That said, it’s important to be aware that the Rule of 72 is just an estimate. It cannot control for real-world conditions that may impact risk and returns.

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FAQ

What are the flaws in the Rule of 72?

There are a few key drawbacks to using the Rule of 72, including the fact that it’s mostly accurate only for a certain subset of investments, it’s only an estimate, and unforeseen factors can cause the rate of return for an investment to change, rendering it useless.

Does the Rule of 72 apply to debt?

Yes, the Rule of 72 can be applied to debt, and it can be used to calculate an estimate of how long it would take a debt balance to double if it’s not paid down or off.

Who created the Rule of 72?

Albert Einstein often gets credit for creating this formula, but Italian mathematician Luca Pacioli most likely invented, or introduced, the Rule of 72 in the late 1400s.

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SOIN-Q425-005

Nov

2025

What Is FICO Score 8 vs. FICO Score 9?

By Dan Miller | Credit, relay, Terminology | Comments Off

FICO® Scores, issued by the Fair Isaac Corporation, are one of the most popular types of credit scores. FICO Scores were first introduced in 1989, and there are currently 16 distinct FICO versions in use today. FICO Score 8 and FICO Score 9 are two of the more popular versions (or models).

Keep reading to learn more on FICO Score 8 and FICO Score 9, including how each works, how they differ, and which score lenders use the most.

Key Points

• FICO Score 8 remains more widely used by lenders, while FICO Score 9 adoption is increasing but not yet universal.

• FICO Score 9 provides a more comprehensive evaluation of a borrower’s creditworthiness due to its updated scoring model.

• FICO Score 9 reduces the impact of medical debt on credit scores, unlike FICO Score 8, which treats all collection accounts similarly.

• FICO Score 9 disregards paid collection accounts, whereas FICO Score 8 still considers them.

• Your scores on both models should be relatively similar, as all FICO Scores take into account payment history, amounts owed, length of credit history, credit mix, and new credit.

What Are FICO Scores?

A FICO Score is a type of credit score produced by the Fair Isaac Corporation. They list five factors that can affect your FICO score:

• Payment history (35%)

• Amounts owed (30%)

• Length of credit history (15%)

• Credit mix (10%)

• New credit (10%)

Your FICO Score is a three-digit number that ranges from 300 to 850, and can help lenders decide how much of a credit risk you might be. Lowering your credit card utilization is one way that you may be able to build your credit score.

Why There Are Different FICO Score Versions

While the Fair Isaac Corporation does share the broad information that makes up a FICO Score, they do not share exactly what goes into a FICO Score. The same is true of other companies that produce credit scores. When you look at VantageScore vs. FICO Scores, for example, you may find that the same person has varying scores, though they’re usually fairly close across all scoring companies.

FICO is constantly tweaking its model to make it as predictive as possible, which is why there are multiple FICO Score versions used.

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How Different FICO Score Versions Are Used

Different FICO Score versions are used depending on the type of loan and the lender’s preferences. Here’s a breakdown:

FICO Score 8 (Most Common)

• Widely used for credit card approvals, auto loans, and personal loans

• Known for being sensitive to high credit card utilization

FICO Score 9 (Improved Model)

• Used by some lenders for personal loans and credit cards

• More lenient on medical debt and paid collection accounts

• Incorporates rent payment history, if reported

FICO Score 2, 4, and 5 (Mortgage Scores)

• Specifically used in mortgage lending

• Required by Fannie Mae and Freddie Mac for home loans

• Older models that focus heavily on payment history and derogatory marks

FICO Auto Score 8 & Auto Score 9

• Tailored for auto loan approvals

• Gives more weight to auto loan payment history

FICO Bankcard Score 8 & Bankcard Score 9

• Used for credit card approvals

• Score ranges from 250 to 900

• Places more emphasis on credit card behavior and revolving credit usage

FICO Score 10 and 10T (Newest Versions)

• Not yet widely adopted

• FICO 10T incorporates trending data, which looks at credit usage patterns over time

• More predictive and accurate, but lenders are slow to switch due to compatibility issues

Lenders choose specific versions based on the type of risk they want to assess and the industry standards they follow.

Key Features of FICO Score 8

FICO Score 8 is one of the most widely used credit scoring models by lenders to assess a borrower’s creditworthiness. It places a strong emphasis on payment history and credit utilization, with late payments and high credit card balances significantly impacting the score.

Additionally, FICO Score 8 does not differentiate between paid and unpaid collection accounts. This model is favored for its balanced approach to evaluating risk while helping lenders make more accurate lending decisions.

Key Features of FICO Score 9

FICO Score 9 introduces several enhancements over FICO Score 8, offering a more refined assessment of creditworthiness. It disregards paid collection accounts, which can positively impact borrowers who have settled past debts. Additionally, it reduces the negative impact of medical collections compared to other types of debt.

The model also incorporates rental payment history when reported, providing an opportunity for renters to build credit. These improvements aim to provide a fairer and more accurate reflection of a consumer’s financial behavior, helping lenders make better-informed decisions.

Which Do Lenders Use More: FICO Score 8 or FICO Score 9?

Lenders predominantly use FICO Score 8 for most credit decisions, as it’s the most widely adopted version of the FICO Score. FICO Score 9 is newer and includes some improvements. As of now, though, many lenders still rely on FICO Score 8 because it has been in use longer and has a more established track record.

Major Differences Between FICO Score 8 and FICO Score 9

FICO Score 8 and FICO Score 9 are two different models of the FICO Score credit score model. Here’s a look at the major differences between FICO Score 8 and FICO Score 9:

Medical Debt:

• FICO Score 8: Treats medical debt the same as other types of debt, potentially lowering your score.

• FICO Score 9: Excludes medical debt from the score if it’s paid off, making it less impactful once paid.

Collection Accounts:

• FICO Score 8: Does not differentiate between types of collections, meaning both paid and unpaid collections can harm your score.

• FICO Score 9: More lenient on paid collection accounts, which won’t negatively impact the score once they’re settled.

Rent Payment History:

• FICO Score 8: Does not consider rent payments when calculating the score.

• FICO Score 9: Includes rent payment history if it’s reported, which can benefit renters with a positive payment history.

Authorized User Accounts:

• FICO Score 8: Considers authorized user accounts as part of the score, even if the primary account holder is not using the card responsibly.

• FICO Score 9: De-emphasizes authorized user accounts to avoid inflating scores based on potentially inactive accounts.

Credit Utilization:

• FICO Score 8: Focuses on credit utilization ratios, especially for credit cards, to assess creditworthiness.

• FICO Score 9: Similar in its approach to credit utilization, but may calculate this slightly differently to reflect more accurate borrower behavior.

Overall, FICO Score 9 offers a more updated approach to certain types of debt and credit behaviors compared to FICO Score 8, but FICO Score 8 is still more commonly used.

How to Check Your FICO Scores

You have a few options to check your credit report and score, including ways to check your credit score without paying. Here are some ways to check your FICO Scores:

• Check with your credit card issuer: Many credit card companies, like Discover and American Express, offer free FICO scores to customers.

• Visit MyFICO.com: The official FICO website provides access to multiple score versions for a fee.

• Use free credit monitoring services: Platforms like Experian offer free access to your FICO Score.

• Contact your bank or credit union: Some banks and credit unions provide FICO scores as part of their customer benefits.

Recommended: Free Credit Score Monitoring with SoFi

The Takeaway

FICO scores, produced by the Fair Isaac Corporation, are one of the more popular types of credit scores used by 90% of lenders. FICO Score 8 and FICO Score 9 are two different versions of the FICO score model.

According to the Fair Isaac Corporation, FICO Score 8 is still the most widely used version of the FICO score, and FICO Score 9 is also still widely used by lenders, even though both models have been available for over a decade.

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FAQ

Is FICO 8 or FICO 9 better?

FICO 9 is considered an improvement over FICO 8, as it reduces the impact of medical debt, disregards paid collections, and includes rental payment history if reported. However, FICO 8 remains widely used by lenders, so its relevance depends on the lender’s preference and the borrower’s financial situation.

What is a good FICO 8 score?

A good FICO 8 score typically falls between 670 and 739. This range indicates that a borrower is considered low-risk by lenders, which can lead to better loan terms and interest rates. Scores above this range are considered very good or excellent, further enhancing borrowing opportunities and financial benefits.

Which FICO score is most important?

The different FICO score models are similar, and none is considered to be more important than any others. Different lenders may use different FICO score models depending on which model they find most advantageous for their purposes.

Is FICO score 8 still used?

Yes, even though FICO Score 8 was first introduced in 2009, it is still widely used in the lending industry. However, over time, lenders will likely start migrating to newer FICO scoring models, such as FICO Score 9, FICO Score 10, and FICO Score 10T.

Is a FICO score of 8 good to buy a house?

It is important to understand that FICO Score 8 refers to the eighth version of the FICO credit scoring model, and not to an actual FICO Score of 8. FICO scores have a minimum of 300, so it is impossible to have a FICO Score of 8. To buy a house with a mortgage, you will likely need to have a FICO Score in the good range (meaning a score of at least 670), though requirements vary by lender.

Do any lenders use FICO 9?

Yes, some lenders use FICO Score 9, especially for personal loans and certain types of credit evaluations. However, FICO Score 8 remains the most widely used version. FICO 9 enhances rental payment reporting and reduces the impact of medical debt, making it appealing for specific lending situations.

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

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

SORL-Q125-022

Nov

2025

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What Is an Installment Loan and How Does It Work?

By Sarah Li Cain | Debt Payoff, personal_loan, Terminology | Comments Off

Table of Contents

What Is an Installment Loan?
What Is an Example of an Installment Loan?
Pros and Cons of Installment Loans
Pros of Installment Loans
Cons of Installment Loans
Installment Loans and Credit Scores
Getting an Installment Loan
Alternatives to Installment Loans
FAQ

There are two basic types of credit: installment and revolving. An installment loan is a form of installment credit that is closed-ended and is repaid in fixed payments over a regular repayment schedule.

Some common types of installment loans are mortgages, auto loans, student loans, and personal loans. If you’re considering borrowing money, learn more about installment loans and how they work here.

Key Points

• An installment loan provides a lump sum repaid in fixed monthly payments, unlike revolving credit such as credit cards.

• Common types include auto loans, mortgages, personal loans, and student loans, with terms ranging from months to decades.

• Pros: predictable payments, ability to cover large expenses, and potential to refinance for better rates. Cons: long-term commitment, interest charges, and limited flexibility once the loan is set.

• Responsible repayment can build credit, while missed payments or high interest rates can damage it.

• Alternatives include credit cards for smaller expenses, paycheck advances, or borrowing from friends/family if a traditional loan isn’t a fit.

What Is an Installment Loan?

An installment loan is a lump sum of money borrowed and paid back over time. Each payment is referred to as an installment, hence the term installment loan.

In contrast, revolving credit like credit cards can be borrowed, repaid, and borrowed again up to the approved credit limit.

Installment loans can be secured with collateral or they can be unsecured. Some loans may have fees and penalties. The interest rate may fluctuate, depending on whether you choose a fixed or variable rate loan.

Recommended: Personal Loan Calculator

What Is an Example of an Installment Loan?

Installment loans can have multiple uses. These include auto loans, personal loans, mortgages, and student loans.

Auto Loans

Borrowers can take out auto loans for new and used vehicles. Monthly installments average around 72 months, but shorter loans may be available.

Loans with longer terms tend to have higher interest rates. It may seem like you’re paying less because the monthly payments may be lower, but you could end up paying more over the life of the loan.

Mortgages

Mortgages, or home loans, typically have terms ranging from 10 to 30 years with installments paid back monthly. Depending on your mortgage, you’ll either pay a fixed interest rate — it won’t change throughout your loan — or variable, which can fluctuate after a certain period of time.

Personal Loans

Personal loans are more flexible types of loans in that borrowers can use them for most purposes — examples include home repairs or debt consolidation. Many personal loans are unsecured, and interest rates will depend on your credit history and other factors.

Recommended: What Is a Personal Loan?

Student Loans

Student loans help borrowers pay for their post-secondary education such as undergraduate and graduate tuition costs. They’re either federal or private, and terms and rates will depend on a variety of factors. (With private loans, you can’t access the protections of federal student loans, such as deferment and forbearance, for example.)

Some student loans have a grace period, a period after graduation during which you aren’t required to make payments. Depending on how the loan is structured, interest may not accrue. Not all student loans have a grace period, however, so it’s important to verify your repayment schedule before you finalize the loan.

Pros and Cons of Installment Loans

An installment loan may or may not be the best fit for your borrowing needs. Consider the advantages and disadvantages, so you understand what you’re agreeing to.

Pros of Installment Loans	Cons of Installment Loans
Can cover small or large expenses	Interest charges on entire loan amount
Predictable payments	Can’t add to loan amount once it’s been finalized
Can refinance to lower rate	Can come with long repayment terms

Pros of Installment Loans

Here are the upsides of installment loans:

Expense

Most installment loans allow borrowers to take out large amounts, helping them to cover large expenses. For instance, many borrowers can’t afford to buy a house with cash, so mortgages can provide a path to homeownership.

Regular Repayments

Installment loans tend to come with predictable payment schedules. If you take out a fixed-rate loan, your payment amount should be the same each month. Having that knowledge of when and how much you need to pay can make it easier to budget.

Plus, installment loans have a payment end date. As long as you keep making on-time payments, your loan will be paid off in a certain amount of time.

Taking a careful look at your budget to make sure you can afford the monthly payments is an important consideration.

Refinancing

You may be able to refinance your loan to a lower rate if you’ve built your credit or if interest rates go down. Refinancing may shorten your loan repayment schedule or lower your monthly payments.

There are typically fees associated with refinancing a loan, which is another thing to consider when thinking about this option.

Cons of Installment Loans

Next, consider the potential downsides of installment loans:

Not Open-Ended

Once you finalize the loan and receive the proceeds, you can’t borrow more money without taking out another loan. Revolving credit like credit cards allow borrowers to use funds continually — borrowing and repaying up to their credit limit.

Commitment

When you take out a loan, being committed to paying it down is essential. Since some installment loans can come with longer terms — think mortgages — it’s important to make sure your budget can handle the regular payment.

Charged Interest

Like other types of loans, you’ll need to pay interest on installment loans. The interest rate you’re approved for is dependent on factors such as your credit history, credit score, and others. Applicants who have a longer credit history and a credit score at the higher end of the range will most likely qualify for the most competitive rates. If you’re stuck with a higher rate because of your poor credit, you could be making larger payments and paying more in interest.

Aside from interest, you may have to pay fees to take out an installment loan. There may also be prepayment penalties if you want to pay off your loan early.

Installment Loans and Credit Scores

How you use an installment loan can affect your credit score. If a lender reports your activity related to the loan, it could affect your score in two ways:

• Applying for a loan: A lender may want to check your credit report when you apply for a loan, which may trigger a hard credit inquiry. Doing so could temporarily lower your credit score.

• Paying back a loan: Lenders generally report your activity to the three major credit bureaus. If you make regular, on-time payments, this positive mark on your credit report could raise your credit score. The opposite can happen if you’re behind on or miss payments.

💡 Recommended: Installment Loan vs Revolving Credit

Getting an Installment Loan

Since taking out an installment loan is a big financial commitment, you may want to consider the following best practices:

• Shopping around: Getting quotes from multiple lenders is a good way to compare personal loans to find one that offers the best rates and terms for your financial profile.

• Prequalifying for loans: Getting pre-qualified allows you to see what rates and terms you may qualify for without it affecting your credit score.*

• Enhancing your borrowing profile: Check your credit report for any errors or discrepancies. Making corrections could have a positive effect on your credit score.

• Adding a cosigner: If you can’t qualify for an installment loan on the merits of your own credit, you may consider asking someone you trust and who has good credit to be a cosigner.

Alternatives to Installment Loans

Here are a few alternatives to consider:

• Using a credit card: If you don’t need a large sum of money or don’t know how much you’ll need to borrow, a credit card can be a smart choice. Paying the entire balance by the due date means you won’t have to pay interest. Paying at least the minimum amount due each month will keep you from incurring a late fee, but you’ll still pay interest on any outstanding balance.

• Borrowing from your next paycheck: Some apps let you receive an advance on your next paycheck, if you meet qualifications. You agree to pay the advance back when your next paycheck is deposited into your bank account.

• Borrowing from friends or family: Asking to borrow money can be an uncomfortable conversation to have. However, it may be an option if you can’t qualify for or would rather not take out a bank loan. Having a written agreement outlining each party’s expectations and responsibilities is a good way to minimize miscommunication and hurt feelings.

The Takeaway

If you’re looking for a loan, an installment loan might fit your needs. This is a loan that disburses a lump sum, which is then paid back over time. Shopping around for an installment loan is a good way to find the best rates and terms for your unique financial situation and needs.

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

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

What is the meaning of installment loan?

An installment loan is a type of loan where borrowers take out a lump sum of money and pay it back in installments. Loan amounts can range from hundreds to thousands of dollars, and terms range from a few months to a few years.

What is an example of an installment loan?

Examples of installment loans include auto loans, personal loans, mortgages, and student loans.

Are installment loans bad for credit?

Making your scheduled monthly payments on time could build your credit score. On the flip side, late or missed payments can hurt your credit score.

What is the difference between a personal loan and an installment loan?

Personal loans are types of installment loans. Other types include student loans, mortgages, and auto loans.

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SOPL-Q425-025

Roth IRA Explained

What Is a Roth IRA?

Roth IRA Contributions

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Tax Treatment

Contribution Limits

Tax-Free Withdrawals

Qualified Distributions

The 5-Year Rule

Non-Qualified Withdrawals

Exceptions

Advantages of a Roth IRA

Disadvantages of a Roth IRA

Roth IRA Investments

Is a Roth IRA Right for You?

The Takeaway

FAQ

Are Roth IRAs insured?

How much can I put in my Roth IRA monthly?

I opened a Roth IRA — now what?

What Is an IRA?

What Is an IRA?

What Are the Different Types of IRA Accounts?

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Traditional IRA

Roth IRA

SEP IRA

SIMPLE IRA

How to Open an IRA

Benefits of Opening an IRA

Which Type of IRA Works for You?

How Much Should You Contribute to an IRA?

How Can You Use IRA Funds?

The Takeaway

FAQ

How is an IRA different from a 401(k)?

What’s the difference between a Roth IRA and a Traditional IRA?

When should I make IRA contributions?

The Rule of 72: Understanding Its Significance in Investing

What Is the Rule of 72?

Who Came Up with the Rule of 72?

The Formula and Calculation of the Rule of 72

Example of the Rule of 72 Calculation

Applying the Rule of 72 in Investment Planning

Example of Compound Returns

Practical Uses in Financial Projections

Estimating Investment Doubling Times

Application in Stock Market Investments

Use During Periods of Inflation

Accuracy and Limitations of the Rule of 72

Is the Rule of 72 Accurate?

Situations Where the Rule is Most Accurate

Comparisons and Variations on the Rule

Rule of 72 vs. Rule of 73

Rules of 72, 69.3, and 69

The Takeaway

FAQ

What are the flaws in the Rule of 72?

Does the Rule of 72 apply to debt?

Who created the Rule of 72?

What Is FICO Score 8 vs. FICO Score 9?

What Are FICO Scores?

Why There Are Different FICO Score Versions

Track your credit score with SoFi

How Different FICO Score Versions Are Used

FICO Score 8 (Most Common)

FICO Score 9 (Improved Model)

FICO Score 2, 4, and 5 (Mortgage Scores)

FICO Auto Score 8 & Auto Score 9

FICO Bankcard Score 8 & Bankcard Score 9

FICO Score 10 and 10T (Newest Versions)

Key Features of FICO Score 8

Key Features of FICO Score 9

Which Do Lenders Use More: FICO Score 8 or FICO Score 9?

Major Differences Between FICO Score 8 and FICO Score 9

How to Check Your FICO Scores

The Takeaway

FAQ

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

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