What Are Flash Loans & How Do They Work?

What Are Flash Loans & How Do They Work?

Flash loans are a type of loan that crypto traders may use to facilitate the buying and selling of different types of cryptocurrency on an exchange. They make use of smart contracts to issue the loans – and the trades they enable – instantly.

What Is a Flash Loan?

Flash loans are a form of uncollateralized (or, unsecured) lending some decentralized finance (DeFi) networks and protocols make available to investors.

Flash loans are loans — they involve a lender loaning money to a borrower, with the expectation that they’ll get paid back. But there are some important distinctions. Namely, flash loans utilize smart contracts, or digital agreements cemented into place on a blockchain network.

Also, flash loans encapsulate the entire transaction — from borrowing to paying back — in one single, instant transaction at any time when you’re trading crypto.

While they’re available on multiple platforms, flash loans began as through Aave , a lending platform built on and enabled by Ethereum. As of December 2021, Aave had issued more than $5 billion in flash loans, including some for hundreds of millions of dollars, too.

Recommended: Crypto Lending: Everything You Need to Know

How Do Flash Loans Work?

If you’re not a developer or have a limited technical background, here’s what you should know: Smart contracts lay out the terms of the loans, and then actually perform the trades with the borrowed funds for traders. It all happens in a flash.

From a technical perspective, a flash loan builds a contract on the blockchain that acts as a request to borrow funds. That requires some advanced knowledge — you may only be able to do it by tapping your developer knowledge and writing some code. There are also tools that can allow people to use flash loans without coding, according to Aave, such as Collateral Swap and DeFi Saver .

Essentially, flash loans are meant to be an easy, low-risk way to borrow money to try and make profitable trades in the crypto markets. If a trade is profitable, the trader pays a 0.09% fee on the gains. If it is unprofitable (or the conditions in a smart contract otherwise aren’t met), the funds go back to the lender.

Recommended: Blockchain in Finance: What Does it Mean for Fintech?

Why Do People Use Flash Loans?

When getting a traditional loan, there are a lot of hoops to jump through: You usually need collateral of some type, for one, and there’s a review of your creditworthiness and approval process. Flash loans require fewer time or resources.

By removing those obstacles and making money available cheaply and instantaneously, borrowers can take a more nimble approach to trading and investing in crypto.

Perhaps the most popular use of flash loans is to try and scalp a profit to take advantage of small arbitrage discrepancies in different types of crypto across various exchanges. Again, within the traditional lending model, there likely wouldn’t be time to take advantage of those discrepancies. But flash loans make it possible.

Recommended: How to Get a Bitcoin Loan

Pros and Cons of Flash Loans

While there are benefits to using flash loans as a crypto trader, there are also some drawbacks to this relatively new technology that it’s important to consider.

Flash Loans: Pros and Cons

Pros Cons
Instantaneous Still a developing product
Don’t require collateral Subject to exploitation
Designed to avoid defaults Not widely used outside crypto

Defaulting on a Flash Loan

Because of the lending mechanics, it’s almost impossible to actually default on the loan. Thanks to the magic of smart contracts, the answer, in a nutshell, is that everything essentially “resets.”

Because a smart contract will consider the transaction complete when the borrower has repaid the lender, a borrower defaulting on a flash loan means that the smart contract cancels the transaction. In effect, the transaction reverses itself, and the money would go back to the lender.

What is a Flash Loan Attack?

Flash loans are a lending mechanism, and they have their weaknesses. One such weakness is that bad actors can engage in a “flash loan attack,” which is more or less what it sounds like — an attempt to exploit the lending mechanism, potentially for profit.

Flash loan attacks can take many forms. Since a flash loan requires the loan to be repaid before the completion of the contract, a flash loan attack may find a way to change the value of the cryptos they’re trading, essentially tricking a smart contract into thinking the loan has been repaid, when it has not.

Again, this is just one relatively simple example of a flash loan attack, but in the recent past, it’s been an effective one.

Flash Loan FAQs

Here are answers to some other flash loan-related questions:

What does “flash loan” mean?

To recap, flash loans get their name because they’re executed instantaneously. They’re done “in a flash.”

Are flash loans risk-free?

No, flash loans are not risk-free. While the lending mechanism that powers a flash loan ensures that they’re difficult, if not impossible to default on, there are security issues at play (flash loan attacks.) That risk, however, mostly falls on lenders, who are the ones doling out potentially millions of dollars in unsecured loans.

What is a flash loan exploit?

A flash loan exploit is an action taken to capitalize on a loophole or shortcoming in the flash loan lending mechanism. A flash loan exploit aims to circumvent lending protocols and safety measures, and allow a bad actor to potentially trick the network into thinking they had repaid a flash loan that they, in fact, had not.

Are flash loans legal?

Yes. But things could change in the future as it’s likely that the crypto space will become more regulated.

The Takeaway

Flash loans may or may not be a part of your crypto investing strategy. You may be at a point where you’re still asking “what is cryptocurrency, exactly?” — rather than figuring out ways to borrow quick money to make money through arbitrage.

So, if you’d rather take a more straightforward approach to trading crypto, one great way to get started is with an investment account on the SoFi Invest platform. You can use it to buy and sell crypto such as Bitcoin, Ethereum, Litecoin, Dogecoin, Tether, and other cryptocurrencies right from your phone.

Photo credit: iStock/masterzphotois


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401k?

What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401k?

A money purchase pension plan or MPPP is an employer-sponsored retirement plan that requires employers to contribute money on behalf of employees each year. The plan itself defines the amount the employer must contribute. Employees may also have the option to make contributions from their pay.

Money purchase pension plans have some similarities to more commonly used retirement plans such as 401(k)s, pension plans, and corporate profit sharing plans. If you have access to a MPPP plan at work, it’s important to understand how it works and where it might fit into your overall retirement strategy.

What Is a Money Purchase Pension Plan?

Money purchase pension plans are a type of defined contribution plan. That means they don’t guarantee a set benefit amount at retirement. Instead, these retirement plans allow employers and/or employees to contribute money up to annual contribution limits.

Like other retirement accounts, participants can make withdrawals when they reach their retirement age. In the meantime, the account value can increase or decrease based on investment gains or losses.

Money purchase pension plans require the employer to make predetermined fixed contributions to the plan on behalf of all eligible employees. The company must make these contributions on an annual basis as long as the plan is maintained.

Contributions to a money purchase plan grow on a tax-deferred basis. Employees do not have to make contributions to the plan, but it may allow them to do so. The IRS does allow for loans from money purchase plans but it does not permit in-service withdrawals.

What Are the Money Purchase Pension Plan Contribution Limits?

Each money purchase plan determines its own contribution limits are, though they can’t exceed maximum limits set by the IRS. For example, an employer’s plan may specify that they must contribute 5% or 10% of each employee’s pay into that employee’s MPPP plan account.

Annual money purchase plan contribution limits are similar to SEP IRA contribution limits. For 2022, the maximum contribution allowed is the lesser of:

•   25% of the employee’s compensation, OR

•   $61,000

The IRS routinely adjusts the contribution limits for money purchase pension plans and other qualified retirement accounts based on inflation. The amount of money an employee will have in their money purchase plan upon retirement depends on the amount that their employer contributed on their behalf, the amount the employee contributed, and how their investments performed during their working years. Your account balance may be one factor in determining when you’re able to retire.

Rules for money purchase plan distributions are the same as other qualified plans, in that you can begin withdrawing money penalty-free starting at age 59 ½. If you take out money before that, you may owe an early withdrawal penalty of 10.

Like a pension plan, money purchase pension plans must offer the option to receive distributions as a lifetime annuity. Money purchase plans can also offer other distribution options, including a lump sum. Participants do not pay taxes on their accounts until they begin making withdrawals.

The Pros and Cons of Money Purchase Pension Plans

Money purchase pension plans have some benefits, but there are also some drawbacks that participants should keep in mind.

Pros of Money Purchase Plans

Here are some of the advantages for employees and employers who have a money purchase plan.

•   Tax benefits. For employers, contributions made on behalf of their workers are tax deductible. Contributions grow tax-free for employees, allowing them to put off taxes on investment growth until they begin withdrawing the money.

•   Loan access. Employees may be able to take loans against their account balances if the plan permits it.

•   Potential for large balances. Given the relatively high contribution limits, employees may be able to accumulate account balances higher than they would with a 401(k) retirement plan, depending on their pay and the percentage their employer contributes on their behalf.

•   Reliable income in retirement. When employees retire and begin drawing down their account, the regular monthly payments through a lifetime annuity can help with budgeting and planning.

Disadvantages of Money Purchase Pension Plan

Most of the disadvantages associated with money purchase pension plans impact employers rather than employees.

•   Expensive to maintain. The administrative and overhead costs of maintaining a money purchase plan can be higher than those associated with other types of defined contribution plans.

•   Heavy financial burden. Since contributions in a money purchase plan are required (unlike the optional employer contributions to a 401(k)) a company could run into issues in years when cash flow is lower.

•   Employees may not be able to contribute. Depending on the terms of a plan, employees may not be able to make contributions to the plan. However, if the employer offers both a money purchase plan and a 401(k), they could still defer part of their salary for retirement.

Money Purchase Pension Plan vs 401(k)

The main differences between a pension vs. 401(k) have to do with their funding and the way the distributions work. In a money purchase plan, the employer provides the funding with optional employee contribution.

With a 401(k), employees fund accounts with elective salary deferrals and option employer contributions. For both types of plans, the employer may implement a vesting schedule that determines when the employee can keep all of the employer’s contributions if they leave the company. Employee contributions always vest immediately.

The total annual contribution limits (including both employer and employee contributions) for these defined contribution plans are the same, at $61,000 for 2022. But 401(k) plans allow for catch-up contributions made by employees aged 50 or older. For 2022, the total employee contribution limit is $20,500 with an extra catch-up contribution of $6,500.

Both plans may or may not allow for loans, and it’s possible to roll amounts held in a money purchase pension plan or a 401(k) over into a new qualified plan or an Individual Retirement Account (IRA) if you change jobs or retire.

Recommended: IRA vs 401(k)–What’s the Difference?

Employees may also be able to take hardship withdrawals from a 401(k) if they meet certain conditions, but the IRS does not allow hardship withdrawals from a money purchase pension plan.

MPPP Plan

401(k) Plan

Funded by Employer contributions, with employee contributions optional Employee salary deferrals, with employer matching contributions optional
Tax status Contributions are tax-deductible for employers, growth is tax-deferred for employees Contributions are tax-deductible for employers and employees, growth is tax-deferred for employees
Contribution limits (2022) Lesser of 25% of employee’s pay or $61,000 $61,000, with catch-up contributions of $6,500 for employees 50 or older
Catch-up contributions allowed No Yes, for employers 50 and older
Loans permitted Yes, if the plan allows Yes, if the plan allows
Hardship withdrawals No Yes, if the plan allows
Vesting Determined by the employer Determined by the employer

The Takeaway

Money purchase pension plans are a valuable tool for employees to reach their retirement goals. They’re similar to 401(k)s, but there are some important differences.

Whether you save for retirement in a money purchase pension plan, a 401(k) or another type of account the most important thing is to get started. If you don’t have access to a money purchase pension plan or similar plan at work there are other options you can pursue, such as opening an IRA online through the SoFi Invest brokerage platform. The sooner you begin saving for retirement, the more time your money will have to grow through the power of compounding interest.

FAQ

Here are answers to some additional questions you may have about money pension purchase plans.

What is a pension money purchase scheme?

A money purchase pension plan or money purchase plan is a defined contribution plan that allows employers to save money on behalf of their employees. These plans are similar to profit-sharing plans and companies may offer them alongside a 401(k) plan as part of an employee’s retirement benefits package.

Can I cash in my money purchase pension?

You can cash in a money purchase pension at retirement in place of receiving lifetime annuity payments. Otherwise, you can start taking Early withdrawals from a money purchase pension plan are typically not permitted and if you do take money early, taxes and penalties may apply.

Is final salary pension for life?

A final salary pension is a defined benefit plan. Unlike a defined contribution plan, defined benefit plans do pay out a set amount of money at retirement, typically based on your earnings and number of years of service. Final salary pensions can be paid as a lump sum or as a lifetime annuity, meaning you get paid for the remainder of your life.

Photo credit: iStock/ferrantraite


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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What Is Mark to Market and How Does It Work?

What Is Mark to Market and How Does It Work?

Mark to market or mark-to-market is an accounting method that’s used to measure the value of assets based on current market conditions. Mark to market accounting seeks to determine the real value of assets based on what they could be sold for right now.

That can be useful in a business setting when a company is trying to gauge its financial health or get a valuation estimate ahead of a merger or acquisition. Aside from accounting, mark to market also has applications in investing when trading stocks, futures contracts, and mutual funds.

But what does mark to market mean and how is it useful to investors? If you trade futures contracts or trade stocks on margin, it’s important to understand how this concept works.

Mark to Market Defined

What is mark-to-market accounting? In simple terms, mark to market or MTM is an accounting method that’s used to calculate the current or real value of a company’s assets. Mark-to-market can tell you what an asset is worth based on its fair market value.

Mark to market accounting is meant to create an accurate estimate of a company’s financial status and value year over year. This accounting method can tell you whether a company’s assets have increased or declined in value. When liabilities are factored in, mark to market can give you an idea of a company’s net worth.

How Mark to Market Works

Mark to market accounting works by adjusting the value of assets based on current market conditions. The idea is to determine how much an asset — whether it be a piece of equipment or an investment — could be worth if you were to sell it now.

If a company were in a cash crunch, for example, and wanted to sell off some of its assets, mark-to-market accounting could give an idea of how much capital it might be able to raise. The company would try to determine as accurately as possible what its marketable assets are worth.

In stock trading, mark-to-market value is determined for securities by looking at volatility and market performance. Specifically, you’re looking at a security’s current trading price then making adjustments to value based on the trading price at the end of the trading day.

There are other ways mark to market can be used beyond valuing company assets or securities. In insurance, for example, the mark-to-market method is used to calculate the replacement value of personal property. Calculating net worth, an important personal finance ratio, is also a simple form of mark-to-market accounting.

Pros and Cons of Mark-to-Market Accounting

Mark-to-market accounting can be useful when evaluating how much a company’s assets are worth or determining value when trading securities. But it’s not an entirely foolproof accounting method.

Mark to Market Pros Mark to Market Cons

•   Can help establish accurate valuations when companies need to liquidate assets

•   Useful for value investors when making investment decisions

•   May make it easier for lenders to establish the value of collateral when extending loans

•   Valuations are not always 100% accurate since they’re based on current market conditions

•   Increased volatility may skew valuations of company assets

•   Companies may devalue their assets in an economic downturn, which can result in losses

Pros of Mark-to-Market Accounting

There are a few advantages of mark-to-market accounting:

•   It can help generate an accurate valuation of company assets. This may be important if a company needs to liquidate assets or it’s attempting to secure financing. Lenders can use the mark to market value of assets to determine whether a company has sufficient collateral to secure a loan.

•   It can help mitigate risk. If a value investor is looking for new companies to invest in, for example, having an accurate valuation is critical for avoiding value traps. Investors who rely on a fundamental approach can also take mark-to-market value into account when examining key financial ratios, such as price to earnings (P/E) or return on equity (ROE).

•   It may make it easier for lenders to establish the value of collateral when extending loans. Mark-to-market may provide more accurate guidance in terms of collateral value.

Cons of Mark-to-Market Accounting

There are also some potential disadvantages of using mark-to-market accounting:

•   It may not be 100% accurate. Fair market value is determined based on what you expect someone to pay for an asset that you have to sell. That doesn’t necessarily guarantee you would get that amount if you were to sell the asset.

•   It can be problematic during periods of increased economic volatility. It may be more difficult to estimate the value of a company’s assets or net worth when the market is experiencing uncertainty or overall momentum is trending toward an economic downturn.

•   Companies may inadvertently devalue their assets in a downturn. If the market’s perception of a company, industry, or sector turns negative, it could spur a sell-off of assets. Companies may end up devaluing their assets if they’re liquidating in a panic. This can have a boomerang effect and drive further economic decline, as it did in the 1930s when banks marked down assets following the 1929 stock market crash.

Mark-to-Market in Investing

In investing, mark to market is used to measure the current value of securities, portfolios or trading accounts. This is most often used in instances where investors are trading futures or other securities in margin accounts.

Futures are derivative financial contracts, in which there’s an agreement to buy or sell a particular security at a specific price on a future date. Margin trading involves borrowing money from a brokerage in order to increase purchasing power.

Understanding mark to market is important for meeting margin requirements to continue trading. Investors typically have to deposit cash or have marginable securities of $2,000 or 50% of the securities purchased. The maintenance margin reflects the amount that must be in the margin account at all times to avoid a margin call.

In simple terms, margin calls are requests for more money. FINRA rules require the maintenance margin to be at least 25% of the total value of margin securities. If an investor is subject to a margin call, they’ll have to sell assets or deposit more money to reach their maintenance margin and continue trading.

In futures trading, mark to market is used to price contracts at the end of the trading day. Adjustments are made to reflect the day’s profits or losses, based on the closing price at settlement. These adjustments affect the cash balance showing in a futures account, which in turn may affect an investor’s ability to meet margin maintenance requirements.

Mark-to-Market Example

Futures markets follow an official daily settlement price that’s established by the exchange. In a futures contract transaction you have a long trader and a short trader. The amount of value gained or lost in the futures contract at the end of the day is reflected in the values of the accounts belonging to the short and long trader.

So, assume a farmer takes a short position in 10 soybean futures contracts to hedge against the possibility of falling commodities prices. Each contract represents 5,000 bushels of soybeans and is priced at $5 each. The farmer’s account balance is $250,000. This account balance will change daily as the mark to market value is recalculated. Here’s what that might look like over a five-day period.

Day

Futures Price Change in Value Gain/Loss Cumulative Gain/Loss Account Balance
1 $5 $250,00
2 $5.05 +0.05 -2,500 -2,500 $247,500
3 $5.03 -0.02 +1,000 -1,500 $248,500
4 $4.97 -0.06 +3,000 +1,500 $251,500
5 $4.90 -0.07 +3,500 +5,000 $255,000

Since the farmer took a short position, a decline in the value of the futures contract results in a positive gain for their account value. This daily pattern of mark to market will continue until the futures contract expires.

Conversely, the trader who holds a long position in the same contract will see their account balance move in the opposite direction as each new gain or loss is posted.

Mark to Market in Recent History

Mark-to-market accounting can become problematic if an asset’s market value and true value are out of sync. During the financial crisis of 2008-09, for example, mortgage-backed securities (MBS) became a trouble spot for banks. As the housing market soared, banks raised valuations for mortgage-backed securities. To increase borrowing and sell more loans, credit standards were relaxed. This meant banks were carrying a substantial amount of subprime loans.

As asset prices began to fall, banks began pulling back on loans to keep their liabilities in balance with assets. The end result was a housing bubble which sparked a housing crisis. During this time, the U.S. economy would enter one of the worst recessions in recent history.

The U.S. Financial Accounting Standards Board (FASB) eased rules regarding the use of mark-to-market accounting in 2009. This permitted banks to keep the values of mortgage-backed securities on their balance sheets when the value of those securities had dropped significantly. The measure meant banks were not forced to mark the value of those securities down.

Can You Mark Assets to Market?

The FASB oversees mark-to-market accounting standards. These standards, along with other accounting and financial reporting rules, apply to corporate entities and nonprofit organizations in the U.S. But it’s possible to use mark to market principles when making trades.

If you’re trading futures contracts, for instance, mark-to-market adjustments are made to your cash balance daily, based on the settlement price of the securities you hold. Your cash balance will increase or decrease based on the gains or losses reported for that day.

If the market moves in your favor, your account’s value would increase. But if the market moves against you and your futures contracts drop in value, your cash balance would adjust accordingly. You’d have to pay attention to maintenance margin requirements in order to avoid a margin call.

Which Assets Are Marked to Market?

Generally, the types of assets that are marked to market are ones that are bought and sold for cash relatively quickly — otherwise known as marketable securities. Assets that can be marked to market include stocks, futures, and mutual funds. These are assets for which it’s possible to determine a fair market value based on current market conditions.

When measuring the value of tangible and intangible assets, companies may not use the mark-to-market method. In the case of equipment, for example, they may use historical cost accounting which considers the original price paid for an asset and its subsequent depreciation. Meanwhile, different valuation methods may be necessary to determine the worth of intellectual property or a company’s brand reputation, which are intangible assets.

Mark-to-Market Losses

Mark-to-market losses occur when the value of an asset falls from one day to the next. A mark-to-market loss is unrealized since it only reflects the change in valuation of asset, not any capital losses associated with the sale of an asset for less than its purchase price. The loss happens when the value of the asset or security in question is adjusted to reflect its new market value.

Mark-to-Market Losses During Crises

Mark-to-market losses can be amplified during a financial crisis when it’s difficult to accurately determine the fair market value of an asset or security. When the stock market crashed, for instance, in 1929, banks were moved to devalue assets based on mark to market accounting rules. This helped turn what could have been a temporary recession into the Great Depression, one of the most significant economic events in stock market history.

Mark-to-Market Losses in 2008

During the 2008 financial crisis, mark-to-market accounting practices were a target of criticism as the housing market crashed. The market for mortgage-backed securities vanished, meaning the value of those securities took a nosedive.

Banks couldn’t sell those assets, and under mark-to-market accounting rules they had to be revalued. As a result banks collectively reported around $2 trillion in total mark-to-market losses.

The Takeaway

Mark-to-market is a helpful principle to understand, especially if you’re interested in futures trading. When trading futures or trading on margin, it’s important to understand how mark to market calculations could affect your returns and your potential to be subject to a margin call.

If you’re ready to invest in stocks, exchange-traded funds, or IPOs, a SoFi Invest® brokerage account can help you get started.

Find out how to open an account with SoFi Invest.

Photo credit: iStock/Drazen_


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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Student Loan Consolidation Rates: What to Expect

It’s possible to consolidate or refinance your student loans into one loan with a single monthly payment. The major difference between these two options is that consolidation is generally offered through the federal government for federal student loans while refinancing is generally completed with a private lender.

When you consolidate student loans with the federal government through the Direct Loan Consolidation program, the new interest rate is the weighted average of your prior rates. Another option is student loan refinancing, which can be completed with a private lender. If you refinance, the new interest rate on your loans is based on factors like your credit score, employment history, among others.

Understanding the differences between consolidation versus refinancing is critical before deciding to take the plunge — especially since private refinancing means you lose your federal student loan benefits.

What Is Federal Student Loan Consolidation?

You can combine your federal student loans into one by taking out a Direct Consolidation Loan ​from the government.

Consolidating your loans may help simplify your repayment process if you have multiple loan servicers. In some cases, consolidating your loans may also be necessary if you are interested in enrolling in an income-driven repayment plan . In order to use a Direct Consolidation Loan, you must have at least one Direct Loan or one FFEL.

The interest rate on a Direct Consolidation Loan is fixed and is the weighted average of the rates on your existing loans. What you end up with really depends on what rates were when you took out your loans (some Direct Consolidation Loan payment plans also factor in your total education debt, including private student loans).

Using current interest rates, say you took out a Direct Subsidized Loan of $25,000 for undergrad (3.73% interest rate for the 2021-2022 school year), a Direct Unsubsidized Loan of $50,000 for grad school (5.28% interest rate), and another Direct PLUS Loan of $10,000 for grad school (6.28% interest rate). If you consolidated, your weighted average rate would be 4.94%.

You can also use SoFi’s debt navigator tool to explore your student loan refinancing options and get a sense of what might be best for your unique situation.

What is Student Loan Refinancing

When you refinance student loans, it means you are borrowing a new loan which is then used to pay off the existing student loans you have. This new loan will have a new interest rate and terms, which as mentioned, are based on personal factors like an individual’s credit history and their employment history.

Refinancing is completed with a private lender and borrowers may have the choice between a fixed or variable interest rate. In some cases, borrowers who refinance to a lower interest rate may be able to spend less in interest over the life of the loan. To get an idea of what refinancing your student loans could look like, you can take a look at SoFi’s student loan refinancing calculator.

Comparing Student Loan Refinancing and Consolidation

As previously mentioned, consolidation can be completed for federal student loans through a Direct Consolidation Loan. Refinancing is completed with private lenders, and can be done with either federal or private loans. An important distinction is that Direct Loan Consolidation allows borrowers to retain the federal benefits and borrower protections that come with their federal loans while refinancing does not.

Depending on how a borrower’s financial situation and credit profile has changed since they originally borrowed their student loans, refinancing could allow borrowers to secure a more competitive rate or preferable terms. The rate and term on a refinanced loan will be determined by the lender’s policies and the borrower’s financial situation and credit profile, including factors such as credit score, income, and whether there is a cosigner. Generally, borrowers can choose between a fixed or variable interest rate.

The interest rate on a Direct Consolidation Loan is the weighted average of the previous loan’s interest rate and all interest rates are fixed for the life of the loan.

Private Student Loan Refinancing Rates

It may be possible for borrowers to qualify for a more competitive interest rate by refinancing their student loans with a private lender. Student loan refinancing rates vary widely. According to Forbes, in December 2021, the average fixed interest on a 10-year refinanced student loan was 3.40%. On a five-year variable-rate loan the average interest rate was 2.49%. As noted previously, the rate you get typically depends on your total financial picture and credit history, including your credit score, income, and employment history.

Borrowers may also consider applying for student loan refinancing with a cosigner, which could potentially help them qualify for a more competitive interest rate.

Why Interest Rates Aren’t the Only Thing to Consider

Interest rates aren’t the only thing to consider when deciding whether to consolidate or refinance. If you go with a Direct Consolidation Loan, keep in mind that you might pay more overall for your loans, since this usually lengthens your repayment term. You will also lose credit toward loan forgiveness for any payments made on an income-based repayment plan or the Public Service Loan Forgiveness program.

If you refinance with a private lender, you won’t be eligible for student loan forgiveness, because you lose federal loan protections, including deferment or forbearance when you refinancing with a private lender. But some private lenders, like SoFi, offer their own benefits, like a temporary pause on payments if you lose your job through no fault of your own.

It’s important to think carefully before consolidating or refinancing your student loans. Consider things like whether a prospective private lender offers any options for relief if you hit a rough patch.

Even if you get a lower interest rate, make sure you can afford the new monthly payments before committing. And remember that this information is just a starting point for your decision. Don’t be afraid of doing more research and trusting you’ll make the right decision for you.

The Takeaway

Consolidating federal student loans can be done through the federal government with a Direct Consolidation Loan. The interest rate on this type of loan is the weighted average of the interest rates on the existing loans.

Refinancing allows borrowers to combine both federal and private student loans in a single new loan with one interest rate. The rate may be variable or fixed, depending on the lender and will be determined by the lender based on criteria like the borrower’s credit history, among other factors. Again, refinancing will eliminate any federal loans from borrower protections like income-driven repayment plans.

Depending on an individual’s personal circumstances, either consolidation or refinancing may make more sense than the other. If refinancing seems like an option for you, consider SoFi, where there are no hidden fees and borrowers have access to benefits like career coaching.

Check out whether you qualify for student loan refinancing with SoFi in just two minutes.


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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL MAY 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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What Is an Apprenticeship? Do They Pay? Pros & Cons

What Is an Apprenticeship? Complete Guide to Apprenticeships

An apprenticeship program trains workers to become skilled in a trade or profession, combining paid on-the-job training with classroom instruction. Apprenticeship programs help workers gain professional skills and experience in a particular field while assisting employers in building a highly-skilled workforce.

There are over 24,000 apprenticeship programs across the nation, offering workers access to hundreds of occupations in fast-growing industries. Before you take on an apprenticeship, it’s important to be aware that these programs require a great deal of commitment and hands-on engagement from both employers and workers.

College may not be for everyone and an apprenticeship can be an alternative way to get your foot in the door in your preferred field. Here are some things you should know before taking on the responsibility of an apprenticeship.

What Is an Apprenticeship?

An apprenticeship is a way to acquire training, work experience, classroom instruction and mentorship in a particular trade. Not only are apprenticeships paid, but it’s also a doorway to well-paid, stable and in-demand jobs.

Approximately 92% of apprentices who complete an apprenticeship retain employment, according to the Department of Labor, and graduates earn $300,000 more over their lifetime compared to their peers who do not complete an apprenticeship. Apprentices also receive a nationally-recognized credential within their industry upon completion of the program, and may even earn academic credit towards a college degree.

How Do Apprenticeships Work?

The majority of apprenticeships are registered either with the U.S. Department of Labor or a state apprenticeship agency. While programs depend on the organization, registered apprenticeships must meet certain standards , according to the National Apprenticeship Act (Fitzgerald Act).

Upon entering the apprenticeship program, apprentices receive hands-on training under the guidance of an experienced mentor. Many apprenticeships also require apprentices to take academic courses related to that career, which may be taken in a classroom, through occupational or industrial courses or even online. Apprenticeships are also paid with pay raises being given to apprentices as skill levels increase.

The eligible starting age for an apprenticeship is 16; however, some occupations require apprentices to be at least 18 years of age. Each apprenticeship’s sponsor also develops minimum requirements related to education and the ability to perform certain job functions. Some apprentices may also have the option to enter a pre-apprenticeship program, which aims to better prepare workers for the apprenticeship program.

Upon completion of the program, a nationally accredited certification is awarded.

How Long Does an Apprenticeship Last?

The time required to complete an apprenticeship, which can range from one to six years , depends on the job and the program. However, the Labor Department specifies that apprentices must complete at least 2,000 hours of on-the-job learning plus 144 hours of classroom work.

Are Apprenticeships Paid?

According to the Department of Labor, the average starting wage for an apprentice is $15 per hour. Pay increases are received when new skills are learned. The average starting salary after completing an apprenticeship program is $72,000.

Do You Have to Pay for an Apprenticeship?

Apprenticeship training is typically offered by the employer at no cost to the apprentice. If there are costs associated with the program, they must be disclosed to apprentices before they agree to participate in the program.

Typical Apprenticeship Costs

Employers may ask apprentices to cover certain expenses, such as costs related to tools or educational materials. Additionally, employers may pay for the instruction but specify that if an apprentice leaves the program before completion, then related costs must be paid back to the employer.

What Types of Careers Offer Apprenticeships?

There are thousands of apprenticeship programs across a range of fields. Here are some industries that offer apprenticeships:

•   Advanced manufacturing

•   Construction

•   Energy

•   Financial services

•   Healthcare

•   Hospitality

•   Information technology and cybersecurity

•   Telecommunications

•   Transportation

Pros and Cons of an Apprenticeship

Pros Cons
Apprentices can earn a salary while avoiding student debt. An apprentice will typically start with a relatively low salary.
Build new skills through hands-on experience and classroom instruction. Apprentices can even earn credit towards a college degree. The competition is tough. Apprenticeships can be hard to get into.
It can open the door to well-paid and in-demand careers. Limited access to certain careers. If you decide to change career paths later in life, it could be challenging.

Pros

•   Earn while you learn: Apprentices can have a secure income while gaining experience in a particular field.

•   Build new skills: Apprentices can gain valuable and sought-after skills through their apprenticeship program. Not only can apprentices gain experience from field training, but there’s classroom instruction provided by apprenticeship training centers, technical schools, community colleges, and four-year colleges and universities, which can sometimes be completed online. Apprenticeship sponsors may also work directly with community colleges to provide college credit for apprenticeship experience.

•   Opens the door to new opportunities: Apprenticeships oftentimes lead to full-time employment and workers may have better access to careers that offer competitive pay and room for advancement.

Cons

•   Start with a lower salary: Although starting salaries for graduates are higher, apprentices are typically paid a lower salary at the beginning of the apprenticeship; however, there are salary increases as new skills are acquired.

•   It can be competitive: Entry into apprenticeship programs can be very competitive, especially in high-paying industries.

•   Limited to certain fields: Changing career paths down the road could be more of a challenge. A large number of occupations still require at least an undergraduate degree, particularly in medical and science fields.

Recommended: What Is a Trade School and Is It Right for You?

Apprenticeship vs Internship

Both apprenticeships and internships are similar in that they both aim to help you gain expertise with hands-on training in a certain industry, but several differences should be noted. Here are some of the most common differences:

•   Duration: Internships typically last only one to three months while an apprenticeship can last up to six years.

•   Pay: Apprentices receive at least the minimum wage specified by the Fair Labor Standards Act for hours on the job. Wage increases are earned as the apprentice gains and uses skills while working for the employer. Internships are usually unpaid, temporary positions.

•   Structure: Apprenticeships have a structured training plan and prepare an apprentice to fill an occupation within the organization. Internships aren’t always structured and only prepare interns through entry-level work.

•   Mentorship: Apprentices work with an experienced mentor. Internships don’t always include mentorship.

•   Credential: After completing an apprenticeship program, a nationally accredited certification is awarded. Interns generally don’t receive any type of credential.

•   Job opportunities: Interns are usually still in college or some students may complete an internship during high school. Internships give a student the opportunity for career exploration and development, and to learn some new skills. An apprenticeship provides in-depth training and apprentices can potentially transition into the same role after completion of the program and earn a higher salary.

Finding an Apprenticeship

There are thousands of apprenticeship programs across the country serving numerous industries and occupations, making them fairly easy to find and apply to. Here’s how you can find one and apply.

1. Choose a Field of Work

Before you begin your search for a program, you need to decide on a particular field of work that matches your interests and skills. It’s also important to consider whether or not you meet the requirements for programs in a particular industry.

2. Look for Apprenticeship Opportunities

There are several places to start your apprenticeship search. You can use the Labor Department’s Apprenticeship Job Finder to search by keyword and location, contact your state’s apprenticeship
agency
, check out trade or labor unions in your area or use traditional job search engines. If you need more guidance, find an American Job Center near you.

3. Review and Meet Application Requirements

Once you decide on a program, check the application requirements for applicants. Most programs require a high school diploma or GED and you must be physically capable of performing the work. Other minimum requirements vary by program but can include a clean criminal record, passing a qualifying exam, or an interview.

4. Submit an Apprenticeship Application

Apprenticeship vacancies open throughout the year with each one giving deadlines for applications and start dates. Once you decide on a program and find an open spot, you must apply directly with the employer or the program sponsor.

5. Start Your Apprenticeship

Once accepted, you’ll likely have to sign a formal agreement that outlines the details of the program and your responsibilities as an apprentice. Long-term employment with the organization may also be a possibility upon successful completion of the apprenticeship.

Alternatives to Apprenticeships

Not right for you? There are alternatives to apprenticeships, such as attending a four-year institution, a community college, or a trade school. There, you’ll be provided with a broader set of knowledge along with the key skills required for your area of study.

However, college can come with a hefty price tag and a large percentage of students turn to private student loans and federal aid for support. Many people also question whether college is worth it, considering there are other options available.

According to the College Board’s annual “Trends in College Pricing ” report, the average cost of attending a four-year college as an in-state student at a public university during the 2020-2021 school year was $10,560. Out-of-state students paid $27,020 on average. Community colleges are one option for students looking to make college more affordable, with the average tuition at about $5,222 per year for in-state students and $8,882 for out-of-state students.

Recommended: Options for When You Can’t Afford Your Child’s College

Beyond the cost of college tuition, whether you choose an apprenticeship or a degree, you’ll need to look closely at your preferred field of study and assess your personal situation to find the path that’s right for you.

For example, perhaps you are considering an apprenticeship vs going back to school. In this case, you may want to evaluate how you’ll pay for college as an adult in comparison to the salary you stand to earn if you pursue a degree. Then evaluate salary and career potential with an apprenticeship. Pursuing higher education is a personal choice and what’s right for you will depend on factors including your individual circumstances and career goals.

Explore Upper Education Loan Options from SoFi

Apprenticeships may not be for everyone, and students who choose to focus on a college degree may need help financing their studies. SoFi’s private student loans allow students to pay for college without the fees. That means no late fees, no application fees, or origination fees to stress about. While private loans can be helpful, because they lack the benefits and borrower protections available with federal loans — like deferment options or income-driven repayment plans, they are generally considered an option only after all sources of funding have been depleted.

The Takeaway

So what is an apprenticeship? An apprenticeship can be a suitable option if you prefer to get your foot in the door without paying for a four-year degree. Apprenticeships can also be an excellent way to gain access to a company or a particular field you wish to work in. However, they aren’t for everyone nor are they available in every field.

Students who are pursuing a college degree may look into private student loans after exhausting all other aid options, including federal student loans. If you think a private student loan may be right for you, consider SoFi’s Private Student Loans. There are no fees and borrowers can choose from four repayment plans.

Interested in learning more about using private student loans to help pay for your education? Check out what SoFi has to offer.

Photo credit: iStock/JohnnyGreig


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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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