Debt Consolidation Programs: How They Work

If you’re trying to pay off debt, you’ve probably looked into the variety of options that could help. If so, you’ve likely come across debt consolidation programs—and may be wondering what they are.

Debt consolidation programs can help borrowers who may be overwhelmed by debt payments by combining multiple loans into a single payment. Typically these programs are offered by credit counseling organizations. These organizations may offer guidance and financial planning in addition to helping consolidate debt.

A reputable credit counseling organization will likely incorporate guidance to help with managing debts, along with providing educational material, workshops, and other ways to help borrowers work to develop a realistic budget.

A legitimate debt consolidation program should feature counselors who are certified and trained in offering advice on consumer finance issues in order to create a personalized plan, whether it’s to address credit card debt, bad credit, or other needs.

Consolidating debt typically results in a refinanced loan, with a lower or more manageable interest rate and modified repayment terms.

According to the Federal Trade Commission , it is recommended to find a local debt consolidation program offering credit counseling in person.

You may find these accredited, nonprofit programs are offered through channels like credit unions, universities, religious organizations, military bases, and U.S. Cooperative Extension Service branches .

(It’s important to note that everyone’s debt payoff needs differ, so your mileage may vary.)

What Is a Debt Consolidation Program?

Debt consolidation programs can play two roles. For one, they help borrowers combine multiple loans into a single payment, which can make repayment less overwhelming. For another, they act as credit counselors.

With tools for loan repayment strategies and debt management, they can help lower and/or simplify monthly debt payments. These types of programs are usually managed by credit counseling companies.

It’s good to note the difference between debt consolidation programs and an actual loan opened to consolidate debt.

Qualifying consumers can use a debt consolidation loan (typically an unsecured personal loan) to combine multiple debts into a new single loan as well, possibly with a lower interest rate. But there is no counseling offered during the loan application process, and paying down the debt remains entirely the burden of the borrower.

The services outlined above can make a debt consolidation program different from other methods of consolidation or interest reduction, such as a balance transfer for a credit card, or a personal installment loan from a banking institution or lender.

Keep in mind that debt consolidation is also different from debt settlement, which is a process used to settle debts for less than what is owed.

When enrolled in a debt management program, which is one part of a debt consolidation program, a single monthly payment is sent to the credit counseling agency, which then distributes an agreed-upon amount to each credit card or loan company. The goal of the program is to act as an interlocutor for the debt between the borrower and creditor.

While most debt consolidation program companies are nonprofit organizations, nonprofit status does not guarantee services are free, or even affordable.

These organizations can, however, reach out to the lenders on behalf of the borrower to find an affordable repayment plan, which could take shape in the form of waived fees or penalties, lowering interest rates, in exchange for a specific timeline of usually three to five years for the debt(s) to be repaid.

These programs are not loans, which would come from financial institutions. Perhaps most importantly, debt consolidation programs do not make any promises to reduce the amount of debt owed.

Those are debt settlement programs, run by outside companies who negotiate payments with creditors, and can be for-profit, predatory, or may not act in the best interest of the borrower.

A debt management program, on the other hand, could help set borrowers up for future success, when it comes to how to budget and manage money, educating consumers about cutting expenses or ways to increase income in order to gradually eliminate debt.

Pros and Cons of Debt Consolidation Programs

Debt consolidation is typically most beneficial to those struggling with high monthly debt payments. Paying just the minimum balance on debts every month means it could take a long time to pay off the debt, and interest costs could continue to add to the balance. Getting rid of high-interest debts can help make it easier to pay off the principal amount of the loan.

While having a lot of debt is certainly stressful, it’s worth weighing the pros and cons of any debt consolidation program before signing up. Here are some pros and cons to ponder:

•   Multiple payments are combined into one payment, likely making it easier to pay on time.
•   Credit counseling could help a borrower get back on track with tools like budgeting and other financial advice.
•   Some programs can help negotiate lower interest rates, fees, possibly creating a more affordable payback plan. (Note: Because lowering interest rates may extend the amount of time borrowers would pay their debt off, they may end up spending more on interest in the long run.)

•   Debt consolidation programs do not reduce the principal amount of debt owed.
•   Can easily be confused for more predatory programs offered by some debt consolidation settlement companies.
•   Some programs might charge fees.

Many of the legitimate counseling companies tend to follow a similar setup process, which typically includes an interview with a counselor to go over things like income, expenses, and current bills and loans. The counselor might suggest areas where spending could be reduced and offer educational materials.

The program may also help set up a budget and will send the proposal out to creditors to agree to any new monthly payments, fees, payment schedules, interest rates or other factors, Reputable programs should only charge for set-up and a monthly fee.

It is generally recommended to take extra care with any for-profit organizations requiring a lot of upfront fees, memberships, or fees for each creditor they work with on negotiation.

There is no magic pill to reduce debt, so spending less and budgeting more have been key pillars of a healthy financial foundation.

No company should promise a quick turnaround for becoming debt-free overnight. Historically, credit repair has been a market tainted by fraud, so it’s recommended to tread carefully and do the research before signing on to any program.

Selecting a Debt Consolidation Program

One common and simple way to sign up for this type of debt management program is to contact a reputable nonprofit credit counseling agency. The U.S. Department of Justice offers a list of approved credit counseling agencies by state.

Along with ensuring the agency you’re considering is on this list, you may want to consider doing further research by asking your state attorney general and checking local consumer protection agency websites.

Debt settlement companies often try to sell themselves as the same service, so be wary and check to be sure the organization is offering financial counseling and not making promises to reduce the amount of debt owed.

Based on the interview and assessment of current income and debt, the counselor could either recommend a debt management program, or another solution which could be a personal loan, bankruptcy, or some other form of settlement.

The company should not promise any sort of quick fix or short-term solutions.

The National Foundation for Credit Counseling is responsible for certifying many of these counselors, who must complete a comprehensive training program certifying them to help and educate consumers regarding their finances.

Because most nonprofits are certified, it helps to read consumer reviews of these programs as well, to see how the company operates.

The next step is to check what services are offered and what fees will be charged, such as an initial sign-up fee and recurring monthly fee. Understanding the costs upfront is important, and can help someone avoid a possibly predatory, for-profit business.

Something else you may think to look out for: A settlement company may charge more fees initially on the promise to arrange a reduced lump sum payment of debts.

These companies often instruct consumers to stop making payments entirely on their debt, which could affect credit rating and even may cause the creditor to send the debt to a collection agency. A legitimate program should offer financial advice and counseling on ways to help reduce debt.

Paying Off Debt Independently

Rather than looking into a debt consolidation program to alleviate unwieldy monthly payments, one alternative worth considering is an unsecured personal loan, which could help reduce the overall amount of interest payments and possibly save money on interest in the long run.

While a personal loan doesn’t normally come with the counseling services offered by some consolidation programs, SoFi members also get access to complimentary appointments with SoFi Financial Planners.

This service for SoFi members can cover some of the ground offered by the certified debt counselors under the debt consolidation programs, with an initial call to talk about goals and personal finances.

The SoFi Financial Planner may cover things with members like take-home pay, monthly budgets and spending, loans and debt, and savings, and come up with some next steps.

By consolidating high-interest debt into one lower-interest personal loan, borrowers might find having a fixed monthly payment is a simpler way for them to manage debt. For someone interested in debt consolidation loans, SoFi personal loans offer various term lengths, and come without fees—unlike many debt consolidation programs.

Consolidating your debt with a personal loan can potentially allow you to pay off your debt at a lower interest rate. An unsecured personal loan could make it easier to focus on just paying down the one loan, with a single monthly payment at a fixed rate and payment amount.

Financial wellness can start with having a plan to be debt-free, and debt consolidation, whether through a certified program or a personal loan, can be one place to start.

Taking out a personal loan with SoFi means complimentary access to SoFi financial planners, and no fees required.

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

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


Read more

How to Save Money for a Trip

Every year, you likely earn at least a few paid vacation days at your job. However, if you’re like many Americans, you rarely ever take them.

As the U.S. Travel Association reports, each year, more than half of Americans leave vacation time on the table. All that unused time accumulated to 768 million missed vacation days in 2018.

Of course, it’s easy to understand why many people simply forgo taking time off. After all, traveling can be expensive.

It’s all too easy: bills can pile up, professional duties can get in the way, and life events can take hold, all letting you leave those vacation days unused. However, there are ways to not only build vacations into your routine but to also save for vacations too.

With a little planning and a small amount of work vacations can be yours again. Here are a few ways you could work saving money for a trip into your financial routine so you never miss another vacation day again.

5 Tips For Saving For a Trip

1. Deciding Where You Want to Go and For How Long

To properly plan for how much you need to save for your trip, you first must decide when and where you want to go. Would you like to stay domestic or go international? Somewhere warm and by a beach, or cold and in the mountains? The choice is yours.

Once you make your choice, you could do a little calculating and add up the costs of transportation, accommodations, food, and entertainment for each member traveling with you. This way, you’ll have a ballpark number to save up to.

Here’s a vacation pro tip for you: If your vacation math comes out to be a little too high for your liking, you could look into your intended destination’s “shoulder season.”

Shoulder season is a professional travel term for the time between the high and low seasons. In other words, it’s a seemingly less desirable time to visit a place.

For example, the shoulder seasons in the Caribbean are in the late spring and early fall. During this time, visitors will still experience warmer temperatures, crystal blue waters, delicious Caribbean foods, and more.

But the early fall, classified here as September to November, also falls at the tail end of the hurricane season, making travel to the Caribbean a bit of a gamble. During that time, flights, hotels, and activities can be much cheaper as there are fewer tourists to fill the seats, rooms, and space.

2. Checking Out Your Current Finances

Once you decide where you want to go and just how much it will cost, then you could take a look at your current financial situation.

You might want to assess whether you have enough money to take a vacation right now, need to postpone until more fruitful times or have the ability to save up for a vacation later in the year.

If you’re not feeling like your finances are quite in the right place to take a trip soon, that’s OK, as there are ways to save so you can still use your vacation days. And that could begin with a budget.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1% APY on your cash!

3. Making “Taking a Vacation” a Line Item on Your Budget

If you already have a budget in place, that’s wonderful news. The only thing you might want to do is add in “travel” as a budget item and start socking away a little cash for that each month.

But, if you’re new to budgeting, that’s OK as well. Now might be a great time to start.

To begin, you could gather all your income statements and any outgoing recurring bills such as student loans, credit card bills, mortgage payments, or other debts.

Then, you could create a list of all your monthly expenses, including everything that comes out of your bank account each month, like rent, car payments, student loan payments, credit card statements, food, gas, insurance, gym memberships, streaming accounts, and more. Anything you spend money on, you could make a line item.

Next, you could compare your after-tax income against your debts and see how much you have left over. Any cash left over could go into your vacation fund.

However, if you have nothing left over at the end of your budgeting homework, you might want to take a cold, hard look at your spending and income level to make room for travel.

The simplest place to start might be by reconsidering your monthly spending. Are you still subscribing to that streaming service, and do you really use that gym membership?

If there are things in your current budget that can go, now could be the time to cut them. Then, you could reallocate that money to your travel budget instead.

4. Taking on a Side Hustle to Pay for Vacation

Of course, cutting back isn’t always an option. If you’re serious about saving for a trip, now may be the perfect time to take on a side hustle.

A side hustle is a part-time job outside your normal work. If you decide to go this route to fund your travels, you might want to think deeply about what you’re passionate about so it feels less like a second job and more like fun.

For example, if you simply adore meeting new people, maybe driving for a ride-sharing service is a good fit for you. If you’re a night owl, perhaps picking up a few shifts here and there as a bartender is good.

Or, if you like dogs, you could try signing up for a dog-walking service to bring in a little more money.

If you’d like to flex a little muscle with your other talents like photography, writing, or graphic design, you might try reaching out to a few places as a freelancer, which could both bring in a little more money and make you feel good at the same time.

5. Creating a Dedicated Space for Your Travel Savings

Now that you’ve done all the hard work of deciding where to go, how much it will cost, and how it fits into your budget, it’s time for a fun item: creating a dedicated savings account for your trip.

After all, it’s way more fun to put your vacation money into a savings account called “oh yes vacation time” rather than simply “account 3045766.”

And, you could take things a step further by making your travel account work for you by opening an online account that offers no account fees, like SoFi Checking and Savings®.

SoFi Checking and Savings has a vaults feature where you can create an individual vault for a specific goal within your overall SoFi Checking and Savings account.

Plus, you can use your SoFi Checking and Savings card during your adventure at any ATM around the world.

So, what are you waiting for? Now that you know how to plan, the world is truly your oyster.

Have a few vacation days at the ready? Start saving with a SoFi Checking and Savings account and get going on your vacation sooner.

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.
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.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi Money® is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member
SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at


Read more

5 Tips for Finding a Mortgage Lender

Buying a home is an incredible accomplishment but does not come without its challenges. Not only are you on the hunt for your dream home (you know, that one with that perfect yard for the dog and amazing fireplace), you’re likely running through your finances to figure out what you can afford.

And then, there’s getting a mortgage loan, which means finding a good, reputable mortgage lender; that offers the type of loan program (down payment requirement, DTI, etc) that best suits your needs, but also offers excellent customer service and competitive rates.

An organization that you can trust and that understands that this is one of the biggest financial decisions you’ll make.

Luckily, there are plenty of viable options for borrowers. There are online lenders, credit unions, direct lenders, and mortgage brokers with a vast array of loan programs to choose from, to name just a few. The trick is narrowing down a crowded field to find someone you trust that offers the loan program you want.

We might not be able to help you find the house of your dreams, but if you’re wondering how to find a good mortgage lender, here are five tips on how to find the best mortgage lender for you.

Tips for Shopping For a Mortgage Lender

1. Decide What’s Important

Throughout the process of obtaining a loan, you’ll have a lot of conversations with a bunch of different people. Before jumping in headfirst, take some time to understand what loan programs you may qualify for such as the amount of downpayment you have to work with and if you are a veteran, what lenders offer VA loans.

Once you narrow down the type of mortgage loan program you will be shopping for you can think deeper about what other elements are important to you.

Right off the bat, it can be hard to pinpoint what type of communication you’ll want during the loan process out of a mortgage lender. But you’ll likely know it when you experience it, for better or worse.

Good mortgage lenders should be clear and upfront about the loan process and all associated costs. They should be willing to answer questions because you will have questions—and you should definitely feel comfortable asking them.

You may even want to ask about a mortgage lender’s communication channel before engaging in a relationship. Here are a few questions you could consider asking them: “Do you communicate through phone, email, or text?” and “How quickly do you respond to questions?”

As you can imagine, there are multiple steps that require back-and-forth correspondence and paperwork when applying for a mortgage. Maybe it’s important for you to have someone who responds quickly. Ask your potential mortgage lender: “What are your turnaround times on things like pre-approval, appraisal, final approval and closing?”

2. Be Prepared

Part of knowing how to find the best mortgage lender is to go in ready to hold your own in conversations. It’s hard to choose between two options if you don’t truly know what you’re looking for, especially when there’s as much fine print as is typically involved in taking out a mortgage loan.

First, know the costs involved in taking out the type of mortgage you need in addition to the interest rate. There will likely be various fees associated with taking out a mortgage, such as origination and application fees, appraisal fees, and other third-party fees.

Fees can vary by lender, so have some idea of what is common and what to look out for. Such as if the rate quote is lower, are the fees higher as a result?

Next, it’s smart to have an idea of how much home you can afford and how much of a down payment is required under your preferred type of loan program. It’s good to note here that even the same loan program can have different down payment requirements at different lenders.

For instance, with a Fannie Mae first time home buyer loan you can put as little as 3% down, but not all lenders carry this program at only 3% down, some lenders may require 5% or 10% according to their internal guidelines.

Armed with this type of information may help you narrow your search to the lenders who best fit your needs. Also, having your financials in order will allow you to know how much you have to work with so you can get down to business with the lender of your choice.

Throughout the mortgage process, how you have managed your credit and the resulting credit scores will come into play. Your credit score may be one of the determining factors on what mortgage lenders you can choose from based on the loan programs you may be eligible to qualify for.

To maximize your buying experience, you may want to take some time to make sure your credit profile is in good enough shape for the loan program you want to qualify for before starting the process of searching for a mortgage lender.

3. Know Your Options

Finding the right mortgage lender means being able to navigate who you can work within the big world of mortgage lending. Here are some of the major types of mortgage lenders out there. Many may offer similar types of loan programs, but through varied channels and possibly with different fees and qualifying criteria:

Mortgage bankers: Bankers work for a financial institution that underwrites loans, but does not take deposits. Mortgage bankers can sometimes also broker out loans.

Retail lenders: Similar to mortgage bankers and also known as direct lenders, retail lenders only originate mortgage products offered by their financial institution.

Mortgage brokers: Brokers don’t generally work with one institution, but instead act as an intermediary between the borrower and a wholesale lender. For the service of pairing you with a mortgage loan from one of the lending institutions they are approved to work with, the mortgage broker will generally take a commission that is a percentage of the loan amount. The loan is approved and funded by the wholesale lender.

Online lenders: A newer option for borrowers, online lenders like SoFi offer mortgage loans and focus on competitive rates and a more streamlined application.

Correspondent lenders: Typically, correspondent lenders are local mortgage loan companies that have the capital to fund a loan, but then quickly turn around and sell the loan to a major financial institution.

Wholesale lenders: Unlike retail lenders, wholesale lenders don’t interact with borrowers and rely on brokers to sell their products.

Portfolio lenders: These lenders originate and fund loans from bank deposits and do not typically resell them after closing. They typically include bigger banks, community banks, credit unions, and savings and loan institutions.

Still, wondering how to find a reputable mortgage lender amongst these options? One thing you can do is read online reviews, like those on the Better Business Bureau’s website You can also check to make sure that your lender is registered to originate loans Nationwide Multistate Licensing System Registry in your state.

4. Compare Lenders

It’s a good idea to shop around for mortgage rate quotes through a number of different lenders. Check with banks, online lenders, credit unions, and other local independent lenders to compare loan terms, interest rates, fees, and closing timelines. Request quotes on writing.

You can plug offers into a mortgage calculator to get an idea of the total interest costs. With a mortgage calculator, you can also play around with different down payment options.

And remember, the interest rate isn’t the only cost to take into consideration; don’t forget to account for all of the fees associated with each rate and program offer.

Third-party fees should pretty much be the same no matter what lender you choose, so it’s the lenders loan terms (qualifying) rate and fees to compare apples to apples.

Checking on costs isn’t the only reason to get multiple quotes. This way, you will get to experience a number of communication styles, and you’ll have a look into the process for each lender.

5. Get Pre-approved

Once you’ve narrowed it down to your chosen lender, apply for mortgage pre-approval. During pre-approval, you’ll be asked to provide documentation on your financials, such as your paystub, W2s, tax returns, bank account balances, and credit information.

This step in the process is valuable when placing an offer on a home. A pre-approval letter shows that you have been vetted for the first (credit) portion of the loan process and you just need to find an eligible property.
Once you apply with a lender you will receive a Loan Estimate laying out the down payment, fees, estimated monthly payment and more.

This is the time to ask any lingering questions on the terms of the loan such as lending fees, rates, commissions, points, and any other fine print you may not understand.

Don’t be shy! This is a huge, important decision and you should feel welcome to ask every question twice if you need to.

At this point, you may even want to consider negotiating your offers. If at all possible, use the competing offers as leverage to obtain better pricing. If the very thought of asking is intimidating to you, just remember that it never hurts to ask and the worst they can say is no. You might be surprised at what you can get if you just ask.

As you compare your mortgage options, consider SoFi Mortgages. With SoFi, you could secure a mortgage with as little as 10% down.

If you’re looking for competitive rates on mortgages, excellent customer service ratings, and a painless prequalification process that takes less than two minutes, check out SoFi Mortgages.

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

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. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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.
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.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see Equal Housing Lender.

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


Read more

Should I Always Use a Stop Loss Order?

Investing in the stock market can fill our minds with “what ifs.” What if we choose the wrong stocks? What if we lose money? What if we buy a stock right before the share price plummets? What if we wait too long to sell a stock, or we sell too early?

The market will always involve some level of risk, but it’s possible to remove a few of those “what ifs” from our heads. One way investors can put their minds at ease is by setting up stop-loss orders.

When an investor places a stop-loss order, sometimes referred to as a stop order, they order their broker to buy or sell a stock once shares reach a certain price. This price is called a “stop price.” Placing a stop-loss order can potentially help keep people from losing money.

Are you a control freak?

Then playing the stock market might fill you with a sense of dread. However, stop-loss orders can help give people a sense of control by doing two things: Limiting how much money they lose or ensure they do make money from a stock they already own.

There are a few different types of stop-loss orders: sell-stop orders, buy-stop orders, and trailing stop-loss orders.

Types of Stop-Loss Orders

Sell-Stop Order

A sell-stop order is an order to sell a stock when shares hit a certain price. Let’s look at two examples. The first shows how sell-stop orders can help investors limit their losses.

Daniel buys 10 shares of Roku at $150 each. He knows he could lose money, but he wouldn’t be comfortable losing more than 10% of what he initially invests.

To ensure he doesn’t lose more than 10%, Daniel sets up a sell-stop order for $135, which is 10% less than he originally paid for his shares of Roku. If Roku shares drop to $135, his broker will immediately sell them, so he only loses 10%.

By setting up a sell-stop order, Daniel has limited his losses. (Remember, 10% is just an example, not a suggestion. Everyone has different preferences when investing.)

Now let’s look at an example of how a sell-stop order can lock in profits. This time, Daniel buys 10 shares of Nike for $100 each. Six months later, shares have increased to $150 each.

Daniel doesn’t want to lose any of his unrecognized gains. “Unrecognized gains” are the gains investors make when share prices increase, but they haven’t sold their shares, so they haven’t collected any of the money yet.

Daniel’s Nike shares have increased by $50, or $500 total. If the share price drops below the original $100, he could lose all those unrecognized gains.

But Daniel isn’t ready to sell his Nike shares yet, either. If the share price continues to increase, he wants to keep earning money.

So, how can Daniel make sure he keeps at least some of the money he’s gained? By setting up a sell-stop order.

Now that the Nike share price is $150, Daniel might set up a sell-stop order for, say, $130. If shares drop to $130, his broker automatically sells them.

Although Daniel wouldn’t be able to keep the full $500 he could have earned had he sold his shares at $150, he would still pocket $30 per share, or $300 total.

In the example of Daniel’s Roku shares, he prevented losses. With his Nike shares, he’s locked in gains.

When trading, you’ll probably hear the term “market order” pop up frequently. Know that a stop-loss order is not the same as a market order. When people place market orders, they buy or sell stocks at the current market price, whatever that may be. With a stop-loss order, people ‘schedule’ a market order that is triggered once a predetermined price has been hit.

So once a stock hits its stop price, the stop-loss order becomes a market order. The stop price isn’t necessarily the same price that the shares will be sold.

For example, Daniel’s stop price for his Nike shares is $130, but by the time they sell, they may have dropped to $125.

As a result, he loses more money than he’d anticipated. Or the share price could increase to $135 when they sell, so Daniel only loses $15 per share, even though he was prepared to lose $20.

Buy-Stop Order

Now that you know what a sell-stop order is, a buy-stop order is exactly what it sounds like. Investors set up a buy-stop order to purchase a stock once shares hit a price higher than the current market price.

Buy-stop orders are placed under the assumption that once a stock starts to increase, it will gain momentum and continue to rise.

If Daniel knows that Pinterest shares generally sell for between $20 and $25, he might set up a buy-stop order to purchase 10 shares once they reach $26. The computer system would buy 10 shares on his behalf, and he’d hope Pinterest share prices would continue to rise.

Trailing Stop-Loss Order

Regular sell-stop orders and buy-stop orders are set at a specific dollar amount. Trailing stop-loss orders are different.

When someone sets a sell trailing-stop order for a certain amount, it tracks (or “trails”) the stock and sells shares once they decrease by that amount. A buy trailing-stop order “trails” the stock and buys shares once they increase by that amount.

Let’s look at an example with real numbers to break it down.

Let’s say Daniel buys shares of AT&T for $40 each. He sets a sell trailing stop-loss order for $1. As long as the stock increases, he’ll hold onto his shares. But as soon as the share price dips by $1, Daniel’s broker will sell his shares of AT&T.

If AT&T’s share price drops from $40 to $39, Daniel’s broker will sell his shares. And if the share price gradually increases to $44 but then drops to $43, a sell trailing-stop order for $1 will cause his broker to sell shares at a stop price of $43. (But remember, because a stop-loss order turns into a market order, shares might be at a price other than $43 by the time they sell.)

Trailing-stop orders are useful for locking in gains. As long as share prices increase, investors keep their shares. Once it decreases by a predetermined amount, the stock is sold.

The Benefits of a Stop-Loss Order

The most obvious advantage of a stop-loss order is that it keeps people from losing too much money in the market. In the first example of Daniel’s shares of Roku, he set a sell-stop order so that even if he did lose money, he didn’t lose more than he was comfortable with or could afford.

Stop-loss orders aren’t just for preventing losses, though. People can also use them to secure a capital gain.

With Daniel’s stop-loss order for Nike, his shares increased from $100 to $150, and he set up a sell-stop order for $130 so that if the stock started to dip, he would pocket at least $30 per share, or $300 total.

If Daniel hadn’t set that sell-stop order for his Nike investment, he could have incurred a net loss. Hypothetically, let’s say the share price continued to drop to $90 before he finally sold. He would have lost $10 per share, or $100, rather than gained $300. Stop-loss orders can lock in profits.

A stop-loss order can make the investment process less stressful. People don’t have to check in on their stocks three times per day, five days per week to track share prices and decide whether they want to buy or sell. Instead, they can set a stop-loss order and move on with their lives.

Stop-loss orders help remove other emotions from the process, too. It can be easy to make irrational or rash decisions when trading stocks.

Daniel might get emotionally attached to his Nike stock, so he holds onto it even when it becomes a bad investment. Or he tells himself he’ll sell once Roku shares drop 10%, but he has a hard time pulling the trigger.

Some people are the type to “set it and forget it.” They buy stocks and forget to check in on them at all. Daniel might say he’ll sell his Roku shares when the price decreases 10%, but he simply forgets to check the market for three months. Roku’s share price continues to drop, and he loses significant money.

Stop-loss orders can be ideal for investors who want to “set it and forget it” and they have the potential to reduce portfolio risk if used appropriately.

Last but definitely not least, a major benefit of stop-loss orders is that they’re free! People may have to buy insurance for your car or home, but they don’t have to pay extra for these types of orders.

The Downsides of a Stop-Loss Order

Stop-loss orders can work against investors when there’s a short-term drop in the share price.

Maybe Daniel buys 20 shares of General Motors for $30 per share. He sets a sell-stop order for $28.

Monday, shares are at $30, but they fall to $28 on Tuesday, so his broker automatically sells all 20 shares. By Friday, shares have jumped up to $33, so Daniel has lost $60 in just a few days because there was a short-term dip.

It’s helpful to research how much a stock tends to fluctuate in a given amount of time to avoid these types of problems. Maybe General Motors’ share price regularly fluctuates by a few dollars at a time, so Daniel should have set his stop-loss order at a lower price.

If investors understand their stocks’ trends, they can probably set up stop-loss orders more strategically.

However, research goes out the window when there is a “flash crash.” This is a sudden, aggressive drop in stock prices—but prices can jump back up just as quickly.

Flash crashes aren’t common, but they occasionally occur if there’s an error or glitch in the market computer system.

In this case, Daniel’s General Motors shares could drop from $30 to $15 in the morning, and because he set up a sell-stop order, they automatically sell. But the share price jumps to $32 by the time the closing bell sounds, and Daniel loses out on those gains because he had a sell-stop order.

Another drawback to consider is that once a stock hits its stop price, the stop-loss order becomes a market order, or an order to sell a stock at the current market price. When a stop-loss order becomes a market order, shares sell for the next available price.

If the difference between an investor’s stop price and the next available price is a few cents, it might not be a big deal.

But if the market is volatile that day and the market price is several dollars below the stop price, someone could end up losing quite a bit of cash—especially in the case of a flash crash.

Granted, a stop-loss order turning into a market order could be either a pro or a con, depending on whether a share price increases or decreases. Regardless, some investors might consider it a disadvantage to not know what to expect.

Using a Stop-Loss Order

If you’re uncomfortable with the risks that come with stop-loss orders, you may choose not to use them. That’s fine. But know that a huge purpose of stop-loss orders is to minimize risk. It might be helpful to think about the trade-offs and whether the pros outweigh the cons, in your particular financial situation.

If you’re not sure whether or not using stop-orders fits into your financial strategy, consider speaking with a professional who can offer additional insight.

At SoFi, members have access to financial planners who can offer personalized advice. If you’re ready to start online investing, SoFi Invest® offers an Active Investing platform, where investors can buy stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

Download the SoFi Invest app and get started trading today.

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.
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.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 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 prequalification for any loan product offered by SoFi Bank, N.A.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Read more

What is Value Investing?

If you’re the type of person who researches every big purchase, hoping to get the highest quality merchandise or service for the least amount of money possible—whether it’s a TV, a smartphone, or a car—you’re a value shopper.

Value investors bring that same concept to building a stock portfolio. They seek out stocks they believe are worth more than the current prices reflect.

Value investing is an investment philosophy that takes an analytical approach to selecting stocks based on a company’s fundamentals—such as earnings growth, dividends, cash flow, book value, and intrinsic value. Value investors don’t follow the herd when it comes to buying and selling, which means they tend to ignore tips and rumors they hear from coworkers and talking heads on TV. Investors can also avoid herd mentality by leveraging auto investing with SoFi.

Instead, they look for stocks that seem to be trading for less than they should be, perhaps because of a negative quarterly report, management scandal, product recall, or simply because they didn’t meet some investors’ high expectations.

That doesn’t mean value investors are looking for the cheapest stocks out there.

Their goal is to find stocks the market may be underestimating and, after doing their own in-depth analysis, decide whether those stocks have the potential to pay off over the long term.

Who Made Value Investing Popular?

Billionaire Warren Buffett , the CEO of Berkshire Hathaway, also known as the “Oracle of Omaha,” is probably the most famous (and most quoted) value investor of all time.

From 1965 to 2017, Buffett’s shares in Berkshire Hathaway had annual returns of 20.9% compared to the S&P 500’s 9.9% return.

Buffet is often quoted as saying, “The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.”

Buffett’s mentor was Benjamin Graham , his teacher at Columbia Business School and later his employer, who is known as “the father of value investing.” Columbia professor David Dodd , another Graham protegee and colleague, is recognized for helping him further develop several popular value investing theories.

Billionaire Charlie Munger , vice chairman of Berkshire Hathaway Corp., is another super-investor who follows Graham and Dodd’s approach.

And billionaire investor Seth Klarman , chief executive and portfolio manager of the Baupost Group, is a longtime proponent.

Joel Greenblatt , who ran Gotham Capital for over two decades and is now a professor at Columbia Business School, is the co-founder of the Value Investors Club .

How Does Value Investing Work?

Value investing is an investing strategy, but it’s similar to how a value shopper might operate when hoping to buy a certain brand of a smartwatch for the lowest price possible.

If that shopper suddenly saw the watch advertised at half the price, it would make them happy, but it also might make them wonder: Is there a new version of the watch coming out that’s better than this one? Is there something wrong with the watch I want that I don’t know about? Is this just a really good deal, or am I missing something?

Their first step would likely be to go online and do some research. And if the watch was still worth what they thought, and the price was a good discount from a reliable seller, they’d probably go ahead and snap it up.

Investing in stocks can work in much the same way. The price of a share can fluctuate for various reasons, even if the company is still sound. And a value investor, who isn’t looking for explosive, immediate returns but consistency year after year, may see a drop in price as an opportunity.

Value investors are always on the lookout to buy stocks that trade below their intrinsic value (an asset’s worth based on tangible and intangible factors). Find your next value investment with SoFi active invest. We made it easy to get started investing in stocks and ETFs with zero commission fees.

Of course, that can be tricky. From day to day, stocks are worth only what investors are willing to pay for them. And there doesn’t have to be a good reason for the market to change its mind, for better or worse, about a stock’s value.

But over the long run, earnings, revenues, and other factors—including intangibles such as trademarks and branding, management stability, and research projects—do matter.

Or, as Buffett’s mentor Graham, put it: In the short run, the market is like a voting machine, tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine—assessing the substance of a company.

What Factors Are Worth Considering?

Value investors use several metrics to determine a stock’s intrinsic value. A few of the factors they might look at (and compare to other stocks or the S&P 500) include:

Price-to-Earnings Ratio (P/E)

This ratio is calculated by dividing a stock’s price by the earnings per share. For value investors, the lower the P/E, the better; it tells you how much you’re paying for each dollar of earnings.

Price/Earnings-to-Growth Ratio (PEG)

The PEG ratio can help determine if a stock is undervalued or overvalued in comparison to another company’s stock. If the PEG ratio is higher, the market has overvalued the stock. If the PEG ratio is lower, the market has undervalued the stock. The PEG ratio is calculated by taking the P/E ratio and dividing it by the earnings growth rate.

Price-to-Book Ratio (P/B)

A company’s book value is equal to its assets minus its liabilities. The book value per share can be found by dividing the book value by the number of outstanding shares.

The price-to-book ratio is calculated by dividing the company’s stock price by the book value per share. A ratio of less than one is considered good from a value investor’s perspective.

Debt-to-Equity Ratio (D/E)

The debt-to-equity ratio measures a company’s capital structure and can be used to determine the risk that a business will be unable to repay its financial obligations. This ratio can be found by dividing the company’s total liabilities by its equity. Value investors typically look for a ratio of less than one.

Free Cash Flow (FCF)

This is the cash remaining after expenses have been paid (cash flow from operations minus capital expenditures equals free cash flow).

If a company is in good shape, it should have enough money to pay off debts, pay dividends, and invest in future growth. It can be useful to watch the ups and downs of free cash flow over a period of a few years, rather than a single year or quarter.

Over time, each value investor may develop their own formula for a successful stock search. That search might start with something as simple as an observation—a positive customer experience with a certain product or company, or noticing how brisk business is at a certain restaurant chain.

But research is an important next step. Investors also may wish to settle on a personal “margin of safety,” based on their individual risk tolerance. This can protect them from bad decisions, bad market conditions, or bad luck.

Determining Margin of Safety

Solid research is the value investor’s first line of defense against losing money on a stock purchase. But while most investors may have access to the same basic information, their valuations could differ greatly.

Just in case that valuation is wrong (because intrinsic value is subjective), investors also can minimize their loss by building in a safety cushion. The idea of using a margin of safety, or leaving some room for error, is a core principle of value investing.

Or, as this Warren Buffet quote puts it: “You build a bridge that 30,000-pound trucks can go across, and then you drive 10,000-pound trucks across it.”

The greater the margin of safety—the difference between the stock’s prevailing market price and its estimated intrinsic value—the higher the potential for high-return opportunities and the lower the downside risk. What’s a good margin of safety? It’s different for everyone.

It all comes down to how much an investor is willing to lose. For example, an investor who uses a 20% margin of safety as a personal guide might buy a stock with an intrinsic value of $100 a share but a price of $80 per share or less. Another investor may feel more comfortable with a 30% to 40% margin of safety.

That investor might have to wait longer for the stock to drop to their price, or they might not ever get the opportunity to add it to their portfolio, but they’re doing what works for him.

Avoiding Herd Mentality

Doing what feels right on a personal level instead of going with the flow is a big part of value investing. And it isn’t always easy.

If everyone around you is talking about a particular stock, that enthusiasm can be contagious. Which is why a typical investor’s decision making is often heavily influenced by relatives, co-workers, friends, and acquaintances. (Beware the dangers of a chatty neighbor at the yearly barbecue!)

For an investor who believes the pursuit of market-beating performance is more about randomness than research, emotions (fear, greed, FOMO) can be their worst enemy.

According to the research firm DALBAR ’s latest Quantitative Analysis of Investor Behavior (QAIB), investors lost 9.42% of their investment over the course of 2018, compared with a 4.38% loss by the S&P 500.

“Judging by the cash flows we saw, investors sensed danger in the markets and decreased their exposure, but not nearly enough to prevent serious losses,” DALBAR’s chief marketing officer, Cory Clark, noted in a press release when the study came out in 2019.

“Unfortunately, the problem was compounded by being out of the market during the recovery months,” Clark said. “As a result, equity investors gained no alpha, and in fact trailed the S&P by 504 basis points.”

And that isn’t all that unusual. Over a 20-year period, from 1999 to the end of 2018, while the S&P 500’s average annual return was 5.62%, DALBAR found the average equity investor’s return was 3.88%.

Behavioral biases can lead to knee-jerk reactions, which can result in investing mistakes. It takes patience and discipline to stick with a value investing strategy.

Value investors don’t follow the herd. They eschew the Efficient Market Hypothesis (EMH ), which states that stock prices already reflect all known information about a security.

Value investors take the opposite approach. If a well-known company’s stock price drops, they look for the reasons why the company might be undervalued. And if there are strong signs the company could recover and even grow in the future, they consider investing.

What Are Some Strategies Value Investors Use?

Value investing isn’t about finding a big discount on a stock and hoping for the best, or making a quick buck on a market trend.

Value investors seek companies that have strong underlying business models, and they aren’t distracted by daily price fluctuations. Their decisions are based on research, and their questions might include:

•   What is the potential for growth?
•   Is the company well managed?
•   Does the company pay consistent dividends?
•   What is the company doing about unprofitable products, projects, or divisions?
•   What are the company’s competitors doing differently?
•   How much do I know about this company or the business it’s in?

Investors who are familiar with an industry or the products it sells (either because they’ve worked in that business or they use those goods or services) can tap that knowledge and experience when they’re analyzing certain stocks.

The same line of thought can be applied to companies that sell products or services that are in high demand. That brand might be expected to remain in demand into the future because the company has a reputation for evolving as times (and challenges) change.

Investors who are time-crunched or still learning the basics might find the homework daunting. Deep diving into earnings reports, balance sheets, and income statements, and pondering what the future might hold isn’t for everyone.

But those investors can still pursue a value strategy by putting their money into mutual funds or exchange-traded funds (ETFs) that follow the same principles.

Whether an investor is DIYing it or getting help from a professional, value investing is a long-term strategy. Which means it’s usually part of an overall financial plan.

And if all the pieces of that plan align, an investor may be able to better control when and if they want to sell certain shares to help with a home purchase or some other big expense, or for income in retirement.

Want to Give Value Investing a Try?

If you’d like to try value investing, opening an investment account with SoFi Invest® can be a good way to get started.

There are no account minimums, so you can take your time choosing the investments that feel right. And with SoFi Active Investing, you can be as hands on as you like, creating and managing your own portfolio. But you still can ask SoFi’s credentialed financial advisors for help at any time.

If active investing doesn’t suit you—or if it just isn’t a good fit right now—you can use SoFi Automated Investing and have SoFi help make and manage your portfolio without paying a management fee.

Ready to get started? Check out what SoFi Invest can do to help you work on growing your wealth.

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 . The umbrella term “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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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, 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.


Read more
TLS 1.2 Encrypted
Equal Housing Lender