Aug
20
2025
What is private equity?

Private Equity: Examples, Ways to Invest

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on Private Equity: Examples, Ways to Invest

Private equity involves partnerships, whereby qualified investors combine their capital in a private equity fund, which in turn funnels the money into an ownership stake in other companies in order to manage, overhaul, and/or acquire them.

The goal of private equity firms is to then sell these companies for more than they invested. The key word in private equity is “private” — as these companies don’t trade on public exchanges.

Private equity investing requires a significant amount of capital, typically invested for a period of years; thus it’s generally only available to high net-worth or accredited investors. Individual investors may be able to access private equity through exchange-traded funds (ETFs) and other vehicles.

Private equity, which is a type of alternative investment, has a high-stakes reputation for good reason, as these investments can be highly risky.

Key Points

•   Private equity investments use a strategy whereby qualified investors pool their capital into a fund that’s used to manage or take over other companies.

•   The goal of private equity investing is to sell the target companies for a profit.

•   Owing to the amount of capital involved, and the longer time commitment, private equity is typically only available to high-net-worth or accredited investors.

•   Private equity firms do not trade on public exchanges, and are not subject to SEC regulations.

•   Private equity is considered a type of alternative investment.

What Is Private Equity?

Private equity can be confused with hedge funds and venture capital, but it’s important to understand what private equity is and how it differs from other high-risk alternative strategies.

Private equity firms raise capital from institutional and accredited investors in order to set up private equity funds that can then be used to buy, manage, and/or acquire other companies.

Private equity firms are typically not publicly traded on a stock exchange or regulated by the Securities and Exchange Commission (SEC), and typically neither are the companies they invest in.

With publicly traded companies, investors purchase shares of the company on a public market such as the New York Stock Exchange (NYSE), or buy stock online. With private equity, qualified investors can combine their assets to invest in private companies that aren’t typically available to the average investor.

Key Characteristics of Private Equity

Certain characteristics help define private equity:

•   Private equity firms pool capital from various investors into a designated fund that can then invest in private companies (those typically not listed on public exchanges).

•   A private equity investment typically involves large sums of money, invested for a period of years.

•   Private equity is typically available to high net-worth, institutional, and accredited investors.

•   Most retail investors would have to use other vehicles, such as exchange traded funds, or ETFs, to gain exposure to PE strategies.

•   Private equity funds also use leverage to invest in target companies.

•   The goal of private equity is to make a profit by overhauling a company and its product or operations, by breaking it apart and selling off parts of it, or by selling the company in an acquisition later.

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How Do Private Equity Firms Work?

Private equity firms have funds that allow qualified investors to pool their assets in order to invest in existing private companies and manage them. PE firms typically don’t target startups, but rather mature companies that may benefit from restructuring or other interventions. Note that this process is separate from the type of self-directed investing most individual investors are familiar with.

Private equity investors are referred to as limited partners. They are often high net-worth individuals or institutions such as endowments or foundations. Equity firms usually require a sizable financial commitment from limited partners for a long period of time to qualify for this investment opportunity.

The equity firm uses the assets from investors to help the companies they invest in achieve specific objectives — like raising capital for growth or leveraging operations.

Private Equity Objectives

To help further these objectives, equity firms offer a range of services to the companies they invest in, from strategy guidance to operations management.

The amount of involvement and support the firm gives depends on the firm’s percentage of equity. The more equity they have, the larger the role they play.

In helping these private companies reach their business objectives, private equity firms are working toward their own goal: to exit the relationship with a large return on their investment. Equity firms may aim to receive their profits a few years after the original investment. However, the time horizon for each fund depends on the specifics of the investment objectives.

The more value a firm can add to a company during the time horizon, the greater the profit. Equity firms can add value by repaying debt, increasing revenue streams, lowering production or operation costs, or increasing the company’s previously acquired price tag.

Many private equity firms leave the investment when the company is acquired or undergoes an initial public offering (IPO).

Role of General Partners and Limited Partners

In private equity firms, general partners and limited partners play very different roles.

•   General partners are typically those who are involved in the oversight of a private equity fund, taking a more strategic role. For example, a general partner may look for target companies to invest in, evaluate these opportunities, and then oversee the companies ultimately added to the private equity firm’s portfolio.

•   Limited partners are the investors who put up the capital for these partnerships: e.g., pension funds, endowments, HNW investors. They are typically less involved in daily operations, and as such they assume less risk for the success or failure of the companies in the portfolio.



💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Types of Private Equity Funds

Typically, private equity funds fall into three categories: Venture Capital (VC), Leveraged Buyout (LBO) or Buyout, and Growth Equity.

Venture Capital Funds

Venture capital (VC) funds focus their investment strategy on young businesses that are typically smaller and relatively new with high growth potential, but have limited access to capital. This dynamic creates a reciprocal relationship between VC fund investors and emerging businesses.

The start-up depends on VC funds to raise capital, and VC investors can possibly generate large returns.

Leveraged Buyout

In comparison to VC funds, a leveraged buyout (LBO) is typically less risky for investors. LBO or buyouts often target mature businesses, which may generate higher rates of return. On top of that, an LBO fund typically holds ownership over a majority of the corporation’s voting stock, otherwise known as controlling interest.

Growth Equity

In some cases, a private equity fund may invest in an established company that has a working business model, but requires capital in order to expand. This is considered a growth equity play.

Can Anyone Invest in Private Equity?

According to the SEC, under securities laws, private equity funds are not registered or regulated as investment companies. Thus, a PE fund cannot offer its securities on a public exchange. In addition, in order to remain exempt from securities regulations, the structure of private equity funds must fall within one of three defined categories:

•   a traditional 3(c)(1) fund with no more than 100 owners

•   a 3(c)(7) fund that’s limited to qualified investors

•   and a qualifying VC fund

So when it comes to how to invest in private equity, only qualified or accredited investors are allowed to become limited partners in a private equity fund. Because private equity funds are not registered with the SEC, investors must understand the risk of such investments and be willing to lose their entire investment if the fund doesn’t meet performance expectations.

Since the initial investment is typically pretty high, and may be well into the millions of dollars, an individual must meet strict criteria to qualify as an individual accredited investor.

•   A person must make over $200,000 per year (for two consecutive years) as an individual investor or $300,000 per year as a married couple.

•   Alternatively, an investor can qualify as accredited if they have a net worth of at least $1 million individually or as a married couple to qualify (excluding the value of their primary residence), or if they hold a Series 7, 65, or 82 license.

•   In addition, some private equity opportunities may require that investors be considered qualified investors, which can mean having assets of at least $5 million.

Other examples of accredited investors include insurance companies, pension funds, and banks.

Direct vs. Indirect Investment Options

As interest in private equity has grown, and private equity firms have sought to develop new avenues to give retail investors that access, there are a growing number of direct and indirect private equity investment options.

•   Direct private equity investments include new offerings from large financial institutions as of Q2 2025, that include a mix of public and private assets. These may include active as well as index options. Some platforms also offer investors the chance to invest their capital into so-called feeder funds, which provide exposure to certain private equity strategies.

•   Indirect private equity investments can include ETFs, and Limited Investment Trusts (LITs), which are closed-end funds that enable investors to pool their capital in a multi-asset fund.

How to Invest in Private Equity

As noted above, there are an increasing number of options for average investors seeking to gain exposure to private equity, including:

Publicly traded stock: Some private equity firms have publicly traded stock that investors can buy shares of. This includes PE firms like the Carlyle Group, the Blackstone Group, and Apollo Global Management.

Funds of funds: Mutual funds are restricted by the SEC from buying private equity, but they can invest indirectly in publicly traded private equity firms. This is known as funds of funds.

Interval funds: These closed-end funds, which are not traded on the secondary market and are largely illiquid, may give some investors access to private equity. Interval funds may invest directly or indirectly through a third-party managed fund in private companies. Investors may be able to sell a portion of their shares back to the fund at certain intervals at net asset value (NAV). Interval funds typically have high minimum investments.

Advantages and Disadvantages of Private Equity

While private equity funds provide the opportunity for potentially larger profits, there are some key considerations, costs, and high risks investors should know about.

Advantages

Here are some possible benefits of private equity investments.

Potentially Higher Returns

With private equity, returns may be greater than those from the public stock market. That’s because PE firms tend to invest in companies with significant growth potential. However, the risk is higher as well.

More Control Over the Investment

Private equity investors are typically involved in the management of the companies they are invested in.

Diversification

Private equity investments allow investors to invest in industries they may not be able to invest in through the public stock market. This may help them diversify their holdings.

Disadvantages

The drawbacks of investing in private equity include:

Higher Risk

Private companies are not required to disclose as much information about their finances and operations, so PE investments can be riskier than publicly traded stocks.

Lack of Liquidity

Private equity funds tend to lack liquidity due to the extensive time horizon required for the investment. Since investors’ funds are tied up for years, equity firms may not allow limited partners to take out any of their money before the term of the investment expires. This might mean that individual investors are unable to seek other investment opportunities while their capital is held up with the funds.

Conflicting Interests

Because equity firms can invest, advise, and manage multiple private equity funds and portfolios, there may be conflicts. To uphold the fiduciary standard, private equity firms must disclose any conflicts of interest between the funds they manage and the firm itself.

High Fees

Private equity firms typically charge high management fees and carry fees. Upon investing in a private equity fund, limited partners receive offer documentation that outlines the investment agreement. All documents should state the term of the investment and all fees or expenses involved in the agreement.

Private Equity Comparisons

Private equity is one type of alternative investment, but there are others. Here’s how a few of them compare.

Private Equity vs IPO Investing

From an investor’s standpoint, private equity investing means you’re putting money into a company, and hopefully making money in the form of distributions as the company becomes profitable.

Investing in an IPO, on the other hand, means you’re buying stocks in a new company that has just gone public. In order to make money, the company’s stock price needs to rise, and then you need to sell your stocks in that company for more than you initially paid.

Private Equity vs Venture Capital

Venture capital funding is a form of private equity. Specifically, venture capital funds typically invest in very young companies, whereas other private equity funds typically focus on more stable companies.

Private Equity vs Investment Banking

The difference between these two forms of investing is of the chicken-and-egg variety: Private equity starts by building high-net-worth funds, then looks for companies to invest in. Investment banking starts with specific businesses, then finds ways to raise money for them.

The Takeaway

Private equity firms manage funds that invest in private companies that are typically not available to investors. Sometimes these companies are small and new with high growth potential; in other cases, the companies are well-established, and may offer a higher rate of return.

Not everyone qualifies to invest in private equity. If you do qualify, it’s important to remember that while private equity funds may offer the opportunity for profitability, they also come with some hefty risks. As with any investment, it’s a good idea to make sure you fully understand the risks of investing in a private equity fund before moving forward.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

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FAQ

What’s the history of private equity?

Pooling money to buy stakes in a private company can be traced back to the early days of the industrial revolution, when this type of financing was a common source of equity for the burgeoning railroad industry. Modern private equity took hold in the 20th century, however, with its roots in venture capital firms that emerged after WWII. Private equity as it’s known today gained popularity when leveraged buyouts took off in the 1980s.

How does private equity make money?

Private equity firms make money by buying companies they consider to have value and potential for improvement. PE firms then make improvements, which in turn, can increase profits. These firms also benefit when they can sell the company for more than they bought it for.

How much money do you need to invest in private equity?

Private equity funds have very high minimum investments that typically start at $1 million, with a diversified portfolio reaching much higher than that. In addition, an individual usually needs to be an accredited investor with a net worth of at least $1 million, or an annual income higher than $200,000 for at least the last two years ($300,000 for those who are married).

What are common private equity exit strategies?

Common exit strategies for private equity firms include initial public offerings (IPOs), where a refurbished once-private company goes public; secondary buyouts, whereby a company is sold to another private equity firm; and liquidation, when a company is dissolved and sold off.

Is private equity suitable for individual investors?

It depends. While direct investments in private equity are generally out of reach for most individual investors, today there are investment options that provide private equity exposure for individuals. These include ETFs, and closed-end funds (like interval funds), and typically permit lower minimums than traditional PE funds.

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Japanese garden

Typical Landscaping Costs You Can Expect

By | Budgeting & Goals, Home Ownership, personal_loan | No Comments

Creating a beautifully landscaped home can improve your day-to-day life and also increase the resale value of your home, making it well worth the investment. The question is, how much will it cost?

Landscaping costs range widely depending on the size, design, and scope of the project, and whether you plan to do it yourself or hire a professional. On average, however, a landscaping project can run between $1,248 and $6,280, according to the home improvement site Angi.

Whether you’re thinking about sprucing up your front yard, back yard, or both, here’s a look at what’s involved, how much it can cost, plus tips for how to budget for and finance a landscaping project.

Key Points

•   The average U.S. landscaping project currently costs $3,648, ranging from $1,248 to $6,280.

•   Full backyard renovations typically cost between $15,000 and $50,000.

•   Climate-conscious landscaping, such as re-wilding with native species, is a growing trend in 2025.

•   Colorful gardens and outdoor living spaces are popular landscaping trends.

•   Landscaping can increase home value, reduce energy costs, and support the environment.

What Are Some Benefits of Landscaping?

If you’re like many homeowners, you may prioritize interior upgrades over outdoor improvements. But improving your landscaping can actually be the gift that keeps on giving — it can beautify your space, increase your home value, and even decrease your heating and cooling expenses.

According to a recent report from the National Association of REALTORS®, an overall landscape upgrade (and even smaller projects like keeping up with yard maintenance), can pay for itself when you sell your home.

Investing in landscaping can also make your home more efficient. Planting leafy trees strategically around your property, for example, can keep your home cooler during the summer and warmer during the winter, reducing your energy bills.

Landscaping can also have environmental benefits beyond your property. The trees, bushes and flowers that make up your landscaping are natural air purifiers — they remove air pollutants from the atmosphere and store carbon dioxide, improving air quality, according to the U.S. Environmental Protection Agency (EPA). Landscaping can also improve local water quality by absorbing and filtering rainwater.

Some of the top landscaping trends for 2025 include:

•  Climate-conscious landscaping Many homeowners are seeking out sustainable landscaping revamps, such as replacing lawns with alternative species (like clover) or re-wilding their yards with native species that require far less maintenance, water, and fertilizer.

•  Colorful gardens After years of soft greens, pastels, and neutrals, landscape designers are favoring brighter, more joyful designs. Plants that provide color and as support local pollinators (like birds, butterflies, and bees) are particularly popular. Examples include native sunflowers, coneflowers, garden phlox, and asters.

•  Outdoor living Landscape design is continuing to incorporate outdoor living spaces, such as seating areas, outdoor kitchens, and cozy fire pits.

Recommended: The Top Home Improvements to Increase Your Home’s Value

How to Budget for Landscaping

A good first step for coming up with your landscaping budget is to actually ignore numbers and give yourself permission to dream — what does your ideal landscaping look like? What does it feel like?

Next, walk around your property and create a list of both needs and wants. In your “needs” column, list repairs that must be done for safety’s sake, ranging from drainage challenges, broken fences, toxic plants that need to be removed, tree removal, and so forth.

Also imagine what the property could look like with the stunning new landscaping you’re envisioning. Perhaps some of the ideas listed above have inspired you in an unexpected direction. Have fun and add these ideas to your “wants” column.

Now, prioritize your list and be clear about which items are optional (perhaps a special trellis for climbing roses) and which are not (trip hazards where you plan to add outdoor seating).

Next, determine your budget, focusing on how much you can realistically spend on landscaping, keeping in mind how quality landscaping can add significant value to your home. Then, it might make sense to talk to several professional landscapers to get estimates.

Professionals will also be able to let you know if your plans are realistic for your property. Even if you intend to do some of the work yourself, these professionals will likely share information you have not yet considered. (Hiring them in the off-season might save you money, too.)

Once you determine the scope and cost of your project, it’s a good idea to add a cushion of 10% to 20% for the unexpected. When you have a final number to work with, you’ll need to determine if you can fund the project out of savings, or if you’ll need to finance any part of your landscaping plan (more on that below).

Recommended: Personal Loan Calculator

How Much Does Landscaping Cost?

The average landscaping project in the U.S. costs $3,648, but ranges between $1,248 and $6,280. Of course, you can spend a lot less than the average if you’re just sprucing up your front garden beds. You can also spend considerably more if your plan is to build a backyard oasis with a pool and outdoor kitchen.

How much your landscaping revamp will ultimately cost will depend on your yard size, the type of landscaping you want to do, and the landscaper’s labor costs.

Generally speaking, backyard landscaping projects cost more than front yard projects. The cost of the average front-yard spruce-up runs between $1,500 to $5,000, whereas a full backyard renovation can range between $15,000 to $50,000.

If you plan to use a designer for your project, it can run $50 to $150 per hour for a professional landscape designer to come up with an artistic direction for your space, choose the plants, and manage the project. The average cost to hire a landscape designer is $4,600. If you’re planning to do a major structural renovation, you may want to hire a landscape architect, which can run $70 to $150 per hour.

Recommended: Home Renovation Cost Calculator

What Is Landscaping Cost Per Square Foot?

Landscaping costs are influenced by a variety of factors, including geography, type of project, and the materials used. Figuring out the dimensions of the project area, however, can help you come up with ballpark cost estimates.

According to Angi, the cost of landscaping runs between $4.50 and $12 per square foot for basic services and intermediate projects, such as aerating, flower planting, and installing garden beds. However, if you’re planning a major tear-out and remodel, you can expect to spend as much as $40 per square foot.

How Much Does New Landscaping Installation Cost?

Starting from scratch can be challenging, but having a blank slate also opens up possibilities for curating your outdoor spaces.

To fully landscape a new home, you’ll want to budget around 10% of your property value. So if you purchased the home for $350,000, you can anticipate spending around $35,000 to both hardscape (add hard surfaces like brick, concrete, and stone) and softscape (add living things) across your front and backyards.

What Will It Cost to Maintain Landscaping?

In addition to the initial outlay, you’ll also need to set aside an annual budget to help with upkeep. The amount of maintenance you’ll need will depend on landscape design, local climate, and how much of a DIY approach you’re comfortable with.

Lawn-mowing can run anywhere from $40 to $150 per service, while getting your trees trimmed averages $1,800 per job. For all-around yard maintenance, like weeding and mulching, you might find a landscaper who charges an hourly rate (often $50 to $100 per hour) or charges a flat rate per job.

Keep in mind that mowing, trimming back shrubs, weeding, and mulching are also jobs you can likely do yourself, which will cut down on your landscape maintenance costs.

What Are Some Options to Finance a Landscaping Project?

If you want to invest in your home through landscaping but the price point is above what you have in savings, you may want to look into financing. Here are two common types of loans for landscaping.

Financing a Landscaping Project With a Home Equity Loan

A home equity loan gives you access to cash by tapping into the equity you have in your home. Your home equity is the difference between your home’s current market value and what you owe on your mortgage. Depending on the lender and your credit profile, you may be able to borrow up to 80% of your home’s current equity.

You can use a home equity loan for various purposes, including home upgrades like new landscaping. Because your home serves as collateral for the loan, you may qualify for a lower interest rate than on some other financial products, like personal loans and credit cards. If you have trouble repaying the loan, however, your lender could foreclose on your home. You’ll also pay closing costs with a home equity loan.

Financing a Landscaping Project With a Personal Loan

You can also use a personal loan to fund any type of home improvement project, including upgrading the outside of your home.

Personal loans for home improvement generally have fixed interest rates and a fixed repayment timeline. You’ll receive all the funds upfront, generally soon after you’re approved, and your monthly payments will be fixed for the duration of your loan.

Personal loans are typically unsecured loans, making them less risky than home equity loans, and don’t come with closing costs. They also tend to be faster to fund than home equity loans, which means you can get your landscape project going sooner. However, because personal loans are unsecured (which poses more risk to the lender), rates are typically higher than rates for home equity loans.

The Takeaway

Landscaping projects can add curb appeal and value to your home, with the current average cost of a landscaping project nationwide is $3,648. Of course you could spend a lot less if you are looking at a small project, like swapping out plants in your front garden, or significantly more for a full overhaul.

If you don’t have enough cash in the bank to cover your landscaping project, you may want to consider getting a loan, such as a home equity loan or a personal loan.

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


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

FAQ

What is a good budget for landscaping?

Many experts advise allocating 10% of your property value toward landscaping costs if you are ready to fully landscape a home. Otherwise, between $1,200 and $6,000 is a typical landscaping cost.

How much is the typical landscaping project now?

The typical landscaping project is currently $3,648.

Is paying for landscaping worth it?

Typically, paying for landscaping is worthwhile as it can improve property value and reduce the need for major work in the future.

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

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

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Should I Use a Dividend Reinvestment Plan?

Dividend Reinvestment Plans: How DRIP Investing Works

By | Growing Wealth, Investing | No Comments

When investors hold dividend-paying securities, they may want to consider using a dividend reinvestment plan, or DRIP, which automatically reinvests cash dividends into additional shares, or fractional shares, of the same security.

Using a dividend reinvestment strategy can help acquire more dividend-paying shares, which can add to potential compound gains. But companies are not obligated to keep paying dividends, so there are risks.

It’s also possible to keep the cash dividends to spend or save, or use them to buy shares of a different stock. If you’re wondering whether to use a dividend reinvestment program, it helps to know the pros and cons.

Key Points

•   Dividend reinvestment plans (DRIPs) allow investors to reinvest cash dividends into more shares of the same securities.

•   DRIPs can be offered by companies or through brokerages, with potential discounts on share prices, or no commissions.

•   There are two types of DRIPs: company-operated DRIPs and DRIPs through brokerages.

•   Reinvesting dividends through a DRIP may lead to greater long-term returns due to compounding.

•   However, DRIPs have limitations, such as tying up cash, risk exposure, and limited flexibility in choosing where to reinvest funds.

What Is Dividend Reinvestment?

Dividend reinvestment plans typically use the cash dividends you receive to purchase additional shares of stock in the same company, rather than taking the dividend as a payout.

When you initially buy a share of dividend-paying stock, or shares of a mutual fund that pays dividends, you typically have the option of choosing whether you’d want to reinvest your dividends automatically to buy stocks or more shares, or take them as cash.

Numerous companies, funds, and brokerages offer DRIPs to shareholders. And reinvesting dividends through a DRIP may come with a discount on share prices, for example, or no commissions.

Recommended: Dividends: What They Are and How They Work

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What Is a Dividend Reinvestment Plan?

Depending on which securities you invest in, you may have the option to enroll in a Dividend Reinvestment Plan or DRIP. This type of plan, offered by numerous companies and brokerages, allows you to automatically reinvest dividends as they’re paid out into additional shares of stock.

Note that some brokerages offer what’s called synthetic DRIPs: meaning, even if the company itself doesn’t offer a dividend reinvestment program, the brokerage may enable you to reinvest dividends automatically in the same company stock.

How DRIPs Help Build Wealth Over Time

Reinvesting dividends can, in some cases, help build wealth over time.

•   The shares purchased using the DRIP plan are bought without a commission, and sometimes at a slight discount to the market price per share, which can lower the cost basis and potentially add to gains.

•   Using a dividend reinvestment plan effectively offers a type of compounding, because buying new shares will provide more dividends as well, which can again be reinvested.

That said, shares bought through a DRIP plan cannot be traded like other shares in the market; they must be sold back to the company.

In that sense, investors should bear in mind that participating in a dividend reinvestment plan also benefits the company, by providing it with additional capital. If your current investment in the company is aligned with your financial goals, there may be no reason to reinvest dividends in additional shares, and risk being overweight in a certain company or sector.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Types of Dividend Reinvestment Plans

There are two main types of dividend reinvestment plans. They are:

Company DRIPs

With this type of plan, the company operates its own DRIP as a program that’s offered to shareholders. Investors who choose to participate simply purchase the shares directly from the company, and DRIP shares can be offered to them at a discounted price.

Some companies allow investors to do full or partial reinvestment, or to purchase fractional shares.

DRIPs through a brokerage

Many brokerages also provide dividend reinvestment as well. Investors can set up their brokerage account to automatically reinvest in shares they own that pay dividends.

Partial DRIPs

In some cases a company or brokerage may allow investors to reinvest some of their dividends and take some in cash to be used for other purposes. This might be called a partial DRIP plan.

DRIP Example

Here’s a dividend reinvestment example that illustrates how a company-operated DRIP works.

If you own 20 shares of a stock that has a current trading value of $100 per share, and the company announces that it will pay $10 in dividends per share of stock, then the company would pay you $200 in dividends that year.

If you choose to reinvest the dividends, you would own 22 shares of that stock ($200 in dividends/$100 of current trading value = 2 new shares of stock added to your original 20). These new shares would also pay dividends.

If, instead, you wanted cash, then you’d receive $200 to spend or save, and you’d still have the initial 20 shares of the stock.

If you wanted to reinvest part of your dividends through the DRIP plan, you might be able to purchase one share of stock for $100, and take $100 in cash. Again, not all companies offer flexible options like this, so it’s best to check.

Long-Term Compounding With DRIPs

Again, reinvesting dividends in additional company shares can create a compounding effect: The investor acquires more shares that also pay dividends, which can then be taken as cash or reinvested once again in more shares of the same company.

That said, there are no guarantees, as companies are not required to pay dividends. In times of economic distress, some companies suspend dividend payouts.

In addition, if the value of the stock declines, or it no longer makes sense to keep this position in your portfolio, long-term compounding may seem less appealing.

Pros and Cons of DRIPs

If you’re wondering whether to reinvest your dividends, it’s a good idea to weigh the advantages and disadvantages of DRIPs.

Pros of Dividend Reinvestment Plans

One reason to reinvest your dividends is that it may help to position you for higher long-term returns, thanks to the power of compounding returns, which may hold true whether investing through a company-operated DRIP, or one through a brokerage.

Generally, if a company pays the same dividend amount each year and you take your dividends in cash, then you’ll keep getting the same amount in dividends each year (assuming you don’t buy any additional shares).

But if you take your dividends and reinvest them through a DRIP, then you’ll have more shares of stock next year, and then more the year after that. Over a period of time, the dividend amount you might receive during subsequent payouts could also increase.

An important caveat, however: Stock prices aren’t likely to stay exactly the same for an extended period of time.

Plus, there’s no guarantee that dividends will be paid out each period; and even if they are, there is no way to know for sure how much they’ll be. The performance of the company and the general economy can have a significant impact on company profitability and, therefore, typically affect dividends given to shareholders.

There are more benefits associated with DRIPs:

•   You may get a discount: Discounts on DRIP shares can be anywhere from 1% to 10%, depending on the type of DRIP (company-operated) and the specific company.

•   Zero commission: Most company-operated DRIP programs may allow you to buy new shares without paying commission fees. However, many brokerages offer zero-commission trading outside of DRIPs these days, too.

•   Fractional shares: DRIPs may allow you to reinvest and purchase fractional shares, rather than whole shares that may be at a pricier level than you wish to purchase. This may be an option with either a company-operated or brokerage-operated DRIP.

•   Dollar-cost averaging: Dollar-cost averaging is a strategy investors use to help manage price volatility, and lower their cost basis. You invest the same amount of money on a regular basis (every week, month, quarter) no matter what the price of the asset is.

Cons of Dividend Reinvestment Plans

Dividend reinvestment plans also come with some potential negatives.

•   The cash is tied up. First, reinvesting dividends puts that money out of reach if you need it. That can be a downside if you want or need the money for, say, home improvements, a tuition bill, or an upcoming vacation.

•   Risk exposure. There are a few potential risk factors of reinvesting dividends, including being overweight in a certain sector, or locking up cash in a company that may underperform.

If you’ve been reinvesting your dividends, and the stock portion of your portfolio has grown, using a DRIP could inadvertently put your allocation further out of whack, and you may need to rebalance your portfolio.

•   Flexibility concerns. Another possible drawback to consider is that when your dividends are automatically reinvested through a DRIP, they will go right back into shares of stock in the company or fund that issued the dividend.

Though some company-operated DRIPs do give investors options (such as full or partial reinvestment), that’s not always the case.

•   Less liquidity. When you use a company-operated DRIP, and later wish to sell those shares, you must sell them back to the company or fund, in many cases. DRIP shares cannot be sold on exchanges. Again, this will depend on the specific company and DRIP, but is something investors should keep in mind.



💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Cash vs Reinvested Dividends

Should I reinvest dividends or take cash instead? How you approach this question can depend on several things, including:

•   Your short-term financial goals

•   Long-term financial goals

•   Income needs

Taking dividends in cash can provide you with ongoing income. That may be important to you if you’re looking for a way to supplement your paychecks during your working years, or for other income sources if you’re already retired.

As mentioned earlier, you could use that cash income to further a number of financial goals. For instance, you might use cash dividend payouts to pay off debt, fund home improvements or put your kids through college. Or you may use it to help pay for long-term care during your later years.

Cash may also be more attractive if you’re comfortable with your current portfolio configuration and don’t want to purchase additional shares of the dividend stocks you already own.

On the other hand, reinvesting dividends automatically through a DRIP could help you to increase your savings for retirement. This assumes, of course, that your investments perform well and that the shares you own don’t decrease or eliminate their dividend payout over time.

Tax Consequences of Dividends

One thing to keep in mind is that dividends — whether you cash them out or reinvest them — are not free money. Dividend income is taxed in the year they’re paid to you (unless the dividend-paying investment is held in a tax-deferred account such as an IRA or 401(k) retirement account).

•   Qualified dividends are taxed at the more favorable capital gains rate.

•   Non-qualified, or ordinary dividends are taxed as income.

Each year, you’ll receive a tax form called a 1099-DIV for each investment that paid you dividends, and these forms will help you to determine how much you owe in taxes on those earnings.

Dividends are considered taxable whether you take them in cash or reinvest them through a DRIP. The value of the reinvestment is considered taxable.

The exception to that rule is for funds invested in retirement accounts, such as an online IRA, as the money invested in these accounts is tax-deferred. If you have received or believe you may receive dividends this year, it can make sense to get professional tax advice to see how you can minimize your tax liability.

How DRIPs Affect Cost Basis

When dividends are reinvested to buy more shares of the same security, the DRIP creates a new tax lot. This can make calculating the total cost basis of your share holding more complicated. It may be worth considering working with a professional in that case, to ensure that you end up paying the right amount of tax when you sell shares.

The complexity around calculating the cost basis is another reason some investors reinvest dividends within tax-deferred accounts. In this case, the overall cost basis doesn’t matter, as withdrawals from a tax-deferred account — such as a traditional IRA or 401(k) — would be simply taxed as income.

Should You Reinvest Dividends?

Reinvesting dividends through a dividend reinvestment plan is partly a short-term decision, and mostly a long-term one.

Factors to Consider Before Reinvesting

If you need the cash from the dividend payouts in the near term, or have doubts about the market or the company you’d be reinvesting in (or you’d rather purchase another investment), you may not want to use a DRIP.

If on the other hand you don’t have an immediate need for the cash, and you can see the value of compounding the growth of your shares in the company over the long haul, reinvesting dividends could make sense.

If taxes are a concern, it might be wise to consider the location of your dividend-paying shares.

The Takeaway

Using a dividend reinvestment plan (DRIP) is a strategy investors can use to take their dividend payouts and purchase more shares of the company’s stock. However, it’s important to consider all the scenarios before you decide to surrender your cash dividends to an automatic reinvestment plan.

While there is the potential for compound growth, and using a DRIP may allow you to purchase shares at a discount and with no transaction fees, these dividend reinvestment plans are limiting. You are locked into that company’s stock during a certain market period, and even if you decided to sell, you wouldn’t be able to sell DRIP shares on any exchange but back to the company.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How do you set up a dividend reinvestment plan?

There are two ways to set up a dividend reinvestment plan. First, you can set up an automatic dividend reinvestment plan with the company or fund whose shares you own. Or you can set up automatic dividend reinvestment through a brokerage. Either way, all dividends paid for the stock will automatically be reinvested into more shares of the same stock.

Can you calculate dividend reinvestment rates?

There is a very complicated formula you can use to calculate dividend reinvestment rates, but it’s typically much easier to use an online dividend reinvestment calculator instead.

What’s the difference between a stock dividend and a dividend reinvestment plan?

A stock dividend is a payment made from a company to its shareholders (people who own shares of their company’s stock). A dividend reinvestment plan allows investors to reinvest the cash dividends they receive from their stocks into more shares of that stock.

Are dividend reinvestments taxed?

Yes, dividend reinvestments are taxed as income in the case of ordinary dividends. Qualified dividends are taxed at the more favorable capital gains rate. Dividends are subject to tax, even when you don’t take the cash but reinvest the payout in an equivalent amount of stock.

What are the benefits of using DRIPs for long-term investing?

One potential benefit of using a DRIP long term is that there may be a compounding effect over time, because you’re buying more shares, which also pay dividends, which can also be reinvested in more shares. This strategy could prove risky, however, if the company suspends dividends or if you become overweight in that company or sector.

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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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SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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Aug
20
2025
What Determines Student Loan Refinance Rates?

What Determines Student Loan Refinance Rates?

By | Fresh Out of School, Going to College, Student Loans, student_loan | Comments Off on What Determines Student Loan Refinance Rates?

Private lenders that refinance student loans base rates they offer on the loan term, the borrower’s risk profile, and a rate index. Typically, the most financially stable applicants get the lowest rates.

When the goal is a lower rate, lower monthly payments, or both, the fixed or variable rate you qualify for makes all the difference. (You can also get a lower rate by refinancing with an extended term, but if you do so you may pay more interest over the life of the loan.)

Here’s a look at what you need to know about how interest rates for student loan refinances work.

Student Loan Refinancing, Explained

When you refinance, you take out a new private loan and use it to pay off your existing federal or private student loans. The new loan will have a new repayment term and interest rate, which hopefully will be better.

Most refinancing lenders offer fixed or variable interest rates and terms of five to 20 years. Shortening or lengthening your existing student loan term or terms can affect your monthly payment and the total cost of your new loan. The two key ways to save money by refinancing are:

•   A shorter repayment term

•   A lower rate

Then again, someone wanting lower monthly payments might choose a longer term, but that may result in more interest paid over the life of the loan.

There are no fees to refinance student loans. Nor is there any limit to the number of times you can refinance. Lenders will want to see a decent credit score, a stable income, and manageable debt. Adding a cosigner may strengthen your profile.

Refinancing federal student loans into a private student loan renders federal benefits moot.

Is Consolidation the Same as Refinancing?

Student loan consolidation and refinancing are terms that are often used interchangeably, but they are not technically the same thing. In general, consolidation means combining multiple loans to create one simplified payment. However, student loan consolidation most often refers to a federal program that allows you to combine multiple types of federal student loans into a single loan. The new loan will have a new term of up to 30 years, but the new rate will not be lower.

However, student loan consolidation most often refers to a federal program that allows you to combine multiple types of federal student loans into a single loan. The new loan, called a Direct Consolidation Loan, will have a new term of up to 30 years, but the new interest rate will not be lower.

Refinancing of student loans is offered by private lenders, such as banks and credit unions. Federal and/or private student loans are refinanced into a new loan that ideally has a better rate; you can refinance a single loan, or consolidate multiple loans into a single new loan through this refinancing process.

If you refinance federal student loans privately, you lose access to federal repayment plans, forgiveness programs, and other benefits.

What Are Interest Rates?

Interest rates are the amount lenders charge individuals to borrow money. When you take out a loan, you must pay back the amount you borrowed, plus interest, usually represented by a certain percentage of the loan principal (the amount you have remaining to pay off).

When interest rates are high, borrowing money is more expensive. And when interest rates are low, borrowing can be cheaper.

Interest rates can be fixed, variable, or a hybrid. For fixed interest rates, lenders set the rate at the beginning of the loan, and that rate will not change over the life of the loan.

A variable interest rate is indexed to a benchmark interest rate. As that benchmark rises or falls, so too will the variable rate on your loan. Variable-rate loans may be best for short-term loans that you can pay off before interest rates have a chance to rise.

Hybrid rates may start out with a fixed interest rate for a period of time, which then switches to a variable rate.

How Is Interest Rate Different From APR?

While interest rate refers to the monthly amount you’ll need to pay to borrow money, annual percentage rate (APR) represents your interest rate for an entire year and any other costs and fees associated with the loan.

As a result, APR gives you a better sense of exactly how expensive a loan might be and helps when comparing loan options.

What Factors Influence Student Loan Interest Rates?

Interest rates for federal student loans are set by Congress and change each year. Federal loans use the 10-year Treasury note as an index for interest rates. These rates apply to all borrowers.

Private lenders, on the other hand, will look at other factors when determining interest rates, such as credit score and credit history. Their interest rates are not governed by legislation so rates can be higher or lower than the federal one, depending on the type of loan and terms. Prevailing interest rates, however, still play a big factor since they change annually.

Typically, lenders see those with higher scores as more likely to pay off their loans on time, and may reward this with lower interest rates. Lenders see borrowers with lower scores as being at greater risk of defaulting on their loans. To offset the risk, they tend to offer higher interest rates.

Some lenders offer a rate discount if you sign up for their autopay program.

What Drives Student Loan Refinancing Rates?

Student loan refinancing rates are driven by many of the same factors that drive rates on your initial loan, such as credit score and credit history. You may want to consider refinancing during an era of low rates or if your financial situation has improved. For example, if you’ve increased your income or you’ve paid off other debts and your credit score received a boost, you may look into refinancing your loans at a lower interest rate.

Many graduates haven’t had much time to build a credit history. A cosigner with good credit may help an individual qualify for a refinance at a lower rate. Cosigners share responsibility for loan payments, of course. So if you miss a payment, they’ll be on the hook.

Refinance Student Loans With SoFi

You might choose to refinance student loans when interest rates are relatively low or your financial situation has improved, potentially providing access to a new private student loan at a lower rate.

Refinancing may be a good move for borrowers with higher-interest private student loans and those with federal student loans who don’t plan to use federal programs like income-driven repayment, Public Service Loan Forgiveness, or forbearance.

A student loan refinancing calculator can help you determine how much you might save by refinancing your student loans. You can compare your options on different loan terms while keeping in mind that a longer term could increase your total interest costs.

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

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

How are student loan refinancing rates calculated?

Lenders base interest rates largely on factors like an applicant’s credit history, income, debt, and prevailing interest rates which change annually.

Does refinancing save you money?

When you refinance your student loans with a new loan at a lower interest rate, you will pay less interest over the life of the loan, given the same or similar loan terms.

What is an average interest rate for student loans?

The average interest rate among all student loans, federal and private, is 5.80%, according to Education Data Initiative researchers. Private student loan rates have a wide range for fixed- and variable-rate loans and generally run from 3.19% to 17.95%.

For the 2025-2026 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 6.39%, the rate on Direct Unsubsidized loans for graduate and professional students is 7.94%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 8.94%. The interest rates on federal student loans are fixed and are set annually by Congress.

Photo credit: iStock/Kateryna Onyshchuk
SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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


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

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

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Aug
15
2025
man on laptop close up

How Does Bill Pay Work?

By | Budgeting & Goals, Financial Independence, money | Comments Off on How Does Bill Pay Work?

Online bill pay can automate payments of one-time and recurring bills, allowing you to seamlessly transfer funds from your bank account to a payee. Using technology in this way can not only be convenient, it may reduce the odds that you’ll forget to pay a bill and end up getting hit with a late fee.

If you’re curious to know more about what online bill pay is, how it works and how to set it up, read on.

Key Points

•   Online bill pay automates the payment process, allowing seamless fund transfers from your bank account to payees.

•   It eliminates the need for check writing and can be managed via digital devices.

•   Users can schedule payments in advance, optimizing their time and managing cash flow effectively.

•   Bill pay and autopay are distinct; bill pay involves user-directed payments, while autopay allows automatic withdrawals by creditors.

•   Setting up bill pay involves selecting bills to automate, entering payee information, and scheduling payments.

What Is Online Bill Pay?

Bill pay is a way of paying your bills online and automating your finances. It allows you to use your mobile device, laptop, or tablet to send money from your account to that of another person or business. No check writing or manual transfers are required.

You specify the funds and provide details on the recipient, and the amount is automatically taken from your account and sent to the payee.

While you can do this in real time, you can also determine the “when.” That means you can schedule bills for payment in advance whenever you have time free, which can be a huge life hack. You can also typically set up recurring payments, which can make paying bills seamless and can help you avoid late fees, too.

How Does the Bill Pay Process Actually Work?

Online bill pay involves a few steps, such as logging into your bank account, accessing the bill pay feature, providing information on where the money should go and the amount, and when you would like it sent.

Then, the banks involved handle the rest, with the funds being electronically debited from your account as indicated and sent to your credit. Often, online bill pay uses the Automated Clearing House, or ACH, system to move the money between financial institutions.

With this process, you can avoid writing and mailing checks or using high-interest credit cards to make payments. In this way, bill pay can be a useful feature of online banking.

expenses that typically accept online bill pay

Here are some of the ways you might use online bill pay services:

For Electronic Payments to Major Companies

You can use bill pay for automated payments to such major companies as:

•  Your mortgage lender

•  Utilities

•  Your car loan lender

•  Your credit card issuer

•  Your student loan provider

•  Subscription services, like streaming platforms

For Paper Checks to Small Businesses or Individuals

You can also likely use bill pay instead of writing checks for such things as:

•  Gym memberships

•  Individuals, such as a dog walker or landscaper

•  Charities you donate to

Not only can this save you the time it takes to write a check, but it can also avoid any worry of the check being stolen or lost.

Bill Pay vs Autopay: What’s the Difference?

You may be tempted to use the terms bill pay and autopay interchangeably, but they are actually two different processes.

•   With bill pay, you are set up one or more payments; you are establishing when and how much money will be taken out of your bank account and transferred to the payee.

•   With autopay, however, you are authorizing a creditor to take money out of your account (which can make some people feel as if they are sacrificing control) or to use your bank’s bill payment system to do so.

Recommended: Paying Bills From a Savings Account

How to Set Up Online Bill Pay in 5 Steps

While bill pay can help make managing finances simpler, it does require some initial manual set-up. But, once you’ve learned how bill pay works, this automatic feature can make keeping track of and paying bills less cumbersome. Here’s how to set up bill pay:

Step 1: Choose a Bank or Credit Unions That Offers Bill Pay

While many financial institutions offer digital payment tools, like online bill pay, it’s worth investigating the features that are included at each before opening up an account. Online billing is free with some accounts, while some providers may charge for each transaction — either per bill or on a repeating monthly basis. You can likely set it up on your financial institution’s website or your banking app.

Step 2: Gather Your Bill Information

Next, think about which ongoing bills you want to automate.

•   Predictable expenses (or fixed vs. variable expenses) that don’t fluctuate from month to month, such as loan and mortgage payments or the internet bill, are solid candidates for recurring automated payments. You may want to schedule payment for a time each month when you know there’ll be sufficient funds in your account to cover what’s come due. Some service providers may even allow you to change the due date on certain bills.

•   Bills that change every month may be more challenging to automate. For instance, if your credit card bill might be $300 one month and $1,300 the next, it can be hard to be certain you’ll have enough money in your checking account to cover the cost.

When you know which bills you want to pay, you’ll sign onto your bank’s website or app and search for the “Pay a Bill” or “Online Bill Pay” function.

Worth noting: Some financial institutions place a cap on the amount of money that can be transferred electronically through bill pay. If an automatic payment exceeds that designated transaction limit, users may then need to pay via a physical method, such as a personal or cashier’s check.

Step 3: Add Your Payees in Your Banking App

The bank’s portal or app will then typically guide you to add details so your funds can be transferred from your checking account to your payee.

You’ll enter the details of each biller you want to pay, including their name, address, and your account number. Or you may be able to search for your biller or choose from a list provided by the bank.

Step 4: Schedule Your First Payment (One-Time or Recurring)

In this step, you can either schedule a one-time payment (to happen ASAP or at a later date), or you might set up a recurring payment at a given frequency (say, on the first of every month).

Step 5: Confirm the Payment and Set Up Alerts

Now, you’re ready to submit your payment. Before authorizing the transfer, double-check the payment details. When you’re ready to finish your transaction, you may be required to submit a security or multi-factor authentication code.

Some financial institutions place a cap on the amount of money that can be transferred electronically through bill pay. If an automatic payment exceeds that designated transaction limit, users may then need to pay via a physical method, such as a personal or cashier’s check.

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*Earn up to 4.00% Annual Percentage Yield (APY) on SoFi Savings with a 0.70% APY Boost (added to the 3.30% APY as of 12/23/25) for up to 6 months. Open a new SoFi Checking and Savings account and pay the $10 SoFi Plus subscription every 30 days OR receive eligible direct deposits OR qualifying deposits of $5,000 every 31 days by 1/31/26. Rates variable, subject to change. Terms apply here. SoFi Bank, N.A. Member FDIC.

What Are the Benefits and Risks of Using Bill Pay?

Here are details about some of the consequences of not paying bills on time.

Benefit: Helps Avoid Late Fees and Protects Your Credit

One of the ways companies or service providers enforce on-time payments is by penalizing people for paying late. Whether it’s a credit card, utility bill or simply missing a payment date by a single day, submitting a late payment can result in late fees, higher interest rates, or other charges.

On top of late penalties, some providers may also charge interest on the balance owed, essentially creating a double wallop of fees if you’re late paying a bill.

•   In some cases, the interest may be charged starting the day an account becomes overdue. In others, it may accrue going back to the purchase date or transaction day.

•   Depending on the interest rate charged and how frequently that interest compounds, this fee could quickly balloon to more than the initial fee assessed.

In addition, late payments are typically reported to the credit bureaus when a payment goes past 30 days unpaid. This in turn can negatively affect your credit score.

Benefit: Simplifies Your Financial Life

Another benefit of using online bill pay can make managing your money easier. There’s no check writing required, and you can make payments anytime, from anywhere you have a wifi connection. So if you need to pay a bill while you are on vacation or you want to set up monthly payments to your power company, it’s easy to do.

As noted above, being able to manage your bill paying with this electronic service can also help you avoid late payments, which can help maintain or build your credit score.

You can also schedule payments for those moments you know there’s enough money in your account to cover debits (say, right after payday), which can help you avoid overdraft fees.

Risk: Payments Aren’t Instant and Require Buffer Time

When using bill pay, it’s wise to keep in mind that it is not an instant payment. Processing times can vary on such factors as time of day and day of the work, as well as individual financial institutions’ policies. Typically, it can take a couple of days for an online bill pay to be completed, so it can be smart to schedule the payment for a few days ahead of the due date. Otherwise, you risk a late payment and possible fees.

Risk: Requires Sufficient Funds to Avoid Issues

Automating your finances doesn’t mean you don’t have to monitor your finances. If you don’t keep very careful tabs on your money, you could risk overdraft if you don’t have overdraft protection. Say you have unusually high expenses one month; your bank balance might be lower than needed to cover your automated bill payments. This could lead to fees and headaches.

Recommended: How to Pay Bills After Job Loss

How Long Does Bill Pay Usually Take?

Bill pay processing times can vary, but electronic payments usually take 2-5 business days. This can offer an advantage over mailing a paper check which requires time in transit as well as up to several days to process.

Keep in mind that scheduling a bill pay at 7pm on a Friday is likely to require more time to arrive at its destination than one that you schedule at 9am on a Monday. Timing and day of the week will impact your payments, so factor this in when scheduling. It’s often best to schedule payments a few days in advance to make sure they reach the creditor by the due date.

The Takeaway

Bill paying is a fact of life, but there are tools that can make it quicker and more convenient. Signing up for automated online bill pay can put you in control. It can ensure that bills get paid on time, reducing the likelihood of late-payment or overdraft fees. It can be a smart move to see what your bank offers in terms of this service and whether it can simplify your financial life.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is online bill pay safe to use?

Online bill pay is typically very safe. While no financial or digital process is entirely risk-free, a reputable bank or credit union usually uses state-of-the-art security measures, such as encryption and multi-factor authentication.

Can I stop a bill payment after I’ve scheduled it?

If a payment hasn’t yet been processed, you can likely cancel it. You may be able to stop a payment via your bank’s app or website or by contacting customer service. A fee may be involved. If the payment is already being sent, however, you may be out of luck in terms of stopping payment.

Can I use bill pay to pay an individual or a landlord?

While many people may think of bill pay as being used to send funds to, say, a utility or other company, you can often use bill pay to send funds to an individual (say, your landscaper or babysitter). You will need their banking details to set this up.

What happens if I schedule a payment but don’t have enough money in my account?

If you schedule an online bill pay but don’t have enough cash in your bank account, the payment will likely be declined. This means your payee doesn’t receive the funds, and you may be hit with late fees and/or overdraft fees. Typically, your bank will notify you that the funds didn’t transfer, and you will need to take action to remedy the situation.

Is there a fee to use online bill pay?

There typically isn’t a fee charged by your bank to use online bill pay. However, some financial institutions may charge a fee to expedite an online bill payment. Also, third-party bill pay services may sometimes charge a fee to use their services.

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

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

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 .

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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