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It is possible to overdraft a savings account, which is when your balance drops below zero. This could happen if you forgot to deposit a check into the account and then transferred funds out, for instance. Or maybe you moved more money out of the savings account into your checking than you actually had. These and other glitches can leave you with a negative balance in your savings.

Consequences of Overdrawing a Savings Account

An overdraft occurs when there is a withdrawal from your account that results in the balance being below zero — sometimes called a negative balance. There are several ways this can happen. Maybe an automatic withdrawal was processed or you wrote a check against your savings account and you didn’t have enough in the account to cover the transaction.

When the negative balance kicks in, a couple of different things could happen next. Much depends on your particular financial institution and the terms you agreed to when you opened the savings account.

Among the possibilities:

•   You may be charged an overdraft fee: If you signed an agreement to opt into overdraft coverage, your financial institution will allow you to overdraft on your account, typically for a fee. (That is, they will authorize the transaction and allow for it to be completed, extending you a loan.) The amount of the fee will differ depending on your account and your bank. Some financial institutions may even charge you every day and/or for additional withdrawals while your account has a negative balance. Considering that the average overdraft fee is about $35, this cost can really add up.

•   Your transaction is declined: Your financial institution may decline the transaction if you don’t have overdraft protection. In this case, the transaction won’t go through. In addition, you could face a non-sufficient funds fee, or NSF fee. In many cases this amount is similar to an overdraft fee.

•   You have a linked account, and the linked account is used to cover the cost. This usually happens when you overdraw a checking account, and a linked savings account covers the difference. However, you may be able to link your savings account to another account (typically at the same financial institution) as a backup. If an account goes down to zero or below, then money would be withdrawn from the backup account to complete the transaction. In many cases, this service is free, though that depends on your bank.

Understanding Overdraft Protection and Fees

Financial institutions offer overdraft protection programs to help ensure your transactions proceed smoothly in case you reach a negative balance. These programs vary somewhat. Options may include linking a checking and savings account together — funds will be transferred automatically for the negative balance. Or the bank might allow the transaction to go through, and you’ll be charged a fee until you make up for the difference.

Federal regulations require banks to allow account holders to opt into overdraft protection for ATM and debit cards for point-of-sale transactions (or purchases). If you don’t opt in, you won’t be able to overdraft — your bank will deny the transaction. In this case, you won’t be charged any bank fees. However, this may not apply to recurring payments, bank transfers, or checks.

As we mentioned, your financial institution may charge you a fee for each transaction that involves overdraft protection, though banks typically have a maximum amount they’ll charge per day. For example, if you transferred $1,200 for your rent payment out of your savings, and you only had $1,000 in your account, you’ll have a negative balance. This results in a $200 overdraft (if you have coverage), plus you’ll pay about a $35 overdraft fee. If you don’t get paid until a week later to make up the difference, your account will continue to have a negative balance. Let’s say your bank ends up charging you a daily fee which adds up to an extra $10 for that week (this is just an example — it depends on the bank), totaling $45 in fees. And even if your bank denies the transaction, you may still have to pay the NSF fee, which could be about $35.

As you can see, overdrafting on your savings account can get expensive. That’s why it’s a smart idea to rectify the situation as soon as possible and prevent it from happening in the future.

Steps if You Have Overdrawn on Your Account

If you’ve overdrawn on your savings account, here’s how to get out of the negative-balance zone.

•  Deposit funds: Once you’ve overdrafted, make a deposit into that account as soon as possible. Doing so can prevent you from being hit with multiple overdraft fees, especially if you know you need to make more withdrawals in the next day or so.

•  Ask to have the fee waived: If this is the first time you’ve had a negative balance, you can contact your financial institution to request to have the fee waived. If you’ve been a loyal customer and have remained in good standing with your accounts up until now, the bank may not charge you.

•  Pay the overdraft fee: If your bank rejects your request to have the fee waived, it’s best to pay it as soon as possible. You can typically do that by making a deposit into the overdrawn account. While your bank likely won’t take drastic measures like closing your account, be aware that letting a bank account sit with a negative balance could wind up hurting your credit score if the matter gets sent to a collection agency.

•  Settle payment with the payee: If your payment didn’t go through, then you’ll need to contact the person or company you owe and make arrangements for alternative payment. Depending on the type of payment, you could face a late or returned payment fee, which you’ll also need to pay.

Tips for Avoiding Overdraft Fees

There are ways to avoid overdraft fees. Here are some methods that can help.

1. Sign Up for Text or Email Alerts for Low Balance

Many banks allow you to sign up for email or text alerts when your savings account reaches a certain threshold. By doing so, you have time to deposit additional funds so you won’t risk your bank account going to zero or a negative balance.

2. Check Your Bank Account Regularly and Review Statements

Logging into your bank account online or through your banking app allows you to quickly see your balance and any upcoming transactions. By keeping on top of your account, you’ll typically be able to see if you’ll need to have more funds on hand, and you’ll have time to make those deposits. You may find that checking your account balances a few times a week is a helpful habit.

3. Review and Compare Automatic Payment Dates to Withdraw Dates

Looking at when money actually gets withdrawn from your account will help you plan better. For instance, if you know you’ll have a few withdrawals totaling $600 on the 15th of each month, you can plan to make sure you have that much in the account then. (Having a buffer is nice, too, if you can swing it.)

4. Revisit Your Budget

Reviewing your budget occasionally will help you see whether you’re overspending in certain areas. If so, working to cut back on expenses can prevent overdrafts. This is especially important during times when basic living expenses can creep up and require budget recalibration.

5. Build an Emergency Fund

You’ve probably heard the advice that it’s wise to have a rainy-day fund with enough cash in it to cover a few or several months’ worth of expenses. Having this kind of buffer will help when unexpected circumstances arise. These situations could range from a big medical bill to your laptop dying to being laid off. Aim to keep your emergency fund in a separate account, far from your everyday accounts, so you’re not tempted to spend it.

6. Consider Overdraft Protection and Coverage

Check into what your financial institution offers in terms of overdraft protection or coverage, and see if it makes sense for you. This may involve opening what is essentially a line of credit, so proceed carefully and find out what it will cost you. Make sure you understand what your responsibilities are, including fees and when a withdrawal from a linked account may occur.

The Takeaway

Overdrafting on your savings account can happen, and it can result in fees. There are several smart tactics that you can use to avoid this scenario — and ways to cope if your balance does wind up in negative territory. Planning ahead for these kinds of money-crunch situations is a wise idea as life is full of unexpected expenses.

Choosing a bank account that covers you for a certain amount of overdrafts and/or one low to no monthly or minimum-balance account fees is another option you may want to explore as part of your money management strategy.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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.

FAQ

Can I overdraft my savings account at the ATM?

It depends on whether or not you have opted into overdraft coverage. Banks are required to allow account holders to opt into overdraft protection for ATM and debit cards for point-of-sale transactions . If you don’t opt in, you won’t be able to overdraft. Your bank will deny the transaction and you won’t be charged a fee. If you do opt in, the bank will allow the transaction and charge you an overdraft fee, which is typically about $35.

Can you go negative in a savings account?

Yes, you can go negative in a savings account. This might happen if you write a check for more than you have in the savings account, for instance. If the bank allows the transaction to go through, you end up with a negative balance in your savings account. In this case, if you’ve signed up for your bank’s overdraft coverage, you will be charged an overdraft fee, which is typically around $35. You may owe additional fees as well if you don’t put money into the account right away.

About the author

Sarah Li Cain

Sarah Li Cain, AFC is a finance and small business writer with over a decade of experience. Her work has been featured in numerous publications, including Kiplinger, Fortune, CNBC Select, U.S. News & World Report, and Redbook. Read full bio.

You may also be interested in:

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Can You Overdraft With a Debit Card?

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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.

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.

3.60% APY
Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. 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.
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SOBK-Q224-1902144-V1

If you miss the annual deadline for filing your income taxes, you don’t necessarily need to panic. Missing that tax filing deadline may not mean a big penalty, and you may have more options than you think. However, it can be wise to take steps to remedy the situation as soon as possible.

For 2024 tax returns, the deadline is set for April 15, 2025. If you’re wondering what might happen if you miss that date, read on.

When Is the Tax Filing Deadline?

Usually, the tax-filing deadline is April 15 for the prior year. So if you are filing your return for tax year 2024, April 15 of 2025 would be the due date.

Worth noting: If April 15 falls on a weekend or holiday, the next business day is used. In the case of 2023, April 15 fell on a Saturday, but on Monday, April 17, the Emancipation Day holiday was observed in Washington, D.C. For this reason, the federal tax-filing date was actually on Tuesday, April 18, that year.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

Reasons Why Someone Might Miss the Tax Filing Deadline

Turning in school papers, paying your credit card bill, applying for rebates: Life is full of deadlines that sometimes are missed. Missing the deadline for taxes is no exception. Here are some common reasons why people don’t file on time:

•   You think you don’t owe any money and figure, why bother to file?

•   You think you do owe money but can’t afford to pay your tax bill, even if you deplete your savings account, so you avoid it entirely.

•   You are missing tax documents and didn’t have time to hunt for them or know where to find them.

•   You ran out of time to get organized and file or simply procrastinated.

•   You had trouble understanding taxes, got stressed out by the process, and didn’t get it finished.

•   You couldn’t afford a tax preparer but realized you didn’t know how to file on your own.

•   You got sick or injured or had a family emergency that interfered with filing.

•   You had a change in status (i.e., were in the middle of a divorce or became widowed) and didn’t know how to file in those new circumstances.

Recommended: 7 Tips to Managing Your Money Better

Are There Penalties for Missed Tax-Filing Deadlines?

“What happens if I miss the tax deadline?” you may wonder. The answer is: It can cost you. For individuals, the IRS can levy penalties for a few infractions related to the annual tax filing deadline. Here’s a closer look:

The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. But it’s important to be aware of these finer points:

•   The IRS can penalize a taxpayer for “failure to file,” which occurs when a person fails to file their tax return by the appropriate April date or by the date specified if the person requests and receives an extension. The IRS can levy a penalty of 5% of the taxes owed per month for each month that the taxes are owed after the April filing deadline passes if you didn’t get an extension. This hits a cap of 25% after five months and can’t go any higher.

•   Another infraction when missing the tax deadline is “failure to pay.” This occurs when a taxpayer doesn’t pay the money they owe on their tax return, even if they file on time. The most common punishment for this offense is a late payment penalty that’s equal to 0.5% of the money owed. That may not sound like much, but it’s due every single month, until the tax is paid in full. And that penalty can be as much as 25% of the overdue taxes.

•   What if both “failure to pay” and “failure to file” penalties are applied in the same month? In this case, the “failure to file” penalty will be lowered by the sum of the “failure to pay” penalty applied that month.

•   The IRS can also penalize taxpayers for failure to pay estimated taxes over the course of a year. The penalty will be calculated based on the amount of the underpayment, how long the taxes were left unpaid, and the interest rate the IRS charges.

•   Another reason the IRS may charge a penalty is if your check to the government bounces. You will likely be assessed an additional 2% on the amount owed to the government.

One last note: You may wonder what happens if you file just a day or two late. It does matter! Even a single day late counts against you; the IRS takes deadlines very seriously.

Recommended: Tax-Deductible or Not? A Guide to Year-End Donations

How Do Extensions Work?

There are years when completing your taxes by the April deadline is just too much to accomplish. Preparing for tax season and completing a return isn’t always simple. As a taxpayer’s financial life evolves, filing can become quite complex and time-consuming. And even if you use a professional tax-preparer, April can be an extremely hectic time for them, and they may not be able to fit you in before the big deadline.

So what happens if you’re missing the tax deadline? Don’t just sit back. This is when an extension may come in handy.

•   The way to get one is to file an IRS Form 4868 , which is an application for permission to take an extra six months (until October) to file your taxes. Taxpayers, however, can’t be late when requesting the extension. You have to submit the form by the April deadline.

•   You can file for an extension online or by mail.

•   An extension only applies to filing your return. It’s important to note that you still have to send the IRS a check for your estimated taxes by April 15 or whatever the due date is in a given year.

•   If you take, say, another month to file the complete return and you owe more than you estimated on Form 4868 in April, you may face penalties for the shortfall.

•   Those penalties will typically grow with each month you take to file, even with the extension.

•   If you overestimate the taxes you owe and pay too much by the April deadline, then you’ll receive a refund after you eventually file.

What Deadlines Mean If You’re Owed Money

All of this discussion about deadlines and penalties ignores one issue: What does all of this mean if you expect to get money back from the government in the form of a tax refund?

A tax refund happens if you overpay your taxes over the course of a year, whether through your regular paycheck deductions, quarterly payments, or other means. When you file your return, it’s a chance to get that money back. Tax refunds are quite common — in terms of 2023 returns filed in 2024, the IRS issued 120.9 million refunds to individuals, totaling about $461.2 billion.

All of the deadlines and penalties described so far apply to anyone who owes money to the IRS in a given year. For taxpayers who are owed money by the government, the rules are different. Some specifics:

•   There is no late-filing fee for taxpayers who file returns requesting a refund from prior years.

•   The annual tax filing deadlines have a different significance for people who will receive a refund check from the IRS. For these taxpayers, there’s a real incentive to file taxes ahead of the deadline. The sooner you file, the sooner you’re likely to receive your refund. The IRS says it issues roughly 90% of its refunds in under three weeks, though it warns that some returns require additional review and may take longer as a result.

•   After a return is three years overdue, the IRS will no longer pay that money. The good news is that there is no late-filing fee for taxpayers who file returns requesting a refund from prior years.

It may seem unlikely that people would leave money unclaimed, but consider this: In 2023, the IRS announced a last call for more than $1.5 billion in unclaimed income tax refunds due to individual taxpayers who never got around to filing their federal income tax returns in a past year. Those unclaimed funds eventually become property of the U.S. Treasury.

So, as you see, it could definitely pay to file that return.

Tips for Filing a Late Tax Return

If you missed the tax filing deadline or know that’s going to happen, here’s advice:

•   You can file the IRS Form 4868 requesting an extension by the tax filing deadline. Even if you do file for a tax extension, however, know that any funds owed are still due by the April date, but you may be able to send in the actual return later.

•   Always file your return as soon as possible. You may want to contact a tax professional to assist you with this, or you can reach out to the IRS for help. You might want to call the IRS Tax Help Line at 1-800-829-1040 or visit your local IRS office.

•   If you owe money but can’t pay it all at once, pay as much as you can, as soon as you can, and look into available options, such as payment plans with the IRS. These can give you an extended timeframe in which to pay what you owe. You may want to consult the IRS’ online Payment Plan tool.

Tips for Getting Your Taxes in on Time

Now that you’ve read about how complicated it can be if you miss the tax filing deadline, here are a few tips to help you get those returns in on time:

•   Get organized early. Gather all the records you’ll need to file (such as a W-2) as they become available.

•   Check against last year’s return to see if there were any forms you had then (say, a Form 1099 reflecting interest on a bank account) that you don’t have now. Track down anything that’s missing.

•   Create or log into an account at IRS.gov to make tracking your progress easier. You can make payments there, too.

•   Make sure you’ve withheld enough money so that you don’t owe too much when you file. If you do wind up having to pay a significant amount, develop a plan early to pay it on time or as close to on time as possible.

•   Know your banking details or open a bank account so that you can use direct deposit, which is usually the fastest way to get a refund.

The Takeaway

Life happens: Sometimes, despite your best intentions, deadlines get missed. When that happens with tax filing, though, there can be some very real financial penalties involved. That’s why it’s important to know when your tax returns are due and then do everything in your power to file on time.

If you can’t get your return finished by Tax Day in mid-April, know the right moves to request an extension and possibly look into a payment plan for money owed that you can’t pay all at once. Having your bank account information handy, especially when you are due a refund, can be valuable.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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.

FAQ

When is the tax deadline?

The deadline for tax-filing is usually April 15 for the previous year’s taxes. However, if that date falls on a weekend or holiday, it will move forward by up to a few days.

How long are the tax extensions given if I miss the tax deadline?

The usual tax extension is six months. However, this is a longer timeline to file your return. Funds owed are still due in April. It can be wise to pay as much as possible towards your total debt to the IRS by Tax Day, and then send the remainder as soon as possible, perhaps via a payment plan with the IRS.

What happens if you miss the tax deadline by one day?

The IRS takes deadlines seriously. For every month that you are late filing your return, you will be assessed a penalty on the total amount owed. That wording of “a month” does not mean the first 30 days after the deadline are a kind of freebie during which you can send in your return and any payment due without penalty. Rather, being even a single day late puts you into that “one month” late category.

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 11/12/25. 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.
We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
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This content is provided for informational and educational purposes only and should not be construed as financial advice.

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.

SOBNK-Q424-074

If you need cash to cover an emergency expense, like a car repair or medical bill, a payday loan or an installment loan are two options you may consider. However, these two loans are different in key ways that are important to understand before making a choice between them. Namely, a payday loan tends to have a short turnaround before you need to pay it off, and typically offers extremely high interest rates.

We’ll explain more about the features of each loan type, and why people choose payday loans vs installment loans.

Understanding Payday Loans

There is no set definition of a payday loan. Generally speaking, they are short-term loans that are due to be paid back on your next payday. Payday loans don’t charge interest per se, but they do charge high fees.

Payday loans are typically for relatively small amounts. In fact, many states limit the amount of a payday loan to $500. Borrowers usually repay the loan in a lump sum on their next payday. The specific due date is often between two and four weeks from when the loan was made.

To repay the loan, borrowers must make out a post-dated check to the lender for the full balance of the loan plus any fees. As an alternative, borrowers can give permission for the lender to electronically debit the funds from their bank account on a certain date. If the borrower doesn’t repay the loan by the due date, the lender can cash the check or debit the funds. Either way, the lender gets paid.

In some states, borrowers may be able to roll over the amount of the loan, paying only the fees when it comes due, while the lender pushes out the due date.

To qualify for a payday loan, you generally need to be 18 years or older and have proof of income, a valid ID, and an active bank, credit union, or prepaid card account.

Risks of a Payday Loan

The risks of payday loans include sky-high fees and the potential for falling into a cycle of debt. Many states set a limit on payday loan fees, but they can still run from $10 to $30 for every $100 borrowed. Consider that a $15 fee for $100 is the equivalent of a nearly 400% APR.

By comparison, the average personal loan interest rate as of December 2024 is 12.33%, according to the Federal Reserve of St. Louis.

Pros and Cons of Payday Loans

Before signing on for a payday loan, carefully consider the advantages and disadvantages.

Exploring Installment Loans

When a borrower receives an installment loan, their lender will give them a lump sum upfront, which the borrower has to repay in fixed payments with interest over a set period of time.

Personal loans are a good example of an installment loan.

They can range in size from a few hundred dollars to $100,000, and the money can be used for any reason, from covering unexpected expenses or consolidating debt to remodeling a home. Repayment terms may stretch from a few months to a few years.

How Installment Loans Work

During the loan application process, lenders will consider factors such as a borrower’s credit score and reports, their income, and the amount and length of the loan.

Typically, borrowers with good credit scores will receive the best terms and interest rate options. These loans may have variable interest rates or fixed, meaning they don’t change over the life of the loan.

Installment loans may be secured or unsecured. Unsecured loans, such as unsecured personal loans, do not use collateral to back the loans. Secured loans do require collateral and may offer borrowers a lower interest rate since they present less risk to the lender.

Pros and Cons of Installment Loans

Personal installment loans tend to offer borrowers the option of borrowing at lower rates than are available through revolving credit or payday loans. However, it’s still important to consider disadvantages in addition to benefits.

Pros and Cons of Installment Loans

Eligibility requirements vary by lender, but generally speaking, you’ll need:

•   Proof of identity

•   Proof of income

•   Proof of address

Your credit score is an important factor, as it helps determine the interest rate you’re offered.

Key Differences Between Payday Loans and Installment Loans

By now you’ve likely got a good sense that installment loans and payday loans differ in some important ways. Here’s a side-by-side comparison.

Choosing the Right Loan for Your Needs

As you can see, there are important differences between payday and installment loans. Not sure which sort of loan is right for you? A good place to start is to determine what your short- and long-term financial goals are and which type of loan best aligns with them. Interest rates, terms, fees, and repayment options are all factors to consider.

You’ll also want to assess your repayment capabilities. Can your income cover your normal expenses plus the loan debt? Finally, check your credit score and the eligibility requirements of potential lenders to see where your application is more likely to be approved.

The Takeaway

Payday loans and installment loans both provide quick cash to cover emergency expenses. However, because of their astronomical fees — equivalent to a 400% APR — payday loans fall under the heading of “predatory lending.” On the other hand, installment loans vary in their terms but generally are a much better deal, provided that you meet eligibility requirements.

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

FAQ

Are payday loans installment loans?

No, payday loans usually require you to pay off the loan amount in full on your next payday, usually two to four weeks from when the loan was made.

What is an installment loan?

When you take out an installment loan, you immediately receive the money you’re borrowing. You then pay it back to your lender in a series of regular fixed payments known as installments.

Are personal loans installment loans?

Personal loans are one type of installment loan. Money from the loan can be used for any purpose, such as debt consolidation or a home remodel.

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

SOPL-Q424-052

Applying for a personal loan is a big financial decision — and it’s important to know exactly what you’re getting into before you sign any paperwork. Finance has vocabulary that may be unfamiliar to some people, which can make it difficult to understand.

This easy-to-reference glossary may help you read your new loan agreement with confidence and understand what each clause of the document means. From APR to cosigners vs. co-borrowers, we’ve got you covered.

What Is a Personal Loan?

Before we dive in, a quick bit of review to get us started: What is a personal loan? A personal loan is a closed-end loan that is disbursed in one lump sum and repaid in equal installments over a set amount of time.

There are many types of personal loans, and it’s common for them to be unsecured, which means there’s no collateral required.

People use personal loan funds for many reasons, from home renovations to debt consolidation to vacations.

What Are the Main Terms Used in a Personal Loan Agreement?

Understanding personal loan terminology will help you navigate the loan process with confidence.

Amortization

Amortization refers to listing the loan’s repayment schedule over the life of the loan, which the lender does when processing the loan. An amortization schedule lists the amounts of principal, interest, and escrow (if included in the loan) that each payment consists of.

A loan may be re-amortized, also. For example, the remaining repayments can be recalculated if you’re thinking of making a lump sum payment on the loan. You would be able to see the change in interest owed over the life of the loan and how much quicker the loan could possibly be paid in full. With this information, you could determine if the extra payment would be worthwhile for your financial situation.

Annual Percentage Rate

An annual percentage rate (APR) is the percentage of the loan principal you can expect to pay in interest over the course of a single year, including any additional fees that might be charged by the lender.

Application Fee

Some loans may require you to pay a fee when you apply for the loan. Not every lender charges an application fee, though, so it’s worth shopping around to find one that doesn’t.

Automatic Payment

Many lenders make it possible to set up an automatic bill payment that will be taken directly from your bank account on the loan’s monthly due date. This strategy can simplify your financial housekeeping — but make sure you’ll have enough funding in the account each month to avoid an overdraft.

Borrower

The borrower is the person or party who is borrowing money as part of the loan agreement. (Most likely, that’s you.)

Collateral

Collateral is an asset a borrower offers to secure a loan, making it less risky for the lender. For example, in a mortgage, the house is used as collateral — which is why a bank can seize and sell a home if the buyer goes into default, a process called foreclosure. Similarly, in an auto loan, the car is used as collateral, which is why it can be repossessed by the bank if the borrower fails to make the loan payments.

Co-borrower

If a loan applicant doesn’t have strong enough financial credentials to be approved for a loan on their own, they might choose to add a co-borrower to the application. This person, ideally with a more robust financial profile than the primary borrower, will also be financially responsible for the loan.

Co-borrowers are applying for a loan together and typically have shared ownership of the borrowed money or asset it purchased. For example, you and your spouse might apply as co-borrowers on an auto loan for a jointly owned car.

Cosigner

Similar to a co-borrower, a cosigner can help bolster the primary loan applicant’s chances of approval. A parent may be a cosigner on their child’s student loans. This person will be responsible for making the loan payments if the primary borrower fails to do so, but they have no ownership of the loan proceeds or asset they purchased.

Credit Agency

A credit agency, also known as a credit bureau, is a company that compiles information on individuals’ and businesses’ debts. These are the companies that calculate and report credit scores to creditors that make an inquiry.

The three main credit bureaus are Equifax, Experian, and TransUnion. You can request a full credit report from each of them once a week at no charge, which you can access at AnnualCreditReport.com .

Recommended: Everything About Tri-Merge Credit Reports

Credit History

Credit history refers to the broad scope of your experience with debt. Positive credit history is one that shows timely payments on debts owed to creditors. Negative credit history will reflect missed or late payments on debts. Some people, typically young people who have never taken on debt, will have no credit history. However, there are ways to build credit over time.

Credit Report

A credit report is a document that details your credit history, including both open and closed accounts, on-time or late payment history, accounts in default or collections, bankruptcies, liens, judgments, and other financial information. It’s important to check your credit reports regularly to detect any incorrect information and correct it as early as possible.

Credit Score

Your credit score sums up your creditworthiness with a numeric score.

Lenders most commonly refer to your FICO® Score, which can range from 300 to 850. VantageScore, which uses the same scoring range, is also used by lenders, but less commonly.

The higher your credit score, the less of a credit risk lenders tend to assume you will be. The average credit score of U.S. consumers is 717 (FICO).

Debt Consolidation

Debt consolidation is an approach to debt repayment wherein you take out one larger debt — like a personal loan — in order to pay off multiple, smaller debts such as credit cards. Doing so can help simplify your monthly finances by having fewer payments to make. You could potentially pay less in interest than you would on the former debts or lower your monthly debt payments, making it easier to meet your financial obligations each month.

Default

Defaulting on a loan means failing to repay it as agreed (for example, not making payments at all), and can lead to a loan going into collections.

Fixed Interest Rates

Fixed interest rates are those that don’t change over time. You’ll pay the same set amount of interest on the loan for its entire term. Comparing rates on personal loans from several lenders is a good way to find a rate that works with your financial situation.

Floating Interest Rates

Floating interest rates rise and lower in accordance with the market. They might also be called adjustable or variable interest rates.

Guarantor

A guarantor is similar to a cosigner or co-borrower in that they can bolster the strength of a loan application. Like a cosigner, a guarantor has no ownership of the loan proceeds or asset purchased with them. The biggest difference between a cosigner vs. guarantor is that a guarantor is only called upon to repay the loan if the primary borrower goes into default.

Gross Income

Your gross income equals the money you earn each year from working, investment returns, and other sources before deductions or withholding.

Installment Loans

Installment loans are loans that are repaid in regular monthly installments. Personal loans, auto loans, and mortgage loans are examples of installment loans.

Interest Rate

The interest rate is the base percentage charged when borrowing money. It does not include fees or other charges that may be associated with a loan.

Hard Credit Check

A lender will perform a hard credit check, or hard inquiry when you apply for a loan or open a line of credit. A large number of hard credit checks in a short period of time can have a negative effect on your credit score.

Late Payment

A late payment is a debt payment made after its due date. Since payment history is one of the most important factors used to calculate your credit score, late payments can have a major negative impact on your credit score.

Lender

The lender is the party lending the money, whether that’s a bank or credit union, or a friend or family member.

Line of Credit

If you don’t need a lump sum of money at one time, a line of credit might be an option when looking for financing. Lines of credit have limits, but the borrower can draw funds as needed instead of all at once. The borrowed funds can be repaid and borrowed again, up to the credit limit.

Recommended: Personal Loan vs Personal Line of Credit

Loan Agreement

The loan agreement is the legally binding contract you sign with your lender to initiate a loan. It will include details about each party’s rights and responsibilities. For the borrower, it may include the loan amount, interest rate, APR, potential fees and penalties, the payment schedule, and other information. It’s important to read the loan agreement carefully and ask questions about anything that you don’t understand.

Origination Fee

Some lenders might charge an origination fee when a loan is initiated — an up-front fee that remunerates the lender for the work of setting up the loan. These fees are typically a percentage of the principal and vary by lender.

Payday Loans

Payday loans are a type of short-term loan, typically for small amounts, meant to fill in a financial gap until the borrower’s next payday.

Despite their relatively low balances, these loans can be exorbitantly expensive. The Consumer Financial Protection Bureau says their rates can typically hover around 400% APR. Payday loans are usually worth avoiding in favor of other, lower-cost loan options.

Payment Terms

The payment terms of a loan are the terms and conditions the borrower agrees to when signing a loan agreement. Your payment terms can include how long the loan will last, how much will be repaid each month, the amount that can be charged for late payment, and other loan details.

Prepayment Fees

Prepayment fees, or penalties, are sometimes charged by lenders when a borrower pays their loan in full before its final payment due date. The lender will not make as much profit from the loan if the borrower pays it off early, and a prepayment fee is a way to recoup some of that loss.

Principal

The principal amount of a loan is the amount borrowed, not including interest or fees. For example, if you take out a personal loan for $10,000, that $10,000 is the principal amount. You’ll pay the lender more than that over the lifetime of the loan with interest factored in.

Revolving Credit

Revolving credit allows you to borrow funds as needed, up to your credit limit, making at least a minimum payment each month you have a balance. Credit cards are a common form of revolving credit.

Secured Loan

A secured loan requires the borrower to pledge collateral, an asset owned by the borrower, to the lender as a guarantee that they’ll repay the loan. If the borrower defaults on the loan, the lender can take ownership of the asset in repayment of the loan. Common examples of secured loans are mortgages or auto loans.

Unsecured Loan

The foundation of unsecured personal loans is trust. The lender trusts that the borrower will repay the loan without requiring collateral to back up that promise. Unsecured loans can come with higher interest rates than secured loans, however, because they present additional risk to the lender.

The Takeaway

When you’re acquainted with personal loan vocabulary, you have a better chance of getting a personal loan that fits your unique financial situation and needs, and understanding your loan agreement before signing it.

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

FAQ

What is personal loan terminology?

Personal loan terminology is terms and definitions of words and phrases you might see in a loan agreement or other documents related to a personal loan.

What are the main terms used in a personal loan agreement?

Common references in a personal loan agreement are principal, interest, APR, origination fee, borrower, and lender.

What is the definition of a personal loan?

A personal loan is a closed-end loan disbursed in one lump sum and repaid in equal installments over a set amount of time.

Photo credit: iStock/nd3000

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

SOPL-Q424-014

Margin trading refers to trading or investing using funds borrowed from a brokerage. Investors should understand that trading on margin operates like a double-edged sword; while it allows you to potentially multiply your gains, it can also multiply your losses.

At its core, margin trading involves borrowing from your broker to increase your purchasing power. This allows you to buy well beyond the actual cash you have at your disposal. We’ll cover the mechanics of how this works, as well as the risks and benefits of undertaking such a strategy.

Understanding Margin Trading

Margin trading means borrowing funds from your broker and using those funds to buy securities. Any borrowed funds must be repaid, with interest, regardless of whether or not you earn a profit on your trade. If you’re wondering about the difference between leverage vs. margin, you can think of margin as a form of leverage.

When investing – be it online investing or otherwise – with margin, your broker will require you to post cash collateral to match a percentage of the funds you borrowed. This is known as the margin, and the exact amount is set by your broker, the type of security traded, and prevailing market conditions.

Risks and Benefits of Margin Trading

Here’s a rundown of some of the most obvious risks and benefits to margin trading:

Benefits of Margin Trading

Some of the benefits of margin trading include:

Added liquidity: Assuming you remain inside of acceptable maintenance margin requirements, margin trading grants additional buying power to smaller cash balances, which can be useful if you don’t want to liquidate existing holdings.

No set repayment schedule: Unlike standard fixed loans, there’s no repayment schedule for repaying your margin loan. The interest accrues while your balance remains outstanding, and is only repaid once the position is closed.

Risks of Margin Trading

Some of the risks of margin trading include:

Debt risks: Trading or investing with borrowed money has its risks, as you could end up in debt to your broker.

High interest expense: Interest rates on margin loans can range from low single digits to as high as 11% or more, depending on your broker and the size of your margin balance. At best, this is a drag on investment returns; at worst, an additional cost you have to pay on a loss.

Risk of margin calls: If at any point, the value of your investments fall beneath a broker’s posted margin requirements, you will be required to deposit additional collateral to cover the shortfall. This is known as a margin call. Failure to meet a margin call can result in a forced sale of your security, additional charges, and other penalties as dictated by your brokerage firm’s policies.

Is Margin Trading Ever Risk-Free?

Under no circumstances is margin trading ever considered free of risk. The core precept of all investing involves risk, and leveraged strategies like margin trading increase risk exposure.

Unlike cash accounts, which limit your losses to the value of your initial investment, margin accounts can result in losses that exceed the value of your initial deposit.

Is Margin Trading a Good Idea for You?

Margin trading isn’t for all investors, and its suitability depends on both the scenario as well as the experience and knowledge of each individual investor.

Trading on margin can be useful when you have a high conviction short-term trade idea. It can also provide the benefit of additional liquidity when much of your cash is tied up in existing investments that can’t be quickly unwound.

When considering margin trading, investors need to be willing and able to absorb any potential losses associated with this strategy. Make sure you fully understand the dynamics of each trade before opening a margin position.

Margin Trading With SoFi

Margin trading allows traders and investors to increase their purchasing power by using borrowed funds to buy securities. But it’s critical that traders and investors keep in mind that using margin can swing both ways – that is, it can allow them to invest more money, but it could also lead to increased losses.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

FAQ

What are the downsides of trading on margin?

Trading on margin involves a number of possible downsides, including added interest costs, heightened portfolio volatility, and magnified losses that may exceed the value of your initial investment.

Do some people make a lot of money trading on margin?

Trading on margin can amplify your potential investment returns thanks to the added buying power it offers. However, this multiplier effect swings both ways and will amplify the size of your loss, should the market move against you.

Is margin trading a good long-term investment strategy?

Margin trading is a form of leveraged trading and therefore not recommended for long-term investors. Over extended periods of time, there’s a heightened risk that market volatility may force a margin call. Also, the added interest expense incurred by margin loans can act as a drag on your investment returns.

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