How It Works is an ongoing series here on our blog, exploring and demystifying topics about which we hear often from our members and the public. Today, we’re taking a look at how SoFi makes money.
[UPDATED 11/21/2024 to include additional information on how SoFi Invest makes money.]
SoFi is able to offer products and services at competitive rates to members because we pride ourselves on our efficiency. As with any time a company implements a new or different way of doing things, people may wonder, “Is there a catch?”
We’re here today to explain how we make money—it’s something we think every consumer should know about the companies they do business with, in finance or any other sector. Since we offer a variety of products, we’ll break this down by product area.
Our Lending Products
First, our lending products (that’s Student Loan Refinancing, Personal Loans, Private Student Loans, and Home Loans). There are many different ways companies make money in lending—some make their money on origination fees and get paid when a borrower takes a loan, others by holding the loans and making money from the interest the borrower pays, and others by selling loans after they’re made to investors while maintaining some ownership for themselves.
We employ a blend of the last two approaches at SoFi, but primarily make money the third way, through securitizations and whole loan sales. The buyers in these securitizations are institutions like pension and insurance funds, as well as other asset managers, who pay a premium upfront for the future potential cash flows from the loans. We’re able to make money through securitizations because investors trust the quality of our loans.
This enables us to have access to funds at a very competitive rate—often, on par with large commercial banks with big balance sheets—without “selling” our relationship with our members.
We then pass those savings on to our consumers by offering them loan products at an interest rate below their current rate, but above our cost of financing. This represents a win-win: the member saves money on their loan payments and SoFi makes enough money to keep doing what it’s doing.
Who Buys SoFi’s Loans?
Who buys SoFi’s loans? Investors like pension and insurance funds, as well as other asset managers. They are willing to pay a premium above the principal value of the loan upfront for the future potential cash-flows.
We sell these loans in two ways: (1) “whole loan sales” where we sell a group (called a “pool”) of loans in their entirety to investors, and (2) “securitizations” where we group the loans together and their combined cash flows pay specific groups of investors (called “tranches”) in a specific sequence. Having multiple ways to sell our loans ensures we have cost-effective financing and reduces the risk that the market disrupts our business.
To break the process down more simply, here’s an example: let’s say SoFi extends a student loan that pays 5% annual percentage rate (APR) for five years with the principal due at the end of those five years. If our borrowers were paying 7% APR originally, for example, they now save a whopping 2% APR each year. Nice!
The value of the total loan is 125% of the original loan amount (5% APR x 5 years in interest; 100% in principal). We sell the loan to investors for 105%. For taking on the risk of loan repayment, investors will get 20% (125% – 120%) over five years; SoFi will get 5% upfront to cover its cost of borrowing funds, its operations, and the memberships perks it offers to its clients. Double nice!
Our Investment Products
SoFi Invest® charges no commissions for the buying or selling of stocks, ETFs or fractional shares in our Active Investing brokerage accounts. Our Automated Investing service also doesn’t charge a SoFi management fee. This is our robo-advisor product, which builds and rebalances portfolios automatically for Members.
We instead earn revenue in a variety of ways–all of which are common and help Members avoid SoFi fees:
• SoFi lends out shares. The borrowers are typically short sellers, or investors who bet that prices of certain stocks will decline. They compensate SoFi and our partners with a loan fee for the shares that are borrowed.
• We also earn money from sending customer orders to third-party market makers–a practice known as payment for order flow. The market makers carry out the customer orders, and regulatory rules require they do so by delivering “best execution.” Recommended: What Is Payment For Order Flow?
SoFi also makes money through its suite of ETFs that charge management fees annually. Below is a table of their expense ratios, or the percentage subtracted from assets each year. So if the expense ratio is 0.19%, that means $1.90 is charged each year for every $1,000 invested.
| ETF Name | ETF Ticker | Gross Expense Ratio | Net Expense Ratio |
|---|---|---|---|
| SoFi Select 500 | SFY | 0.19% | 0.05% |
| SoFi Next 500 | SFYX | 0.19% | 0.06% |
| SoFi Social 50 | SFYF | 0.29% | 0.29% |
| SoFi Enhanced Yield | THTA | 0.49% | 0.49% |
*SoFi ETFs are distributed by Foreside Fund Services, LLC.
Our Deposit Account
With SoFi Checking and Savings, we earn a small amount of interest on the money in the accounts and from the merchant with each swipe of the debit card.
But unlike most banks, SoFi has lower costs from doing business online, so we pass those savings on to our members in the form of higher interest paid on deposits—and we don’t charge account fees on top.
Our Life Insurance
We also offer term life insurance through our partnership with Ladder and Ethos. Forlife insurance, we earn a set marketing fee every time a member submits an application for life insurance.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
For members enrolled in the Apex Fully Paid Securities Lending Program, securities are lent based on the Master Securities Lending Agreement. Members are eligible to receive a monthly payment if Apex lends out any securities. The payment is a percentage of the total net proceeds earned, which is subject to change. There are risks with share lending, for a detailed review of those risks please review the Important Disclosure. Members may opt out of the Securities Lending Program at any time by sending us a message via chat.
SoFi Checking and Savings
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Personal Loans
Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi’s underwriting requirements. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. Additional terms and conditions may apply. Lowest rates reserved for the most creditworthy borrowers. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 10/28/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details.
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