How It Works is an ongoing series here on our blog, exploring and demystifying the topics we hear most about 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 prices to members because we pride ourselves on our efficiency. As is the case any time a company implements a new or different way of doing things, people may wonder: “Is there a problem?”
We’re here today to explain how we make money – something we believe every consumer should know about the companies they deal with, whether in finance or any other sector. Since we offer a diverse range of products, we will segment them by product area.
Our lending products
First, our lending products (which are student loan refinancing, personal loans, private student loans, and home loans). There are many different ways that companies make money from lending. Some make their money from origination fees and get their money when a borrower takes out a loan, others by holding the loans and making money from the interest the borrower pays, and others by selling the loans afterward. . They were offered to investors while keeping some ownership for themselves.
We use a combination of the latter two approaches at SoFi, but we make money primarily the third way, through securitization and entire loan sales. The buyers in these securitizations are institutions such as pension and insurance funds, as well as other asset managers, who pay premiums in advance of potential future cash flows from the loans. We are able to make money through securitization because investors trust the quality of our loans.
This enables us to access funds at highly competitive rates – often, on par with large commercial banks with large balance sheets – without “selling out” our relationship with our members.
We then pass these savings on to our customers by offering them loan products at an interest rate that is lower than the current interest rate, but higher than our cost of financing. This represents a win-win: The member saves money on their loan payments and SoFi makes enough money to continue doing what it does.
Who Buys SoFi Loans?
Who Buys SoFi Loans? Investors love pension and insurance funds, as well as other asset managers. They are willing to pay a premium above the original value of the loan in advance of potential future cash flows.
We sell these loans in two ways: (1) “whole loan sales” where we sell a group (called a “pool”) of the entire loans to investors, and (2) “securitization” where we pool the loans together and pay out their combined cash flows to specific groups of investors (called “slides”) in a specified sequence. Having multiple ways to sell our loans ensures we obtain cost-effective financing and reduces the risk of market disruption to our business.
To break down the process more simply, here’s an example: Let’s say SoFi offers a student loan that pays an annual percentage rate (APR) of 5% for five years with the principal due at the end of those five years. For example, if borrowers were originally paying an APR of 7%, they are now saving a whopping 2% APR each year. Nice – good!
The total loan amount is 125% of the original loan amount (5% APR x 5 years interest; 100% of the loan principal). We sell the loan to investors at 105%. To bear the risk of repaying the loan, investors will receive 20% (125% – 120%) over five years; SoFi will receive a 5% deposit to cover the cost of borrowing money, its operations and the membership perks it offers to its clients. Nice double!
Our investment products
SoFi Invest® does not charge any commissions for buying or selling stocks, ETFs, or fractional shares in our active investing brokerage accounts. Our automated investing service also doesn’t charge SoFi management fees. This is our robo-advisor product, which automatically builds and rebalances portfolios for members.
We instead earn revenue in several ways – all of which are popular and help members avoid SoFi fees:
• SoFi lends equity. Borrowers are usually short sellers, or investors betting that the prices of certain stocks will fall. They compensate SoFi and our partners with loan fees for the shares borrowed.
• We also make money from sending client orders to external market makers – a practice known as payment for order flow. Market makers execute client orders, and regulations require them to do this by providing “best execution.” Recommended: What is Pay for Order Flow?
SoFi also makes money through its suite of ETFs that charge an annual management fee. Below is a table of their expense ratios, or the percentage deducted from assets each year. So, if the expense ratio is 0.19%, this means you are charged $1.90 annually for every $1,000 invested.
| Name of the ETF | Index ETFs | Total expenses ratio | Net expense ratio |
|---|---|---|---|
| Sophie select 500 | Sfi | 0.19% | 0.05% |
| Sophie Next 500 | SFX | 0.19% | 0.06% |
| Sophie Social 50 | SFYF | 0.29% | 0.29% |
| SoFi Boost 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 funds in the accounts and at the merchant with each debit card swipe.
But unlike most banks, SoFi has lower costs of doing business online, so we pass these savings on to our members in the form of higher interest paid on deposits – and we don’t charge account fees on top of that.
Our life insurance
We also offer term life insurance through our partnership with Ladder and spirit. For life insurance, we earn a set marketing fee each time a member submits an application for life insurance.
Sophie Invest®
Investments are not FDIC insured • Not bank guaranteed • May lose value
SoFi Invest comprises two distinct companies, with several products and services offered to investors as described below: Individual client accounts may be subject to terms applicable to one or more of these platforms.
1) Investment and robo-advisory services are provided by SoFi Wealth LLC, an SEC-registered investment advisor (“SoFi Wealth”). SoFi Wealth LLC’s brokerage services are provided by SoFi Securities LLC.
2) Active investment 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 SoFi Wealth Investment Advisors nor 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 in the prospectus, which contains the fund’s investment objectives, risks, charges, expenses, and other relevant information. You can obtain the prospectus from the fund company’s website or by email to customer service at [email protected]. Please read the prospectus carefully before investing.
ETF shares must be bought and sold at market price, which can differ significantly from the fund’s net asset value (NAV). Investment returns are subject to market fluctuations and shares may be worth more or less than their original cost when redeemed. Diversifying ETFs will not protect against loss. The 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 loaned based on a Master Securities Lending Agreement. Members are eligible to receive a monthly payment if Apex lends any securities. Payment is a percentage of the total net proceeds earned, which is subject to change. There are risks associated with equity lending, for a detailed review of these risks, please see the Important Disclosure. Members can 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, Member NA Member FDIC.
SoFi Student Loan Refinancing
SoFi Student Loans are originated by SoFi Bank, Member NA of the Federal Deposit Insurance Corporation (FDIC). Smooth #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. The lowest rates are 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 federal student aid options before you consider any private loans, including ours. Read the FAQ. 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 country restrictions apply. Not all products are available in all states. See SoFi.com/eligibility 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 qualifying status, reside in the United States, and meet SoFi’s underwriting requirements. SoFi Personal Loans may be used for any legitimate personal, family, or household purposes and may not be used for post-secondary education expenses. The minimum loan amount is $5,000. Additional terms and conditions may apply. The lowest rates are reserved for the most creditworthy borrowers. SoFi personal loans funded in 2023 averaged about $33,000. Information current as of 10/28/24. SoFi Personal Loans are originated by SoFi Bank, Member NA Member FDIC. Namls #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific licensing details.
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