Key Terms to Know About Credit and Lending
APR stands for Annual Percentage Rate. It is the annual rate that borrowing money will actually cost you, inclusive of standard fees and interest rates. It is shown as a percentage of the total amount of money you are borrowing. Because of that, it is one of the most helpful metrics you can use to compare the price of different loans. Learn more about APR.
Collateral is a property or other asset that a borrower offers as a way for a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can take the collateral to help recover losses from lent money that won’t be paid back. Common examples of collateral are houses, or cars. Most personal loans through LendingClub do not require collateral.
Credit utilization, or usage, is the ratio of your credit card and other revolving credit balances to your credit limits. In other words, it’s what you owe versus what you could possibly borrow on your credit cards, to show how much of it you’re using. It is an important component of your credit score, and the general rule of thumb is to keep it under 30%. Learn more about credit utilization and how to improve it.
Debt-to-Income (DTI) Ratio
Your DTI ratio is a number that represent your total monthly debt obligations divided by your total gross (before tax) monthly income. It is a very important component of your credit score, and the general rule of thumb is to keep it under about 40%. Learn more about DTI, how it affects your credit score and what you can do to improve it.
Hard Credit Inquiry
A hard inquiry is a check into your credit report by a company or individual that typically occurs when you have applied for a credit card, loan, home mortgage, or car loan or other credit. It can negatively impact your credit score. Learn more about hard inquiries.
Soft Credit Inquiry
A soft credit inquiry is a check into your credit report by a company or person that does not affect your credit score. When you check your loan options through LendingClub, we use a soft credit inquiry, so you can see if a loan is right for your situation before you choose to take one out. Another example of this is when you are preapproved for a loan. Learn more about soft inquiries.
Interest is the money you pay regularly, at a particular percentage rate, in order to borrow money. In other words, it's the price of borrowing money. For example, if your interest rate is 25% and you borrow $1000, you will owe $1250 if you pay it back in the first year. That means you’d be paying $250 to borrow $1000, as long as the interest isn’t compounding.
Fixed Interest Rate
A fixed interest rate loan is a loan where the interest rate never changes over the life of a loan. This allows borrowers to accurately predict their future payments. Personal loans through LendingClub have a fixed interest rate.
Variable Interest Rate
A variable interest rate is an interest rate on a credit card or loan that may change over time.
Compounding interest is when you are paying interest on interest you owe, rather than what you borrowed, also known as the principal. If you are paying minimums on your credit card, your interest could be compounding, meaning you are paying interest on interest.
A personal loan through LendingClub has a fixed interest rate that never increases.
A loan term is the amount of time agreed upon in a loan contract for the loan to be paid off. For example, LendingClub provides access to three- and five-year personal loan terms.
Rather than being backed by an asset such as a car or home, an unsecured loan does not use collateral. Credit history, income, and other attributes are considered to determine a person’s creditworthiness for unsecured credit. Most personal loans through LendingClub are unsecured loans.
A secured loan is backed by a valuable asset (such as a car or property) which is used as collateral. Some loans through LendingClub are secured.