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Debt-to-income ratio measures your monthly debt payments against your income. Improve it by paying down debts, increasing income, or avoiding new debt.

<p>Your debt-to-income ratio (DTI) is a comparison of your income to your current debt load and it plays a big factor in how lenders determine your borrowing risk. </p><p>When you apply for a personal loan or line of credit, lenders look at more than just your credit history and credit scores. They also want to know how much debt you’re carrying—and if you can comfortably afford to take on more. That’s where your debt-to-income ratio comes in. </p><h2><b>What is debt-to-income ratio?</b> </h2><p>Your debt-to-income ratio compares your debt payments to your monthly gross income or how much you earn each month before taxes and other deductions. Your DTI ratio gives lenders a clearer picture of your current debt and income, and is used to determine how much money you can afford to borrow responsibly. </p><p><b>Examples of debt that lenders will consider: </b></p><ul><li><p>Minimum credit card payments </p></li><li><p>Loan payments (such as <a href="https://www.lendingclub.com/auto-refinancing">car payments</a>, student loan payments, <a href="https://www.lendingclub.com/personal-loan">personal loans</a>, and other loan payments) </p></li><li><p>Monthly alimony or child support payments </p></li><li><p>Rent payment or mortgage payments </p></li><li><p>Other debts included in your credit report </p></li></ul><p><b>Examples of debt lenders don’t consider: </b></p><ul><li><p>Utilities like gas and electricity </p></li><li><p>Cable bills </p></li><li><p>Phone bills </p></li><li><p>Health insurance costs </p></li><li><p>Groceries </p></li><li><p>Entertainment and other variable expenses </p></li></ul><p>Lenders typically divide your DTI ratio into two components: front-end DTI and back-end DTI. </p><p><b>Front-end DTI</b> </p><p>Also known as a housing ratio, your front-end ratio includes housing expenses such as monthly mortgage payments, property taxes, monthly homeowner’s association dues, and homeowner’s insurance. </p><p><b>Back-end DTI</b> </p><p>Your back-end ratio includes your front-end DTI plus all your other monthly DTI debt (credit card bills, car loan, etc.) While both are important, most lenders focus on your back-end DTI because it presents the most accurate account of your recurring monthly costs. </br> </br>Remember, it&#39;s essential to be as accurate as possible when reporting your income to lenders. And don’t forget to include any income from bonuses or overtime pay. Most lenders verify income during the <a href="https://www.lendingclub.com/resource-center/personal-loan/steps-to-how-to-take-out-a-personal-loan"><u>loan application process</u></a>, so if your numbers differ from theirs, it can delay the process or cause your loan application to be declined. </p><h2><b>Why is DTI ratio important?</b> </h2><p>Along with your credit history and credit score, DTI is one of the most critical measurements of your creditworthiness in the eyes of lenders. It helps them determine how responsible you are with your debt. Having a good DTI ratio matters for a few key reasons: </p><h3><b>1. It can help with home buying.</b> </h3><p>Your DTI has a significant impact on your ability to take out a home loan. <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/">A DTI of 43%</a> </br>is typically the highest ratio one can have to qualify for a mortgage, but mortgage lenders generally prefer that borrowers have a DTI of 36% or less. </p><h3><b>2. It can help determine your approval for a personal loan.</b> </h3><p>When it comes to personal loans, lenders often look for borrowers with a DTI no higher than 40%. However, sometimes exceptions are made for borrowers with a higher DTI but generally good credit. </p><h3><b>3. It can help you qualify for better interest rates.</b> </h3><p>If you’ve lowered your DTI since you last took out a loan, such as a personal or auto loan, you may be able to qualify for a lower interest rate through refinancing. </p><h3><b>4. It provides a snapshot of your overall financial health.</b> </h3><p>If your DTI ratio is below 36%, it’s a pretty good indicator that you can take on and manage new debt responsibly. If your DTI is over 43%—and particularly if it’s over 50%—you’ll likely need to pay down some debt or find other sources of income before lenders will approve you for a mortgage or personal loan. </p><h3><b>5. It works in tandem with your credit score.</b> </h3><p>Though your DTI does not directly impact your credit score, it is closely associated with your credit utilization. If your DTI and credit utilization ratios are both low, you’ll have a better chance of being approved for loans. </br> </br><b>Keep in mind: </b>most lenders do not advertise maximum debt-to-income ratios, but instead provide guidelines that offer some flexibility. For example, a common guideline is the 28/36 rule used by some lenders to assess borrowing capacity. According to this rule, a household should only spend 27% of its gross monthly income on housing expenses, and no more than 36% on debt expenses—like car payments and credit cards. </p><h2><b>How to calculate debt-to-income ratio in 3 steps</b> </h2><p>Since lenders use your DTI to determine whether or not you’re capable of taking on more debt, it’s a good idea to know your DTI before you apply. Thankfully, the formula is pretty straightforward: </p><h3><b>Step 1: Add up your total monthly debt payments.</b> </h3><p>Add up all recurring monthly payments that factor into your DTI. </p><h3><b>Step 2: Divide that number by your gross monthly income.</b> </h3><p>Once you’ve totaled all your monthly debts, divide that number by your gross monthly income. </p><h3><b>Step 3: Convert the total into a percentage.</b> </h3><p>Take the number you’ve just calculated and multiply it by 100 to get your final DTI ratio. </p><h3><b>Debt to income ratio example:</b> </h3><p>Sarah wants to calculate her debt-to-income ratio before applying for a loan. Her monthly bills and income are as follows: </p><ul><li><p>Rent: $1,200 </p></li><li><p>Student loan: $400 </p></li><li><p>Credit cards: $300 </p></li><li><p>Gross income: $5,000 </p></li></ul><p>Sarah&#39;s total monthly debt payment is $1,900: </p><p> $1,900 = $1,200 + $400 + $300 </p><p>Sarah&#39;s DTI ratio is 0.38:  </p><p>0.38 = $1,900 ÷÷$5,000 </p><p>In other words, Sarah has a 38% debt-to-income ratio. </p><h2><b>How to lower your debt-to-income ratio</b> </h2><p>Like your credit score, there are a number of ways to improve your debt-to-income ratio. If your current DTI ratio is over 40% (or close to it), you can take a few different routes to improve it. </p><h3><b>Pay down existing debt.</b> </h3><p>Increase the amount you’re currently paying on your monthly debt. Rather than making the minimum credit card or loan payment every month, pay off slightly more. Even a small increase will help decrease your overall debt and lower your DTI ratio as a result. </p><h3><b>Avoid additional debt.</b> </h3><p>Focus on paying down your current debt without adding more recurring debt obligations. </p><h3><b>Postpone large purchases.</b> </h3><p>If possible, avoid making large purchases that will use up a large portion of your available credit. </p><h3><b>Create and stick to a budget.</b> </h3><p>If you don’t already have one, create a personal monthly budget and stick to it. Your budget can help you decrease monthly spending and increase monthly debt payments to pay down your existing debt faster. </p><h3><b>Check your DTI ratio regularly.</b> </h3><p>Make a note to recalculate your debt-to-income ratio on the same day every month. Note any changes, record your progress, and use it for motivation. </p><h2><b>The bottom line</b> </h2><p>The debt-to-income ratio is an important measurement used in the loan application and approval process. Understanding what it is, and what you can do to improve it, may help enhance your overall financial wellness and increase your ability to secure a future loan. To maintain a healthy DTI, keep paying as much as you can toward your debts each month. </p><h2><b>Debt-to-income ratio FAQ</b></h2><h3><b>What is a good debt-to-income ratio?</b> </h3><p>Generally, lenders consider at or below 36% a good debt-to-income ratio, though many will lend to individuals with a higher ratio. For example, a <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/">DTI of 43% is the maximum debt</a> to income a borrower can have for a qualified mortgage, but a DTI of 20% would be considered more favorable. </p><h3><b>Is monthly rent included in debt-to-income ratio?</b> </h3><p>Whether or not rent is included in the debt-to-income ratio calculation depends on the type of loan you’re applying for. For a <a href="https://www.lendingclub.com/personal-loan">personal loan</a>, any amount you pay toward housing such as rent counts toward your total monthly debt and will be included in calculating DTI. When applying for a mortgage, your current rental or lease payment is not included in your debt-to-income ratio calculation. </p><h3><b>How can I lower my debt-to-income ratio quickly?</b> </h3><p>The quickest way to lower your debt-to-income ratio (besides getting a pay or salary increase) is to pay off more of your debt than the minimum required. There are a number of different strategies for <a href="https://www.lendingclub.com/personal-loan">paying off debt</a>: the debt avalanche method will pay off debt the fastest, but look into the debt snowball and debt snowflake methods as well. </p><h3><b>What are some other ways to lower my debt-to-income ratio?</b> </h3><p>In addition to paying more toward your debts, you should also avoid taking on more debt and avoid or postpone large purchases that will add to it. Finally, you can find ways to increase your monthly income, such as taking on a side hustle or selling unwanted items online. </p>

Someone might be declined a personal loan due to poor credit score, high debt-to-income ratio, or insufficient income. Next steps include improving credit, reducing debt, or applying with a co-signer. Consider checking your credit report for errors and exploring other lenders.

<p>If you’ve been turned down for a personal loan—don’t panic, and try not to worry. The first thing to know is that having your loan application denied doesn’t define you as a person. Lenders must set minimum qualifications for all loan approvals. If you fall just shy of those qualifications, you may be declined. </p><p>That doesn’t mean you aren’t smart with money or financially responsible. It just means you must make a few financial adjustments to meet their threshold. Just because your loan application was declined this time doesn’t mean it has to be your last chance. In fact, there is a lot you can do to improve your odds of being approved. </p><h2><b>6 Reasons you might be declined for a personal loan</b>  </h2><h3><b>1. Bad credit history</b> </h3><p>When it comes to any loan—mortgage, student loan, or <a href="https://www.lendingclub.com/personal-loan">personal loan</a>—credit history is the number one factor lenders consider. Your credit history is the primary way lenders evaluate how likely you are to repay (or default on) a loan. If you’ve had credit hiccups in the past (e.g., past due accounts, collections, bankruptcy) <a href="https://www.lendingclub.com/resource-center/personal-finance/what-is-a-good-credit-score-and-how-to-boost-yours">your credit score</a> may not meet the lender’s minimum requirements. You can order your credit reports free of charge through <a href="https://www.annualcreditreport.com/index.action">AnnualCreditReport.com</a> to see where you can improve<a href="https://www.lendingclub.com/resource-center/personal-loan/how-to-improve-credit-score"> your credit score</a>. </p><h3><b>2. High debt-to-income ratio</b> </h3><p>Even if your credit history is OK, and you have made all your monthly payments on time, you may have your loan application denied if your debt-to-income ratio (the sum of all your debts divided by your monthly income) is too high.  Generally, a low DTI (under 40%) signals to lenders a healthy balance of debt to income. </p><p>To <a href="https://www.lendingclub.com/resource-center/personal-loan/what-is-debt-to-income-ratio-how-to-improve-it">calculate your debt-to-income ratio</a>, add up all your current debt—including credit cards, auto loans, and student loans<i>—</i>and divide it by your income. If your DTI is too high, paying down debt drops your <a href="https://www.lendingclub.com/resource-center/personal-finance/what-is-credit-utilization-and-how-to-improve-it">credit utilization ratio</a> and improves your debt-to-income ratio, increasing your chances of approval. </p><h3><b>3. Unstable employment history</b></h3><p> Lenders generally want to see that any income listed on your application has been consistent so they can assume it will remain so moving forward. If you have different pay stubs, recently changed jobs (in the last 60 days), or have freelance work from multiple employers, it may create a snag in your income calculations. </p><p>If your income fluctuates because you’re self-employed or do seasonal work, that doesn’t mean your application will always be declined. While your paychecks may not be consistent or predictable, some lenders may be willing to look at your past tax returns so they can compare your income over a longer period of time. </p><h3><b>4. Minimum income requirement not met</b> </h3><p>Along with income stability, lenders look for proof of income to verify you can repay what you borrow. If your income is below the lender’s threshold, you may be denied, or offered a loan for a lower amount. Make sure you include all forms of income in your next application, including any income from side gigs, investment accounts, or child support payments. </p><h3><b>5. Loan purpose mismatch</b> </h3><p>Personal loans provide a lot of flexibility in how you can use the funds. However, some lenders may not allow you to use them for certain things like:  </p><ul><li><p>Secondary education (i.e., college tuition) </p></li><li><p>Making investments such as in stocks </p></li><li><p>Anything illegal or partially illegal (i.e., gambling).  </p></li></ul><p>Make sure the loan application matches your purpose. For example, if you need funds for a professional certification or training, looking into a private or federal student loan may be more appropriate. </p><h3><b>6. Missing information or paperwork</b> </h3><p>Loans almost always require several forms of paperwork, including employment and income information (including tax returns, pay stubs, or bank statements), a credit report, government-issued ID, and in some cases collateral documentation. If you are missing some of this information, you are essentially guaranteed to be denied. Make sure all of your paperwork is in order before you <a href="https://www.lendingclub.com/resource-center/personal-loan/how-to-apply-for-a-personal-loan">apply for a personal loan</a> again. You may end up not needing some of it, but it&#39;s better to have it handy just in case. </p><h2><b>How to improve your chances of getting approved for a personal loan</b> </h2><p>If your new loan application was denied for any of the reasons above, here&#39;s a short checklist of action items you can go through to improve your chances of being approved next time. </p><h3><b>1. Review your decline notice.</b> </h3><p>The very first thing you should do is understand why you were declined for a personal loan. Any lender who denies loan approval is required to send an <a href="https://www.thebalance.com/what-s-an-adverse-action-notice-959985">adverse action notice</a>, which lists the reason(s) your application was declined. If you were turned down because of something on your credit report, this notice will tell you what led to the decline in your credit report and the name of the credit bureau that reported the information. Because of the decline, you are eligible to receive a free copy of your credit report. </p><h3><b>2. Review your credit report.</b> </h3><p>Check your credit report for errors and dispute any inaccuracies about your personal finance history with the credit bureau. At least one in five consumers have an <a href="https://www.consumerfinance.gov/about-us/blog/common-errors-credit-report-and-how-get-them-fixed/">error on their credit reports</a>, according to a study by the Federal Trade Commission.  </p><p>For example, it’s possible someone else’s account information could have been included in your report. Or, if you filed for bankruptcy in the past, be sure your report does not include accounts that have been discharged.  Keep an eye out for inaccurate account information. If you paid a bill on time that is reported late, for example, you can dispute that information with the reporting credit bureau. </p><p>Closed accounts reported as still active could have a negative impact on your credit score if the account has negative information. Go over not only each account, but your account history as well.And always be on the lookout for any <a href="https://www.lendingclub.com/resource-center/personal-finance/identity-theft-7-tips-to-reduce-your-risk">signs of identify theft</a> such as unfamiliar accounts, purchases you didn’t make, and credit applications you didn’t complete. </p><h3><b>3. Boost your credit score.</b> </h3><p>If your loan application was denied despite an accurate credit report, it could be your <a href="https://www.lendingclub.com/resource-center/personal-finance/what-is-a-good-credit-score-and-how-to-boost-yours">credit score</a> is too low. Common reasons include: </p><p><b>Late payments: </b></p><p>If you&#39;ve missed payments, be sure to get caught up, and continue making on-time payments. Late payments can stay on your credit file for up to seven years. </p><p><b>Debt-to-income ratio:</b></p><p>Are your credit balances high compared to your income? Pay down your debts as quickly as possible to lower your DTI and total credit utilization. (Struggling with debt? These <a href="https://www.lendingclub.com/resource-center/personal-finance/best-creative-ways-to-pay-off-debt">creative ways to pay down debt</a> can help you pay down your balances faster.) </p><p><b>Credit utilization: </b></p><p>Are your cards close to their maximum limits? Remember, it&#39;s not just total <a href="https://www.lendingclub.com/resource-center/personal-finance/what-is-credit-utilization-and-how-to-improve-it">credit utilization</a> that matters, but each account limit. Try to bring all your credit balances below 30% for a score boost. </p><p><b>Recent inquiries: </b></p><p>Have you been applying for credit a lot recently? Business loans, home loans, auto loans? Too many hard inquiries in a short period of time will hurt your credit score and may signal that you’re in financial trouble and need cash quickly. Limit applications to only what you need, and try again in a few months. </br> </br><i>Remember, a hard credit inquiry will impact your credit, but a soft inquiry won’t. Most applications are hard inquiries, while pre-approvals are soft inquiries. Learn more about the </i><a href="https://www.lendingclub.com/resource-center/personal-finance/key-differences-of-a-soft-credit-check-vs-hard-credit-check"><i>differences between a hard and soft inquiry</i></a><i>.</i> </p><p><b>Lack of credit history: </b></p><p>If you just don&#39;t have enough credit history, consider becoming an authorized user on the account of a spouse or parent with good credit. Make sure the account you sign onto has a good payment history—the older the account, the better. You may also consider a <a href="https://www.experian.com/blogs/ask-experian/what-is-a-secured-credit-card/">secured credit card</a>, which lets you put down a deposit and borrow against it. The limit may not be high, but you’ll earn a monthly credit score boost as you make payments on time. </p><h3><b>4. Find a co-signer.</b> </h3><p>If you don’t have a steady income, have had some financial setbacks, or are still building a good credit history, applying with another person could help approve your application. Applying with a cosigner or co-borrower might even help you secure a better loan than what you would’ve received on your own, i.e., a better rate, a higher loan amount, or both. </br> </br>And there are additional factors to consider when applying for a joint personal loan. For example, both individuals are obligated to repay the loan, and both have rights concerning the funds. Here’s <a href="https://www.lendingclub.com/resource-center/personal-loan/personal-loans-with-a-cosigner-vs-co-borrower">what you need to know about applying with a cosigner or co-borrower</a>. </p><h3><b>5. Apply for a smaller loan amount.</b> </h3><p>Consider asking for a smaller personal loan than what you need or asked for previously. A smaller loan will appear less risky to a lender, and may help improve your overall DTI picture which could help you qualify. While applying for less than you need may delay reaching your goal as quickly as you had hoped, it could turn out to be the more financially responsible path. For example, if you can start paying down debt with a smaller loan at a lower rate sooner rather than later, that&#39;s a step in the right direction. Always consider all possible options, and run the numbers given your personal financial situation. </p><h3><b>6. Shop around.</b> </h3><p>Not all lenders have the same lending criteria and requirements. Rates, fees, and terms can also vary widely from lender to lender. By shopping around and comparing several loan offers against each other, you could end up saving hundreds, or even thousands, of dollars over the course of your loan. And after working through steps 1-5 above, you may want to try applying through a different lender simply to see if that makes any difference. </p><h2><b>Personal loan rejection reason FAQ</b> </h2><p>Still have questions? Some of these commonly asked questions may provide the answer. </p><h3><b>Why does a personal loan get rejected?</b> </h3><p>Many factors go into determining eligibility for a personal loan. The most common reasons for rejection include a <a href="https://www.lendingclub.com/resource-center/personal-finance/how-to-understand-your-credit-score">low credit score or bad credit history</a>, a high <a href="https://www.lendingclub.com/resource-center/personal-loan/what-is-debt-to-income-ratio-how-to-improve-it">debt-to-income ratio</a>, unstable employment history, too low of income for the desired loan amount, or missing important information or paperwork within your application. Your loan could also be rejected if the purpose isn’t for an eligible reason—like trying to take out a personal loan for investing. </p><h3><b>What should I do if my loan application is rejected?</b> </h3><p>Lenders are required to provide an explanation letter for rejected applications. If you’re rejected, read through the letter and determine what can be remedied. For example, you can work to <a href="https://www.lendingclub.com/resource-center/personal-loan/how-to-improve-credit-score">improve your credit score</a> or <a href="https://www.lendingclub.com/resource-center/personal-finance/best-creative-ways-to-pay-off-debt">pay down high-interest debts</a> to improve your debt-to-income ratio. You can also try to reapply with a cosigner—someone with a high credit score and a secure income—or opt for a <a href="https://www.lendingclub.com/resource-center/personal-loan/how-to-apply-for-a-joint-personal-loan">joint personal loan</a>, where co-borrowers share both the loan funds and responsibility for repayment. Both can increase your chances of approval. </p><h3><b>Why was my loan declined?</b> </h3><p>Personal loans can be declined for many reasons, but in most cases it’s due to a poor credit score or unreliable credit history. Before reapplying, take a look at your credit report (you’re allowed one free report per year from Equifax, Transunion, and Experian). If your score is less than good (660 or less), <a href="https://www.lendingclub.com/resource-center/personal-loan/how-to-improve-credit-score">try taking some time to improve it</a>. If you see any <a href="https://www.lendingclub.com/resource-center/personal-finance/how-to-read-your-credit-report-identify-red-flags">errors on the report</a>, dispute them immediately with the three major credit bureaus. </p><h3><b>How can I avoid being rejected for a personal loan?</b> </h3><p>Lenders look at your credit score, debt-to-income ratio, income, employment history, and credit history as key markers in determining loan eligibility. If possible, work to improve your personal finances before applying or opt for a joint personal loan with a creditworthy co borrower to strengthen your application. </br> </br>If you’re concerned about being rejected for a personal loan, consider <a href="https://www.lendingclub.com/personal-loan">checking your rate online first</a>. Checking your rate won’t affect your credit score and can help determine eligibility before you apply. </p>

Need to fill gaps in your budget, cover a large expense, or pay down high-interest debt at a lower cost? Understanding how to take out a personal loan is the first step to securing the funds you need to cover temporary, short-term expenses.

<p></p><p>To take out a personal loan, start by determining how much you need to borrow and calculating whether it fits within your budget. Before applying for a loan, research and compare various lenders to find the best interest rates and terms for your needs. Once you&#39;ve chosen a lender that offers the best deal, submit your application. </p><p>Whether you need to fill gaps in your budget, cover a large expense, or pay down high-interest debt at a lower cost, understanding how to take out a personal loan is the first step to securing the funds you need to cover temporary, short-term expenses. </p><p>The steps for taking out a personal loan are similar, no matter which lender you choose. Here&#39;s how to take out a loan in 6 simple steps: </p><h2><b>How to take out a personal loan in 6 steps</b> </h2><ol><li><p>Determine how much you need to borrow </p></li><li><p>Check your credit score </p></li><li><p>Shop around and compare lender options </p></li><li><p>Check your interest rate </p></li><li><p>Choose a lender and apply </p></li><li><p>Accept the loan </p></li></ol><h3><b>1. Determine how much you need to borrow.</b> </h3><p>Before you take out a loan, know how much you need and how much you can afford to repay monthly. Borrow <a href="https://www.lendingclub.com/help/personal-loan-faq/how-much-can-i-borrow"><u>only what’s needed</u></a> to cover your goal, like paying off credit card debt, covering an emergency expense, or making home improvements. And remember: lenders will consider basic information, including your income when providing repayment terms, but it’s up to you to conduct a thorough review of your financial picture.  </p><p>Before applying for a personal loan, decide what payment will fit your budget. Consider your monthly expenses and all of your potential sources of extra income. That way, you can compare loan offers based on what you know you can afford. </p><h3><b>2. Check your credit score.</b> </h3><p>Lenders are more likely to approve loans to borrowers with high credit scores and may offer borrowers more favorable terms—like lower interest rates. Review your credit report and run a credit check before you try to take out a loan. You can get one free credit report per year from each of the three credit bureaus: Equifax, TransUnion, and Experian. Make sure to check for any inaccuracies in your report. </p><p>If you find any, report them immediately to one of the credit bureaus. If your credit score is in the lower range, consider taking steps to improve your score before applying for a <a href="https://www.lendingclub.com/personal-loan"><u>personal loan</u></a>. Low credit scores can lead to higher interest rates or prevent you from qualifying, so it&#39;s in your best interest to do what you can to make improvements before applying for a loan or borrowing money. </p><p>Here are some ways to boost your credit before applying for a personal loan: </p><ol><li><p>Pay off credit card balances. </p></li><li><p>Catch up on overdue payments. </p></li><li><p>Avoid new credit applications unless necessary. </p></li><li><p>Dispute any <a href="https://www.lendingclub.com/resource-center/personal-finance/how-to-read-your-credit-report-identify-red-flags"><u>incorrect info</u></a> on your credit report with Experian, TransUnion, or Equifax. </p></li></ol><h3><b>3. Shop around and compare lender options.</b> </h3><p>There are more options than ever for personal loans. You can borrow from a brick-and-mortar bank, credit union, or online lender. The best personal loan for you will depend on your finances and the amount and purpose of the loan. When comparing lenders, make sure to compare APRs—the total cost of your loan, including interest fees—and try to find a lender that doesn’t charge prepayment penalties or hidden fees. But make sure to look at the whole package. </p><p>Though interest rates, costs, and repayment terms are a big part of the decision, take the time to read reviews and other customer experiences before committing. A company with excellent customer service could help you navigate the process and make your personal loan experience stress-free. </p><h3><b>4. Check your interest rate.</b> </h3><p>When you submit a loan application for a personal loan (or any credit card account), your credit score might take a hit. That’s because a personal loan application—like applying for a new credit card—triggers a hard inquiry on your credit report. </p><p>Inquiries aren’t necessarily bad, but having too many might look like a red flag. Luckily, many online lenders, like LendingClub Bank, let you check your loan rate and review your potential loan offers before applying without impacting your credit score. </p><h3><b>5. Choose a lender and apply.</b> </h3><p>Once you’ve found a lender that works for your personal finances, complete an application. You may be asked to provide proof of income—like pay stubs, business records, or tax documents—and proof of residence. The steps can vary a bit by lender, but you&#39;ll usually need to give the following details: </p><ol><li><p>Name </p></li><li><p>Date of birth </p></li><li><p>Social Security number </p></li><li><p>Physical address </p></li><li><p>Contact info </p></li><li><p>Desired loan amount, term, and loan purpose </p></li><li><p>Employment and income info </p></li><li><p>Housing status and monthly payment </p></li><li><p>Driver&#39;s license or other government-issued photo ID </p></li></ol><p>If you are <a href="https://www.lendingclub.com/resource-center/personal-loan/what-to-do-if-you-are-declined-a-personal-loan"><u>declined</u></a> for a personal loan for some reason, try not to worry. You’re not alone, and there is a path forward. Taking steps to improve your personal loan eligibility can set you up for success the next time you apply. </p><h3><b>6. Accept the loan.</b> </h3><p>Your lender may send a check for the loan amount or make a direct deposit to your bank account. In the case of a balance transfer loan, they may pay your creditors directly. </p><h2><b>Reasons to take out a personal loan</b> </h2><p>A personal loan is an unsecured loan that can be used for almost anything. A personal loan can help you get the money you need without breaking the bank. Here are four of the most common reasons you might take out a personal loan.  </p><h3><b>You need to pay for a large purchase, project, or event.</b> </h3><p>If you need to make a significant purchase―like replacing an aging furnace, deck, or roof―the interest rate on a personal loan might be better than the annual percentage rate (APR) on your credit card or in-store financing options. If you take out a loan and pay the seller in cash, you may be better off in the long run. </p><h3><b>You want to consolidate credit card debt.</b> </h3><p>Debt consolidation is a way to combine multiple debt accounts so you can pay the total down faster and save money on interest rates. If you’re struggling to pay off debt, in many cases, you can qualify for a lower interest rate and a monthly payment that’s more in line with your budget. LendingClub Bank, for example, offers <a href="https://www.lendingclub.com/personal-loan/balance-transfer-loan"><u>balance transfer loans</u></a> and joint applications to help members save money and get the lowest possible rates. Over 5 million LendingClub members have used a personal loan to pay down their high-interest debt. </p><h3><b>You have unexpected medical or emergency expenses.</b> </h3><p>Rather than charging unexpected costs to a high-interest credit card, a personal loan can get you the money you need without the stress of credit card debt. A personal loan not only gives you the time you may need to pay the money back, but it can also save you money on interest compared to a credit card. When deciding between the two, compare APRs to determine the best rate. </p><h3><b>You want to improve your credit score.</b> </h3><p>A personal loan may help improve your credit score—especially if your current credit report shows credit card debt as your primary type of credit. A personal loan can help diversify your account mix and may lower your credit utilization ratio, which are important factors in determining your score. Plus, making on-time payments can help boost your payment history. </p><h2><b>Taking out a personal loan FAQ</b> </h2><p>These are some of the most commonly asked questions about how to take out a personal loan. </p><h3><b>Is it a good idea to take out a personal loan?</b> </h3><p>It depends on your current financial situation and what you need. Most personal loans are unsecured, meaning they don’t require collateral. That means if you have a high credit score, steady income, good credit history, and low debt-to-income ratio, a personal loan could be a more cost-effective solution for funding a large or unexpected expense. However, secured loans—like a mortgage or auto loan—might be the better option if you&#39;re trying to purchase a home or car. Before you apply, make sure you meet the personal loan eligibility criteria. </p><h3><b>How to take out a small personal loan?</b> </h3><p>A small personal loan may help cover a temporary spike in monthly expenses or an unanticipated financial burden. Generally, at most $3,000, a small personal loan can be a great way to borrow exactly what you need without relying on credit cards. </p><p>Because they are typically less profitable than larger loan amounts, mortgages, or auto loans, some major banks won’t offer small personal loans. LendingClub Bank, however, offers qualified borrowers loan amounts as low as $1,000 (and all the way up to $40,000). </p><h3><b>How do I get started?</b> </h3><p>If you’re ready to start exploring personal loan options, start by checking your rate with a few different lenders. This lets you collect your potential loan offers so you can decide where to apply for your loan. At LendingClub, you can check your rate for free without impacting your credit score. </p>

Helping your money grow may feel like a daunting task, especially if you’re not used to keeping a close eye on your cash. However, making your money work for you doesn’t have to be complicated or time-consuming.

<p>Prioritizing and gaining control over your financial well-being is more important now than ever. A recent <a href="https://www.pymnts.com/consumer-finance/2022/pymnts-intelligence-61-pct-of-us-population-living-paycheck-to-paycheck/"><b><u>LendingClub study</u></b></a> revealed 60% of working Americans are living paycheck to paycheck—across all income brackets and age groups.<sup>1</sup>  </p><p>However, with some planning, it’s possible to make your money stretch further. From budgeting and paying down debt to using high-yield savings accounts and setting your bills to autopay, there are many strategies that can help you put your money to work and meet your financial goals.   </p><p>Here’s a closer look at five ways to help maximize your money.  </p><h2>1. Identify your most important financial goals </h2><p>Setting goals can help keep your finances in order. Whether you’re saving for a dream vacation, an emergency fund, or paying off debt, it’s important to clearly define your financial goals. Goals often vary from person to person, depending on age, current place in life, family needs, current income, and even past debt. So, don’t worry if what’s important to you is different from what’s important to others.   </p><p>Once you’ve identified your financial goals, you can start taking steps to achieve them and launch a plan to manage your money resources. As you map out your goals, think about your start date, end date, and any key milestones you want to reach along the way. For instance, if your goal is to save up for a wedding, your financial goals may include a mix of saving for the perfect dress, paying a venue in advance, expenses due on the big day, or pre-paying for your honeymoon.<sup>2</sup>  </p><p>Whatever your financial goals, consider using a budget to stay on track. And don’t forget to celebrate meeting mini-goals along the way. If you’re not sure how to prioritize your money goals, a financial professional can help you figure out what’s most important and create a roadmap.  </p><h2>2. Learn to budget (and stick to it) </h2><p>Knowing where your money is going is one of the best ways to make money work for you. <a href="https://www.lendingclub.com/resource-center/personal-finance/sticking-to-a-budget-common-problems-and-solutions"><b><u>Budgets are an important tool</u></b></a> for managing your cash and improving your relationship with money. Setting a realistic budget can help you keep your finances on the right path, cover your expenses, track spending, manage debt, and reduce financial stress.<sup>3</sup>   </p><p>However, sticking to a budget isn’t always easy. Many people put off budgeting because it can feel too restrictive or complicated—but it&#39;s OK to simplify things. Start by jotting down your income and expenses to see where you stand. Then, create budget categories. You can keep your categories broad, like housing, bills, food, entertainment, savings, and more. Or, drill down into specific areas, such as subscriptions, groceries, takeout food, rent, utilities, and so on.<sup>4</sup>   </p><p>Writing your budget on paper (or in a budgeting app) can help you see where you can make cuts without making major sacrifices—freeing up money to pay down debt or boost your savings.  </p><h2>3. Pay down your debt </h2><p>High-interest debt often compounds each month. If you’re carrying credit card debt and only making the minimum payment, it could take many months—or even years—to pay off your original balance. Making a plan to pay off your debt now will free up your funds for a brighter future.<sup>5</sup>   </p><p>Two common ways to pay down debt are the <a href="https://www.lendingclub.com/resource-center/personal-finance/debt-snowball-vs-avalanche-which-should-you-choose"><b><u>debt snowball and debt avalanche</u></b></a> methods.   </p><ul><li><p><b>Debt snowball method:</b> Using this strategy, you’ll build momentum by paying off smaller debts first. You might extend your payoff timeline and increase your interest costs—but early wins often help people stay motivated when using this method.<sup>6</sup> </p></li><li><p><b>Debt avalanche method:</b> With this method, you’ll tackle debt with the highest interest rate first. While you’ll save on interest in the long run, paying down debt with this method often requires ongoing discipline and self-motivation.<sup>6</sup>  </p></li></ul><p> If you’re tackling multiple debts or saddled with <a href="https://www.lendingclub.com/resource-center/personal-finance/ways-to-pay-off-credit-card-debt-fast"><b><u>high-interest credit cards</u></b></a>, you may want to consider a <a href="https://www.lendingclub.com/personal-loan/debt-consolidation"><b><u>debt consolidation loan</u></b></a>. These loans combine all your debts into one monthly fixed payment—often with a lower interest rate—so you can get out of debt faster and spend less on interest overall.<sup>7</sup> </p><h2>4. Open a high-yield savings account </h2><p>If you have to stash your cash somewhere, you might as well earn interest. <a href="/personal-savings/high-yield-savings"><b><u>High-yield savings accounts</u></b></a> tend to offer higher interest rates than standard savings accounts, boosting your cash reserves over time.   </p><p>Check to see if your current bank offers high-yield savings accounts. Or shop around to compare rates. High-yield savings accounts are typically offered at traditional banks, credit unions, and online financial institutions. Once you have your account set up, consider scheduling automatic transfers from your checking account. These could happen on a weekly or monthly basis, or intervals that work for your budget.   </p><p>Many high-yield savings accounts provide tools to help you set up “buckets” for each of your savings goals. For instance, you can set up a bucket for an emergency fund, vacation expenses, or vehicle repairs. And if you choose to schedule automatic transfers, you may be able to designate how much cash goes into each bucket.  </p><h2>5. Automate bill payments </h2><p>Paying bills on time is an important part of managing money. Not only is your payment history a factor in calculating your credit scores, but late payments often result in costly late fees and penalties. To avoid the risk of paying your bills late, consider setting up automatic bill payments. Often you can do this right from your bank account. Or you can set up autopay directly with each account.   </p><p>Without late payments to worry about, you can direct more funds to investments or other savings vehicles. And while you’re automating your bill payments, it may also be a good time to automate money transfers. For instance, if you schedule bill payments for the first of each month, you could also set up deposits for your savings or retirement accounts.   </p><p>Automatic bill payments (and other types of automatic transfers) can usually be paused or canceled at any time. So if you need to change the date or amount you pay, you&#39;ll have flexibility to do so. You can also decide to make extra payments on top of your autopays to help pay debt down faster. For example, if you have your credit card payments set to pay the minimum each month, you can always make an extra payment.<sup>8</sup> </p><h2>The bottom line </h2><p>Creating real financial growth in your life may feel a bit overwhelming, but it doesn’t have to be. Practicing good money habits and making small financial moves now can pay off big in the future. Plus, you’ll get the added benefit of watching your money grow and celebrating when you meet your goals.   </p><hr/><ol><li><p><a href="https://www.pymnts.com/consumer-finance/2022/pymnts-intelligence-61-pct-of-us-population-living-paycheck-to-paycheck/"><u>PYMTS</u></a>. “PYMNTS Intelligence: 61% of the US Population Living Paycheck to Paycheck.” </p></li><li><p><a href="https://files.consumerfinance.gov/f/documents/cfpb_your-money-your-goals_SMART-goals_tool_2018-11.pdf"><u>Consumer Financial Protection Bureau</u></a>.”Setting Smart Goals.” </p></li><li><p><a href="https://www.consumerfinance.gov/about-us/blog/budgeting-how-to-create-a-budget-and-stick-with-it/"><u>Consumer Financial Protection Bureau</u></a>. “Budgeting: How to create a budget and stick with it.” </p></li><li><p><a href="https://consumer.gov/managing-your-money/making-budget#what-to-know"><u>Consumer.gov</u></a>. “Making a Budget.” </p></li><li><p><a href="https://www.consumerfinance.gov/about-us/blog/how-get-handle-debt/"><u>Consumer Financial Protection Bureau</u></a>. “How to get a handle on debt.” </p></li><li><p><a href="https://www.consumerfinance.gov/about-us/blog/how-reduce-your-debt/"><u>Consumer Financial Protection Bureau</u></a>. “How to reduce your debt.” </p></li><li><p><a href="https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-know-if-im-thinking-about-consolidating-my-credit-card-debt-en-1861/"><u>Consumer Financial Protection Bureau</u></a>. “What do I need to know about consolidating my credit card debt?” </p></li><li><p><a href="https://files.consumerfinance.gov/f/documents/cfpb_adult-fin-ed_ways-to-pay-your-bills.pdf"><u>Consumer Financial Protection Bureau</u></a>. “Ways to pay your bills.” </p></li></ol><p></p>

We all experience costly, unplanned expenses from time to time—a broken appliance, an auto accident, a surprise medical bill, a loss of income. Having a dedicated emergency fund can not only provide the reassurance you’ll be able to meet unanticipated financial needs, it’s also one of the first essential steps you can take to start saving. Putting even a small amount aside for emergencies can help you recover more quickly and get back to meeting your financial goals that much faster.

<p>Unplanned expenses happen from time to time—like a broken appliance, surprise medical bill, or loss of income. Having a dedicated emergency fund helps provide reassurance you’ll be able to cover some (or all) of the cost when the unexpected happens. Let’s take a closer look at some of the common types of emergency expenses, how much you need to save, and how to build an emergency fund.  </p><h2>What is an emergency fund? </h2><p>An emergency fund is typically a dedicated savings account set up to cover unplanned expenses and financial emergencies. Emergency savings differ from other types of savings you may have set aside when planning for expenses like leisure travel, holiday gifts, a down payment for a home or car, or other financial goals.<sup>[1]</sup>  </p><p><b>Some examples of unforeseen expenses include:  </b></p><ul><li><p>Unexpected medical bills </p></li><li><p>Vehicle repairs to keep your car on the road </p></li><li><p>Urgent home repairs, like a leaky roof </p></li><li><p>Appliance repairs or replacement </p></li><li><p>Emergency veterinary bills </p></li><li><p>Unemployment or reduced wages </p></li><li><p>Natural disasters </p></li><li><p>A global health crisis  </p></li></ul><h2>Why you need an emergency fund  </h2><p>Remember, emergency funds should only be tapped to cover unexpected expenses that aren’t part of your routine monthly budget spending or other savings goals. The types of situations you can cover with your emergency fund depend on how much you have saved—but remember, every little bit counts.<sup>[1]</sup>   </p><p>If you’re wondering what’s the goal of an emergency fund, here are a few reasons why you can benefit from having money set aside for a rainy day.    </p><ul><li><p><b>Pay for minor unplanned costs.</b> An emergency fund helps you cover small unexpected expenses, like fixing a broken washing machine or taking your dog to the vet.  </p></li><li><p><b>Protect against loss of income.</b> If you’re out of work for an extended time or lose your job, your emergency fund helps pay for essential expenses like rent, utilities, and groceries. </p></li><li><p><b>Avoid extra debt.</b> Without an emergency fund, even a small financial setback could turn into debt that’s hard to pay off and have a lasting impact on your financial outlook. This is especially true if you need to use an <a href="https://www.lendingclub.com/personal-loan/emergency-loan"><b><u>emergency loan</u></b></a>, high-interest credit cards or tap other savings, like retirement accounts, to cover an unplanned cost.   </p></li><li><p><b>Gain peace of mind. </b>Having a nest egg set aside for unplanned expenses helps ease the <a href="https://www.lendingclub.com/resource-center/personal-finance/money-and-mental-health-is-burnout-affecting-your-finances"><b><u>financial stress</u></b></a> in the event of an emergency, allowing you to put your focus on dealing with the situation instead of worrying how you’ll cover the cost.   </p></li></ul><h2>What’s a good amount to have in an emergency fund? </h2><p>Experts generally recommend saving at least three to six months’ worth of expenses. However, the amount of money needed in your emergency fund varies widely depending on factors like your income level, the rate at which you can save money, and your other financial obligations and goals. </p><p>For example if you have a lot of high-interest debt, you may be more focused on paying that down instead of saving. However, even if you’re paying off debt, it’s still a good idea to put some cash toward an emergency fund.<sup>[2]</sup>    </p><p>To determine how much you need to save, it’s important to consider how you’d pay for a small emergency—like a $500 vet bill, for example—as well as covering your essential expenses in the event of job loss. Also think about your personal financial situation, including your income, bills, and who you’re financially responsible for.   </p><p>Are you the sole earner with dependents? Do you share expenses with a partner and have no children? Is your income steady, or are you a freelancer with a fluctuating cash flow? Don’t forget to think about your debt. Do you have lots of credit card debt, a car payment, student loan, or other obligations? It’s also important to consider your essential expenses like rent or mortgage, groceries, utilities, and insurance premiums.<sup>[1]</sup>  </p><h3>Here’s when to save 3 months’ worth of expenses </h3><p>An emergency fund with three months’ worth of expenses can help you financially navigate a major emergency, like being out of work after a car accident. While it won’t cushion you for the long haul, it can help cover your essential bills while you get back on your feet. If you share expenses with a partner, three months might also be a strong savings goal, since you’ll have another income source to lean on.<sup>[2]</sup>   </p><h3>Here’s when to save 6 months’ worth of expenses </h3><p>Consider saving six months’ worth of expenses to get through a major emergency, like getting laid off. This is especially important if you’re the sole earner or don’t have any other financial resources to tap into. While saving six months of expenses might seem overwhelming, it’s okay to start small. Save up for one month, then two, and so on. Before you know it, you might be surprised to see how much you’ve saved.<sup>[2]</sup> </p><h2>How to start building your emergency fund  </h2><p>If you’re not sure how to get started building your emergency fund, here are a few strategies to begin saving. </p><h3>Set a goal </h3><p>Start by setting a small savings goal you can easily reach, and increase your goal amount as you progress. For example, what was the last unplanned expense you had difficulty paying? If paying a $300 dental bill was a struggle before, then set an initial emergency fund goal of $300. Once you reach that goal, set a bigger goal, and so on. </p><p>Some banks let you create savings “buckets,” which can come in handy if you want to set separate savings goals for different kinds of emergencies, like medical expenses, car repairs, or veterinary fees.<sup>[1]</sup>  </p><h3>Build saving into your budget </h3><p>Examine your current budget and spending habits to find areas where you can cut back, and put that money toward your emergency fund. Consider forgoing some “extras,” like pricey entertainment tickets or restaurant visits and streaming services. If you don’t have a <a href="https://www.lendingclub.com/resource-center/personal-finance/sticking-to-a-budget-common-problems-and-solutions"><b><u>budget</u></b></a>, now is a great time to create one.<sup>[1]</sup>  </p><h3>Automate your savings </h3><p>Decide on an amount you can afford to have <a href="https://www.lendingclub.com/resource-center/personal-finance/simple-steps-on-how-to-start-saving-money"><b><u>automatically transferred</u></b></a> to a savings account on a regular basis. For example, saving just $25 a week adds up to $1,200 a year. Typically you can set up automatic transfers between two bank accounts, like a checking and high-yield savings. </p><p>If you get paid by direct deposit, ask your employer to split up your paycheck between two accounts. Freelancers can try designating a small percentage of every client payment to an emergency fund.<sup>[1]</sup> </p><h3>Use a financial windfall </h3><p>Whenever you come into extra money, like a tax refund, stimulus payment, or cash for a birthday gift, put it into your emergency fund. Similarly, if you get a raise or earn a bonus, try to keep living on your previous income and set the difference aside for a rainy day.<sup>[1]</sup>  </p><h3>Earn extra income </h3><p>Starting a side job or gig—like selling items you no longer need or use, driving for a rideshare service, or working retail during the holidays—can all jump-start your emergency savings. If you’re a freelancer or have inconsistent income, instead of automating transfers (which may leave your checking account short of funds), you might try designating a certain percentage of every deposit—say, 5% or 10%—into your emergency fund. </p><h3>Don’t spend your emergency cash </h3><p>Remember, your emergency fund is supposed to be used for unexpected expenses and needs. For example, you’d use the fund to buy a new washing machine if yours breaks down, but not just because you want the latest model. It’s also important to replenish any funds you take out of the account. So, if you use $500 to buy that replacement washer, set a new goal to replace the $500 you used so you have it for the next emergency.  </p><h2>Where should you keep your emergency fund? </h2><p>When choosing the type of account for your emergency funds, consider easy-to-access, interest-bearing savings or checking accounts. Generally, unless there are additional associated fees, the account should be separate from your existing accounts, such as a vacation savings account or a regular checking account used to pay your monthly bills. </p><p>Look for an account that lets you earn interest to help you build your savings faster. Good examples of emergency fund accounts are typically <a href="https://www.lendingclub.com/personal-savings/high-yield-savings"><b><u>high-yield savings accounts</u></b></a> or money market accounts that offer a higher annual percentage yield (APY) than regular savings accounts. A rewards checking account may be another good option for your emergency fund. These types of accounts are also usually easy to access if you need to make a quick withdrawal. </p><p>However, depending on your financial habits, it might be helpful if your emergency funds are a little bit harder to get to. To create some friction, consider establishing an account at a different bank than where you have your regular checking or savings accounts. Confirm how long it takes to transfer money from one bank to another in case you need to withdraw funds quickly.   </p><p>Some accounts come with fees, a minimum opening deposit, or a monthly balance requirement. So be sure to check the fine print when comparing accounts. It’s also a good idea to look for insured financial institutions to keep your money safe. </p><p>Federally insured banks are covered by the Federal Deposit Insurance Corporation (FDIC), and federally insured credit unions are covered by the National Credit Union Administration (NCUA). This protection means your deposits are insured up to the maximum amount allowed, which is $250,000 per depositor, per ownership category at each institution.<sup>[3][4]</sup> </p><h2>The bottom line </h2><p>An emergency fund not only ensures you’ll be able to meet unanticipated financial needs, but it’s also one of the first essential steps you can take to start saving. Putting even a small amount aside for emergencies can help you recover more quickly and get back to meeting your <a href="https://www.lendingclub.com/resource-center/personal-finance/how-to-build-a-strong-financial-foundation"><b><u>financial goals</u></b></a> that much faster. </p><p>Setting aside at least three to six months’ worth of essential living expenses is ideal, but if you’re on a tight budget, saving even just a few hundred dollars may be enough to cover smaller emergencies like a broken dishwasher.    </p><hr/><ol><li><p><a href="https://www.consumerfinance.gov/an-essential-guide-to-building-an-emergency-fund/"><u>Consumer Financial Protection Bureau</u></a>. “An essential guide to building an emergency fund.” </p></li><li><p><a href="https://www.cnbc.com/select/how-much-to-save-in-emergency-fund/"><u>CNBC</u></a>. “3 to 6 months of savings might be ‘tried and true wisdom’ but this expert has advice if you’re living paycheck-to-paycheck.” </p></li><li><p><a href="https://www.fdic.gov/resources/deposit-insurance"><u>Federal Deposit Insurance Corporation</u></a>. “Deposit insurance.” </p></li><li><p><a href="https://ncua.gov/consumers/share-insurance-coverage/frequently-asked-questions-about-share-insurance#:~:text=The%20National%20Credit%20Union%20Administration,by%20Share%20Insurance%20Fund%20protection."><u>National Credit Union Administration</u></a>. “Frequently asked questions about share insurance.” </p></li></ol><p>  </p>

Related Impact

{noun} A type of credit that allows the borrower to make charges and payments against a set borrowing limit, paying interest only on outstanding balances.

<p>A type of credit that allows the borrower to make charges and payments against a set borrowing limit, paying interest only on outstanding balances.</p><h2>What is Revolving Credit?</h2><p>Revolving credit is a type of credit that lets you borrow money as needed up to an amount called your credit limit. Borrowing reduces your available credit, and repayment replenishes your credit limit (minus the interest and fees charged). Revolving credit does not have a fixed number of payments. This differs from installment credit which lets you borrow a lump sum and pay it back over a set number of fixed monthly payments.</p><h2>How Does a Revolving Line of Credit Work?</h2><p>It helps to think of a revolving line of credit as a renewable source of funds within a set credit limit. The lender sets the credit limit upon application approval. You can use as much of your credit limit as you need, paying interest only on the money you borrow. As you repay what you’ve borrowed (plus interest and fees), your available credit replenishes, and you can continue borrowing against your revolving line up to the credit limit.</p><h3>Types of Revolving Credit</h3><p>The most common revolving credit products are lines of credit and credit cards.</p><p><b>Lines of credit </b>come in different forms, including home equity lines of credit (HELOCs), personal lines of credit, and business lines of credit. Credit lines are typically issued by banks and credit unions, and generally you can draw on your line using special checks, ATM, telephone, and online banking. You’ll only pay interest on the money borrowed from your line of credit. </p><p>Some lines of credit may be limited in how the funds can be used, such as only for balance transfers from credit cards.</p><p><b>Credit cards</b> are revolving credit accounts that, unlike lines of credit, require you make a purchase or cash advance to access your credit line. While card issuers reserve the right to change your credit limit, you can access your available credit as long as your account is in good standing. When you make purchases on a credit card, you can repay the balance in full by the end of your billing cycle to avoid interest charges and fees. If you don’t pay your outstanding balance in full,the balance “revolves,” or rolls over, to the next month and will accrue interest until paid in full. </p><p>Note: Both lines of credit and credit cards can be secured or unsecured. Secured accounts require collateral; unsecured accounts do not. For example, a HELOC uses your home as collateral. Credit cards are typically unsecured, but some secured cards require cash deposits as collateral.</p><h3>Why is Revolving Credit Important?</h3><p>Revolving credit offers greater borrowing flexibility than installment credit. For instance, if you get a $10,000 installment loan for a home remodeling project, you typically receive all the money at once and must start repaying on the entire loan balance immediately plus interest on that amount—even if you don’t use the funds right away. If you need more money, you’ll have to apply for a new loan.</p><p>On the other hand, if you get a line of credit or credit card with a $10,000 limit, you can draw on it as needed—say, $1,000 in January, $2,000 in April and $1,500 in June­—and interest will accrue only on the amounts you borrow. As you pay back what you’ve borrowed, your available credit is restored up to your credit limit, so you can make future purchases without needing to apply for additional credit.</p><p>Since it doesn’t require fixed monthly payments, revolving credit can also offer greater payment flexibility than installment loans. If money is tight in a particular month, you have the option of only making the minimum payment on a revolving account, potentially making it easier to meet other financial obligations.</p><p>Revolving credit can also serve as a financial cushion. Even if you never use it, it’s there in case you need quick access to small amounts of cash in an emergency.</p><h3>What Are the Risks of Revolving Credit?</h3><p>Revolving credit has some drawbacks you should be aware of.</p><p><b>Collateral risk:</b> If you fail to make payments on a secured revolving credit account, you could lose your collateral. With a secured credit card, that loss could be a few hundred dollars. With a HELOC, you stand to lose your home.</p><p><b>High interest rates:</b> Revolving credit typically has higher interest rates than installment credit. Interest rates for most credit cards and many lines of credit are also <i>variable</i>, meaning they can change over time based on economic conditions.</p><p><b>Excessive debt: </b>If you only make the minimum payment on a credit card, you could accumulate a large balance. Credit card interest is typically <i>compounded</i>, meaning interest accrues on both the balance of your purchases and on previously applied interest. Compound interest can cause your balance to snowball until it’s difficult to pay down.</p><h3>How Does Revolving Credit Affect Your Credit Score?</h3><p>Revolving credit could help your credit score in several ways.</p><ul><li><p><b>On-time payments:</b> Making revolving credit payments on time could boost your credit, since timely payments are a major factor in your FICO®  Score.</p></li><li><p><b>Responsible credit utilization:</b> Keeping your revolving credit balance below 30% of your credit limit could increase your credit score.  Ideally, you would pay your credit card balances in full each month.</p></li><li><p><b>Diverse credit mix:</b> A variety of accounts, including installment credit and revolving credit, could show lenders you can successfully manage different types of debt.</p></li></ul><p>Revolving credit could also have negative impacts on your credit score when not managed responsibly. </p><p><b>Late payments: </b>Missing payments could have a significant negative impact on your credit score. Setting up auto-payments on your revolving credit accounts can help ensure you never miss a due date.</p><p><b>Excessive credit utilization:</b> Consistently carrying balances that exceed 30% of your available credit limit can reduce your credit score. </p><p><b>Hard inquiry:</b> When you apply for revolving credit, creditors perform a credit check called a <i>hard inquiry</i>, which could cause a small, temporary dip in your credit score.</p>

{noun} The total annual cost to borrow money, including fees, expressed as a percentage.

<h2>What is Annual Percentage Rate (APR)?</h2><p>Annual percentage rate (APR) is the cost of borrowing money on an annual basis. APR is expressed as a percentage, to make it easier to compare the cost of credit. </p><p>APR and interest rate are sometimes used interchangeably, however, APR and interest rate are different. APR includes both interest plus fees applied over the course of a loan. Because APR is a more complete measure of the cost of credit, it is usually higher than the interest rate.</p><h2>How is Annual Percentage Rate Calculated?</h2><p>To calculate APR on a loan, you’ll need to know a few other numbers first:</p><p><b>Interest:</b> The total interest charges paid over the life of the loan, also known as the cost of borrowing money.</br><b>Fees:</b> Review the terms and conditions of the loan to find the fees that apply to your loan. Fees vary by loan type and lender. </br><b>Principal:</b> The original loan amount.</p><p><b>Days in the Loan Term (n):</b> Since APR measures the annual cost of borrowing money, multiply 365 (days) by the number of years in the loan term. For loan terms under one year, use the number of days.</br></br>The formula to calculate APR is: </p><img src="//images.ctfassets.net/orqped9h4wgz/6cJEgR4ftSGoIaSuKLlek6/a3ce252e07839182be4e7550cd09e08a/Formula-Calculate-APR.png" alt=""/><p>The steps to calculate APR are:</p><ol><li><p>Find the interest charges</p></li><li><p>Add the fees</p></li><li><p>Divide the sum by the principal balance</p></li><li><p>Divide by the number of days in the loan’s term</p></li><li><p>Multiply by 365</p></li><li><p>Multiply by 100</p></li></ol><h3>Credit Card APRs</h3><p>Credit card APRs do not reflect fees and since a credit card has no set loan amount or fixed repayment term, its APR is simply its interest rate.</p><p>Under the Truth in Lending Act, passed in 1968, lenders and other financial institutions must disclose APR when offering credit. </p><h2>Why is Annual Percentage Rate Important?</h2><p>Knowing the annual percentage rate helps you understand the true cost of borrowing. </p><p>For example, all lenders are required to disclose APR, which makes it easier to compare loans from different banks and make a more informed borrowing decision.</p><h2>Are There Different Types of APRs?</h2><p>There are different categories of APRs depending on the type of financial product.</p><h3>Credit Card APRs</h3><p>Credit cards have several APRs that may apply to different transactions or account activities.</p><ul><li><p><b>Purchase APR: </b>The rate you pay for purchases. </p></li><li><p><b>Balance transfer APR: </b>The rate applied if you use a card to pay down balances on other credit cards or loans. </p></li><li><p><b>Cash advance APR:</b> The rate charged on ATM withdrawals or cash-equivalent transactions, like money-order purchases. </p></li><li><p><b>Introductory APR: </b> A promotional interest rate for a limited period of time that is lower than the card&#39;s regular APR, sometimes as low as 0 percent APR.</p></li><li><p><b>Penalty APR</b>:  A higher-than-normal rate that results from violating a card’s terms of service. </p></li></ul><h2>What’s the Difference Between Fixed and Variable APRs?</h2><p>APRs can be fixed or variable. A fixed APR remains unchanged for the life of your loan. A variable APR fluctuates in sync with a published market index, like the U.S. Prime Rate.<b>   </b></p><h3>Adjustable-Rate Mortgages</h3><p>Home loans with variable interest rates are called adjustable-rate mortgages (ARMs). With an ARM, your APR is fixed for an initial term (typically one, three, or five years, but sometimes as long as 10 years), then resets every six or 12 months, based on market rates. </p><h2>What Affects APR?</h2><p>The APR you&#39;re offered depends on a few factors: </p><ul><li><p>Whether a loan or line of credit is secured or unsecured</p></li><li><p>Current economic conditions</p></li><li><p>Your credit history</p></li></ul><p>Lenders may also consider your income and assets, down payment, and where you live when determining your APR.</p><h2>How Do You Get a Good APR?</h2><p>Getting the best APR on a loan or credit card typically requires shopping around. </br></br>Start by prequalifying with multiple lenders. Prequalifying is a quick process where you provide some basic information about your income and borrowing goal. Then, lenders respond with a preliminary, non-binding estimate of the loan amount and APR. This is typically done through a soft credit check, which doesn’t impact your credit.</p><p>Then, compare the preliminary offers and submit a full application to your lender of choice. With your detailed financial information and a hard credit inquiry, which will impact your credit, lenders can make a formal loan offer that includes your APR, fees, and repayment terms. </br></br>If you’re unhappy with the terms you’re offered (or if lenders decline your applications), your credit history might be the culprit. If this is the case, you can work to pay down your existing debts and bring late payments current, which can improve your credit score and chances for approval over time.</p>

{noun} The amount of unpaid interest that has accumulated as of a specific date, either on a loan or an interest-bearing account or investment. 

<h2>What Is Accrued Interest? </h2><p>Accrued interest is the amount of unpaid interest that has accumulated as of a specific date, either on a loan or credit card you’re repaying or on an interest-bearing account or investment.  </br> </br>Accrued interest can be owed or earned. For example, with a loan or credit card, it’s the amount of interest (payment you owe) that has been incurred since you made your last payment. With an interest-bearing account or an investment, such as a bond, it&#39;s the interest (income you earned) that has accumulated since the last time you received a payment from the financial institution or bond issuer. </p><h2>How Does Accrued Interest Work? </h2><p>The way accrued interest works depends on several factors, including the type of account, the balance or principal, the interest rate, timing, and whether you are borrowing money (such as with credit cards, auto loans, and personal loans), or earning money (such as with interest-bearing checking or savings accounts).  </p><h2>Accrued Interest on Loans </h2><p>Personal loans, auto loans, and other types of debt charge interest to their borrowers. Most lenders use the simple interest method of accounting, which means that interest that accrues each day is based only on the principal balance of the loan and doesn&#39;t compound on previously accrued interest. </p><p>For example, on a personal loan, the interest on your debt accumulates daily based on your current loan balance and interest rate.  When you make a loan payment, a portion of your total payment amount goes toward the interest that has accrued since your last payment and the remainder goes toward paying down the principal balance of your loan. </p><p>If you have a fixed interest rate, the daily interest amount will go down over time as your principal amount owed decreases with on time payments. With variable rate loans, the amount of interest that accumulates can fluctuate along with the loan&#39;s interest rate, however there&#39;s generally a downward trend with timely payments.  </p><p> </p><h2>Accrued Interest on Bank Accounts </h2><p>Generally, with interest-bearing deposit accounts, such as a high-yield checking or savings account, interest typically accumulates daily and is paid out monthly. The amount of interest that accrues is based on your balance and the account&#39;s annual percentage yield or APY (which may adjust higher or lower as rates rise or fall) and compounding interest. The higher the APY and your balance, the more you&#39;ll earn. </p><p>Also, most banks and savings institutions will compound the interest you earn, usually daily. This means that the interest that accrues each day is based not only on your principal account balance but also on the interest that has accumulated since the last payment.  </p><p>For example, let&#39;s say you have a $10,000 balance in a savings account with an interest rate of 5%. On the first day, your balance earns $1.37 in interest, and that gets added to your interest-earning principal—compounded—at the end of the day. That happens every day. </p><p>By the end of the year, your principal will have grown to $10,512.67—$500 in interest on your principal balance, and $12.67 from the interest earned on your interest.  </p><p> Calculation for daily interest rate: </p><p>0.05 / 365 = 0.000136986 </p><p> Calculation for first day’s interest: </p><p>0.000136986 x 10000 = 1.36986 </p><p> While your interest rate is 5% compounded daily; your total return including compounding, or <a href="https://blog.lendingclub.com/apr-vs-apy-whats-the-difference"><u>annual percentage yield</u></a>,  is 5.1267%. </p><p>Compounding interest increases your savings over time, especially in a rising interest rate environment. </p><h2>Accrued Interest on Bonds </h2><p>If you&#39;re investing in bonds, interest is typically paid out every six months, and the amount that accrues between payments depends on the face value of the bond and its interest rate. This calculation is known as yield to maturity. </p><p>Interest on bonds does not compound; that is, you don’t earn interest on your interest. </p><h2>How Accrued Interest Affects Borrowers </h2><p>If you borrow money, understanding accrued interest gives you an idea of how your loan&#39;s costs are incurred. As you make your regular monthly payments, for instance, the amount of interest that accumulates over time decreases. And if you make additional principal payments on top of your regular payments, you can reduce how much interest accrues even more.   </p><p>Keep in mind that, if you make an extra payment on a loan the lender may use some of that money to pay off the interest that has accrued since your last regular payment unless you specify otherwise. You can request that the lender put the full amount of your additional payment toward the principal balance, saving you more money on interest in the long run. </p><p>Understanding how accrued interest works is particularly important if you have student loans. While college students aren&#39;t typically required to make monthly payments while they&#39;re still in school, interest accrues from the moment the loans are disbursed.  </p><p>For borrowers with federal subsidized loans, the federal government will typically pay interest that accrues while they&#39;re in school and during future deferment periods. If you have unsubsidized loans or private student loans, all the interest that accumulates while you&#39;re in school (and during periods of deferment or forbearance) is added to your balance once repayment begins.  </p><p>If you want to avoid a growing balance, consider making interest-only payments while you&#39;re still in school. </p><h2>How Accrued Interest Benefits Savers </h2><p>If you have an interest-bearing deposit account, look into how often (daily, weekly, monthly, quarterly, semi-annually, annually) your financial institution compounds the interest that accrues in your account. The more frequently interest is compounded (e.g., daily vs. quarterly) makes it possible for you to earn more interest more quickly. </p><p>And if you&#39;ve invested in bonds, understanding how accrued interest works can help ensure that you get the money you&#39;ve earned, especially if you sell the bond between scheduled interest payments. For example, if you sell a bond three months after your last payment, you won&#39;t receive the amount of interest that accrued during that time. Because the buyer will receive the full semi-annual (every six months) interest payment despite only owning the bond for three months, they should pay you the amount that has accrued since your last payment on top of the price of the bond. </p><h2>How Is Accrued Interest Calculated? </h2><p>On loans, lenders generally calculate interest on a daily basis using either a 360-day or 365-day year. The lender will divide the loan&#39;s interest rate by one of those numbers to determine your daily interest rate, which it then applies to your balance. </p><p>On interest-bearing deposit accounts, interest generally accrues daily. Depending on how often your financial institution compounds interest, the amount that accrues each day may be calculated based on the principal balance plus previously accrued interest. </p><h2>What Is an Example of Accrued Interest?  </h2><p>Let&#39;s say you have a personal loan with a $20,000 principal balance and a 12% interest rate. To calculate the amount of interest that accrues every day, you&#39;ll do the following equation: </p><p>Calculation for daily interest rate: </p><p>0.12 / 365 = 0.000328767123288 </p><p>Calculation for daily accrued interest: </p><p>0.000328767123288 x $20,000 = $6.58  </p><p> In other words, you&#39;ll have $6.58 in daily accrued interest. Over 30 days, that amounts to $197.40.</p>

A debt that is written off as a loss because the financial institution or creditor believes it is no longer collectible due to a substantial period of nonpayment.

<p>A debt that is written off as a loss because the financial institution or creditor believes it is no longer collectible due to a substantial period of nonpayment.</p><h2>What Is a Charge-Off?  </h2><p>A charge-off on your credit report indicates the financial institution or creditor has written the account off as a loss and has stopped attempting to collect on a debt that you owe. However, a charge-off does not mean your debt is forgiven—it may be transferred to a collection agency or sold to a debt buyer. As long as the debt remains outstanding, you&#39;re still responsible to pay it. </p><h2>How Does a Charge-Off Work? </h2><p>When you miss a payment on a loan or credit card or have a bank account with a negative balance, the creditor or financial institution will attempt to collect the amount you owe. At some point, the creditor may determine the debt is uncollectible and decide to charge it off. This means the creditor has written off the remaining balance as a loss.  </p><p>At this point, the creditor will report the account as “Charged Off” to the credit reporting agencies which will appear on your credit reports along with the account balance. If the charge-off is legitimate and you can&#39;t convince the creditor to remove it, a charge-off can remain on your credit reports for up to seven years after your first missed payment. </p><p>Once a creditor has charged off a debt, they may decide to sell it to a debt buyer or transfer it to a debt collection agency for pennies on the dollar. If this happens, your account will be closed, interest will stop accruing on your balance, and your credit report will reflect that the account was &quot;Charged Off.&quot; However, you will still be liable for paying off the debt to the debt collection agency. Additionally, the collection agency may report a collection account for the same debt, further impacting your credit score. </p><h2>Will a Charge-Off Impact Your Credit Score? </h2><p>Your payment history is the most influential factor in your FICO credit score. Missing just one payment could have a significant negative impact on your credit score. </p><p>If a debt balance remains unpaid long enough for the creditor to stop attempting to collect payment, the worsening delinquency and subsequent charge-off could have a long-term  and far reaching impact to your credit score.  </p><p>For example, a low credit score and history of nonpayment may make it more difficult to get approved for credit in the future. It may also impact your ability to get approved for a residential lease or to qualify for lower interest rates on auto or homeowners insurance.  </p><h3>How Can You Repair a Charge-Off? </h3><p>The best way to repair a charge-off is to prevent it from happening. If you start missing payments, don&#39;t ignore the situation. Contact your lender and ask if there’s anything that can be done to help you avoid a charge-off situation. </p><p>In the event your debt is charged off, as long as there is a balance, you’re still responsible for repayment which is why you should consider ways to pay off the debt as soon as possible to avoid having it go to collections. Even if you cannot pay off the debt in full, you may want to consider negotiating a payment settlement with the creditor for less than what you owe or, if necessary, having the debt discharged in bankruptcy.  </p><p>In some cases, you may be able to negotiate with the lender to remove the charge-off from your credit report in exchange for full payment—a process known as “pay for delete.” Even if you can&#39;t get it removed, paying off the balance could potentially reduce the impact to your credit score.  </p><p>If the creditor does sell the debt to a collection agency, you&#39;ll face more attempts to collect the amount you owe. Some debt collectors may even resort to lawsuits to force collection through a court order. </p><h3>How Can You Limit Charge-Off Damage? </h3><p>The timeframe for when a creditor decides to charge-off an account ranges from 120 to 180 days from your initial delinquency date. You&#39;ll typically receive letters and phone calls reminding you of the past-due payment, urging you to get caught up. Don&#39;t ignore the creditor—this is the best time to talk to the lender to see if you can avoid a charge-off. </p><p>If you&#39;ve had an account charged off recently, contact the creditor as quickly as possible to verify the accuracy of the account details and look for opportunities to pay off some or all of the debt to avoid transfer to a collection account and further damage to your credit score. </p><p>In some cases, a charge-off could be reported in error. If this happens, it could damage your credit score, so you should act quickly to dispute the negative item with the credit reporting agencies. As long as the dispute isn&#39;t frivolous, the credit bureaus are required to investigate it and remove or update the information if it&#39;s found to be innacurate.  </br> </br>To contact the credit bureaus:  </p><ul><li><p><a href="https://www.equifax.com/personal/credit-report-services/credit-dispute/"><u>Equifax</u></a> </p></li><li><p><a href="https://www.experian.com/contact/personal-services-contacts.html"><u>Experian</u></a> </p></li><li><p><a href="https://www.transunion.com/credit-disputes/dispute-your-credit"><u>TransUnion</u></a> </p></li></ul><p>If the creditor decides to charge-off your account, it&#39;ll only report only to the credit reporting agencies that it normally reports to. For many lenders, it&#39;s all three, but some lenders may only report to one or two of the major credit bureaus. </p>

{noun} An interest rate that remains the same for a set time, usually for the life of the loan.

<p> An interest rate that remains the same for a set time, usually for the life of the loan.</p><h2>What Is a Fixed Interest Rate?</h2><p>A fixed interest rate is an interest rate that remains the same for a set time, usually for the life of the loan. With fixed-rate financing, borrowers can enjoy payment stability and avoid the risk of a variable interest rate—which may increase substantially over time, especially in rising interest rate environments.</p><h2>How Do Fixed Interest Rates Work?</h2><p>When you take out a loan with a fixed interest rate, your loan terms will define the fixed rate period.</p><p>Generally, for financial products like fixed rate mortgages and personal loans, your interest rate will remain the same throughout your loan term, as will your monthly payment amounts.</p><p>For financial products such as adjustable rate mortgages, the interest is variable, which means it can change periodically. Often, an adjustable rate mortgage (ARM) will have an initial period where the rate is fixed. After the fixed period, your interest rate may stay the same or it may adjust based on prevailing interest rates at the time.</p><h2>What Is the Difference Between Fixed and Variable Interest Rates?</h2><p>Fixed interest rates generally won’t change—either for the life of your loan or during a predetermined fixed period. In contrast, variable interest rates fluctuate based on market conditions and may change at any time.</p><h3>What Benefits Do Fixed Interest Rates Offer?</h3><p> Having a fixed rate loan offers several benefits for your finances.</p><ul><li><p><b>Financial Predictability. </b>A fixed interest rate makes it easier to plan your finances since your monthly payments don’t fluctuate over the fixed period, usually the life of the loan. Such predictable payments can  help you more easily manage your budget and alleviate stress.</p></li><li><p><b>Eliminate Interest Rate Risk. </b>With a fixed interest rate, you don&#39;t have to worry if interest rates start to increase in a volatile economy. Compared to loans with variable rates, a fixed-rate loan with a lower interest rate could save you money in a rising interest rate environment.</p></li><li><p><b>Potentially Lower Borrowing Costs. </b>With fixed-rate loans, you’ll know your total borrowing costs—including interest and fees—before you sign your loan documents. With variable-rate loans, it’s difficult to calculate your total borrowing costs since your interest rate may change substantially over time.</p></li></ul><h3>What Are the Drawbacks to Fixed Interest Rates?</h3><p>While a fixed interest rate can help you plan your finances for the long term, there are a few drawbacks to consider.</p><ul><li><p><b>Potentially Higher Rates. </b>Adjustable-rate financial products often have lower interest rates for an initial, introductory fixed period which may temporarily lower your cost to borrow. Fixed-rate products don’t offer such “teaser” rates.</p></li><li><p><b>Risk in Decreasing Interest Rate Environments. </b>If interest rates start going down, you may end up paying more to borrow on a higher interest rate than if you took out a new loan.</p></li><li><p><b>Refinancing Costs. </b>Even if you decide to refinance to get a lower rate, refinancing costs may outweigh the savings you may realize, and the process can be time-consuming. It’s  important to compare the total cost of borrowing of your existing versus a potentially new loan before making a decision.</p></li></ul><h2>What Can You Do to Get a Good Fixed Interest Rate?</h2><p>Generally, having a high credit score and a demonstrated track record of responsible debt management can help you land a lower fixed interest rate. In contrast, if you have a low credit score and a spotty history of on-time payments, the lender may view you as a higher-risk borrower and may not offer you the best fixed interest rate they have available.</p><h2>Can You Switch from a Variable Interest Rate to a Fixed Interest Rate?</h2><p>In most cases, you can&#39;t switch from a variable to a fixed interest rate on an existing loan. While you may be able to refinance your loan—either with your current lender or a new one—and move to a fixed-rate loan that way, it’s important to consider how well you would be able to cope with economic uncertainty. A low variable rates may be tempting initially, but should economic conditions sour and rates begin to rise rapidly, it may be difficult to find a good fixed rate when you want one. Or you may experience an unexpected obstacle, like job loss, that could make refinancing into a fixed interest rate loan difficult.</p><h3>Are Credit Card Interest Rates Fixed?</h3><p>Generally, credit card interest rates are variable, not fixed.</p><h3>Are Student Loan Interest Rates Fixed?</h3><p>It depends on the type of student loan. Student loans like Perkins Loans and PLUS Loans have fixed interest rates. Many other direct federal student loans—both subsidized and unsubsidized—have fixed rates as well.</p>

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Why you'll love the LendingClub app

Never miss a money move

Make the smartest money move of the day. Download the app now!¹

WHAT WE OFFER

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LEGAL

ABOUT US

ACCOUNT

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Mobile App

Take your money everywhere with our app

Why you'll love the LendingClub app

Never miss a money move

Make the smartest money move of the day. Download the app now!1

WHAT WE OFFER

RESOURCES

LEGAL

ABOUT US

ACCOUNT

Powered by the LCTM platform

Take your money everywhere with
our app

Make the smartest money move of the day. Download the app now!¹

Powered by the LC^TM platform