Being aware of personal loan terminologies is essential while researching personal loans in today’s digital World. Determining the best offering from a reputed lender is of utmost importance in cases of your financial matters. Let’s brush up on some fundamental concepts with this dictionary of personal loan terminology.
A personal loan can be used for every legal purpose. There are no limitations on end usage. Personal loans can be used for a variety of objectives, including further education, remodelling your home, and medical expenses. Therefore, we can say that a personal loan is a “Jack of all Trades.”
Perhaps you have no doubts that a personal loan has the potential to be used for debt consolidation or to make payments on life’s significant events. Have you ever been curious about what “APR” refers to?
Do you certainly understand the distinction between a collateral-based and a non-secured loan? If you find yourself puzzled by financial language, you are not the only one in this. Typically, individuals do not discuss agreements concerning loans or the terminology used in loans daily. So, it’s not practical for everyone to be knowledgeable about all the associated terms.
Therefore, we designed this glossary of typical terms and phrases you will encounter while comparing financial institutions and loan agreements.
Read the information provided to become aware of common loan terms. Afterwards, as you explore all of your financial options, you’ll be able to make an informed decision and ask for a loan that’s ideal for you.
- Annual Percentage Rate (APR)
If you decide to ask for a loan for personal use, the annual percentage rate, or APR, is the amount you agree to repay each year.
Is it equivalent to the interest rate? Not precisely! APR is a percentage rate that includes both the interest rate and any associated yearly charges. Therefore, by checking the APR, you may get a clear idea of the loan’s year-round cost.
However, what happens if the lending institution is not charging yearly charges for your personal loan? In this scenario, the rate of interest and APR are the same.
- Borrower / Applicant
The person borrowing the money is the individual who is called a borrower. A borrower may also be referred to as an applicant.
The borrower’s responsibility is to repay the amount owed. A loan might have multiple borrowers listed on the loan request. If any of the borrowers is unable to repay the debt, the remaining borrowers must pay to prevent defaults.
- Co-Signer
A cosigner who is responsible for a personal loan is an individual who signs along with the borrower. By accepting the terms and conditions of the loan, they undertake to repay the loan if the borrower with primary responsibility finds it difficult to continue making repayments. The cosigner may be somebody’s spouse, parent, sibling, or relative.
In case your credit score or salary is too low to be eligible, think about involving a cosigner on the borrowing form. If you sign up along with a cosigner, your loan request will be accepted more quickly, which means you may be eligible for advantageous rates of interest.
- Credit Score
Why is a credit score considered one of the most important factors in personal loans? The financial institution will evaluate your credit score along with your earnings to determine your ability to repay as a borrower. If your credit score is poor, you pose a higher risk as a borrower. In this instance, getting a loan request accepted could be difficult.
However, Maintaining a Good Credit Score Will:
- Enhance the entire eligibility of the applicants.
- It indicates that you are a reliable borrower.
- Let’s get your loan request accepted quickly.
- It makes you eligible for cheaper interest rates.
- Allows you to take out a large loan sum.
- Debt Consolidation
Consolidation of debt is the process of combining different debts and covering their installments in a single payment.
In such a scenario, you may hold more than one credit card and a continuing loan with the exact same lending institution. The financial institution may treat this as a debt-consolidation loan.
Meanwhile, it is essentially a personal loan. Merging various outstanding amounts into a single loan allows you to better maintain the account you have for loans.
Additionally, there is another advantage to taking out a debt-consolidation loan. A personal loan may have a significantly lower APR than those on your credit cards. This will help you save a lot of money on interest costs if you skip a due date.
- Fixed Rates of Interest
Whenever you acquire a loan for personal use with an interest rate that is fixed, you will continue to pay the same rate for the remainder of the loan term. Furthermore, with fixed interest rates, you can better organize the monthly repayments on loans since you must set aside a specific sum every single month.
- Floating Rates of Interest
Floating rates of interest are changeable rates. These are related to market scenarios. Therefore, if you ask for a loan featuring fluctuating rates of interest, the interest rate can fluctuate during the term. This may become useful if the current market patterns indicate that the rate of interest will fall.
- Hard and Soft Inquiry
Financial institutions contact credit bureaus for more information about your credit history and score. This gets recorded as a hard inquiry, which may reduce your credit score a bit. That is why it is not advisable to make applications for more than one loan at the same time.
Although checking your credit report along with your score is considered a soft inquiry, as a result, your credit score remains unaffected. Conversely, if a financial institution analyses your credit to determine whether to approve you for a personal loan (even if you still haven’t asked for one), it is considered a soft inquiry.
- Amortization
Loan amortization is the method of paying back a personal loan with set amounts regularly. Whenever you’re taking out a personal loan, you must repay it within a set time frame. This timeframe is known as the loan term. This personal loan repayment structure is divided into multiple minor instalments over the loan’s term. Additionally, you don’t simply repay the loan amount taken out. However, in addition to the loan’s principal, you must pay interest.
Interest and principal repayments are paid through EMIs of a predetermined amount, making it easier to keep up with loan commitments while maintaining other financial commitments.
The loan amortization plan will indicate to you the precise means by which you will repay the personal loan and how the loan sum you owe will decrease as time goes on.
The amortization calculator applies a particular formula to figure out the loan payback arrangement:
A = [i x P x (1 + i)n] / [(1 + i)n -1]
Where “A” represents, “Periodic Repayment Amount”
“P” Represents “Principal”
“i” represents “Interest Rate”
“n” Represents the total number of payments.
- Prepayment Penalty
If you pay back your loan amount before the loan term expires, the financial institution will impose prepayment penalties or charges. This is because these assist lenders in recovering at least some of the interest lost as a result of a prepayment that has been made. However, not every lender needs a prepayment charge, so always keep a watch out for these!
- Secured and Unsecured Loans
A secured loan is backed by security or collateral. If the applicant fails to make the loan’s repayment, the financial institution may confiscate the collateral. Unsecured loans are free of any security or collateral.
- Loan Term or Tenure
The duration of the loan, also known as tenure or term, is the length of time you have (in months) to repay the money you borrowed. Personal loans typically have a term of 12 to 60 months.
- The Debt-to-Income (DTI) Ratio
DTI is an approximate representation of a person’s overall monthly debt relative to the person’s gross monthly earnings. The DTI ratio, presented as a percentage, represents one of the most important elements in determining a person’s creditworthiness.
- Gross Income
Gross income is the amount of money earned before taxes and other expense deductions are taken into account. This comprises every means of revenue, such as wages, profits from businesses, and interest.
- Origination Fee
Origination charges are just once administration charges charged by certain financial institutions to prospective customers for the processing, funding, and/or underwriting of their loan. Origination charges are often determined as a percentage of the overall loan sum, although these differ by lender.
- Loan Foreclosure
Each loan has a predetermined term. Loan foreclosures take place whenever you choose to repay an outstanding loan earlier than the end of its tenure, either completely or partly.
- Equated Monthly Installment (EMI)
An EMI is a predetermined sum that you repay to the financial institution on a particular date every month until the loan term is completed. It equates to the entire sum of the principal plus the rate of interest that applies.
- Pre-Closure Charges
Pre-closure implies totally repaying a personal loan before the loan term expires. Pre-closure penalties, like prepayment fees, range between 2 and 5% of the borrowed amount.
- Credit Score
Whenever it comes to getting financial products and services, your credit score is quite significant. This is among the very first points a financial lender will look into when you ask for a loan. A credit score is a 3-digit number that represents your credit rating and has been developed over time. The probability of loan acceptance increases if your credit score is normally above 700.
- Personal Loan Balance Transfer
When you decide to transfer the remaining personal loan amount from a particular institution to a different one, you are utilising the PLBT function. It comes about when a different lender presents a lower rate of interest on the outstanding balance. The main objective of a PLBT is to lower the interest rate on the balance that is still outstanding. As a result, it is critical that you thoroughly analyse the PLBT offer to significantly lower total interest payments.
- Top Up Loans
A top-up loan is a borrowing option provided by the financial institution that allows you to take out extra funding over and beyond your current personal loan amount. Top-up loans are not new loans.
Bottom Line
The information above will help you if you are thinking about asking for a personal loan. However, in advance of applying for a personal loan, you must carefully evaluate your financial condition and avoid incurring further debt.
At this point, once you’ve mastered the terminology of personal loans, look at the most reputable financial institutions and discover how to go about applying. As with any type of financial obligation, you must be knowledgeable about the specifics of personal loans and think about speaking with someone with financial expertise to ensure it’s a good fit for your specific financial position.