Financial Glossary: Personal Loan Terminology You Should Know

For most of us, the only financial education we’ve ever received is advice from family and friends. And while their suggestions may be well-intended, it’s no substitute for taking proactive steps to increase your own financial literacy. Because when it comes to making important financial decisions, like applying for a personal loan, it’s important to understand the terminology clearly before signing on the dotted line.

Here’s a list of common financial terms to know that can help improve your financial literacy and make informed decisions as you research and apply for a personal loan.

A

Annual Percentage Rate (APR) – The yearly cost of your loan proceeds, calculated for the term of your loan. It includes interest charged on your loan, as well as any upfront finance charges, such as loan origination fees or application fees.

C

Charge-off – An accounting term generally used to describe a loan that has become seriously delinquent. When a lender charges off a loan, this means the loan is written off as a loss to the company from an accounting standpoint. The borrower is still responsible for paying back the full amount of money that is owed. A charged off loan typically will remain on a borrower’s credit history for seven years and will likely have a negative impact on credit scores during that time.

Collateral – Property that is pledged as security by the borrower for the repayment of a loan. If the loan is not paid in full or it defaults, the lender may take possession and sell the collateral to try to regain their losses.

Cosigner – A person, other than the main borrower, who signs a loan application with the primary borrower. The cosigner also adds their income and credit score for consideration, which could increase the odds of a loan being approved.

Credit – The ability to borrow money in order to purchase goods or services now and pay later.

Credit score – A three-digit number that tells lenders how likely you are to repay the loan on time. It is possible to have three different credit scores as there are three major credit bureaus that create their own unique scores based on the information in your credit report. Learn more about why credit scores are so important to lenders.

Creditworthiness – A borrower’s ability to repay debts in the future. A person’s creditworthiness is based on various factors that lenders use to evaluate the likelihood a borrower will repay his or her credit obligations.

D

Daily simple interest – A method of calculating interest on a loan on the current unpaid principal loan balance. Interest is charged daily and payments are applied first to any other charges provided for in your loan agreement, and then toward the interest accrued and then to the principal balance. If you pay early, more of the payment is applied to the principal, and if you pay late, more of the payment is applied to interest. As the balance decreases, more of your monthly payment is applied to principal. The amount of your payment applied to interest appears as a separate line item in your monthly statement.

Debt consolidation – Taking out a new loan to pay off one or more outstanding debts. Examples of debt you can consolidate include credit cards, personal loans and auto loans.

Deferment – The ability to temporarily postpone making a loan payment until a later date due to economic hardship. A loan deferment can allow a borrower to keep their account current and avoid penalties like late fees.

F

Fixed payments – Payment amounts that stay the same throughout the life of a loan, provided the borrower makes scheduled payments on time.

Fixed rate – An interest rate on a loan that does not change over the life of the loan. This is common for personal loans.

I

Installment loan – A set amount of money borrowed that is repaid with interest through fixed monthly payments. The most common types of installment loans include mortgages, auto loans, personal loans and student loans.

Interest rate – The amount a lender charges a borrower for taking out a loan, usually expressed as an annual rate that is charged to your unpaid principal balance.

L

Lien – A lender’s legal claim on a consumer’s property to secure payment of an unpaid debt.

O

Origination fee – A one-time, upfront operational fee a lender charges to cover loan processing costs.

P

Precomputed interest – A method of calculating the interest that will be due over the term, where interest is precalculated at the time you take out your loan to determine the total amount you will pay back. Your loan agreement shows this amount as the “Total of Payments”. Your monthly payments then are applied to other charges provided for in your loan agreement, and then to reduce “Total of Payments” amount.

Prepayment fee – A one-time fee some lenders charge for paying off a loan ahead of schedule.

Prequalification – A quick way for lenders to determine what kind of loan, if any, a borrower may qualify for. (It’s important not to confuse prequalification with preapproval, which is a more formal commitment from a lender and often requires additional documentation.)

Principal – The amount you’ve borrowed from a lender.

R

Refinancing – Paying off an old loan with a new loan in order to save money on interest, lower monthly payments or get more favorable loan terms.

S

Secured loans vs. unsecured loans – Secured loans are loans for which repayment is secured by collateral. Unsecured loans don’t require collateral and are often issued based on the creditworthiness of the applicant and may have higher interest rates than secured loans.

Signature loan – A type of unsecured loan that relies on a borrower’s credit history, income and signature as assurance that he or she will repay it. It’s also known as “good faith loan” or “character loan.”

T

Term – The length of time in months or years that the borrower agrees to repay the loan.

V

Variable rate – An interest rate that can change over time in response to changes in the market. With a variable interest rate, a loan payment can get larger or smaller as the prime rate changes.

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