Top 10 Personal Loan Terminologies Used in Finance World
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Top 10 Personal Loan Terminologies Used in Finance World

Top 10 Personal Loan Terminologies Used in Finance World

Millions of Americans use loans to cover unexpected expenses, home improvements, debt consolidation and much more. It seems the basics are quite straightforward like the one that avails student loans for higher studies, the one for a loan to buy a car, a mortgage loan to purchase a house and so on and so forth. To add to the list these days there is one more loan type that is gaining rapid fame as it is flexible, easy to apply for, usually offers low interest rates (if your credit score is good) and the loan amount is smaller when compared to other loan types. By now you should have guessed it right, as it is called a personal loan. Make your finance partner and apply online today!

Recent developments in loans can be attributed partly to the financial crisis, to the historical regularities taking into account the severity of the past recession and the loan supply factors exerting a considerable descending pressure on loans growth since the beginning of the financial tensions that started around a decade ago. As a result these days lending options are many like- banks, p2p lending, credit unions and the latest -online lenders. Online lenders are introducing new types of loans to make it easier for customers to avail and utilize. Any loan sanctions are generally based on a combination of the borrower's income, the credit history and the loan terms.

So if you have thoughts about taking a loan for any reason, it is good to know a few prevailing loan terminologies before jumping the bandwagon. Here are the top ten:

1. Annual Percentage Rate

  • APR stands for Annual Percentage Rate and in a simple language it is the numeric representation of your interests rate expressed as a percentage depicting the actual yearly cost of your funds over the period of a loan.
  • It can be fixed or variable.
  • Types of APR include purchase APR, cash advance APR, promotional APR and penalty APR.
  • According to the division of finance in Missouri, the APR=FEE (Origination fee + Interest) ÷ Amount Financed ÷ Number of days in loan × 365 × 100

2. Credit History

  • It is basically a record of consumers. From that, one could check the borrower's ability to repay debts and acts as a demonstration of a responsible debt repayment over a period of time.
  • It is represented through a credit report sourced by banks, credit card companies, collection agencies, governments and it includes the details of the consumer's credit account like when it was opened, the account balance, transactions history and other information.
  • One can call the Annual Credit Report at 1-877-322-8228 and follow the instructions to check their credit history.

3. Collateral

  • According to Investopedia, a collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower fails to make promised loan payments, the lender can seize the collateral to recover its losses.
  • Loans backed by collaterals typically have lower interest rates compared to unsecured loans.
  • House or home equity, cars, your investments and savings can be assets that could help you qualify when borrowing with collateral loans.

4. Debt-to-income ratio(DTI)

  • DTI or debt-to-income is calculated by dividing total recurring monthly debt by the gross monthly income, and expressed as a percentage.
  • It is a method to measure an individual's ability to manage monthly payments and debts.
  • Low DTI means you are less risky to lenders.

5. Debt-Consolidation

  • It simply means taking out a single loan to pay off a number of other loans/ debts.
  • Helps to pay off a number of liabilities and mostly unsecured consumer debts.
  • Multiple debts are combined into a larger piece of debt with favorable payoff terms like a lower interest rate or lower monthly payment or both.

6. Lien

  • It is a legal claim or the right for the lender to take possession of a property /an asset if the debt repayment doesn't happen as agreed.
  • In legal terms it is a formal document signed by the party to whom money is owed and sometimes by the debtor who agrees to the amount due.

7. Principal

  • It is the total amount owed on a loan excluding interest or the money that you originally agreed to pay back.
  • We all are aware of the simple interest calculation formula [A=P (1+RT)] which implies the cost of borrowing based on the principal amount.
  • Any payment made on a loan will be applied first to any fees that are due for example, late fees then the rest of your payment will be applied to the principal balance of the loan.

8. Installment

  • It is defined as a sum of amount payable as one of several equal payments for something, spread over a contracted duration that may be months or years.
  • Having a loan of a specific amount that is paid back according to a set schedule.
  • It can also be single payment.

9. Repayment Term

  • It is the amount of time or the duration within you need to repay the loan.
  • The longer the loan the lower your payments but higher are the overall interest charges.
  • Periodic payments include part principal plus interest.
  • Can be monthly, semi-annual or annual for long term loans.

10. Prepayment Penalty

  • Some lenders impose charge/fees on a borrower who opts to pay off part or whole of the loan in advance. This is known as prepayment penalty.
  • Lenders do this to mitigate prepayment risk because if the borrower pays the loan off early lender loses future interest on the loan payments.

Your rate on loans may vary substantially based on the lender you choose. Several new lenders have entered the market and for a while, American consumers did not have that option. With the rapid growth of online lending, consumers finally have a choice and now that you are well-known with popular loan terminologies, hope you are ready to apply.

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This article has not been reviewed by Odyssey HQ and solely reflects the ideas and opinions of the creator.
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