Personal loans can be a great financial tool for those looking to consolidate debt, make a big purchase, or cover unexpected expenses. However, navigating the world of personal loans can be confusing, especially when it comes to understanding all the terms and jargon used in the process. In this blog, we will take a closer look at some of the most commonly used terms in personal loans, so that you can make informed decisions when choosing the right loan for your needs.
APR (Annual Percentage Rate)
Annual Percentage Rate (APR) is the total cost of a loan, expressed as a yearly interest rate. The APR takes into account not only the interest rate but also any fees or other charges that may be associated with the loan.
Balance transfers refers to transferring the balance of an existing loan to a new loan, often with a lower interest rate. Balance transfers can be a useful way to save money on interest and manage your debt, but it’s important to understand the terms of the new loan and any associated fees.
Collateral is property or assets that are used to secure the loan. If you default on the loan, the lender can take possession of the collateral as payment for the debt.
Co-Signer / Guarantor
Co-Signer / Guarantor is someone who signs the loan agreement with you, agreeing to repay the loan if you are unable to. Co-signers can help increase your chances of getting approved for a loan, or help you secure a lower interest rate.
Credit score is a numerical representation of your creditworthiness, based on information from your credit report. Your credit score is a key factor in determining the interest rate and loan terms you may be offered.
Default is when you fail to make your loan payments according to the terms of the loan agreement. Defaulting on a loan can have serious consequences, including damage to your credit score and legal action by the lender.
Debt consolidation refers to the process of combining multiple debts into one loan, typically with a lower interest rate and a single monthly payment. Debt consolidation can simplify debt repayment and make it easier to manage your finances, but it’s key to understand the terms of the new loan and any associated fees before consolidating your debt.
Interest rate is the amount you will be charged for borrowing money, expressed as a percentage of the loan amount.
Loan term is the length of time over which you will repay the loan. Loan terms can range from a few months to several years, depending on the lender and the loan amount.
Late fees is a fee charged by the lender if you fail to make your loan payment by the due date. Late fees can vary greatly from lender to lender, so it’s beneficial to read the loan agreement carefully and understand the terms of your loan.
Pre-Approval is an estimate of the loan amount and interest rate you may be eligible for, based on your credit history and income. Pre-approval can help you determine what type of loan you can afford, and can also give you a bargaining chip when negotiating with lenders.
Processing Fee is a fee charged by the lender for processing the loan application and preparing the loan agreement. Processing fees can vary widely from lender to lender, so it makes it relevant to compare fees and understand what you will be paying before you agree to a loan.
Prepayment refers to paying off your loan before the end of the loan term. Some personal loans may have penalties for prepayment, so it’s essential to understand the terms of your loan agreement before making extra payments.
Secured loans is a loan that is backed by collateral, such as a car or a house. Secured loans can be easier to obtain, and often come with lower interest rates, but they can put your assets at risk if you are unable to repay the loan.
Unsecured Loans is a loan that is not backed by collateral, and is typically based on your credit history and income. Unsecured loans can be more difficult to obtain, but they do not put your assets at risk if you are unable to repay the loan.
By understanding these key terms, you will be better equipped to navigate the personal loan process, and find the loan that best fits your financial needs. Just remember to always read the loan agreement carefully, and never sign on for a loan that you cannot afford to repay.