Personal loans are excellent when you need quick cash but don't want to dip into your savings or investments. For example, a personal loan can come in handy if you need to fund your wedding, finance your child's education, or pay off medical bills.
But, before you go ahead and apply for a personal loan, you must research and compare lenders. With so many personal loan options, new terminology, and rows of numbers, it is easy to get confused! While some terms are self-explanatory, you may find yourself in a fix when you come across terms like debt consolidation loan or loan amortization.
But don't worry. In this article, we will explain the personal loan glossary for you. Armed with this knowledge, you can surely make a more informed decision! For your convenience, the personal loan terms are presented in alphabetical order.
Let us dive in!
A
#1 Annual Percentage Rate (APR)
A loan's annual percentage rate, or APR, is the annual cost you promise to pay back when you apply for a personal loan.
Is it the same as the interest rate? Not exactly! APR on a personal loan bundles together the interest rate and any annual fees and is expressed as a percentage rate. So by looking at the annual percentage rate, you get a complete picture of the loan's yearly cost you have to bear.
But what if your lender does not charge annual fees on your personal loan? In that case, the interest and annual percentage rates are the same. In any case, it is best to use the annual percentage rate as the basis of comparison.
B
#1 Borrower
The borrower is the person who is applying for the loan. Sometimes, a borrower is also called the applicant.
The borrower's responsibility is to pay back the loan. A loan can have more than one borrower mentioned in the loan application. Then, if one of the borrowers fails to pay back the loan, the other borrower needs to make payments to avoid default.
C
#1 Cosigner
A cosigner for personal loan is someone who signs jointly with a borrower. By agreeing to the loan terms, they promise to pay back the loan if the main borrower is unable to make payments. The cosigner can be a spouse, family member, or friend.
Including a cosigner for your loan application is a good idea if your credit score or income is insufficient to qualify. When you sign up with a cosigner, your application will get approved faster, and you may get preferential interest rates.
#2 Credit score
Your credit score is a three-digit number that summarises your creditworthiness. For example, when you take a loan or a credit card, each transaction and repayment gets recorded in your credit report. This is then reflected on your credit score, calculated by a credit bureau like CIBIL or Experian.
Why is credit score one of the most significant personal loan terms? Your lender uses your credit score and income to determine your repayment capacity as a borrower. You present more risk as a borrower if you have a low credit score. In this case, getting your loan application approved may be hard. On the other hand, having a high credit score can:
- Improve your overall eligibility
- Attest that you are a trustworthy borrower
- Get your loan application approved faster
- Make you eligible for lower interest rates
- Allow you to borrow a high loan amount
D
#1 Debt consolidation
Debt consolidation means a combination of multiple debts simultaneously and paying the instalments for them at once.
For example, you may have two or more credit cards and an ongoing loan from the same lender. Your lender may classify this as a debt consolidation loan. However, in essence, it is a personal loan. Combining multiple due amounts into one loan makes it easier to manage your loan account.
There is one more benefit of a debt consolidation loan. A personal loan may offer you a much lower APR than your credit cards. This can help you save considerably on interest payments if you miss a bill.
F
#1 Fixed interest rates
If you borrow a personal loan at a fixed interest rate, you will pay the same rate for the rest of the loan tenure. In addition, with a fixed interest rate, it is easier to plan your monthly loan payments because you have to set aside a fixed amount each month.
#2 Floating interest rates
Floating interest rates are variable interest rates. They are linked to changes in market conditions. So, when you apply for a loan with floating interest rates, the rate may change throughout the tenure. This can be helpful if the prevailing market trends suggest that the interest rates will go down.
H
#1 Hard Inquiry and soft inquiry
Lenders reach out to credit bureaus to check your credit report and score. This is reflected as a hard inquiry and can lower your credit score slightly. That is why it is recommended not to apply for too many loans at once.
However, when you check your credit report and score, it is a soft inquiry. Therefore, it does not affect your credit score. Similarly, if a lender checks your credit information to prequalify you for a personal loan (i.e., when you haven't applied), it is reflected as a soft inquiry.
I
#1 Interest and interest rate
Interest is the money you pay to your lender when you repay the loan. When the lender offers you the loan terms, they will mention the interest rate, which decides how much interest you will have to pay.
You will continue to incur interest on the due amount each month throughout the tenure. Note that the interest is more important than the principal amount. So, your monthly payments will first pay down any outstanding interest. Then, the remaining will go towards lowering your principal.
A good way to assess the overall interest payment is to use a personal loan EMI calculator.
L
#1 Loan Amortization
Loan amortization is the process of repaying a personal loan with fixed payments in a scheduled manner. Your loan amortization schedule lists the following:
- How much money must you pay each month
- When you will make this payment
- How will that payment be divided between the interest incurred and the principal balance?
Some lenders offer personal loans with loan amortization schedules. Typically, they have a three-year payment plan.
P
#1 Prepayment penalty
If you pay your loan before the tenure ends, your lender will charge a prepayment penalty or prepayment fees. This is because they help lenders get back some of the money they lose in interest because of a prepayment. But not all lenders charge a prepayment fee, so keep an eye out for them!
S
#1 Secured loan vs unsecured loan
A secured loan has security or collateral attached to it. If the borrower defaults on the loan, the lender can seize the asset. Unsecured loans do not require any collateral.
T
#1 Term or tenure
The term or tenure is the time (in months) you can take to pay off the loans. Most personal loans have a tenure of 12 to 60 months.
In conclusion
Looking to apply for a personal loan? Turn to Tata Capital. We offer personal loans at attractive rates of interest and flexible repayment options. Visit the website to learn more and check your personal loan eligibility.
11 January 2023
7 mins read
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