It is very important to know and understand most loan terminologies. This will help you ease through when reviewing lenders and their loan terms. As such we have put together quite a good number of loan terminologies would be meeting day in and day out as a borrower.
There are different forms of loans with several terminologies that might either differ or have the same meaning. Understand your vocabularies when it comes to loans.
Here are some loan terminologies you need to take into consideration before you apply for a loan;
Lender – A financial institution or a person that provide a loan to a borrower. He/she is also known as the creditor since give out the loan to the person who requested for it. They set the terms and rates of the loan for repayment by the borrower.
Borrower – This is the opposite of a lender. Thus, since the lender is the giver, a borrower is the receiver. He/she is also known as the debitor. They apply and receive loans and make payments to it.
Principal – The loan amount a borrower apply for is known as the principal. For example, when someone apply for a loan of $2000, this amount is regarded as the principal. It’s also the principal amount you pay interest on.
Interest Rate – This is the fee paid on the principal amount. It is calculated as a percentage of the amount borrowed. An interest rate on a loan can be 5%, meaning any amount you borrow, you will pay 5% of it as interested rate.
Origination Fee – This is a fee charged by a lender in order to process your loan. This amount is either added or subtracted from the principal amount.
Annual Percentage Rate (APR) – This is the total yearly amount you pay on your loan (principal) including other charges like interest rate, origination fee and others. It’s calculated in percentage.
Credit Score – This is a number used by lenders to determine the creditworthiness of a borrower. There are several factors that are put together to get that number, they include; credit history, payment history, and others. Not all lenders review borrowers with credit score.
Loan Agreement – Terms of a loan is regarded as the terms and conditions a borrower must adhere to. The terms contains the repayment period, interest rate, origination fee (if applicable), APR, late fee payment, payment schedule and methods.
Loan Terms – This refers to the period or time frame to repay your loan. Loan terms varies depending on the kind of lender and loan amount. When there is a 3-year term on your loan, it means you must repay your loan within 3 years.
Downpayment – This mostly goes with Mortgage loans. Borrowers are expected to make an upfront payment based on the price purchase of the house. It is calculated as a percentage of the price of the house. Some downpayment ranges between 10 and 20% . Which means a borrower has to make a 10% of $2000 as downpayment if thus the cost of the house.
Grace Period – It is the amount of time given after a payment date is due. It’s is usually 15 days after due date.
Mortgage Loan – A form of loan used to buy or refinance a house and can also be used to build your dream house. This loan type comes with providing a collateral.
Collateral – This acts as a security in exchange for a loan. In other words, it’s an asset a lender request in order to secure a loan especially for Mortgages.
Co-signer – An individual with good credit score who agrees to sign a loan agreement for someone with bad or lower credit score.
Installment Payment – Here the borrower repay the loan in small amount monthly for the time frame of payment. It’s a monthly payment method.
Default on loan – When a borrower miss several payment periods which goes against the loan terms. Thus if you fail to make payment between a certain number of days according to the loan agreement then your loan goes into default. This will however affect your credit score.
Secured and Unsecured Loans – As we can see they are opposite of each other. Secured loans comes with providing a collateral while Unsecured loans doesn’t.
Late Fee: This is the fee paid when a borrower fails to make payment on the due date.
Pre-approval – This system is used by borrowers to determine how much they can get when they apply for a loan. This mostly applies to people with lower credit score or no credit score history.
Pre-qualification – This is step taken by a lender to review your potentials to see if you are likely to qualify for the loan.
Prepayment – This is a form of making advance payment on a loan before due date. Thus, you make an early payment before the deadline date.
Repayment Plan – It is a method of paying back loan over the expected or agreed period of time.