Personal Loans Glossary – Important Terms You Must Know

  • Annual Percentage Rate (APR): The Annual Percentage Rate is basically the overall cost of credit. A loan’s APR is essentially its overall finance charge. It includes the principal as well as the interest component of the loan, and is shown as an annual rate. The APR enables customers to compare various loans with different charges and interest rates.
  • Application Fee: It is the fee charged by a lender to cover costs associated with processing the loan.
  • Automatic Payment: It is one of the repayment options for your personal loan. By choosing automatic payment facility, your monthly EMIs will be deduced directly from your bank account on a particular day each month and you won’t have to do it manually each time.
  • Borrower: A borrower is someone who takes a loan from a lender.
  • Collateral: Security as it is also called, a collateral can be any asset that backs your loan. In case you fail to repay the loan on time or continuously default on payments, the lender has the right to repossess the asset you pledged as collateral for the loan.
  • Credit Agency: They are organisations that review your credit information and create credit reports that can be checked by lenders to determine your eligibility for a personal loan.
  • Credit History: It is a record of all the borrowing and repayment transaction an individual has undertaken. It is one of the most crucial factors that determine an individual’s eligibility for a personal loan.
  • Credit Report: It is a report generated by a certified credit rating agency showing an individual’s credit history.
  • Credit Score: A credit score is an individual’s valuation and ability to repay a loan. It is computed based on his/her history of borrowing and repaying.
  • Debt Consolidation Loan: These are loans that can be taken to combine all your debts into one. These loans come with lower interest rates and are ideal if you have multiple loans to repay in addition to credit card dues to clear. They club all your debts under a single umbrella, thereby effectively ensuring that you have only one loan to clear.
  • Default: In case a borrower does not meet the legal obligations of a loan, he/she is said to be defaulting on the loan.
  • Fixed Interest Rates: Interest rates that remain unchanged over the tenure of the loan are called fixed interest rates.
  • Floating Interest Rates: As opposed to the working mechanism of fixed interest rates, floating interest rates are those that keep changing over the tenure of the loan.
  • Guarantor: A guarantor is essentially an individual who guarantees that you will repay the loan in full. Lenders usually require guarantors when the credit history of a borrower is not up to the mark. In these cases, guarantors become legally liable for the repayment of the loan.
  • Interest Rate: Interest rates are basically the cost paid by the borrower for availing a loan from a lender. It is a percentage of the loan amount that will have to be paid along with the principal amount every month.
  • Late Payment: When you delay your monthly EMI payments, it is called late payment and lenders usually charge a late payment fee to customers who do not make their payments on time.
  • Lender: A lender is usually a bank or a financial institution that lends money to borrowers.
  • Line of Credit: Lines of credit are essentially loans that do not require any kind of security or collateral and are usually offered at variable interest rates.
  • Loan Agreement: It is the official document representing the terms and conditions of a personal loan. It also includes the rights as well as the obligations of a lender and borrower.
  • Payday Loans: These loans are unsecured personal loans that can be availed based on your job. They are ideal for financial emergencies. In case you run short of money towards the end of the month, payday loans can be taken for a few days and the repayment can be done once your salary is credited to your account.
  • Prepayment Fees: In case you wish to repay your loan ahead of schedule, you will be charged a prepayment fee. Not all lenders charge this fee, but those that do levy a charge in order to recover some of the money they were expecting to collect as interest on the loan.
  • Principal Amount: The principal amount of a loan is the amount you borrow, exclusive of fees or interest.
  • Secured Personal Loan: It is a loan that requires the borrower to pledge assets as security or collateral.
  • Term: It is the tenure of the loan – the time frame given to you to repay the amount borrowed. 
  • Unsecured Personal Loan: It is a loan that does not require the borrower to pledge any asset as collateral.

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