The following loan terminologies and definitions are intended to provide basic, informal meanings for words and phrases.
The phrases listed here will help you improve your loan vocabulary to make better decisions when borrowing money. Any particular queries you may have will be gladly answered.
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1. Interest Rate Variable
When you take up a variable-rate loan, the interest rate changes according to a benchmark rate set in the loan agreement. A home equity line of credit is a frequent example of a financing option with a variable interest rate. The frequency with which the interest rate adjusts varies per lender. Your payments may increase or decrease throughout the loan term if you pick a variable interest rate loan.
2. Unsecured Credit
An unsecured loan does not require any form of security. Credit cards, personal loans, and school loans are all instances of unsecured loans. If you take up an unsecured loan, the lender cannot confiscate your personal belongings until a judge grants them a judgment.
Read Also: What Is Loan – A Comprehensive Guide
3. Soft Credit Check
Soft credit checks happen when you look at your credit report, apply for a job, or grant a lender permission to do a brief credit check on you. Your credit score is unaffected by a soft credit check. When prequalifying for a loan, allowing a lender to do a mild credit check is beneficial. By prequalifying, your lender will be able to offer you an estimate of the APR and terms of your loan if you apply.
It’s a good idea to prequalify with various lenders to compare rates to get the greatest interest rate available.
4. Recourse Loans
A recourse loan is backed up by collateral. If you default on your loan, the lender has the right to take the collateral. In addition, if the asset connected to the initial loan isn’t enough to fulfill the obligation, they may be able to pursue additional personal assets.
5. Secured Loan
A secured loan is backed by collateral. The lender has the right to take the asset if you default on the loan. Home equity loans, vehicle loans, and mortgages are all instances of secured loans.
The principal refers to the amount of money you committed to borrowing. The principal balance of your loan reduces when you return it. The interest you owe is not included in the principal amount.
7. Prepayment Penalty
If you pay off some or all of your loan debt before the end of the loan term, some lenders will charge you a prepayment penalty. Some mortgage firms, for example, may charge you 2% of the remaining principal balance if you pay off your loan early. Prepayment penalties on Federal Housing Administration (FHA) mortgages and student loans are prohibited under federal law.
8. Loan Terms
The length of time you have to repay your loan is called the loan terms. If you take out a six-year vehicle loan, for example, the loan duration will be six years.
9. Non-recourse Loans
Non-recourse loans are loans that are not repaid if the borrower default.
A non-recourse loan is not backed by any assets. If you default on your loan, the lender has the right to take the collateral. The lender, on the other hand, has no legal authority to confiscate any further personal property.
10. Loan Limit
Your loan limit is the utmost amount a lender will lend you. Based on your income, creditworthiness, and DTI, a lender will enable you to borrow a specific amount of money. Although a lender may enable you to borrow more than you can afford, it’s a good idea to think about your budget before taking out a loan.
11. Loan Origination Fee
Some lenders impose origination fees for expenditures connected to your loan, which are taken from the loan amount. This charge covers the cost of underwriting, processing, and managing your loan. If a lender charges a 5% origination fee and you borrow $10,000, your account will be credited with $9,500 ($10,000 – $500).
12. Late Fee
Your lender may charge you a late fee if you make a late payment on your loan. The amount of the late fee and when the lender charges it varies per lender. Some lenders, for example, may not charge you a late fee until your payment is 15 days past due. Your loan agreement contains this information.
13. Loan Deferment
Some lenders can enable you to postpone your loan if you are having financial difficulties. You will not be liable for repaying the loan during this time. Your debt may, however, continue to accrue interest. The deferral lengthens the loan period, thereby increasing your overall borrowing costs.
14. Loan Agreement
A loan agreement is a legal document that binds you and the lender together. You’ll discover essential information in this agreement, such as:
- The total amount owed, including both principal and interest.
- Percentage rate per year
- The amount of the late fee
- Schedule of payments
- How do you pay back your loan?
- What happens if you don’t pay your loan back?
It’s crucial to read this contract since some lenders put details on utilizing the cash. When you take out a personal loan, for example, most lenders will tell you that you can’t use the money for schooling or investment.
15. Installment Loans
A set payback time is specified in the loan agreement for an installment loan. Let’s assume you want to refinance a high-interest debt with a personal loan. The lender will expect you to make monthly payments or installments to repay the loan once you get the lump sum payment.
16. Loans Amortization
Lenders utilize loan amortization to generate a set payback plan for fixed-interest rate loans. Calculating how much money will go toward principal and interest for each installment payment is part of the process.
17. Hard Credit Check
The lender will do a rigorous credit check or inquiry when you apply for a loan. This credit inquiry generally has a little influence on your credit score, dropping it by up to four points in some cases. A hard credit check lasts two years on your credit record. However, some credit reporting companies, such as MyFico, only accept hard credit checks from the previous year.
18. Gross income
Your gross income is the amount of money you make before taxes, and other deductions are deducted from your pay. A lender may use your gross income to determine your debt-to-income ratio when deciding whether or not to lend you money (DTI). This ratio compares your monthly income to the amount of money you spend each month on debt. A lender can choose how much money to lend you based on this percentage.
19. Grace Period
The borrower is not responsible for repayments during the grace period of a student loan. During this period, however, interest typically accrues (unless on direct subsidized loans), and you can choose to pay it or not. After you graduate, drop below half-time enrollment, or quit school, you will usually have a grace period on your loans. Some federal student loan debtors, for example, receive a six-month grace period after graduation.
20. Fixed Interest Rate
A fixed interest rate loan has an interest rate that stays the same throughout the loan term. The monthly payment does not vary since the interest rate remains constant. The consistent monthly installments make budgeting for your loan payments much easier.
21. Credit Score
Lenders will examine your credit score before accepting your loan to see how dangerous a borrower you are. Your FICO credit score, which runs from 300 to 850, will be used by some. The following criteria go towards determining your score:
- Payment history: 35%
- Current debt amount: 30%
- Credit history length: 15%
- Credit mix: 10%
- New credit activity: 10%
Borrowers with strong to outstanding credit scores often get the best loan interest rates. A decent credit score, according to the FICO credit model, is at least 670.
A co-signer is a person who agrees to sign a loan to enable someone with a bad credit score or no credit history to get a loan. If you co-sign for a loan, you will be held financially liable if the principal borrower defaults or misses a payment. This can harm your credit as well, not just the principal borrower’s.
The term “co-borrower” refers to someone who accepts to share responsibility for repaying debt with you. You and your partner, for example, would be co-borrowers if you both qualified for a mortgage loan. To approve applicants, lenders look at the credit and income of both the principal borrower—you—and the co-borrower. If the loan is granted, both of your names will appear on the loan paperwork, and you will own the asset jointly.
Collateral is an asset that you may use to obtain a loan by pledging it to a lender. Real estate, automobiles, cash, and investments are all common kinds of collateral. When you take out a vehicle loan or a mortgage, for example, the asset that secures the loan is the car or the home. If you don’t pay back your loan, the lender has the option of repossessing your automobile or foreclosing on your property. On secured loans, collateral is necessary; on unsecured loans, it is not.
25. Borrower Default
A borrower defaults on a loan when they fail to repay the debt as agreed. The lender may be ready to work with you if you’re a few days late on your payment. If you don’t answer after they try to contact you for months, they may transfer your debt to a debt collector. The debt collector may report you to the credit bureaus, causing your credit to suffer.
The amount of time a debt is deemed in default varies depending on the lender and the kind of obligation. Federal student loans, for example, are not deemed in default until they are nine months past due. Contact your lender or check the conditions of your loan to find out when it will be deemed in default.
26. Annual Percentage Rate (APR)
The annual percentage rate (APR) is the total cost of a loan over the course of a year. The interest rate, as well as any other financing costs, are included in this rate. When you take out a personal loan, for example, you may be required to pay loan origination costs. The interest rate would be lower because the loan origination cost is not included if you looked at the interest rate.
The APR is required to be disclosed by lenders under the Truth in Lending Act, so you know exactly how much a loan will cost.
You are the borrower when you seek a loan and get cash. You, as the borrower, will be responsible for repaying the loan according to the agreed-upon conditions.
An extra payment is made to decrease a loan’s main sum.
29. Deferred Payment Loan:
A loan permits the borrower to postpone all monthly principal and interest payments until the promissory note’s maturity date when the outstanding principal loan balance and all accumulated interest become due and payable.
30. Inspection Reports
Reports commissioned by the borrower to examine the home’s quality. This usually includes a Termite Report as well as a “whole house” inspection. Roof, foundation, geological, and septic tank inspections are some of the other studies that may be obtained.
Interest is a monetary payment made in exchange for the use of money, generally represented as a percentage. Also, a property right, portion, or title.
32. Interest-Only Payment Loan
Non-amortizing loan in which the lender gets interested over the period of the loan and the principal is returned in one single amount at maturity.
Paying down existing debt and creating a new one is referred to as refinancing.
The principal home is being restored. Repairs, renovations, and additions to the permanent structure of the principal house are often included.
35. Rescission Rights
The right to terminate a contract and put the parties back in the same position before the contract was signed. A borrower has three working days from signing the loan paperwork to terminate the loan without penalty in a refinancing transaction. Purchase transactions are exempt from the right to revoke.
Collection of payments and administration of operational operations linked to a mortgage are referred to as servicing.
37. Loan-to-Value (LTV) Ratio
The proportion of a mortgage loan’s principal balance to the securing property’s value, as defined by the purchase price or appraised value, whichever is lower.
38. Automated Clearinghouse (ACH):
An electronic payments transfer network that allows direct transfers of monies between bank accounts and lenders. Borrowers who are not on active payroll are not eligible for this function.
39. Net Income
After subtracting any Federal and/or State payroll taxes, net income is the monthly wage given to a borrower.
40. Preliminary Disclosures
A general name for a collection of disclosure papers must be provided to a loan applicant under Federal law. Truth-in-Lending, Estimate of Settlement Charges, Fair Lending Notice, and a California Credit Disclosure are among the types available.
Taking out a loan to cover expenditure, whether for a car or a home renovation project, might be a wise choice. However, if you are unfamiliar with key loan terminology, you may be at a disadvantage when analyzing loans or comparing loans from different lenders.