All About Personal Loan Glossary and Terminology

Personal Loans are a popular financial product that provides individuals with access to funds for various purposes, such as debt consolidation, home improvements, or unexpected expenses. When exploring Personal Loan, it is essential to understand the associated terminology and glossary of terms to make informed decisions. In this guide, we will delve into a comprehensive list of personal loan glossary and terminology to equip you with the necessary knowledge.

Personal Loan Glossary and Terminology 

Listed below are some most common words used by lenders. Understanding these will help you understand Personal Loans better.

• Annual Percentage Rate (APR)

This is the total percentage of the amount you have to pay on your loan. It comprises your interest amount, loan processing fees, and all of the other charges that your lender imposes on you. These charges could be a flat fee that is levied on all borrowers, or it could be a percentage of your principal amount. You can use the below formula to calculate your APR:

{(Interest charges + Fees/Loan Amount)/Number of Days in Loan Term} * 365 * 100

For instance, if your interest charge is Rs.5,000, fees are Rs.2,000, the loan amount is Rs.1 Lakh, and the duration is 365 days, then your APR can be calculated this way: 

APR = {(5,000 + 2,000/1,00,000)/365} * 365 * 100 

As per the calculation, your APR is 7 %.

• Application Fee

This is a one-time fee levied by the financial institution for processing a loan application. You will have to pay it while submitting your application and it is non-refundable. So, if your lender rejects your application or you decide to cancel it, you will not get the fee back. The cost can differ depending on the lender and you might even be able to negotiate the actual amount with some lenders. Remember that all lenders do not charge application fees.

• Automatic Payment

This is a feature where you authorize your lender to deduct the loan payments from your account automatically every month on a set date. It saves your time and ensures that you never have to worry about paying late fees again. All you have to do is ensure that there are sufficient funds in your account to cover your loan payments. 

• Borrower

Anyone who takes money from a financial institution and agrees to pay it back with interest within a specified tenure is a borrower. This transaction takes place as per a loan agreement between the borrower and the lender. The borrower has to pay the agreed amount as per the repayment schedule and honour the terms and conditions mentioned in the agreement.

• Collateral

Collateral is an asset, such as a house or car, that a borrower pledges to secure the loan. It acts as a form of security for the lender in case the borrower defaults on payments. These are primarily required for secured loans. A loan with collateral is a low-risk loan for the lender as they can claim the pledged asset to recover the outstanding amount. This is why when borrowers provide collateral, they can secure loans at low-interest rates and favourable terms.

• Loan Agreement

It is a legal contract between the lender and borrower, which includes important details related to the approved loan such as the principal amount, interest rates, additional charges, tenure, and repayment schedule. The agreement acts as a written record to ensure mutual understanding and clarity. All the involved parties are expected to abide by the terms and conditions mentioned in it.

• Term/Tenure

This is the duration from the time of the loan’s disbursement to the time when the borrower is supposed to finish repaying the entire amount. This period is agreed upon by the lender and the borrower at the time of loan application and is specified in months or years. The loan tenure plays an important role in deciding the number and number of monthly instalments. A long tenure comes with smaller instalments but with higher interest rates. On the other hand, a short tenure will have larger payments but with lower interest rates.

• Credit History

Your credit history contains information such as your past debts and repayment history, your credit mix, credit exposure, and credit inquiries. Credit history is an important part of credit reports, and it is considered by lenders before issuing loans. If your credit history shows you have paid your debts on time, have low credit inquiries, diverse credit mix, etc, then you are seen as a responsible borrower and vice versa. A good credit history increases your chances of securing a loan at favourable terms and attractive interest rates.

• Credit Report

Your credit report is generated by credit rating agencies based on your previous and ongoing debts. The pattern of your payments is also taken into consideration which shows if you pay your debts responsibly or not. Lenders use this report to evaluate how likely you are to pay back their funds and decide if they should accept your loan application.

• Interest Rate

It is the fee charged by the lender for providing you with the loan amount and is mostly calculated on an annual basis. While paying back the loan, you pay back the principal amount plus interest. Interest rate is a massive factor that needs to be considered while applying for a loan. The interest rate charged to you by your lender can depend on multiple factors such as your income, creditworthiness, market conditions, and loan amount.

• Lender

Any financial institution that provides loans to individuals and businesses is a lender. These loans can be of various types, tenure, and amounts. Before approving a loan, all lenders evaluate the borrower's income, creditworthiness, and other factors. The borrowers are expected to pay back the principal amount along with interest over a specific time period.

• Secured Loan

A secured loan is where you have to provide collateral to your lender. It must be something like a car, property, or other assets. This type of loan is less risky for the lenders because your assets act as a guarantee that you will repay the amount. Secured loans have low-interest rates and long repayment terms. These loans are mostly used for large purchases like buying a home or car. If you are unable to pay back your secured loan, the lenders can take possession of your collateral. 

• Unsecured Loan

Unsecured loans can be availed without providing collateral, which makes it riskier for lenders. That is why these loans come with a higher rate of interest and short repayment periods. To alleviate the risk further, lenders provide loans to those borrowers that have a good credit score. People who opt for unsecured loan primarily use the funds for small expenses like a vacation, weddings, home improvement, etc.

• Prepayment Fee

This is a fee charged by the lender when you pay your outstanding loan amount before the agreed-upon period. Lender’s profit from your instalments which comprise the principal loan amount and interest. When you clear your loan ahead of schedule, they lose out on the interest. However, keep in mind that every lender does not impose prepayment penalties. Those who do, calculate the prepayment fees by using any of these three methods:

Flat charges: A fixed cost regardless of the remaining amount.

A percentage of the balance: A small percentage of your outstanding loan amount will be charged.

Based on your interest rate: The outstanding loan amount plus the interest for the remaining months.

• Floating Interest Rate

This is also known as ‘variable rate’ and it means that rate of interest can change periodically based on market conditions during your loan term. If the variable interest rate happens to decrease, then you will end up saving money. This is not possible with fixed interest rates. On the other hand, the floating interest rate could also go higher, which will require you to spend more on loan payments. So, if you are taking a loan on a floating interest rate, take its possible fluctuations into account.

• Fixed Interest Rate

As the name suggests, this is the cost that the lender charges on the principal amount without changing it throughout the loan's tenure. This is the most common form of interest method, and it is also easy to understand and calculate. Some of the credit products that use fixed interest rates are Personal Loans, mortgage loan, auto loans, bonds, etc.

• Default

Default is a situation where a borrower fails to make their scheduled payments multiple times or for an extended period. This could lead to serious consequences such as being charged late fees and penalties, getting a negative impact on the credit score, losing collateral, having to face legal actions, and more. If you know you will not be able to repay your instalments, then communicate with your lender as soon as possible and try to find a solution.

• Principal Amount

It is the amount that you borrowed from your lender. For example, if you take out a Personal Loan of ?1 Lakh, your principal amount is ?1 Lakh. The principal amount is also one of the factors that are considered when calculating your interest rate. The instalments that you are required to pay after taking out a loan comprise the principal amount and the interest. With each instalment, your principal balance amount decreases.

Conclusion

Now you know many of the common terminologies associated with Personal Loans. This will help you understand a loan’s features, requirements, and terms and conditions better. You can compare loan offers with better accuracy, avoid misunderstandings, and communicate more effectively with lenders. Most importantly, you will be better at finding a loan that suits your requirements.

 

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply