There are a huge number of personal loan related terms that confuse many consumers. Most of these terms are used ‘interchangeably’, thus adding to the confusion. Here is a list of such terms that you need to understand before you borrow a personal loan. But before that – what is a personal loan? Let’s know about that first.
What Are Personal Loans?
The terms - personal loans, payday loans, online loans, cash advances and advance loans are all the same. These loan amounts are meant to cover sudden financial emergencies like unexpected bills or education related expenses. Most of these loan amounts are granted till the borrower’s next payday. This means that the repayment duration for such amounts does not exceed 30 days.
Personal Loan Related Terms
• APR or the Annual Percentage Rate: Is the amount that the borrower would need to pay at a yearly percentage.
• Asset: Is anything owed by the borrower that has a cash value. Assets include investments, savings, goods and property.
• Bad credit: Is a term is used to describe the poor credit rating of an individual. When a person’s credit gets damaged due to late payments, bankruptcy, not making payments or going over the card limits, then this bad credit is reflected in the credit report.
• Balance: Is the total amount of money that a person owes on a loan. It includes the cash advance, any new purchase, unpaid balance from the previous month and other charges like late fee or interest.
• Balance Transfer: Is the transfer of the debt owed on one credit card to another. This option is usually considered when the borrower is offered a lower interest rate on the other card.
• Collateral: Is any sort of property that is offered to secure the loan. Also termed as security, it can be seized in case the borrower fails to pay back the loan amount.
• Cosigner: Is the person who signs for the loan along with the borrower. He/she is responsible for paying back the loan amount if the borrower defaults.
• Creditworthiness: Is the lender’s way of measuring the borrower’s past and future ability and willingness to pay back the borrowed amount.
• Credit scoring system: Is a system used to ascertain whether the borrower should be extended any further credit or not. The procedure includes assigning scores to various components of creditworthiness.
• Debt service: Is the total payment including repayments and interest amount.
• Default: Is when the borrower fails to maintain the terms of the credit agreement with the lender.
• Establishment fee: Is the fee charged by the lender to set up the loan amount.
• Finance charges: Is the amount that the borrower would pay to get credit from the lender.
• Fixed rate: Is a procedure that helps determine the finance charges owned by the borrower when he is granted credit.
• Liability: Is the legal responsibility under which the borrower is liable to repay the debt amount.
• Loan protection: Is protection on the debt amount available in circumstances such as injury, disease, and involuntary retirement.
• Open-end credit: Is a line of credit that can be used repeatedly up to a certain limit. The term is also called as charge account or revolving credit.
• Principal: Is the amount of loan.
• Reschedule: Is revising the date for loan repayments.
• Statement: Is a monthly bill from a lender that outlines and summarizes the entire credit account.
• Variable rate: Is the rate that varies over time unlike the fixed rate. The changes in the variable rate are dependent on the fluctuations in the market rates of interest.