What All You Should Know About Personal Loan Glossary And Terminology

If you plan to get a personal loan, thorough research is essential. Beyond your financial needs, loan amount, and interest rates, there are numerous other terms and conditions that significantly impact your borrowing experience. Having a comprehensive personal loan glossary at your disposal will place you in a stronger position to navigate your loan obligations confidently.

Here's a comprehensive guide to all the potentially confusing personal loan terminology you may encounter whilst completing your loan application and throughout your repayment journey.

If you are looking to get a personal loan from Bajaj Finance, you can check if you have a pre-approved offer with just your phone number and OTP – no need to visit the branch.

1. Annual percentage rate

The annual percentage rate is the yearly interest generated by the loan amount, which is charged to the borrower and paid to the bank.
 

2. Application fee/ Processing charges

This is a one-time fee levied by the bank/ financial institution for processing your personal loan application. The application fee varies from bank to bank.
 

3. Loan agreement

This document contains all the details about your personal loan. This is an essential document that must be signed by both the borrower (you) and the bank/ authorized personnel to be valid.
 

4. Principal amount

This is the actual amount requested by the borrower and sanctioned by the institution. This does not include the interest component.
 

5. Term/ Tenure

This is the timeframe allocated to the borrower for repaying the loan in full along with interest. The timeframe can be fixed or flexible as per the terms and conditions of the agreement. This is one of the most looked-up terms in a personal loan glossary.
 

6. Automatic payment

This procedure is also called a direct debit. It allows the lending institution to automatically deduct the EMI from your bank account on a fixed date every month. Once automated, this cycle continues until the final EMI payment.
 

7. Loan prepayment

This facility is available for every borrower as they can choose to prepay/ foreclose the loan before the stipulated timeframe/ tenor. You may have to pay a prepayment penalty if you foreclose your loan.
 

8. Balance transfer

Confused about this personal loan terminology? Well, here is what it means. Some banks/ NBFCs allow you to transfer your loan to other financial institutions if they offer more flexible terms and conditions. The balance transfer facility easily lets you shift your loan to another lender.
 

9. Borrower

The individual applying for a personal loan is called the borrower.
 

10. Collateral

The security put up against the loan is called collateral. In the case of non-repayment of the loan, the lending institution has the right to seize the security, which could be in the form of property or gold. However, personal loans are unsecured loans and do not require any collateral.
 

11. Credit history

Your credit history contains all the information about your previous loans. The report also includes insights into your repayment behaviour.
 

12. Credit score

Your personal loan eligibility or creditworthiness is calculated based on your credit history. Banks give this credit history a numerical score known as the CIBIL score. A high CIBIL score will allow you to get loans easily and at the lowest personal loan interest rates.
 

13. Credit Report

This is an individual's credit rating based on their credit history and credit score. This report contains the entire borrowing history of an individual.
 

14. Credit agency

This institution monitors and reviews information on potential loan applicants and relays the same to lenders. The job of a credit agency is to determine a borrower's creditworthiness and report it to the financial institution.
 

15. Loan default

A highly unpleasant scenario in which the borrower is unable to repay the loan within the allocated timeframe.
 

16. Floating rate

These are flexible interest rates that change according to the market condition and government regulations. Floating rates are subject to variation according to the prevalent policies and trends.
 

17. Fixed rate

A fixed rate or fixed interest rate does not vary throughout the tenure even if revised interest rates are announced. Fixed interest rates are determined at the time of taking the loan and remain unchanged.
 

18. Guarantor

A guarantor is typically required in cases where the personal loan amount is very high. While agreeing to provide the guarantee for the loan, a guarantor is bound by an agreement to repay the loan if the borrower defaults.

Additional Read: What is a personal loan

Why understanding these terms matters

Mastering personal loan terminology provides several crucial advantages:
 

• Informed decision-making: Understanding terms helps you compare offers effectively and choose the best loan for your needs
• Negotiation power: Knowledge of terminology enables you to negotiate better terms with lenders
• Avoiding hidden costs: Familiarity with fees and charges helps you identify and avoid unnecessary expenses
• Better communication: Clear understanding improves your communication with bank representatives and customer service
• Risk mitigation: Knowing penalty terms and default consequences helps you plan better and avoid costly mistakes
   

Conclusion

Taking a personal loan is a significant financial decision that requires thorough understanding of all terms and conditions. Whilst it may seem daunting to navigate through pages of fine print, this comprehensive personal loan glossary equips you with the knowledge needed to make confident, informed decisions.
 

Remember, a well-informed borrower is better positioned to secure favourable loan terms, avoid costly mistakes, and manage their debt responsibly. Use this glossary as your reference guide throughout your personal loan journey, from application to final repayment. Before signing any loan agreement, ensure you understand every term and don't hesitate to ask your lender for clarification on any unfamiliar terminology. Your financial future depends on making informed choices today.
 

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