If you plan to avail yourself of a personal loan, you must research what you are getting into. Apart from your financial needs, the loan amount, and interest rates, there are many other terms and conditions that you should be aware of. Having a good personal loan glossary handy will place you in a better position to tackle your loan obligations.
Here is a guide to all the confusing personal loan terminology you may have come across while completing your loan application.
Personal loan glossary and terminology - Explained in a simple language
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/ Tenor
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
Summary: If you plan to take a personal loan, it is important to read all the terms and conditions before signing on the dotted line. However, it is not easy going through the pages and pages of fine print that come with your personal loan application. Here is a personal loan glossary that will help you better understand all the confusing personal loan terminology.
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