15 Loan Terminology You Must Know

Loans are a step towards opportunities without financial limitations. A well-calculated, strategized loan taken from a reliable lender can be a great tool for people to achieve their dreams and explore unchartered territories. For example, if you are a student looking into international education opportunities, student loans can be your stepping stone towards it. To understand and utilise loans better to the best of your ability,  you must know some loan terminologies to help you strategize your loan amount and repayment.  So, here’s the list of 15 loan terminology you must know! 

1. Principal

The sum of money the borrower borrows is one of the most popular loan terminologies, principal. The main aim of repayment is to repay the principal and pay interest on this initial amount. As you start paying off your loan, your principal starts to decrease. The interest paid, however, isn’t included in this principal amount. As your principal decreases, further interest is calculated based on the balance. 

2. Interest Rate

Interest rate is a loan terminology that refers to a specific percentage of the principal the borrower charges as a loan cost. So, the lower the interest rate, the less interest you pay for your loan. Many different types of interest rates can be decided at the initial phase of the loan. For example, in fixed interest rates, the rate stays the same throughout the repayment period. So, you have to pay a fixed amount of monthly instalments, making it easy to plan your monthly budget. Other types include variable interest rates, floating interest rates, prime rates, etc. 

3. Annual Percentage Rate (APR)

The loan terminology, annual interest rate, APR, is the total cost of taking out a specific loan amount for a year. The APR amount includes other financial charges like loan origination fees and not just the interest, which is why it may be more than the interest rate. What is important to know about APR is that loan providers are legally required to disclose it to the borrower so they can have a complete picture of how much it will cost to get the loan. 

4. Term

The loan terminology, ‘loan term’, refers to a specific time window. This is the window in which the borrower is supposed to repay the loan. For example, if your student loan term is 6 years, you must finish the repayment in these six years. The loan term is predecided and included in the loan documents. The shorter the loan term, the higher the monthly payments are. And the longer the term, the more interest you pay your lender. 

5. Collateral

Any asset that is valuable enough to be pledged to your lender for a loan is referred to as the loan terminology ‘collateral.’ Thus, collaterals can include real estate, vehicles, investments, jewellery, etc. The house or car you will buy can also be collateral in case of a mortgage or automobile loan. In case of a failed repayment, the lender can seize your collateral for sale and recover the loan amount. For example, if you have borrowed a mortgage and cannot repay the loan, your lender will foreclose on your home. 

6. Amortization

As the principal keeps decreasing and the interest rate stays the same, the monthly instalment amounts keep changing too. To make a fixed payment schedule, lenders use the loan amortization process. The loan terminology refers to the process of calculating how much money the borrower has to pay each month towards repaying the loan principal and interest. Loan amortization makes it more convenient for the borrower to plan their monthly budget as their loan instalments become uniform throughout their loan term. 

7. Grace Period

Grace periods are granted in student loans. The loan terminology refers to a time frame during which the borrower does not have to make repayments. However, they can still choose to pay off the accrued interest that adds up monthly. The grace period starts after the borrower has graduated and is usually 6 months. The grace period can start even when you have dropped out of school or dropped below half-time enrolment. 

8. Prepayment Penalty

A penalty fee is charged to the borrower in case of an early instalment payment. If the borrower pays a majority part or all of their loan amount before the predecided loan term, they are charged a prepayment penalty. However, it is important to remember that the lender cannot charge a penalty on student and home loans or mortgages. 

9. Default

The loan terminology ‘default’ refers to a situation that occurs in case of a loan agreement violation from the borrower's side. The violation can be anything from missed payments to policy violations. Defaults have dire consequences for the borrower. The lender can take legal action against the borrower for such clear violations. The borrower’s credit scores are also affected by defaults. 

10. Co-borrower 

If two people borrow a loan, they are referred to as the loan terminology, co-borrowers. For example, if a husband and wife take a mortgage together, they will be considered loan co-borrowers. Co-borrowers are equally responsible for the repayment of the loan amount. As both have signed up as primary borrowers, both names will be included in the loan agreement while they jointly own the asset. The loan amount is calculated based on the total income of the borrowers. Thus, you can opt for a higher loan with a co-borrower than a traditional, solo loan. 

11. Cosigner

Unlike a co-borrower, a co-signer is considered a backup or a secondary borrower. The co-signer is responsible for repayments when the primary borrower cannot repay. Borrowers can also opt for a co-signer if they have no credit history or bad credit scores. For example, if a dependent student opts for a student loan, their guardian or parent can sign as a co-signer with them. 

12. Unsecured loan 

If no collaterals are attached to your loan, it is referred to by the loan terminology, ‘unsecured loan.’ Student loans, personal loans, credit card loans, etc, come under unsecured loans. As no collateral is involved, the loan process can be lengthy, with many verifications. In the case of an unsecured loan, the lender cannot take ownership of the borrower’s assets if they cannot repay. Rather, the lender can take legal action against them with a passed court judgment. 

13. Secured loan 

Unlike their unsecured counterpart, secured loans have a specific asset attached to them. The asset can be anything from real estate to gold to a vehicle. If the borrower cannot repay their loan amount under the term period, the lender can seize the asset and sell it to recover it. Secured loans are quicker and easier to obtain than unsecured loans since the lender has a backup for failed repayment. 

14. Loan origination fees 

The loan terminology ‘loan origination fees’ refers to one of the most significant fees that the lender charges from the borrower when the loan agreement is signed. This fee is the cost of taking the loan, covering all the loan processes like overwriting and administering the loan. The amount is then deducted from the loan amount that had been initially borrowed. 

15. Loan limit 

The maximum loan amount a borrower can borrow from their lender is called the loan terminology ‘loan limit’. The student loan limit is decided by the lender based on the borrower’s income and credit scores. So, higher, more consistent income paired with higher credit scores can increase the loan limit. Some lenders may even choose to lend more money than the borrower can afford. But it is always advisable to calculate your own needs and budget before applying for a loan. For example, if you are applying for a student loan, calculate the amount you need for your fees, living expenses, student essentials kits, etc., and apply the exact amount you need rather than borrowing as much as possible. 

Knowing your loan terminologies and understanding these terms can be a great way to understand your loan process and manage your loans better. For someone taking a loan for the first time, knowing loan terminologies can eradicate anxiety and give them a clearer picture of what they are getting into. Just make sure you get a loan from some best student loan providers and take a step towards your dream life!  Also, check how you can manage your debt effectively and plan better.