Online loan jargon can make it hard for you to figure out what’s great and what you should avoid.

Luckily, this post explains some of the most common phrases and words that apply to an online loan so you can easily decipher the information. That way you can make an informed decision and choose the best possible online loan for your needs.

Annual Percentage Rate (APR)

The annual percentage rate of an online loan provides a reasonably accurate cost of borrowing, because it includes the interest you pay, plus some fees the lender may charge.

While the APR provides a better tool for comparing what lenders offer than the interest rate alone, it isn’t foolproof so check out its drawbacks too.

Application Review Period

The time the lender requires to review your submitted information before making an initial decision. This can range between minutes for online lenders to days or weeks for in-person creditors.

Arrears

A term used if you fail to keep up with monthly payments. Your online loan can ‘fall into arrears’ and the amount of arrears is calculated from the date of the first missed payment.

Borrower

You would be the borrower if you are the person that applies for and accepts a loan offer. The borrower is also the person responsible for repaying the online loan according to the loan agreement.

Cosigner

Some applicants can’t qualify for an online loan based on their own finances. In this case, the lender may ask for a creditworthy person to back the online loan.

This person agrees to repay the loan if the borrower doesn’t  make their payments, a serious responsibility. Still, cosigning offers several borrower benefits worth pursuing if you can’t get an online loan yourself.

Credit Inquiry

When you apply for most credit products, the lender checks your creditworthiness through one of the credit reporting agencies. Lenders with a pre-approval process usually use a soft inquiry, which does not affect your credit score.

Lenders that do not use pre-approval tend to use hard inquiries. This gives them access to your complete credit file, but it also lowers your credit score for up to two years.

Credit Score

Your credit score is a number assigned to you by the credit reporting agencies. These agencies track your credit usage, compile the information in a report, and then summarize your risk level with this 3-digit number.

The U.S. has three credit reporting agencies, each with their own rating system. However, they all use similar criteria to calculate your risk level.

Generally, achieving and maintaining a credit score of 580 or higher is very beneficial since it offers many powerful advantages.

Credit Report

Experian, TransUnion and Equifax are the three main credit reporting agencies in the U.S. They collect credit information and create reports on your credit activity. You can get free copies of your credit reports annually to check for errors. This is important, since mistakes can affect your creditworthiness and any online loan application.

Debt Consolidation

Debt consolidation combines several debts into a single online loan. This makes it easier to manage your finances and if you can get a decent interest rate it will also save you money.

Consolidation loans are personal installment loans with a fixed interest rate and regular payments, which is usually a better option than credit cards that accrue interest every month. Still, like any other financial solution, they have pros and cons.

Debt-to-Income Ratio

A Debt-to-Income (DTI) ratio measures your total monthly debt payments against your gross monthly income. Lenders use it as a tool to see whether you can handle more debt.

Default

Fail to make a payment. This can lower your credit score and make it much harder to get further credit. Always contact your lender if you know you can’t pay on-time.

Dishonored Payment Fee

The lender may charge you a dishonored payment fee if you do not have enough money in your account when your payment is due. This may apply to bounced checks, declined direct debits, or unsuccessful electronic fund transfers.

Electronic Income Verification

A method used by some lenders to verify your income through your bank. It often speeds the loan process since the borrower doesn’t need to provide proof of income paperwork when they apply.

Eligibility Criteria

The factors lenders use to determine whether you are eligible for an online loan. These vary between lenders and may include things such as age, income amount, income source, stability, credit, and more. Different lenders cater to different borrowers, so there is a wide range of products to suit needs.

Funds Release Date

The estimated time for funds to reach your bank account after you’ve signed your paperwork and the lender has processed your documents. This can range between hours and weeks, depending on the lender.

Interest Rate

The cost of borrowing the principal amount, expressed as a percentage rate, excluding fees.  Interest rates can be fixed throughout the online loan term or variable and fluctuate with the movement of the U.S. prime rate.

Late Payment Fee

A late payment fee is usually a one-time charge levied when the borrower doesn’t pay on time. It may be a fixed amount or a percentage of the past-due payment. It is meant to compensate the lender for the inconvenience and added administrative costs.

Lender

The lender is the company granting you credit. Lenders can be found online and in-person. Both are viable resources, but do your research to ensure you find safe options.

Loan Agreement or Loan Contract

These are the papers sent to you that explain the details of your online loan. They explain things such as the amount of the loan, the interest rate, payment amount, date, and repayment method such as autopay, loan end date, and any fees and penalties.

Loan Purpose

The reason you want to borrow money. Generally, lenders won’t grant you an online loan for certain reasons such as illegal activities. However, most grant online loans for almost any other reason such as consolidating debts, emergencies, taking a vacation, or improving your home. If they ask for a reason, it is probably to tailor their offerings to your needs.

Origination Fee

An origination fee is charged by some, but not all lenders. It helps them pay for processing your application.

This fee is usually calculated as a percentage of your loan amount and ranges between .05% and 8.0%. It is deducted from the cash you receive.

Payment

The amount you pay, including interest, to the lender at regular intervals to eliminate your debt.

Payment Frequency

How often you make payments. Payments are typically made monthly, but some lenders offer bi-monthly or weekly payments to reduce the amount of interest paid.

Prepayment Penalty

Online loans may include a prepayment penalty if you pay more than your scheduled amount. This penalty is meant to compensate the lender for lost interest and may apply to extra payments, larger payments, or paying off your entire loan early.

Prepayment penalties can be a flat fee or a percentage of your remaining loan balance. Fortunately, not all online loans include them.

Pre-Qualification or Pre-Approval

These terms can be used interchangeably and refer to the lender’s method of determining whether you are likely to get an online loan. The lender asks you for basic information and then uses a soft inquiry to access your general credit information.

If you are pre-qualified or pre-approved your chances are good that you will get an online loan. However, it is not guaranteed since the lender will later do a hard inquiry for all your credit details. If they find discrepancies, they may not follow through with their offer.

Principal

The principal on an online loan is the amount you borrow, excluding interest. When the lender calculates your payments, a portion goes towards the principal and a portion towards interest to pay for the privilege of using the lender’s money.

Repayment Schedule

A document outlining the amounts and times of payments over the agreed loan term, based on the amount borrowed and the interest rate. The schedule includes when your payments start and when you can expect to pay off your loan if you stick to your normal payment schedule.

Secured Loan

A secured loan is one that is backed by collateral such as a physical asset. The lender can claim this asset if you do not repay your loan. A common secured loan is an auto loan backed by your vehicle.

Term

The repayment term of an online loan is the length of time given to repay it. Lenders offer varying terms, so you can choose what works best for you.

Longer terms lead to lower payment, but you pay more interest. Shorter terms ensure you pay your online loan off quickly, and you do not pay as much interest. However, a very short loan term can make it hard to fulfill other financial obligations.

Unsecured Loan

An unsecured loan doesn’t require collateral. Instead, the lender bases their decision on factors such as your income, credit history, debt-to-income ratio, and more. A common unsecured loan is an online installment loan.

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Apply through FlexMoney and discover why so many people find us their best choice for an online loan. Why deal with lenders that charge hidden fees or make their paperwork so complicated you don’t know what you’re getting into? We’re straightforward, provide an in-depth FAQ, and can answer your questions over the phone too.