A personal loan is a big decision and you need information to choose wisely. Nonetheless, that’s hard if you don’t understand personal loan terms.
Luckily, we’ve condensed loan terminology into this personal loan glossary to help you. If a term isn’t listed here, ask the lender for clarification before signing your loan agreement.
Amortization
This loan terminology is often used for fixed interest rate personal loans. It describes how each scheduled payment pays a portion towards the principal first and the balance towards outstanding interest.
Annual Percentage Rate (APR)
The annual percentage rate is a very important personal loan term, because it reflects your true cost of borrowing. This loan terminology describes your interest rate and other finance charges, which can drive up your costs. Every lender must disclose the APR on their loans.
Application Fee
An application fee isn’t typical for personal loans. Yet, some lenders levy it just to process your application. Always check for this personal loan term, or you could pay unnecessarily.
Arrears
You may see this personal loan term mentioned in your loan agreement. ‘Falling into arrears’ basically means your loan is overdue. Lenders calculate the amount of arrears from you’re the date of your first missed payment date until the current date.
Automatic Payment
An automatic payment describes a lenders system for withdrawing your personal loan payment directly from your bank account each due date. It is a way to simplify your finances, providing you ensure funds are available. Otherwise, you could face additional fees.
Borrower
This is a typical loan term you will see in every loan agreement. The borrower is the person that applies for the loan, receives the funds, and is legally bound to repay the loan as agreed.
Collateral
This is a personal loan term you should pay close attention to. When a loan is backed by collateral, it means it is backed by an asset. Examples of collateral include cash, investments, vehicles, and real estate. If you do not repay your loan, the lender can seize your asset. Collateral is not necessary for all personal loans (see unsecured loan).
Co-Borrower
This loan terminology only appears when another individual agrees to share the responsibility of repaying a personal loan. The lender considers both incomes in the qualification process, but both parties are responsible for the full amount. If one party fails to pay, the lender can pursue the other.
Some personal loans do not require a co-borrower, because the income requirement is relatively low.
Co-Signer
This personal loan term applies to an individual who agrees to back the primary borrower by using their stronger credit score and credit history. The co-signer is held responsible if the primary borrower does not fulfill their loan obligations.
Some personal loans do not require a co-signer, even when the applicant has less than pristine credit or a short credit history.
Credit Agency or Credit Bureau
A credit agency, or credit bureau, is a company that records and stores debt-related information on individuals and businesses. They issue credit reports when requested.
Equifax, Experian, and TransUnion are the three agencies in the U.S. You can obtain your three free reports from AnnualCreditReport.com to check for errors.
Credit History
Your credit history is the record of your experience with debt. The more you demonstrate timely repayment of various types of debts, the more positive your credit history. Those with missed or late payments have a negative credit history. Those who have never taken on debt, may not have a credit history.
Credit Report
A credit report is a document that shows the details of your credit history. It includes any open or closed credit accounts, whether you paid on-time or late, as well as any collection, default, bankruptcy, lien, or judgment against you. You should check the reports from all three credit agencies for accuracy.
Credit Score
Each credit reporting agency uses the information in your credit report to assign a numerical rating that indicates your risk level. The higher your credit score, the less risky. Since each credit reporting agency uses their own rating system, you will have three credit scores.
Experian and Equifax offer a free service for credit scores. However, you must use an independent source such as Credit Karma or Credit Sesame for your Transunion credit score. If you’re interested in the details on how these agencies calculate your credit scores, you can find it here.
Debt Consolidation
Debt consolidation involves combining multiple debts into one personal loan with a single payment. This simplifies your finances and the right loan can lower interest rate too.
Debt-To-Income Ratio (DTI)
Your debt-to-income ratio compares your monthly income to how much you spend each month. Lenders use it to determine how much money you an afford to borrow.
Default
Default is another way of saying you did not meet your loan obligations. It is up to the lender to decide when your loan goes into default, but the issue can affect your credit report and credit score.
Deferment
This personal loan term is important should you ever encounter financial hardship. Some lenders will defer, or delay your installment loan payments for a time, but the loan will continue to accrue interest on the balance.
Fixed Interest Rate
A fixed interest rate personal loan has the same rate throughout the loan term. Your monthly payments remain the same, making it easier to budget.
Gross Income
Your gross income is the total amount of income earned before deductions. It includes your salary, tips, commissions, and other in-kind employee benefits.
Hard Credit Check or Inquiry
When you’re applying for a personal loan, pay special attention to this personal loan term. Many lenders choose to perform a hard credit check. This lowers your credit score by up to 10 points and remains on your credit report for up to two years. However, not all personal loan applications involve hard inquiries.
Installment Loan
An installment loan is a personal loan with a set repayment period and regular scheduled payments. You’re issued a lump sum and then repay your debt plus interest according to your loan agreement.
Interest
Interest is what you pay for using a lender’s money. It is included in the APR lenders must reveal to you beforehand. If the lender states they charge simple interest, you are only charged interest on the principal outstanding, which saves you money. Compound interest accumulates on the principal and the interest from the previous month, which costs you more. Find more about the factors that determine personal loan interest rates and interest rates in general.
Loan Agreement
A loan agreement, or loan contract, is the document you sign that binds you to lender’s terms. It includes important information such as your loan amount, the annual percentage rate, your payment schedule, fees and penalties, and the repercussions if you do not meet your loan obligations.
Late Fee
If you are late making your loan payment, your lender may charge you a late fee after a certain time. Look for this personal loan term in your loan agreement to determine when this will happen and how much it will cost you. Better yet, pay on time.
Loan Term
This loan term describes the time you have to repay your loan. Lenders may set the term to a year or less if your personal loan is for a relatively small amount. If you’re borrowing a substantial amount, the lender will probably offer you more time to repay and more payment choices so you can align them with your finances.
Net Income
This is the monthly salary you receive after the deduction of state and federal taxes, child support and wage garnishments, and voluntary deductions such as medical, dental, vision, long term care, critical illness, universal life, and accident insurance, union dues, parking, etc. It is also known as take home pay.
Origination Fee
Watch for this personal loan term. Some lenders make it seem this is a normal expense, when it is actually discretionary. The lender charges you a percentage of your loan amount to cover their administrative costs and deducts it from the funds you receive. This fee can range between 1.0% and 10.0% of your loan amount.
Payday Loan
Loan terminology can be confusing, which can lead to poor decisions. A payday loan is a short-term, unsecured loan, but not an installment loan. You only have weeks to repay, because it is only meant for a temporary financial gap. Your costs are usually higher too, hovering around 400% APR, according to the Consumer Financial Protection Bureau.
Pre-Approval
Pre-approval, or pre-qualification is a process a lender may use to review your finances and your credit. They use a soft credit check and if you meet the lender’s requirements, they notify you and provide their installment loan terms. There’s no obligation, and it does not lower your credit score. However, you won’t lock in the terms until you accept them and sign your loan agreement.
Prepayment Penalty
This is another personal loan term you should check for before you decide on a lender. Basically, it is an amount the lender charges if you pay more than your scheduled payments. This includes extra payments, lump sums, or even your entire loan. Luckily, some lenders do not charge prepayment penalties.
Principal
This a typical personal loan term seen in all loan agreements. It is the amount you agreed to borrow, not including interest.
Repayment Schedule
A repayment schedule lays out when you make your payments over your loan term, based on the amount you’ve borrowed.
Secured Loan
A secured loan is one that is backed by an asset. This collateral is attached to the loan and if you default on your loan, the lender can seize the asset.
Soft Credit Check or Inquiry
A soft credit check is often part of a pre-approval process. The lender does a quick review of your credit to determine whether they will offer you a personal loan. If you’re pre-approved, the lender provides a no-obligation estimate of the costs and terms they’re offering so you can compare them with other lenders.
Unsecured Loan
An unsecured loan does not involve collateral. The lender grants you the personal loan based on their assessment. They can’t seize your personal assets if you default, unless the court issues a judgment against you.
Variable Interest Rate
Some installment loans have a variable interest rate, which rises and falls based on a benchmark stated in the loan agreement. The frequency of adjustments depends on the lender and your payment amount rises and falls with these adjustments.
Bottomline on Personal Loans
It is easy to see that there is much to consider when choosing a personal loan. However, FlexMoney can make the process much simpler. We’re a licensed lender that offers Missouri personal loans. We use a pre-approval process and a soft credit check, so it is quick and easy to see whether you qualify. You may also want to read our article on various loan types before you decide on a financial product.
Borrow between $200 and $2,000 through our FlexMoney loans, and take 12 months to repay. We don’t charge application or origination fees or pre-payment penalties. You don’t need collateral or a co-signer either.
More importantly, FlexMoney offers easy approval. We help many people get a low income installment loan or a bad credit installment loan. If you earn a steady recurring income paid by direct deposit, try FlexMoney. We make borrowing hassle-free.
If you’re interested in the difference between a personal loan and a line of credit, you can read more about that here.