Important Loan Terminologies: What Every Borrower Must Know

Whether you’re a first-time borrower or want to learn, you must understand these loan terminologies.

Securing a loan for the first time or signing paperwork for a mortgage can seem intimidating — especially when faced with so many unfamiliar terms and jargon associated with the loan agreement.

To help you understand how loan works, here’s a blog post concisely explaining the most important loan terminologies you should know.

List of Loan Terminologies

While applying for a loan (whether secured or unsecured) or comparing online, we encounter some loan terminologies that we do not understand. So, I’ve curated a list of 10 such loan terminologies to help you make an informed decision while choosing a loan plan.

1. Principal
2. Interest
3. APR
4. Installment
5. Amortization
6. Prepayment
7. Balance Transfer
8. Default
9. Lender
10. Borrower
11. Co-signer

Unlocking the Loan Terminologies

1. Principal

Principal is the initial amount of money borrowed or the part of the amount borrowed that remains unpaid (excluding interest). It’s essentially the amount on which interest is calculated throughout the loan term. Repaying the principal gradually reduces the loan balance.

2. Interest

Interest represents the cost of borrowing money and is calculated as a percentage of the loan’s principal. This is how lenders make a profit by giving loans. The interest rate, depending on whether it’s fixed or variable, affects your monthly repayments and total loan cost.

3. APR (Annual Percentage Rate)

APR, or Annual Percentage Rate, refers to the annual rate charged for borrowing or earned through an investment. In terms of loans, it’s the total cost of borrowing, including interest and other charges, expressed as a yearly percentage. It gives borrowers a comprehensive measure to compare the cost of loans offered by different lenders.

4. Installments

An installment refers to regular, periodic payments that a borrower agrees to make to repay a loan over a specified period. Each installment typically includes a portion of the principal amount and interest. Installments help gradually reduce the outstanding loan amount until it’s fully paid. Installment payments are commonly associated with mortgages, car loans, and personal loans.

5. Amortization

Amortization refers to the process of gradually reducing a loan balance over a fixed period through regular, equal payments. Each payment is split into two parts: a portion that covers the interest and a portion that pays the principal. Initially, the interest portion is large and the principal portion is small, but over time, the principal portion increases until the loan is fully paid off.

6. Prepayment

Prepayment refers to the early repayment of a portion or the entire principal amount of a loan before its due date. This can reduce the total interest paid over the life of the loan and may also reduce or eliminate penalties. Prepayment can benefit borrowers by reducing the loan tenure and the total interest cost. However, some lenders may charge a prepayment penalty to offset their loss of anticipated interest income.

Also, read Best Personal Loans In India 2024

7. Balance Transfer

A balance transfer is transferring the outstanding principal amount of a loan from one lender to another to benefit from lower interest rates or better loan terms.

8. Default

If a borrower fails to repay a loan as per the agreement, they default on the loan. Default can result in serious consequences, including falling credit scores, additional fees, and legal actions.

9. Lender

A lender is an entity (which could be a bank, credit union, or online lender) that provides a loan, expecting it to be repaid with interest.

10. Borrower

The borrower is the individual or organization that receives the loan from the lender and agrees to repay it as per the loan agreement.

11. Co-signer

A co-signer is someone who agrees to repay the loan if the primary borrower cannot. Having a co-signer (with a good credit score) can enable borrowers with poor or no credit history to obtain loans.

Check Forbes for more insights.

Summing Up

Knowing these essential loan terminologies, you can seamlessly navigate your next loan contract or agreement without feeling overwhelmed or intimidated. If you liked this article, please comment and share it with your friends and families.