10 Key Terms About Personal Loans That Everyone Should Know
Updated: May 7, 2021
Getting a personal loan is a good way of covering any expenses or consolidating any debts that needed to be paid. However, there might be some jargon that you won’t understand while sending in your application and leave you with question marks.
It’s better to be knowledgeable about the basic terminology concerning personal loans. You get to extend your understanding so that you can keep up a conversation regarding your loan when needed.
Here are 10 common words and phrases that you’ll hear during the course of your personal loan application.
APR is short for annual percentage rate. This is an annual representation of your interest rate in a single year. This is often disclosed by the lender when your personal loan involves credit that can span longer than a year in payment. This is often seen with mortgage loans and installment loans made in large amounts.
A borrower is a person who requires a personal loan and submits an application for a loan. They’re in charge of bringing requirements and documents to the table in order to get their request for a loan approved.
The funding time refers to the short period between the approval of your application and the actual deposit of the amount you borrowed. Funding time can depend on when the transaction was completed and if the bank is open.
An interest rate refers to a percentage of the loan that will be paid on top of the money borrowed. This is compensation for the risk of lending a borrower money. The percentage charged to the borrower is up to the lender to decide.
Late Payment Penalty
A late payment penalty is given when a borrower is unable to fulfill their monthly payments. This penalty may entail a fee to cover the offense and impact the borrower’s credit score, depending on the terms set by a lender.
A lender is an individual or establishment that lends money to a borrower. Most lenders associated with taking out a personal loan are your local bank, credit union, or online lending site.
An origination fee is charged to a borrower by a lender when the loan is originated. This fee acts as compensation for the lender’s processing of the loan. Just like the interest rate, the lender dictates what percentage of the loan the origination fee will take.
A prepayment penalty is a fee charged to a borrower when they decide to pay off their debt early. This is to cover the lender’s financial loss of the loan’s early payment, as they usually make revenue along the term length.
A promissory note is a written loan agreement that finalizes the terms and conditions of a borrower and lender’s arrangement. The necessary details in a promissory message would be the total amount of the loan, possible penalties, interest rate, and APR, if applicable.
A term length is the repayment period a borrower has to undergo in exchange for their loan. A personal loan’s term length is either short-term for emergencies or long-term for more significant amounts.
Taking note and remembering these terms about personal loans can make the process of borrowing and finding a lender much easier. Open communication between both parties is vital to clarify any misunderstandings.
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