Loan Lingo: Understanding Personal Loan Terminology

There are instances in your life where you might need to secure a personal loan, whether it’s to cover an emergency, make a large purchase, and so on. While getting one isn’t rocket science, it can feel a bit overwhelming. There are several words that you may not know or make you feel like you are reading in a foreign language.

Don’t fret! We’ve compiled a list of the top 20 loan-related words so you can be knowledgeable and feel more prepared when setting out to get your loan.

1. Principal
   The original amount of money you borrow, not including interest or fees.
2. Interest Rate
   The percentage the lender charges you for borrowing money. It can be fixed (stays the same) or variable (can change).
3. APR (Annual Percentage Rate)
   The total yearly cost of borrowing money, including interest and most fees. It gives a more complete picture than the interest rate alone.
4. Term
   The length of time you have to repay the loan, usually stated in months or years (e.g., 36 months or 5 years).
5. Loan Agreement
   A legal document that outlines the terms and conditions of the loan between the borrower and lender.
6. Secured Loan
   A loan backed by collateral (like a house or car). If you don’t repay, the lender can take the collateral that you agreed to use (known as your asset).
7. Unsecured Loan
   A loan not backed by collateral. Approval is usually based on your credit score and income.
8. Collateral
   Property or assets pledged by a borrower to secure a loan. This is used by the lender to recover losses if the loan is not repaid.
9. Cosigner
   A person who agrees to repay the loan if the borrower can’t. This helps borrowers with lower credit scores get approved.
10. Amortization
    The process of paying off a loan over time. Payments typically reduce both interest and principal.
11. Prepayment
    Paying off a loan (or part of it) before the due date. Some loans have prepayment penalties, which means you pay a fee for paying early.
12. Default
    Failing to repay a loan according to the terms. This can damage your credit and may impact your ability to borrow in the future.
13. Delinquency
    The status of a loan when a loan payment is late, but the loan hasn’t yet gone into default.
14. Origination Fee
    A one-time charge by the lender for processing a new loan. It’s usually a percentage of the loan amount.
15. Underwriting
    The process lenders use to evaluate a borrower’s creditworthiness and risk level.
16. Debt-to-Income Ratio (DTI)
    A comparison of your monthly debt payments to your monthly income. Lenders may use this as part of assessing your ability to repay.
17. Refinancing
    Replacing an existing loan with a new one, usually to get a better interest rate or change the loan term.
18. Deferment
    A temporary pause on loan payments, often used with student loans.
19. Forbearance
    A temporary reduction or suspension of loan payments, typically granted during financial hardship.
20. Balloon Payment
    A large, one-time payment at the end of a loan term, generally as part of a balloon loan which lets borrowers keep monthly payments smaller in exchange.