Loan Terms and Jargon Explained for Beginners

1. Principal:

• The initial amount of money borrowed, before interest or other charges are applied.

2. Interest Rate:

• The percentage of the principal amount that is charged by the lender as compensation for the use of their money.

3. Annual Percentage Rate (APR):

• The total cost of borrowing, expressed as a yearly interest rate, including both the interest rate and any fees or costs associated with the loan.

4. Term:

• The period over which the loan is expected to be repaid. For example, a 5-year loan has a term of five years.

5. Amortization:

• The process of paying off a loan over time through regular, equal payments. Each payment covers both interest and a portion of the principal.

6. Collateral:

• An asset (e.g., a house, car, or savings account) that is pledged as security for a loan. If the borrower defaults, the lender can seize and sell the collateral to recover their losses.

7. Unsecured Loan:

• A loan that is not backed by collateral. Instead, the lender relies on the borrower's creditworthiness to assess the risk.

8. Secured Loan:

• A loan that is backed by collateral, which the lender can take possession of if the borrower defaults.

9. Default:

• Failing to meet the agreed-upon terms of the loan, such as missing payments or violating other conditions.

10. Foreclosure (in the case of mortgages):

• The legal process by which a lender takes possession of a mortgaged property after the borrower fails to meet the agreed-upon terms.

11. Prepayment Penalty:

• A fee charged by some lenders if the borrower pays off the loan early, before the agreed-upon term.

12. Cosigner:

• A person who agrees to take on the responsibility of repaying a loan if the primary borrower defaults.

13. Grace Period:

• A specified period after the due date of a loan payment during which the borrower can make the payment without incurring late fees or penalties.

14. Origination Fee:

• A fee charged by the lender to cover the cost of processing a loan application.

15. Debt-to-Income Ratio (DTI):

• A financial metric that compares a borrower's total monthly debt payments to their gross monthly income. Lenders use DTI to assess a borrower's ability to manage additional debt.

16. Credit Score:

• A numerical representation of a borrower's creditworthiness, based on their credit history. Higher scores indicate lower credit risk.

17. Loan-to-Value Ratio (LTV):

• The ratio of the amount of the loan to the appraised value of the collateral. It's used to assess the risk of a loan.

18. Installment Loan:

• A loan that is repaid over time with a fixed number of scheduled payments.

19. Revolving Credit:

• A line of credit with a predetermined credit limit that can be used repeatedly up to that limit. Credit cards are a common example.

Remember, it's essential to fully understand the terms and conditions of any loan before agreeing to it. If you're unsure about any aspect, don't hesitate to ask the lender or seek advice from a financial advisor.