Terminology You Should Know Before Applying for a Loan

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Category: Loans
Posted on: 12/24/2020
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Don't go into borrowing money from a lender without knowing their lingo because you'll soon find yourself unfamiliar with how to navigate your loan and its terms. Equipping yourself with the vast loan terminology is not only helpful, but it could also mean the difference of securing a better loan for your needs.

Here's a comprehensive list of helpful terms used by lenders within the industry—you'll find that by learning lending terminology, you'll be able to communicate with lenders much easier as well as being able to find a loan suitable for your financial requirements.

Accrued Interest

Accrued interest is interest that builds on itself until your loan is completely paid off—paid by you, the borrower. Every day, the interest is calculated based on the unpaid principal balance of your original loan.

Amortization

Amortization is the gradual repayments of your loan, usually displayed in monthly installments that show each repayment's principal and interest.

Annual Fee

Loans aren't just the cost of the money you initially borrow—you'll see plenty of fees, and an annual fee is one of them. An annual fee is commonly issued by lenders and is typically charged to cover administrative costs, or on a credit card, this fee is issued. 

Annual Percentage Rate (APR)

Your APR is shown as a percentage, representing your annual costs of borrowing over your loan's term. You'll see APR attached to not just your loans but also your credit cards.

Asset

An item in which you own that has an exchange value is an asset. You can use assets in loans as collateral.

Balance

Balance refers to what money you have available in your account, and in terms of debt, balance can mean the amount you still owe, not including the payments you've already made against your loan.

Bankruptcy

Bankruptcy is a legal process where if you file for bankruptcy, a court liquidates your assets to make up for what you owe financially. Bankruptcy allows the debtor a chance to start over, but when you file for bankruptcy, the action stays on your credit report for 7-10 years.

Capitalization

Capitalization means adding the unpaid interest to the original loan amount you borrowed.

Chapter 7 Bankruptcy

There are different chapters of bankruptcy, and chapter 7 is arguably the most common where debtors are allowed to liquidate their debts.

Chapter 13 Bankruptcy

The second most common type of bankruptcy filing for individuals is chapter 13. Chapter 13 bankruptcy is different from Chapter 7 because it's less about eliminating debt and aims to reorganize your finances instead. In chapter 13 bankruptcy, you make payments to a trustee for a period of 36-60 months. The trustee distributes your money to your creditors on your behalf who have filed claims.

Collateral

Sometimes in a loan, lenders require that borrowers put up collateral to secure the money. 

This is called a secured loan, and the collateral can be property or assets that the borrower owns, like a house, car, piece of machinery, or something of enough value. If the borrower fails to pay their loan, the lender can seize this collateral and liquidate it to make up for any losses.

Consolidation

Consolidation is the process of combining your monthly loan payments or loans into one payment or loan. 

This can be done through a consolidation loan and is most commonly done for student loans, giving you a new payment schedule and interest rate.

Credit Score

Your credit score is the number that's assigned to you by credit reporting bureaus like Trans Union or Experian. 

Your credit score is based on your credit history, borrowing record, and other pertinent financial habits. 

Lenders use this score to determine your creditworthiness when issuing you loans, as well as your interest rates. 

The higher score you have, the lower the interest rate you can acquire for a loan.

Default

The failure to repay your loan in abidance to the terms with your lender—defaulting takes place after 180 days of non-payment on your account.

Deferment Period

In special circumstances, you can postpone your payments when your repayment period has started. 

Deferment is an option for students who have federal student loans and are facing economic hardship. You have to apply to have your loans deferred. 

For some loans, you can have interest payments deferred as well.

Debt-to-Income Ratio (DTI)

DTI is a measurement that compares your overall debt to what you make in your personal income. The higher your ratio number is, the more burden you feel in making repayments against your debts.

Free Application for Federal Student Aid (FAFSA)

The FAFSA is free form you can complete to determine what type of federal student aid you're eligible for.

Fixed-Rate

If you have a loan that has a fixed interest rate, that means your interest rate percentage won't change over the course of your loan's lifetime, nor will your monthly payments.

Forbearance

Forbearance is another common option for federal student loans for students facing financial hardship. In forbearance, students are allowed to postpone their payments, although interest does accrue and is added to the overall amount owed.

Interest Rate

Your interest rate is the cost of borrowing money in a loan or on a credit card. The lower the interest rate, the less you'll owe.

Liquidation

When a lender liquidates your assets, that means they're turning your property or assets into cash. 

Liquidation occurs when you've defaulted on a loan, and your lender uses your collateral to settle the debt.

Loan Forgiveness

For federal student loans, there's the loan forgiveness program. Students who've been repaying on their loans for a certain number of years can qualify, as can students who enter qualifying workforce fields like teaching, nonprofits, or law enforcement.

Mortgage

A mortgage is a type of loan used to purchase a home or commercial property.

Personal Loan

Personal loans are usually unsecured, meaning they're not backed by collateral. These loans are typically short-term and have interest rates based on your credit history and score.

Principal

Principal is the amount borrowed—it doesn't include your interest.

Refinancing

When you refinance a loan, you can replace your original loan with a new one at a new interest rate.

Repossession

Repossession is the act of your creditor seizing your property if you default on a loan. For example, if you default on a car loan, your lender can repossess your car.

Subsidized Loan

A subsidized loan is a type of loan where the government pays interest. These loans are commonly designed for eligible students who can qualify for interest-free time in school or during deferment periods.

Term

Your term refers to the period of time to which your loan extends and is to be paid back in full. 

Personal loans usually have shorter terms, about 2-5 years, but a mortgage has much longer terms, with the most popular term length being 30 years.

Unsubsidized Loan

In opposition to a subsidized loan, an unsubsidized loan is when the government doesn't pay interest. The student would be responsible for making interest payments the moment the loan becomes active.

Variable Rate

As opposed to a fixed rate, a variable rate fluctuates and can increase or decrease every month, so your loan payments can do the same. A variable rate is also sometimes referred to as an adjustable-rate or a floating rate.

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