A personal loan is a type of loan that is not secured by collateral. This means that the lender does not have any assets that they can seize if the borrower defaults on the loan. Personal loans are typically used for consolidating debt, paying for major expenses, or making home improvements.
Here are some of the important terms that you need to know about personal loans:
- Annual Percentage Rate (APR): The APR is the total cost of a loan expressed as a yearly percentage. It includes the interest rate, fees, and other charges.
- Application fee: A fee charged by a lender to cover the costs of processing a loan application.
- Automatic Payment: It is one of the repayment options for your personal loan. By choosing automatic payment facility, your monthly EMIs will be deduced directly from your bank account on a particular day each month and you won’t have to do it manually each time.
- Balloon payment: A large final payment that is due at the end of a loan term.
- Borrower: A borrower is someone who takes a loan from a lender.
- Collateral: An asset that is pledged to a lender as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral.
- Credit score: A number that lenders use to assess a borrower’s creditworthiness. It is based on a borrower’s payment history, debt-to-income ratio, and other factors.
- Credit Agency: They are organisations that review your credit information and create credit reports that can be checked by lenders to determine your eligibility for a personal loan.
- Credit History: It is a record of all the borrowing and repayment transaction an individual has undertaken. It is one of the most crucial factors that determine an individual’s eligibility for a personal loan.
- Credit Report: It is a report generated by a certified credit rating agency showing an individual’s credit history.
- Debt-to-income ratio: The percentage of a borrower’s monthly income that is used to repay debt. Lenders typically want borrowers to have a debt-to-income ratio of no more than 40%.
- Debt Consolidation Loan: These are loans that can be taken to combine all your debts into one. These loans come with lower interest rates and are ideal if you have multiple loans to repay in addition to credit card dues to clear. They club all your debts under a single umbrella, thereby effectively ensuring that you have only one loan to clear.
- Default: In case a borrower does not meet the legal obligations of a loan, he/she is said to be defaulting on the loan.
- EMI: The equated monthly installment (EMI) is the amount of money that a borrower must pay each month to repay a loan. It is calculated by dividing the principal amount of the loan by the loan term and the interest rate.
- Fixed Interest Rates: Interest rates that remain unchanged over the tenure of the loan are called fixed interest rates.
- Floating Interest Rates: As opposed to the working mechanism of fixed interest rates, floating interest rates are those that keep changing over the tenure of the loan.
- Grace period: A period of time after the due date of a loan payment during which the borrower does not have to pay any interest or penalties.
- Interest rate: The percentage of the principal amount of a loan that is charged by the lender as interest.
- Late Payment: When you delay your monthly EMI payments, it is called late payment and lenders usually charge a late payment fee to customers who do not make their payments on time.
- Lender: A lender is usually a bank or a financial institution that lends money to borrowers.
- Line of Credit: Lines of credit are essentially loans that do not require any kind of security or collateral and are usually offered at variable interest rates.
- Loan agreement: A legal document that outlines the terms and conditions of a loan, such as the amount of the loan, the interest rate, the repayment period, and the fees.
- Loan term: The length of time that a borrower has to repay a loan.
- Payday Loans: These loans are unsecured personal loans that can be availed based on your job. They are ideal for financial emergencies. In case you run short of money towards the end of the month, payday loans can be taken for a few days and the repayment can be done once your salary is credited to your account.
- Prepayment penalty: A fee that a borrower may have to pay if they repay a loan early.
- Prepayment Fees: In case you wish to repay your loan ahead of schedule, you will be charged a prepayment fee. Not all lenders charge this fee, but those that do levy a charge in order to recover some of the money they were expecting to collect as interest on the loan.
- Principal Amount: The principal amount of a loan is the amount you borrow, exclusive of fees or interest.
- Processing fee: A fee charged by a lender to cover the costs of processing a loan application.
- Secured loan: A loan that is backed by collateral. If the borrower defaults on the loan, the lender can seize the collateral.
- Term: It is the tenure of the loan – the time frame given to you to repay the amount borrowed.
- Unsecured loan: A loan that is not backed by collateral. If the borrower defaults on the loan, the lender cannot seize any assets.
These are just some of the most common terms used in lending in India. It is important to understand these terms before you apply for a loan.
The six basic C’s of lending are:
- Character: The borrower’s willingness and ability to repay the loan.
- Capacity: The borrower’s income and expenses.
- Capital: The borrower’s assets and net worth.
- Collateral: The security that the borrower pledges to the lender.
- Conditions: The economic and market conditions.
- Credit score: The borrower’s credit history.
Lenders will consider all of these factors when making a lending decision.
