At a Glance
Personal loan terminology can quickly become confusing if you have no experience with loans. By outlining some of the common loan terms you may see during your research, you can make a more educated decision on what loan type is right for you. Treat the following as a personal loan glossary to reference in the future:
Annual percentage rate
The annual percentage rate (APR) on a loan is the total yearly cost associated with borrowing that loan. It includes all charges associated with the loan, including fees and the interest rate. Therefore, sometimes, the interest rate and annual percentage rate differ. In the event there are no fees associated with the loan, the interest rate, and APR may be the same.
Learn more: Annual Percentage Rate on Personal Loan
Adverse action notice
An adverse action notice is simply the notification a person receives when their loan application has been denied. This can come in the form of a written letter, email, or even a digital notification within an application portal.
Automated clearing house (ACH)
The automated clearing house (ACH) system is a financial system that processes financial transactions such as debits, credits, charges, and more. ACH is often how paychecks or other direct deposits are sent to employees or individuals.
Amortization on a loan refers to gradually paying off the debt over time, rather than making a single lump sum payment. There are different kinds of amortization, such as straight-line amortization, which involves equal payments at regular intervals for the entire payment period.
Annuity is funding that is handled through insurance. Essentially, a person makes payments to a fund where it grows tax free for years. Later, those funds are then disbursed to the person who made the contributions at a regular interval.
Applicant / borrower
By applying for a loan and then being approved for that loan, you go from being the applicant to the borrower.
A borrower in default
When a borrower is in default, they have not made payments on the loan they borrowed for over 30 days past the due date. At this point, a lender may seek legal action to recoup their money, or they may repossess collateral that was put down on the loan.
A cash advance is essentially a small loan that is taken out. Credit card issuers will typically allow card holders to take money out at an ATM by borrowing against your card’s line of credit.
A co-signer is a person who agrees to also put their name on a loan application as a guarantor to help a person with a lower credit score (typically) get approval for the loan. If that primary borrower fails to pay the loan, the responsibility will fall to the co-signer.
Related: Personal Loans with a Cosigner
Collateral is an asset that a borrower puts down as security on a secured loan. In the event they are unable to pay the loan using cash, a lender has the legal right to take possession of whatever collateral was put down. Collateral can be a vehicle, a mortgage, and more. It is not required on unsecured loans.
A co-borrower is someone who signs up to pay the loan back jointly with another borrower. Both the co-borrower’s credit scores, income levels, and credit histories are considered when a lender decides on the application.
Related: Co-borrower vs Co-signer
Your credit score is essentially a measure of your history with credit. It is based on the following factors:
- Payment history: 35%
- Current debt amount: 30%
- Credit history length: 15%
- Credit mix: 10%
- New credit activity: 10%
Most lenders will look at the FICO rating of your score, which can range from 300-850. A credit score of around 670 is considered good.
A direct lender is the person or organization that is providing a loan directly to you. This is as opposed to an indirect lender, which is a third-party that connects customers to direct lenders.
Debt consolidation is the process of combining multiple types of debt into one single lump sum of debt with a single interest rate. This can be done by taking out a loan in the amount of all your existing debt, thereby reducing your debt to a single loan.
When looking at loan vocabulary, deferred means to put off or delay for a certain period. If a loan company offers deferments, you may be able to apply and, if approved, your loan repayments may be delayed by the amount of time they specify.
Fixed interest rate
A fixed interest rate is an interest rate that remains unchanged for the entire life of the loan. When you are quoted a fixed interest rate when applying for the loan, that is the rate that you will pay for the entire repayment period.
Different loan terms will have different features, some of which potentially include a grace period. A common example is student loans. These loans usually have a grace period that is from the time of loan approval until graduation. During this grace period, the borrower is not responsible for making any payments on the loan. Once the grace period ends, however, the terms of repayment agreed upon at the time of borrowing begin.
A person’s gross income is the amount of money they earn before any taxes or deductions are taken out. Most lenders will look at your gross income when considering your loan application and may use it to make certain calculations such as your debt-to-income ratio.
Hard credit check
A hard credit check involves an official inquiry from a lender into your credit score, credit history, and more. It usually lasts on your credit record for around two years and can potentially lower your credit score in the short-term by up to four points.
An installment loan is a loan that has fixed payments over a regular period. After taking out a personal loan, you will be required to make payments, or installments, on that loan monthly. The exact amount of frequency of these installments will be outlined in the terms of the loan.
Compare: Best Installment Loans
The loan agreement is the legal contract between you and a lender that will outline aspects of a loan such as: repayment period, monthly installment amount, principal amount, interest rate, APR, any fees, how to repay your loan, information regarding the event of default, and more.
Late payment fee
In the event you miss a due date for your loan payment, a lender may charge you a fee for paying slightly late. The exact date upon which this fee becomes active varies from lender to lender, so be sure to read the terms of your contract.
Should you run into financial hardships, your lender may allow you to take a loan deferment. During this deferment time, you won’t be responsible for making payments on your loan. Deferment will not last forever and extends your overall loan term, meaning you are paying more in the long run due to interest.
The loan limit is the maximum amount a lender will allow you to borrow. A loan limit may be higher than you can afford, however, so be sure to only borrow what you can pay back.
Loan origination fee
Some lenders will charge what is known as a loan origination fee. This fee is typically the lender’s costs associated with origination or creating the loan and can range in amount. The fee is deducted from your loan before you receive the funds. Should you wish to borrow $10,000 and there is a 3% origination fee, you would receive $9,700 from the lender.
Learn more: Personal Loan Origination Fee
The term on a loan is the amount of time you must repay the loan and can vary from one to seven years on average for a personal loan.
A mortgage is business loan terminology for a loan used to make a home purchase. Real estate loans can have slightly different features than standard loans, which is why they are their own category and are named differently.
A non-recourse loan in lending terms is a secured loan that is backed by collateral.
A payday loan is a small, short-term loan used to cover small costs between paychecks, hence the name.
A personal loan is a variable loan that can be used for nearly any purpose. The amount of a personal loan can vary from $1,000-$100,000 on average and typically has a term of one to seven years. Interest rates on personal loans can vary anywhere from 5%-35% depending on your credit score, credit history, income level, and other factors.
Learn more: Everything You Need to Know About Personal Loans
Some lenders may allow for the pre-approval of a loan. This means that you can submit a pre-approval application for a loan and the lender will automatically tell you if you are approved for a loan, along with the amount and terms. Some credit card companies will run pre-approvals using soft credit checks and send out credit card offers in the mail, even without you applying.
A prequalification on a loan application means that you meet all the requirements for the application, and it is a good indication that you will be approved if you submit a full application. However, it is still possible to get denied on your application if something has changed or if something wasn’t discovered during the prequalification process.
Some lenders will charge you a percentage fee for paying off the loan before the end of the loan term. This is since they technically did not make as much money in interest as they expected, and a prepayment penalty is how they may account for this.
The total amount of money you agree to borrow is the principal. It is the amount you pay back, not including all the interest on top of it.
Of the many common personal loan terms, you may see recourse loans listed. As with non-recourse loans, these are also secured by collateral. However, recourse loans allow a lender to go after your other assets to recoup their payment as well in the event you default on the loan.
A secured loan is backed by some type of collateral, whether that be a vehicle, home, or other type of asset. In the event of loan default, a lender may have the legal right to secure that collateral.
Soft credit check
A soft credit check does not impact your credit score and is performed when applying for a job, checking your own credit, or during prequalification.
An unsecured loan does not have any collateral backing it. The only source of repayment that a lender can assume is the cash flow of the borrower themselves. Basic loan terminology will often discuss an unsecured loan vs. secured loan.
Related: Secured vs. Unsecured Personal Loans
Variable interest rate
Unlike a fixed interest rate, a variable interest rate can change over the lifespan of a loan. This fluctuation will be based on a benchmark rate that is outlined in the terms and conditions of your loan agreement.
Receiving approval and the terms of the loan offer can range from being instant to taking up to a week. This depends on where you apply for the loan, whether that be an online lender, traditional bank, or credit union. Typically, online lenders will be the fastest.
When looking at the terms of loans, you likely wonder whether meeting them will impact your credit score. Yes, a failure to repay your loan on time and in-full will damage your credit score. Always meet the minimum payment on time to ensure your credit score does not suffer.
Oftentimes, people will use personal loans as a form of debt consolidation. In terms of credit terminology, personal loans and debt consolidation loans can potentially be the same. By taking out a personal loan in the sum of all your debt that offers a better interest rate than your other debt, you can technically pay less in the long-run if done correctly.