Personal Loan Terminology Glossary: 24 Terms You Need to Know

Wondering if the interest rate is different from the annual percentage rate? Discover the answer and more in this comprehensive loan terminology guide.

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1. Amortization

Amortization is the process of breaking down your total debt into equal monthly payments over the loan term. Each payment includes both principal and interest, ensuring that by the end of the loan term, the entire debt is paid off.

2. Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) represents the total cost of borrowing, including the interest rate and any additional fees, such as closing costs. This means the APR is typically higher than the interest rate alone.

3. Borrower

A borrower is an individual who obtains money from a financial institution, like a bank or a lending company, with the promise to repay it.

4. Co-Borrower

A co-borrower is someone who applies for a loan alongside another borrower. For example, if you and a friend take out a loan to start a business, you are each other’s co-borrowers, sharing equal responsibility for the loan.

5. Collateral

Collateral is an asset that a borrower pledges to the lender as security for a loan. Common forms of collateral include houses, cars, and business inventory. If the borrower fails to repay the loan, the lender can seize the collateral.

6. Co-Signer

A co-signer is an individual who signs a loan agreement alongside the borrower and agrees to repay the loan if the borrower defaults. Unlike co-borrowers, co-signers do not have access to the loan funds but are still legally responsible for repayment.

7. Credit Score

A credit score is a numerical representation of a borrower’s creditworthiness. Higher credit scores improve the chances of loan approval and can secure better interest rates and terms. A low credit score may indicate a higher risk to lenders, potentially resulting in loan denial or higher interest rates. Improving your credit score involves paying off existing debts and making timely payments.

8. Debt Consolidation

Debt consolidation involves combining multiple debts into a single loan, simplifying payments to one monthly installment. This can make managing debt easier and potentially save money if the new loan has a lower interest rate.

9. Default

Default occurs when a borrower fails to repay the loan according to the agreed terms. Lenders have specific criteria for what constitutes a default, which can vary. Understanding these terms is crucial to avoid penalties and negative impacts on your credit score.

10. Early Payment Fee

Also known as an early settlement fee, this charge is applied if you pay off your loan before its maturity date. Lenders impose this fee to compensate for the lost interest they would have earned over the full loan term.

11. Extension Fee

If you need more time to repay your loan, you can request an extension from the lender. If granted, you will incur an extension fee. Keep in mind that extending the loan term will increase the total interest paid over time.

12. Grace Period

A grace period is the additional time given after your payment due date during which you can still make a payment without being charged a late fee. The length of the grace period varies by lender, so it’s important to review your loan agreement.

13. Gross Income

Gross income is the total earnings of a borrower before taxes, contributions (such as Pag-IBIG, SSS, PhilHealth), and other deductions. Lenders assess a borrower’s gross income to determine their ability to repay the loan.

14. Interest

Interest is the cost of borrowing money, calculated as a percentage of the principal loan amount. Lenders offer two types of interest rates:

  • Fixed Interest Rate: Remains constant throughout the loan term, resulting in predictable monthly payments.
  • Variable Interest Rate: Fluctuates based on market conditions, which can cause your monthly payments to vary.

15. Late Payment Fee

A late payment fee is charged if you miss a payment due date. This fee can be a fixed amount or a percentage (typically between 3% to 8%) of the overdue amount. For instance, UnionBank imposes a ₱500 or 6% penalty on late payments.

16. Loan Origination Fee

This fee covers the costs associated with processing a loan application, including underwriting, funding, and administrative tasks. It is usually a small percentage of the total loan amount.

17. Loan Term

The loan term is the period over which you must repay your loan. For example, a five-year personal loan requires repayment within five years. Some lenders also use the term “loan tenor.”

18. Maturity

Maturity is the date on which the final payment of your loan is due. On this date, you are expected to have fully repaid the loan, including principal, interest, and any applicable fees.

19. Principal

The principal is the initial amount borrowed from the lender, excluding interest and fees. Monthly loan payments typically include a portion of the principal along with interest and any applicable fees.

20. Refinancing

Refinancing involves replacing an existing loan with a new one, usually to secure better terms or lower interest rates. For instance, if your current loan has a high interest rate, you might refinance it with a new loan that offers more favorable terms.

21. Renewal Fee

When you finish paying off a loan, some lenders may offer the option to renew it. Renewing the loan typically incurs a renewal fee.

22. Revolving Credit

Revolving credit allows you to borrow up to a maximum amount, repay it, and then borrow again as needed. This feature is common with credit cards but is also available through some banks as a loan product, such as PSBank’s revolving credit.

23. Secured Loan

A secured loan requires collateral, such as a house or car, which the lender can seize if you fail to repay the loan. This type of loan often has lower interest rates due to the reduced risk for the lender.

24. Unsecured Loan

An unsecured loan does not require collateral. However, because there is no asset backing the loan, lenders may impose stricter requirements and higher interest rates to mitigate their risk.

Understanding these terms will help you navigate the complexities of personal loans, ensuring you make informed decisions and manage your finances effectively.

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