When getting a loan it is important to under the terms associated with the loan because it can help you make a wiser financial decision. A personal loan is a decision that can affect individuals financially and even hurt their future.
So when getting a loan it is essential to create a budget to make sure all the payments are made on time.
Personal loans are a good way to finance different life events such as large purchases, home repairs, car purchases, vacations, and much more. To make sure you protect yourself here are key terminologies to know about a personal loan.
APR (Annual Percentage Rate): This is a standard way that lenders use to express the cost of borrowing money over the span of a year.
The APR takes into consideration the interest you will be paying on a loan, as well as any other fees that could be associated with the loan. When getting a personal loan, there can be other fees that lenders might have, such as origination fees, processing fees, or even prepayment penalties.
To make it easier, lenders use a simple APR scale expressed as a percentage to help borrowers make a decision. For example, if you apply for a $10,000 loan with a 20% APR, you will pay $2,000 in interest over the course of the year, and lenders will also factor in any other fees to that loan if there are any.
It is important to understand that APR will not always reflect the full cost of borrowing the money, and you should always check with the lender to understand the full cost.
The Borrower: A borrower can be a person, entity, or organization that takes out a loan from a lender and is sometimes referred to as the applicant. The applicant who applies for a personal loan is responsible for repaying the loan with interest over a period of time, usually in monthly increments.
In other words, a borrower or an applicant is someone who is seeking funds and agrees to a loan agreement with the lender to obtain the desired funds and, in return, agrees to pay the lender on time with interest.
Borrowers are usually required to provide documents such as tax returns, pay stubs, identification, credit history, and, in some cases, collateral to be approved for a loan. Each lender will have a different verification process that a borrower needs to go through to get approved for a loan.
A cosigner: An individual who agrees to take the same amount of responsibility for a loan with the primary borrower. The consignor in most cases is someone with a good credit history and good income who acts as the backup borrower which means they will be responsible to pay the loan if the primary borrower is not able to do so.
If you have a consignor on the loan it will increase the likelihood of the loan getting approved and is mostly used if the primary borrower has a lower income or credit score.
As a cosigner, you have a big responsibility and should be very cautious when accepting to cosign under someone’s loan due to you being equally responsible. Anyone who is a borrower’s close family and friend is the most common individual who will co-sign under loans.
Credit score: This is a numerical value that will represent a borrower’s creditworthiness based on the previous use of their credit. It’s a 3-digit number that is typically calculated by credit reporting agencies such as Transunion, Equifax, and Experian.
Your credit score is calculated on payment history, usage, length of credit history, types of credit accounts you have, and your credit inquiries. The higher your credit score the better is viewed by the lender and will improve the individual ability to obtain better terms and increase the pool of lenders willing to work with you.
Credit scores will range anywhere from 300 to 850, the lower your credit score the more risk present to the lenders which can affect your approval rate and even your terms.
Debt Consolidation: This will be the step of adding multiple debts that an individual has and combining it into a single manageable debt helping the person make the payment on time.
Usually, this can be done by getting a loan that you can use to pay off existing debts such as credit cards or any other loans. The main objective of a debt consolidation loan is to combine all the high-interest rate dependents into one with a lower-interest-rate loan that will combine everything into one simple payment.
Debt consolidation can save you money and improve your credit score by reducing the amount of debt you own. When consolidating your debt be sure to consider every other option out there to make sure to choose the one that is best for you.
Interest rate: An interest rate is a charge from the lender for borrowing money from them. Usually, interest rates are shown as a percentage of the principal borrower and in most cases charged annually or monthly.
Lenders use different criteria to determine the interest rate such as borrowers’ credit score, length of the loan, type of loan, and of course the current going rate for loans.
The interest rate can really play a big role in the cost of the loan meaning that if you get approved with a high-interest rate it can cost you more to own an item than the item is worth. Lenders will usually disclose interest rates at the time of the loan approval and will be displayed on your loan agreement.
Secured loan: A secured loan will be a type of a loan that has some collateral backing it or attached to it. Usually, the collateral will be an asset of some sort that a lender can seize and sell if the individual fails to pay back the loan.
In most cases, secured loans are considered less of a risk for the lender meaning they will be more leaning in providing better terms for the borrower. The most common ways a loan can be secured is if you use collater as real easte, vehicle,s stocks, and anything else that is a valuable asset.
Something to consider when applying for a secured loan is that if you fail to pay for the loan the lender has the right to seize any collateral provided to them to recoup their losses.
Unsecured Loan: An unsecured loan will be a type of loan that will not be backed by any collateral. With an unsecured loan lenders will not require any collateral to secure the loan and lenders will use other criteria to get an individual approved for the loan.
Lenders will consider credit score, income, and other personal criteria to determine if you will pay the loan back on time. Since unsecured loans are more risky lenders often require a stricter approval process and higher interest rates than other loans.
Most unsecured loans are personal, student, and credit cards. If you default on the loans, the lender might pursue legal action to recoup their losses but has no right to seize any assets.
Loan Terms: Is refers to the condition lender and borrow agree when a loan agreement is signed. Loan terms can include things such as the loan, interest rate, fees, and repayment schedule.
Most common terms offered by most personal loan lenders will be 12 months to 60 months, but there are many lenders that can go up to 84 months or even offer shorter terms. When selecting a lender be sure to consider what loan terms are best suitable for you and choose the right lender that will be able to match that.
Loan origination fee and prepayment penalty: A lot of personal loans will have something called a loan origination fee which is a 1%-10% charge a lender will have you pay which will cover the cost of the processing loan application.
It will be a one-time fee that will be taken as a percentage of your total loan and in some cases, it’s taken out of loan proceeds which can lower the amount you receive from the lender. The loan origination fee will depend on the lender and the loan type. Be sure to always consider all the fees associated with the loan before agreeing.
Another big fee that might be included in your personal loan will be a prepayment penalty. Which is the charge that a lender requires the borrower to pay if the loan is paid off before the agreed-upon date.
Lenders design this fee to compensate for the interest payment they would have received if the individual had the loan for the full term. Not all lenders have prepayment fees but you should always ask them if you ever plan on paying the loan off sooner.
There is no right answer to that question. But personal loans are amazing options to consider when shopping for loans. The most common reason why most individuals get a personal loan will be to consolidate debt, cover emergency expenses, pay bills, renovate their homes, and purchase vehicles.
A personal loan might be a great solution for you and a way to help your financial situation. Before applying for any loan be sure to consider any alternatives that might be cheaper.