Important Terms Related to Loans

A loan is a financial service that can be avail by individuals to quench their thirst for money. Taking a loan is a cakewalk these days. But it is important to know about the terms related to loans. As many of us are not aware of the financial terms related to loans. The need for an hour is the financially independent society. 

Learning terms related to loans can help any individual who is thinking about taking financial services or might avail of financial services. Check your eligibility for loan and keep yourself updated with the terms related to it. Here is the list of terms that one should know before applying for a loan. 

Annual Percentage Rate: The APR or the annual percentage rate of a loan is the overall charges that a borrower will pay during the tenure of the loan. It includes the interest rate and principal amount. It is the overall cost of the credit offered by banks and NBFCs. 

Application Fee or Processing fee: This is the fee imposed by the financial institutions to process the application for a loan. The processing fee for the loan application can be between 0-2%. 

Automatic Payment: The EMI of the loan is deducted from the bank account of the borrower automatically. This feature is enabled by the borrower and can save a borrower from becoming a defaulter. 

Balance Transfer: Transferring your running loan from one lender to another who is offering attractive interest rates and other features for loan repayment. A balance transfer is a smart solution when the other lender is offering more benefits to the borrower. For example, if you have taken a home loan of a particular amount at a particular rate of interest, and after the lock period you realized that another lender is offering the loan at less rate of interest. Then you can transfer the ongoing home loan to another lender. 

Borrower: The person who is applying for the loan and the loan is granted by the lender is called a borrower. This is the same for all loan. 

Collateral: The security asset that a borrower is presented in front of the lender, against which a loan is sanctioned. Secured Loans demand collateral security for approval. Usually, long-term business loans, home loans, and working capital loans need collateral. 

Credit Agency: The organization which has the right to generate the credit score of a person is known as Credit Agency. In India, CIBIL, Equifax, Highmark, and Experian have the authority to generate a credit score. However, it is noted that the credit scores generated by these agencies are different from each other.

Credit Report: A credit agency generates a credit report of a person. The credit report depicts the creditworthiness of a person. 

Credit Score: A credit Score is a three-digit number depicting the creditworthiness of a person. A person with a credit score of more than 700 has a higher chance of getting an unsecured loan approved. Boost your credit score to increase your chances of getting a loan. 

Default: If the borrower misses any EMI, he or she is listed as a defaulter and it decreases the credit score of the person. 

Fixed Interest rate: If the interest rate on a certain loan remains unchanged throughout the tenure of the loan period it is called a fixed interest rate. For example, if the borrower has got is the loan approved at a 10.25% of an interest rate for two years. Then for two years, the interest rate shall remain at 10.25%. 

Floating interest rate: The floating rate of interest changes as per the repo rate set by the RBI. It might increase or decrease the interest rate. 

Guarantor: If the loan amount is a bit high then the lender may require a guarantor who shall be legally liable for the repayment of the loan if the borrower defaults it. 

Interest Rate: The lender charges a certain percentage of the loan amount every month which is the EMI part of the amount. The remaining amount contributes towards the repayment of the principal amount. 

Late Payment: A delay in the loan repayment any month is known as a late payment.

Lender: The financial institution like banks, and NBFCs are the lender. The authority which is providing financial services. 

Loan Agreement: The terms and conditions related to the loan which is signed by the borrower as well as the lender is the loan agreement. 

Loan Prepayment: When the borrower wishes to close the loan by prepaying before the expiry period of the loan. 

Prepayment Fees: Prepaying a loan may come with fees which are known as prepayment charges or fees. The borrower should get to know about the prepayment fees before thinking of closing the loan before the completion of tenure. 

Principal Amount: The amount of loan sanctioned to the borrower is the principal amount. This is the amount excluding any deductions and fees. 

Term: The allocated time period given to repay the loan is known as the term. 

Conclusion

The above article is a glossary of terms related to loans. If you are thinking of applying for a loan then it is good to know about basic terms related to it. A loan is a planned decision that can help you to fulfill your dreams and quench your financial thirst. For making it a smart decision it is important to acknowledge the terms and conditions related to loans. My Mudra is providing financial services to the people and helping them to be financially independent.