During financial hardships, many of us turn to personal loans. It is one of the most effective and efficient ways to meet your immediate financial needs such as medical emergencies, unanticipated wedding costs, and more. However, for a first-timer, understanding
personal loan glossaries can prove tiring. If you do not know the jargon, you may find yourself at a disadvantage when comparing offers with different lenders. Today, we have put together a list of the top 27 personal loan terminologies that every borrower should be aware of to be able to choose the best loan product.
Top 27 Personal Loan Terminologies that Every Borrower should be Familiar of
What is the Annual Percentage Rate (APR)?
APR reflects the yearly loan costs that you need to incur before or after acquiring personal loan funds. APR includes the interest rate, upfront fees such as processing fees, and any other fees you may have to pay during the loan period.
What is an Application Fee?
This is a one-time charge that you must pay when you
submit your loan application. Financial institution charges this fee as part of the loan processing cost.
What is Automatic Payment?
Automatic payment is a facility that allows you to choose a repayment option in which the EMI amount is directly debited from your account on the due date. When you choose this method, the lender deducts the EMI amount on a specific day of a month until the conclusion of the loan term. Some of the examples of automatic
payment methods are post-dated cheques, direct debit from a bank account, or the ECS mode.
What is Arrear?
Arrear refers to an EMI amount that is overdue and is not paid on the due date. Arrears are calculated from the due date of the first missed payment.
What is Balance Transfer?
A balance transfer is an arrangement in which you can switch from your existing lender to a new one. Borrowers prefer to transfer their outstanding debt to a new lender when the new lender's personal loan terms and rates are more appealing than that of the previous lender.
ency in charge of keeping track of your
credit score. The lender reports your repayment pattern to the credit bureau throughout the loan period, and the credit bureau evaluates it and changes your credit score accordingly.
What is Credit History?
Credit history is a track record of all your previous or existing debts to date. It shows your previous or existing EMI pattern, any previous loan defaults etc. The financial institution assesses credit history to determine the repayment potential of the borrower.
What is Credit Score?
A credit score is a numerical expression of how sound your credit profile is. The credit bureaus decide your credit score after a thorough assessment of your credit history. As a thumb rule, the higher your credit score, the more likely you are to get approved for a personal loan.
ALSO READ: STEP BY STEP GUIDE FOR CHECKING YOUR CREDIT SCORE What is Credit Appraisal? Credit appraisal refers to an evaluation process where the lender thoroughly analysis your details and documents. It is the procedure through which a lender determines whether or not to provide a loan to a certain applicant as well as the amount of loan that the applicant is qualified for and the interest rate that should be charged.
What is Collateral?
Collateral refers to a security that the borrower pledges with the lender to obtain a personal loan. Although personal loans are unsecured forms of financing, some applicants with low income or an average credit score use their assets as
collateral to receive funds.
What is a Co-applicant?
A co-applicant, also known as a co-signer, is a person who signs a loan application alongside the primary borrower. A co-income applicant's credit score is taken into account by the lender for risk profiling. When you choose to add a co-applicant to your application, then depending on your loan agreement, the EMI is shared proportionally between you and the co-applicant.
What is Default on a Loan?
Default refers to a situation when a borrower has not paid his or her EMI for a very long time. Default has long-term repercussions and can affect your future borrowing capacity.
ALSO READ: Consequences of Non-Payment of EMI and Ways to Avoid It What is Deferment?
In the personal loan glossary ‘deferment’ refers to taking a break from paying monthly debt repayments for a specific time. To avail deferment, you will first require approval from the lender. When you ask for a deferral, you are requesting your lender to reschedule personal loan payment terms.
What is Debt Consolidation?
In the context of a personal loan,
debt consolidation refers to an arrangement in which the borrower uses the loan amount to pay off all of their high-interest debt all at once.
What is the Debt-to-Income Ratio (DTI) or Fixed Obligation to Income Ratio (FOIR)?
The debt to income ratio reflects the relation between your monthly income and monthly obligation towards loan repayment. If your DTI is 30%, it means 30% of your gross monthly income goes towards repayment. In general, the higher your DTI, the less likely you are to be approved for a personal loan. To calculate your debt-to-income ratio, use the formula given below.
Debt-to-Income Ratio = Sum of All Outstanding Loan EMIs ÷ Gross Monthly Income
What is EMI?
The
EMI or equated monthly instalment refers to the borrower's monthly obligation towards loan repayment. When you choose longer repayment tenure, your personal loan EMI will be on the lower side and vice versa.
What is e-NACH?
e-NACH is the digital process under which the borrower authorises the lender to debit the specific amount from his or her account on a set day each month.
What is Fixed Interest Rate?
Fixed interest rate refers to a personal loan arrangement where the interest rate does not fluctuate in response to market conditions, inflation, or RBI's benchmark rate. Your interest rate is determined by the
personal loan eligibility and
personal loan documents provided by the borrower.
What is Floating Interest Rate?
Offered by a few lenders, floating interest rate refers to the financing arrangements under which your
personal loan interest rate keep on changing in response to change in RBI's base rate and other external factors.
What is Guarantor?
If the lender believes there is a high risk in lending to your profile or if the amount of an unsecured personal loan is high, the lender may ask you to add a guarantor to your application. However, keep in mind that if the principal borrower defaults, the guarantor will be held accountable for the payment of any outstanding debts. You may also opt for a guarantor if you require funds urgently but are falling shy of the lender's minimum income requirement.
What is Lien?
Lien, in the context of a personal loan, comes into play when a borrower puts his or her assets as a guarantee (collateral) to receive a personal loan but then fails to repay the debt. A lien gives a lender the legal power to seize and sell a borrower's collateral property if he or she
defaults on a loan.
What is Loan Agreement?
A
loan agreement refers to the official document that states all the terms and conditions related to your loan repayment, interest rate, tenure etc. To receive funds in your account, you and the lender must both sign the agreement.
What is a No Objection Certificate?
A No Objection Certificate (NOC), in the context of a personal loan, refers to the document that your lender gives to you after the successful repayment of your debt. It serves as evidence that you have paid all your outstanding dues. Failure to acquire a
NOC might harm your credit score.
What is a Pre-approved Loan?
A pre-approved personal loan is usually provided to the lender's existing customers. If you have taken out any sort of loan from the lender, then based on your previous debt repayment, the lender offers a
pre-approved loan at a special interest rate. Pre-approved loans are provided by lenders to retain their loyal customers.
What is Prepayment?
Prepayment is when a borrower pays off a portion or all of their outstanding loan balance before the agreed-upon due date. When you choose to pay off your loan early, the lender may charge you a prepayment fee based on the amount you want to pay off early.
What is Foreclosure?
In personal loan terminology
, ‘foreclosure’ refers to a condition in which the borrower pays all outstanding debts in full before the conclusion of the loan term. However, keep in mind that most lenders will allow you to foreclose on a personal loan only after you have completed one year of repayment. Depending upon personal loan payment terms on a
foreclosing of a loan, the lender imposes a foreclosure fee which can range from 2% to 5% of the outstanding loan amount.
ALSO READ: Things to Know While Closing a Personal Loan To Conclude:
It is critical to improve your financial knowledge, especially when it comes to arranging funds for personal necessities. By understanding the basic personal loan terminology, you will not only be able to compare lenders but also be able to acquire a better personal loan deal.
