Personal Loan Terminology Glossary: 24 Essential Terms to Know

Understanding the various terms associated with personal loans can be crucial to making informed financial decisions. This comprehensive glossary explains key loan terminology to help you navigate the complexities of borrowing.

1. Amortization: Amortization is the process of spreading out your total debt into equal monthly payments over a specified loan term. Each payment includes a portion of the principal and interest, ensuring the loan is fully paid off by the end of the term.
2. Annual Percentage Rate (APR): The APR represents the total cost of borrowing money, encompassing not only the interest rate but also additional fees such as closing costs. As a result, the APR is typically higher than the nominal interest rate alone.
3. Borrower: A borrower is an individual who obtains money from a financial institution or lender with the agreement to repay it over time.
4. Co-Borrower: A co-borrower is someone who jointly applies for a loan with another person. Both parties are equally responsible for repaying the loan and have access to the loan funds.
5. Collateral: Collateral is an asset pledged by the borrower to secure a loan. Common types of collateral include real estate, vehicles, and business inventory. If the borrower defaults on the loan, the lender can seize the collateral to recoup losses.
6. Co-Signer: A co-signer agrees to repay the loan if the primary borrower fails to do so. Unlike a co-borrower, a co-signer does not have access to the loan funds but shares responsibility for the debt.
7. Credit Score: A credit score is a numerical representation of a borrower’s creditworthiness, based on their credit history. A higher credit score can lead to better loan approval odds and more favorable terms. Improving your credit score involves paying off debts and making timely payments.
8. Debt Consolidation: Debt consolidation involves combining multiple debts into a single loan, simplifying repayment with one monthly payment. It can also potentially lower the overall interest rate.
9. Default: Default occurs when a borrower fails to make scheduled loan payments. Each lender has specific criteria for what constitutes a default, which can lead to serious financial consequences.
10. Early Payment Fee: Also known as an early settlement fee, this charge is imposed if you pay off your loan before the agreed-upon maturity date. Lenders use this fee to compensate for lost interest income.
11. Extension Fee: If you need more time to repay your loan, you can request an extension from the lender, which often comes with an additional fee. Keep in mind that extending the loan term increases the total interest paid.
12. Grace Period: A grace period is the timeframe after your due date during which you can make a payment without incurring late fees. The length of the grace period varies by lender.
13. Gross Income: Gross income is the total earnings of a borrower before deductions such as taxes and other contributions. Lenders use gross income to assess a borrower’s ability to repay a loan.
14. Interest: Interest is the cost of borrowing money, expressed as a percentage of the principal. There are two types of interest rates:

• Fixed Interest Rate: Remains constant throughout the loan term, providing predictable monthly payments.
• Variable Interest Rate: Fluctuates based on market conditions, potentially altering the monthly payment amount.

15. Late Payment Fee: Charged when a borrower misses a payment due date, late payment fees can be a fixed amount or a percentage of the overdue amount. For example, UnionBank imposes a penalty of ₱500 or 6%.
16. Loan Origination Fee: This fee covers the administrative costs of processing a loan application, including underwriting and funding. It is typically a small percentage of the total loan amount.
17. Loan Term: The loan term is the duration over which the loan must be repaid. For instance, a five-year personal loan requires repayment within five years. Some lenders use the term “loan tenor” interchangeably.
18. Maturity: Maturity is the date when the final loan payment is due. On this date, the borrower must have fully repaid the loan, including principal and interest.
19. Principal: The principal is the original amount borrowed from the lender, excluding interest and other fees. Monthly payments gradually reduce the principal balance.
20. Refinancing: Refinancing involves obtaining a new loan to pay off existing loans, often to benefit from lower interest rates or better terms. For example, replacing a high-interest loan (Loan A) with a lower-interest loan (Loan B) can reduce overall costs.
21. Renewal Fee: A renewal fee is charged when you renew a loan after completing the original term. This fee is applicable if you choose to extend the loan.
22. Revolving Credit: Revolving credit allows borrowers to withdraw, repay, and withdraw again up to a specified credit limit. This type of credit is commonly associated with credit cards but is also offered by some banks as a loan product.
23. Secured Loan: A secured loan requires collateral, such as a house or car. If the borrower defaults, the lender can seize the pledged asset to recover the loan amount.
24. Unsecured Loan: An unsecured loan does not require collateral. Due to the higher risk for lenders, these loans often have stricter approval criteria and higher interest rates.

Understanding these terms will help you make informed decisions when applying for a personal loan, ensuring you choose the best option for your financial situation.