16 Terms You Need to Know Before Speaking to a Lender

The world of financing can be confusing if you don’t have extensive personal experience with loans. Before you approach a lender for financial help, learn some of the typical terms used in this industry. Once you become familiar with the language, you will have an easier time understanding loan agreements and contracts.

Amortization

Amortization refers to installment payments on the interest and principal of a debt.

Annual Percentage Rate

The annual percentage rate (APR) is expressed as a percentage and calculated based on a yearly rate. The APR may be higher than the interest because it includes other finance charges.

Application Fee

The application fee is the charge levied by a banker when a borrower submits an application.

Credit Report

Credit bureaus receive information about consumers and then compile reports to show credit history. Credit reports typically include the amount of debt and payment history.

Credit Score

A consumer’s credit score is a number indicating their risk as a borrower. A high score indicates a low-risk borrower, while a low score indicates a high-risk borrower. A banker will use a credit score to determine whether to approve a loan, as well as the interest they will charge.

Fees

When securing a loan, the borrower may need to pay specific fees for the transaction. Fees may be negotiable. They may also be charged annually.

Fixed Rate

If the interest does not change, it is a fixed rate. Some contracts may feature an introductory rate that will increase at a later time.

Interest Rate

A banker will charge a borrower a fee, based on the amount borrowed. Interest rates are expressed as a percentage of the principal.

Lien

Some financing requires a lien, or claim, on a piece of property, such as a house or car. Upon the satisfaction of the agreement, the lien disappears.

Line of Credit

Some loans are revolving, which means that the lender makes a specific amount of money available to the borrower. With regular payments, the debt “revolves” and again becomes available as credit to the borrower.

Loan Term

The term is the length of a contract. The term generally ends when the final payment is due and the debt is repaid.

Payment Schedule

A lender sets regular payments for a contract, known as the payment schedule. Often, this schedule involves monthly payments. The borrower will receive a payment schedule that states the payment dates and the amount due. Late payment may result in default.

Points

A loan may involve points, which are fees paid to the lender. Generally, one point equals one percent of the amount borrowed.

Prepayment Penalty

Some contracts include a prepayment penalty provision. With this provision, the lender can charge an additional fee for paying off the loan early.

Promissory Note

The contract that outlines financing terms and a promise to pay back the loan is called a promissory note. The promissory note contains all provisions and conditions of the contract.

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