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 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.
The application fee is the charge levied by a banker when a borrower submits an application.
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.
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.
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.
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.
A banker will charge a borrower a fee, based on the amount borrowed. Interest rates are expressed as a percentage of the principal.
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.
The term is the length of a contract. The term generally ends when the final payment is due and the debt is repaid.
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.
A loan may involve points, which are fees paid to the lender. Generally, one point equals one percent of the amount borrowed.
Some contracts include a prepayment penalty provision. With this provision, the lender can charge an additional fee for paying off the loan early.
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.