Glossary of Loan Terminology
There are different types of loans available and many people are confused by the terminology and meaning of some of them. We have provided a simplified guide to the most common loans available. However, not all loans are part of our business, so loan explanations will be restricted to those that we are able to provide.
Bad Credit Personal Loan
As the name suggests, this loan has been specifically set up for those people that have a bad credit rating, or bad credit score. For whatever reason, late payments, loan defaults, bankruptcy, and mortgage or loan arrears, your access to finance is denied. A Bad Credit Loan will have high interest, but these loans are a way to get some normality back into your life. If you can provide security, for example, your home, then you will find that you can borrow funds. Just check all the loan terms and conditions before you accept the offer.
Cash Loans are sometimes referred to as payday loans or cash advance loans and these are arranged for borrowers who are employed but find themselves short of immediate funds they may require for an emergency. A cash loan can help you in this situation with funds ranging from $100 to $1,000.
The idea is to repay the loan on your next payday, but it is possible to renew the loan for later paydays. All you need to apply for a fast cash loan online is to be employed and have a bank account. Your credit score or credit history is not usually a problem and is not checked most times.
Debt Consolidation Loan
By consolidating all of your small loans you might have into one loan, it can give you a fresh start and better control of your existing finances. You just manage one payment and it’s usually at a lower interest rate. Place your credit card debt, store cards, HP loans into one, low-cost monthly payment that has been designed to be well within your current means.
A small short-term loan, unsecured, and is not specifically tied to a borrower’s payday. It can be referred to as a cash advance or installment loan. Being employed or having a stable income is a prerequisite for getting this type of loans.
A fixed APR loan with scheduled monthly repayments spread over an agreed period. Depending on the lender there may be some flexibility in the repayment amounts and the repayment schedule.
A payday loan is also known as a fast short-term cash loan. Refer to the above explanation because the loan terms are the same.
Nearly all loans use the same terminology when we talk about finances. We hope that this explanation of loan terms helps you to clarify things for you when you see these words written or spoken when you are applying for a loan. The world of finance is not as complicated as some people like to make out. It’s simply about:
and some of the legalities involved in getting money, or borrowed funds, from a to b.
Acceptance Rate – This refers to the percentage of customers that are successful when applying for a loan or a credit card facility. At least 66% or two thirds, of loan applicants, must be offered what is known as the advertised rate, known as the APR.
Acceleration – The repayment of a loan obligation sooner than the period contracted for.
Accrued Interest – The interest that is payable to or earned by the lender and payable by the borrower. Interest is calculated daily on the unpaid principal still owing and is called ‘accrued interest’.
Amortization – The repayment of a loan made up of the principal and the interest usually by monthly installments.
APR – Annual Percentage Rate: This is the rate of interest payable annually on the loan. This applies to Credit Card balances as well. Potential borrowers can use this figure to compare lenders. The APR must be legally disclosed by the lender.
Arrears – Any missed payments on loans or credit cards are called arrears. As a borrower, you have a legal obligation to pay back arrears as quickly as possible.
Arrangement Fee – Any administration costs associated with setting up the loan.
Assignment – If the existing lender transfers the loan to another lender who is eligible to take on the loan. The borrower remains legally liable to repay the loan on the original terms.
Base Rate – This is the interest rate set by the Federal Reserve. Any changes to the Base Rate can cause changes in the interest rate the lender charges the borrower.
Business Loan – A loan provided specifically for a business based on its past and likely future performance.
Capitalization – The additional unpaid accrued interest that is added onto the principal balance of a loan and as result, increasing the loan amount.
Car Loan – A loan to enable a borrower to purchase a car. Usually, the car is used as collateral/security for the amount borrowed.
Consolidation – Combining two or more loans into one new loan with a new interest rate and a different repayment schedule.
Consumer Finance Association (CFA) – Most lenders in the business of consumer credit are members, as are government bodies, local authorities, and consumer groups. Members signed a constitution that means they follow a code of practice.
Credit Crunch – When lenders cut back on their lending activity at the same time because they feel that borrowers are not in a strong enough position to repay debt.
Credit File – Credit reference agencies store personal information on anybody that borrows money or applies for a loan.
Credit Reference Agencies – These are companies (Experian, Equifax, TransUnion, for example) that keep records of credit and borrowing arrangements of individuals. Information consists of amounts owed, with whom, payments that are made, defaults, arrears and any possible legal actions.
Credit Search – A general search done by the lender using the services of Credit Reference Agencies.
Cumulative Debt Limit – The total amount an individual is able to borrow based on the ability of the borrower to repay, including assets possibly used as security.
Daily Interest Credit – The method of calculating the rebate of precomputed interest. If prepayment is made, the interest charge (finance charge) will be reduced to the amount earned on the day of prepayment, also known as “actuarial method.”
Data Protection Act – A law sadly missing in the USA where different states operate a mixture of laws that supposedly protect the private data of individuals. The Federal Trade Commission Act that prohibits unfair or deceptive practices using personal data.
Default –This refers to both a failure to repay a loan as well as missing a loan repayment that was due. Defaults are recorded on an individual’s Credit File and will adversely affect their chances of obtaining any future credit.
Deferment Period – Under certain conditions, after the repayments on a loan have begun, principal payments (and sometimes interest payments) can be postponed for an agreed period of time. Usually the borrower needs to provide supporting documentation to apply for a deferment.
Delinquent – If the borrower has failed to make a payment, or payments, due on a loan, it can refer to the inability of the borrower to meet other loan terms as well.
Demand Note – If the lender requires full payment of the loan regardless of the installment repayment terms and conditions of the original loan agreement.
Disbursement – When the funds are made available to the borrower, this refers to the transaction when the lender releases the loan funds.
Due Diligence – The efforts and practices of a lender, in the making, servicing, and collection of loans, which are at least as extensive and forceful as those generally practiced by financial institutions for consumer loans.
Early Redemption Charge – If the borrower pays back the debt before the due date, an early payout fee is applied. A borrower should weigh up the fee charged against the interest charged to see which is the most beneficial.
Employee – A person who works full time for a company or business.
Escrow – A situation in which a third party, acting as the agent for the buyer and the seller, carries out the instructions of both and assumes the responsibilities of handling all the paperwork and disbursement of funds at settlement or at closing.
Equity – The term usually refers to home ownership but in fact, you can have equity in any of your valuable possessions including your car. Your equity is the amount of money you would receive if you sold that possession. You can use that money to pay any outstanding amount on the property.
Federal Reserve Regulation – This the law that ensures there is truth in lending and that there is full disclosure to the borrower from the lender about the annual percentage rate (APR) and additional finance charges.
Financial Need – Basically this means the borrower’s requirements to solve their financial crisis. The word ‘need’ is loosely applied to the requirement for more money.
Fixed Rate – An interest rate that is applied to a loan and will not change unless the loan is rewritten.
Forbearance – In certain situations in the lifetime of a loan, there may be a need to allow a temporary stop payment on a loan.
Grace Period – It’s a period, maybe 6 – 9 month, that a lender will give to a borrower before entering the repayment period. For example, an individual might apply for a loan, the loan is approved, and the lender will allow a grace period before the borrower agrees to the start time of repaying the loan.
Guaranteed Approval Loans – A popular marketing trick that dishonest websites often use. No one lender can guarantee a loan approval! Check out this page written by DirectLoansLender’s experts about guaranteed approval loans.
Guarantor – This refers to a person, other than the borrower, who will guarantee the loan repayments. In the case of a default, it is the guarantor’s responsibility to make the loan repayments. A guarantor is usually a person in a sounder financial situation than the borrower, and in such a financial state that they are able to repay the full outstanding loan amount in the event of a default.
In the case of student loans, the guarantor will be a state agency or a non-profit organization which administers a student loan program. The institution or organization guarantees repayment of student loans to private lenders.
Homeowner Loan – This is a secured loan and is only available, as the name suggests, to a person with their own home. The property is used as security for the loan.
Insolvency – The inability to make any repayments.
Instant Approval Loans – Unlike previously when it could take days to get a loan approved, an instant loan is one that a lender can approve quickly, online, sometimes within a few minutes. Instant eligibility is decided electronically.
Interest – The amount of money you pay to borrow money and usually expressed as an annual interest (APR).
Joint Application – This is a loan application made by more than one person, for example a husband and wife, a couple.
Lender – The company that is providing the loan.
Loan Purpose – The reason for which the loan is being taken out.
Loan Term – The period of time over which the loan will be paid off.
Loan to Value Ratio (LTV) – The ratio of the principal balance of a mortgage loan to the value of the securing property, as determined by the purchase price or Appraised Value, whichever is less. For example: an individual may be offered a mortgage of 90% LTV on a property worth $100,000. In this case, the offer would be $90,000.
Loan Commitment – A loan commitment letter will state the approved loan amount, initial interest rate and loan term. The letter will also require that certain conditions are met prior to loan funding. The initial interest rate specified will be the rate in effect at the time a loan commitment is issued.
Loan Denial – The loan has not been approved. The reasons for denial may include credit history, lack of verifiable liquid assets, inadequate income, etc.
Monthly Repayments – This is the amount of money required to be paid monthly including the interest to settle a loan.
Mortgage – This is usually a loan to purchase a home. The property is used as a collateral for the loan.
Net Income – The amount of money a person gets paid minus the tax and any other allowable deductions.
No Credit Check Loan – This means that the lender does not carry out a credit check or run a soft credit check on the borrower. The loan amount is usually small, up to $1,000, and unsecured. The no credit check loan is specifically designed for people with poor credit or a low credit score.
Online Loans – These days, most loans are available online. Technology has advanced to the point where borrowers can apply for loans online and receive confirmation or not within a few minutes. If a loan is approved, the funds will appear in the borrower’s account the next day.
One Hour Loans – A one hour payday loan does not necessarily mean that the loan funds are made available to you within an hour. The one hour is the time it usually takes to get a loan approved online, electronically. The cash is made available the next day once the loan is approved.
Payment Protection Insurance – An insurance taken out to cover debt repayments if the borrower is unable to make repayments because of a number of reasons, such as redundancy, illness or an accident.
Personal Loan – This is a general loan taken out by the borrower for any purpose. The loan rate and amount are based on the credit history of the applicant. Personal loans can be secured or unsecured.
Promissory Note – The legal and binding contract signed between the lender and the borrower which states that the borrower will repay the loan as agreed upon in the terms of the contract.
Qualifying Criteria – These are the eligibility requirements that a lender might ask for before approving a loan. For example, employment, over the age of 18, residency and income. The number of requirements depends on the lender and the type of loan.
Repayment Schedule – The period over which a loan will be repaid and the details of the loan repayment amounts.
Same Day Loans – If funds are needed urgently for an unexpected expense, one potential solution that’s available is to apply for a same day loan. Simply fill out an online application form, and once the loan has been approved the funds can be transferred to a bank account the very same day.
Secured Loan – This is usually a homeowner loan where the borrower’s house is used as collateral. However, a secured loan can include any goods or chattel owned by the borrower that has value enough to cover the loan amount. A car, memorabilia, and jewelry can be used as security. Failure to make repayments can mean the lender has the right to repossess the security.
Total Amount Repayable – The total amount of the loan plus the interest and any applicable fees.
Typical APR – The advertised interest rate that is offered to a minimum of two-thirds of successful loan applicants.
Underwriting – The process of verifying data and then approving the loan.
Unsecured Loan – a loan that does not require any security or collateral. The loan is based on the credit history, credit score, and the financial standing of the borrower. Payday loans, quick cash loans, cash advance loans are unsecured loans.
Variable rate – This is an interest rate that may change during the term of the loan based on the Federal Reserve interest rate and the economy.