10 Key Personal Loan Terminologies Explained For First-Time Borrowers | Business News

10 important loan terms for borrowers to know. (Representative Image)

First-time borrowers applying for home loans, seeking sufficient funds for their marriage or needing urgent money for medical emergencies often end up signing intricate papers without understanding the different terms and complications associated. As a responsible person, it is your duty to understand the terminologies involved with agreements and transactions to repay the loan.

Here are 10 key loan terms that you must know before signing up for any agreement with your bank.

Principal

For beginners, the original amount borrowed from a lending institution or the bank is called the principal sum. Depending on the principal loan amount, the interest rate is calculated and repayments are finalised.

Interest Rate

The interest rate is a percentage charged on top of the principal sum for borrowing the money from the lending institution. It can be both fixed and variable, depending on the loan agreement and market fluctuations. The interest rate decides how lucrative the loan is for the borrower, who doesn’t want to pay any significant sum above the principal amount.

EMI

For fixed interest rate loans, borrowers pay Equated Monthly Installments (EMIs). The EMI is a monthly repayment made by the borrower towards the lending institution, which includes both a portion of the principal sum and the interest rate charged.

Loan Tenure

Simply put, it is the duration agreed between the borrower and the lender to repay the entire loan purchased. With long tenures, the monthly EMIs are usually reduced, while the interest rate is high. For short-term loans, EMIs are kept high and the interest paid is reduced.

APR

Annual Percentage Rate (APR) is a figure representing the comprehensive cost of borrowing expressed annually. The APR is inclusive of the interest rate and cumulative fees. It gives the clearest picture of the cost of the loan and not just the applicable interest rate. Check the APR before borrowing any financial product.

Prepayment

Prepayment helps the borrower repay the loan fully or partially before the end of the loan tenure agreed between the two parties. Prepayment eases the borrower’s burden and financial stress, reducing their interest liability. However, some banks impose penalties on their customers for premature repayment of loans.

Processing Fees

It is the fees charged by the lender for administrative work related to the entire process of approving and delivering the loan to the borrower. Some banks may add the processing fees to the loan amount or deduct those upfront from the borrower’s registered bank account. One should enquire with the lending authority about this fee before securing the loan.

Moratorium

Moratorium stands for the temporary pause allowed by the lending institution under special conditions to the borrower. It helps reduce the burden of repayments on the creditworthy individuals during their sudden economic struggles.

Collateral

It acts as an asset guaranteeing repayment in cases where the borrower may default. Before signing the agreement, the borrower may pledge a specific asset to the lending institution as security for the loan. It could be property papers, gold, a fixed deposit and other assets.

Loan-To-Value Ratio

This ratio helps lending institutions determine the borrower’s eligibility, repayment terms and applicable interest rates. It represents the loan amount to the value of the asset securing the loan. An individual with a lower loan-to-value ratio is considered a healthier buyer, with a lower risk of defaulting on the loan.