We get it. Loan terminology — financial terms in general — can be confusing. So if you’re feeling overwhelmed, you’re not alone.
To help you feel more confident, we’ve broken some common loan vocabulary down into everyday language. Here’s some important things to know when you’re researching, applying for and hopefully closing on your personal loan.
General loan terminology
Let’s start with some basic loan vocabulary. You’re sure to come across these words and phrases often as you research different lenders and review applications.
A loan you pay back in a set amount of time. Each payment is a monthly installment, hence the name. Common installment loans include personal, car and student loans, as well as mortgages.
The agreed-upon time you have to pay off an installment loan.
A percentage of the money you’ve borrowed. When you receive a loan, lenders charge interest as you pay it back.
This stands for annual percentage rate. An APR includes your interest rate, but also wraps in things like one-time charges and annual fees. (See how APR affects loan payments with a personal loan calculator.)
An interest rate that doesn’t change. This is common for personal loans.
Payment amounts that don’t change. Also common for personal loans, they stay the same throughout the life of your loan (provided you make payments on time as scheduled in your loan agreement).
The amount you’ve borrowed from a lender.
Loan application terminology
Now for some vocabulary you’ll likely see as you start applying for loans.
Combining a number of debts — credit cards, household bills and so forth — into a single loan.
A quick way for lenders to tell you what kind of loan, if any, you may qualify for. (It’s important not to confuse prequalification with preapproval, which is a more formal commitment from a lender and often requires additional documentation.)
Your take-home pay after taxes and other deductions (such as health insurance), i.e. the amount on your paycheck. (Note that your net income is different from your gross income, which is your wages without any deductions.)
Secured loans are backed with something of value that you own (also called collateral), such as a car, truck, boat or RV. An unsecured loan is money borrowed without using collateral.
A three-digit number that tells lenders how likely you are to repay the loan in a timely fashion. (Learn more about why credit scores are important to lenders.)
Someone who signs for your loan with you. If your credit score isn’t strong enough, a cosigner — someone who is legally obligated to repay your loan if you’re unable to — may be a way to get the money you need.
Additional terminology to know
We’ve covered the big terms, but here’s some lesser-known vocabulary you should be aware of, especially as you get closer to finding the right lender for your personal loan.
A one-time fee to cover loan processing costs.
The total amount due to completely pay off your loan.
A one-time fee a lender may charge for paying off a personal loan ahead of schedule.
Financial terminology doesn’t have to be scary
And it doesn’t have to be confusing. The more you familiarize yourself with the terminology above, the better prepared you’ll be to find the right lender, then sign on the dotted line. So read them over a couple times. You’ll be an expert in no time.