Sometimes, financial terms can sound like a foreign language. If you plan to enter any type of contract, including a personal loan, it is important to clearly understand the terminology before signing on the dotted line.
Here is a quick list of fundamental personal loan terms to help get you started:
Creditworthiness - Creditworthiness is a valuation assigned to every borrower that is used as a judgment of their ability to repay debts in the future. A person’s creditworthiness is based on various factors that lenders use to evaluate the likelihood a borrower will repay his or her credit obligations.
Collateral - Collateral is property that is pledged as security by the borrower for the repayment of a loan. Common examples of collateral include cars, boats and jewelry. In some cases, a lien is placed on the collateral giving the lender a legal right to take possession of the pledged property if the borrower defaults and fails to repay the loan. If the loan is paid in full, the lien is removed. If the amount is not paid in full or the loan defaults, the lender may take possession and sell the collateral to try to regain their losses.
Cosigner - A cosigner is a person, other than the main borrower, who signs a loan application with the primary borrower. By adding their name to the application, the cosigner is also adding their income and credit score for consideration which could increase the odds of the loan being approved. In the event the loan is approved, the cosigner becomes equally responsible for repayment and a safeguard for the lender if the main borrower defaults. If you plan to cosign a loan for someone, it is important to know the obligations and impact on your own financial situation. Please visit the website of the Federal Trade Commission for more information on cosigning a loan.
Secured loans vs. unsecured loans - Secured loans are loans for which repayment is secured by collateral. Since a lender can take possession of collateral if the consumer does not repay as agreed, this type of loan may offer lower interest rates. Unsecured loans don’t require collateral and are often issued based on the creditworthiness of the applicant and may have higher interest rates than secured loans. For more information, check out our blog on the difference between secured and unsecured loans.
Lien - A lien is a lender’s legal claim on a consumer’s property to secure payment of an unpaid debt.
Term - The term is the length of time in months or years which the borrower agrees to repay the loan.
Annual percentage rate (APR) - The cost of credit, as a year rate, that takes into consideration interest and prepaid finance charges over the term of the loan. It is a single percentage number made up of several factors including interest, fees and additional costs incurred with closing the transaction. Be aware that APRs vary by lender.
Fixed rate vs. variable rate - A Fixed Rate is a rate on a loan that does not change over the life of the loan. A Variable Rate is a rate that can change over time based on changes in an index rate, such as the prime rate. An index is a benchmark interest rate that reflects general market conditions. The index amount fluctuates based on market conditions which can cause the loan’s interest rate to increase or decrease periodically throughout the life of the loan.
Debt consolidation - Debt consolidation is a type of debt refinancing that involves taking out a new loan to pay off one or more other outstanding debts. Examples of debt you can consolidate include credit cards, personal loans and auto loans. Once approved, the new loan will be used to pay off the other debts and ideally prevent mounting interest on multiple outstanding balances from driving you deeper into debt.
Prepayment fee - Some lenders charge a fee for paying off a loan ahead of schedule. If you think you may pay off a loan early, be sure to ask your lender about a prepayment fee and understand all the terms and conditions of the loan contract before signing.
We hope you learned something new and have a better understanding of personal loan terms than you did before.
If you have any questions about applying for a personal loan or regarding your current loan with OneMain, please visit our Frequently Asked Questions (FAQ) page.