Lending Vocabulary: Breaking down terms so you feel a little less dumb when it comes to understanding your loan.
Lending is a complicated process where a lot of terms get thrown around, making the whole thing very confusing. Let’s break down a few definitions that might help you better understand the lending process:
Secured / Unsecured–Secured means that collateral is promised against the debt, like a home or vehicle loan. Unsecured has no collateral–think credit cards or student loans. Secured usually has a lower interest rate because there’s less risk of default.
Installment Loans–An installment loan means a specific amount of money is borrowed with very defined terms. Each payment reduces the balance of the loan & then it is closed out. Home, student and auto loans are installment loans.
Revolving Lines of Credit–For a specific amount of money for use at any time. As the balance is paid down, the funds become available to use again. Examples are credit cards, equity lines of credit & overdraft protection on checking accounts.
Fixed / Adjustable Interest Rates– Pretty self explanatory, but you should know that an adjustable rate loan usually has a lower interest rate to start, because the lender knows they can reset interest down the road if the lending environment changes, whereas the fixed rate is locked for the life of the loan.
APR or Annual Percentage Rate–APR is the total yearly cost of taking out a loan. It includes finance charges, interest & fees.
Co-Borrower–Someone who is jointly responsible for paying back a loan. The borrower & co-borrower share ownership of the asset.
Co-signer–If you need help qualifying for a loan, a co-signer agrees to be responsible if the primary borrower fails to pay. They do not own any part of the asset.
Deferment–Under some circumstances, your lender may allow you a loan deferment. During this time, you will not have to make payments, but you will still accrue interest.
Prepayment penalty–Some lenders will charge you a fee for paying early. Be sure to check with your lender if you are thinking about paying some or all of your loan early.
What would you like to understand better when it comes to debt? Let us know in the comments!
