Personal Loans Lending Terms Explained

When making that personal loan, being familiar with the terminology of the banker can help you understand what you are getting into. You don’t need to be a loan officer to get a basic knowledge of what various words commonly used in borrowing mean.

The “term” of a loan is the length of time given for the borrower to repay the note. The number of months or years is important because it can change the rate of interest and the size of the payment. Many lenders will increase the rate for longer term loans and decrease it for shorter terms.

Likewise, the payment for a longer term loan tends to be lower because the amount being repaid is spread over a longer period of time. This is sometimes offset by higher interest rates. The payment difference between a 7 year and a 5 year car loan may be less than 10%. One could be $500 per month for 7 years and the other would be $450 per month for 5 years because of interest rate savings. Check this out before agreeing to the term.

Interest is the cost of borrowing money. It floats depending on current economic and financial conditions in the world. It can also change with the strength of your credit rating, what you are buying, and how long it will take to repay the loan.

Various fees are associated with loans. A loan origination fee is the amount you pay for the bank to go to the trouble to make you a loan. It’s a one time payment at the beginning of the loan. On real estate transactions, you may also have closing costs that involve any number of items. Origination fees, pre-paid taxes and insurance, loan insurance, filing fees, and amounts agreed upon by the buyer and seller are just a few.

Escrow is the money you have to pay at the beginning and during the life of some loans to cover expenses such as taxes and insurance. The escrow amount is held in a fund, and the bank or lender uses them to pay these expenses when they occur.

Collateral is a piece of real estate, item of value, or bank account that stands for the value of the money loaned. Home loans are collateral loans. Normally, when speaking of personal loans, it is just the integrity of the borrower that stands good for the loan. Collateral loans tend to be larger and longer termed than personal loans.

Most of the other terms just get ugly, like foreclosure and repossession. Very few people need these explained.