Getting a loan marks an important financial milestone, especially if it’s a mortgage for your very first property. However, loan terminology tends to be incredibly complex and confusing, and dealing with so many complicated terms at once can make the entire process sound off-putting. With so many nuances to consider, it’s easy to feel lost and worried about the financial situation you’ll be taking on along with the loan.
Luckily, loan terminology is easy to learn, especially once you get the hang of it. By familiarizing yourself with these terms and consulting a credit union, you’ll understand all the jargon before you know it. Here are seventeen loan terms you need to know:
- Principal
The principal is the amount of money you’ll be borrowing from a lender or financial institution, which you must repay over time.
- Interest
Interest is the amount of money a financial institution or lender will charge you for borrowing their money.
- Interest Rate
The interest rate is usually a percentage of the money you borrowed from a financial institution, which they will charge you since you took out a loan.
- Term
Terms refer to the mutually agreed time you must repay an installment loan. The “term” of a loan is usually 15 or 30 years, but the “terms” of the loan refer to its conditions.
- Origination Fee
The origination fee is the cost that covers the loan’s processing expenses. It’s also known as an underwriting fee, a processing fee, or an administrative fee. This fee often goes on top of the principal. However, some institutions include the cost in your principal, while others do not charge this fee.
- Payoff Amount
Payoffs are the amount of money you must pay to repay your loan completely. It includes the principal, interest, and origination fee.
- Prepayment Fee
The financial institution you borrowed money from will charge you a prepayment fee if you pay your loan ahead of time. While paying your loan in advance sounds ideal, it may be more expensive for you in the long run. Be sure to double-check the terms and conditions of your loan.
- Pre-Approval
Pre-approval is the process in which a financial institution studies your financial information. They send you an official statement that declares the amount you can borrow, along with the interest rate and loan term.
- Prequalification
In prequalification, the financial institution assesses your credit scores and history to see if you can qualify for a loan. You’ll have to give your financial information to a lending advisor, who will then inform you of how much you can borrow, just like the pre-approval process. However, it does not promise you a loan.
- Net Income
This value refers to the money you make after taxes, insurance, and other deductions are taken out of your paycheck. Your net income is different from your gross income, which refers to the total amount you make, including taxes and deductions.
- Credit Score
Your credit score demonstrates your ability to pay your credit on time, which presents itself in a three-digit number. The goal is to have a credit score as close to 800 as possible since you can get better loan terms this way.
- Cosigner
Cosignatories come from an individual who signs on your loan with you. They are required to repay your loan if you are no longer capable of doing so.
- Secured Loan
A secured loan involves putting up a valuable asset, like a house or a vehicle, as collateral if you default on your loan and cannot pay it anymore. The collateral is something you’ll risk losing, but you’ll usually get better interest rates and more flexible terms.
- Unsecured Loan
With an unsecured loan, you don’t have to put up anything as collateral. All you need is to sign the papers. However, you won’t receive terms as favorable as those in a secured loan, but you don’t have as much to lose.
- Installment Loan
This plan is a common type of loan, as it’s an amount of money you must pay off over a set period. It usually involves monthly payments. Mortgages, auto loans, and personal loans are types of installment loans.
- Variable Rate Loan
This type of loan’s interest rate is tied to the Prime Rate, which usually changes every quarter. This arrangement can be advantageous when interest rates fall; however, you’ll be paying more every month for your interest when they arise.
- Fixed-Rate Loan
Meanwhile, a fixed-rate loan has a slightly higher interest rate than a variable rate, but it never changes, which means more predictable monthly payments.
Conclusion
Although many of these terms look intimidating at first, they’re quite simple to understand. Now that you’re familiar with these basic loan terms, you’ll be more prepared to apply for a loan!
Good Neighbors Credit Union helps a wide range of people build a financial foundation, from under-served individuals to those with more substantial means. We help our members refinance, find the best savings account rates, and many more. Contact us today to find out how we can help you!