When you are in the market for a loan, you might feel like there are a million different details to understand. Loan terms can seem especially confusing and complicated, but they don’t need to be. There are many articles on the internet that try to explain loan terms in simple language but often give readers the false impression that these explanations are all you need to know about loans.
The reality is that every financial institution has Its way of handling things and will give you different loan terms depending on what they think you want. That doesn’t mean it’s impossible to get a good deal when taking out a loan; it just means that it takes some research and common sense. Here are some tips and loan terms we at Mwananchi Credit Limited thought would be beneficial to you, our esteemed customers.
Know the Basics of Loan Terms Before You Start
It’s tempting to just jump straight into a search for the best title deed loan or logbook loan, but you’ll save yourself a lot of headaches if you take a few minutes to get a grasp on the basics of loan terms and the lingo used by financial institutions. This will help ensure that you are looking at the right loan type for your situation and that you are comparing apples to apples when comparing loan offers. You might be asking yourself different questions if you are new to the lending world like;
- What are the different types of loans? There are many different types of loans out there, but the two that most people are interested in are mortgages and auto loans.
- What are the standard loan terms? Each type of loan has standard terms that are used by most financial institutions. This means that you can expect to see a typical repayment schedule, interest rate, and loan amount when you apply for a given type of loan.
Here is a brief overview of the important loan terms to look out for when applying for loans.
1. Credit score
Your credit score is one of the most important factors that lenders will consider when determining whether or not you can get a loan. A credit score is a number that lenders can use to determine how likely you are to repay a loan. Your credit score is based on information from your credit report, which has details from all of your credit accounts. If you have paid off your credit card bills on time, added new accounts to your credit report, or have a high income, your credit score will be higher; whereas, if you are behind on payments, have too many open accounts, or have low income, your credit score will be lower.
A high credit score generally means you can get lower interest rates on a loan and have more repayment options. If you have a low credit score, you may have trouble getting approved for a loan, have higher interest rates, or have fewer repayment options.
2. APR
The loan term annual percentage rate (APR) is the interest rate that lenders use to advertise loans. This number is important because it allows you to compare different loans and understand how much you will pay in interest throughout the loan. Many lenders will advertise their APR as zero, which means they are trying to lure you in with a great-sounding loan but don’t include the other costs associated with the loan.
If you see a loan advertised with a zero APR, you should be wary of the loan and consider looking at other options. The APR is an important number in a loan, and lenders can’t just advertise zero because they don’t know what the APR will be.
3. Credit appraisal
A credit appraisal is an evaluation of the property used as collateral for a loan. Lenders often require a property appraisal before approving a loan. This is to make sure that the property is worth the amount of money you are requesting in the form of a loan. If you are taking out a loan to buy a house, the lender will conduct a home appraisal to make sure the property is worth the amount you are requesting. If you are taking out a loan to purchase a car, the lender will conduct a car appraisal to make sure the car is worth the amount you are requesting.
4. Collateral
The loan term collateral simply denotes the asset pledged to avail the loan. In many cases, the lender will not approve a sanction or go through with loan disbursement unless you pledge an asset that you own. These instruments are called secured loans and the value of the asset often impacts the principal amount of the loan. Collateral is usually in form of a logbook or a title deed.
5. Deferment
A deferment is a time during which you do not have to make payments on your loan. This might be due to extenuating circumstances or because of a special type of loan where the interest is not accrued while the loan is being deferred.
6. EMI
This term is an acronym that stands for equated monthly instalment. A loan agreement denotes the monthly amount due during the entire loan repayment process. When planning your loans, always check the EMI amount and ensure that it fits your budget. Any discrepancies in the EMI details must be addressed immediately.
7. Lender
The lender is the financial institution where you are taking out a loan. Depending on the type of loan and the lender, the lender will be responsible for collecting the payment on the loan.
8. Guarantor
A guarantor is someone who signs a loan agreement along with the primary borrower. The guarantor is legally responsible for the loan, meaning that if the primary borrower misses a payment, the lender will come after them for payment rather than the primary borrower. This is typically done when the primary borrower does not have enough income or assets to qualify for a loan on their own.
9. Lien
A lien is a type of loan where your car, home, or other property is used as collateral to secure the loan. The lender has the right to appropriate the property if the borrower does not make their loan payments on time. A lien can also refer to a second mortgage (or third, fourth, etc.).
10. Term
The loan term refers to the length of time between when you take out the loan and when it is due. Most home loans have a term of 30 years, while many car loans have a term of 72 months. The term will affect your monthly payment, which is calculated based on the amount of the loan and the interest rate of the loan.
11. Loan agreement
The loan agreement is a legal contract that defines the terms and conditions of your loan. You should always read the fine print and make sure you understand all of the terms of the loan. You should also make sure that the contract is signed and dated by both you and the lender.
12. Fixed/Floating interest rate
The fixed interest rate on a loan is exactly what it sounds like: the interest rate does not change. The floating interest rate changes depending on the terms of the loan. Most variable-rate loans are based on a benchmark, such as the prime rate or LIBOR.
13. Principal
The principal is the amount of money you initially borrowed for the loan. The principal does not change over time, even though the amount you have to pay each month will increase as you accrue interest. When the loan is paid off, the lender will return the remaining principal to you.
In Conclusion
While this isn’t an exhaustive list of the loan terms you may encounter when availing of loans, understanding these important loan terms is vital. It can give you a leg up in negotiations with your lender, and help you make better borrowing decisions. However, if you come across other loan terms and have doubts about your loan or the offer made to you, get them cleared right away.
Most lenders will have dedicated support teams and relationship managers who can offer you the needed insight. To ensure that you have a hassle-free experience, pick your lender wisely. One smart option is Mwananchi Credit Limited, with whom you enjoy a completely digital, transparent and simplified experience.
