The Ultimate Loan Glossary – Loan Terms You Need to Know

If you are new to the world of loans and credit, here are some basic terms that you need to know.

loan terms you should know

  • Lender

A lender is an individual, group, company, or a financial institution that provides funds to an individual or a company with the intention of receiving it back over time. The repayment amount will also include an interest component.

  • Borrower

A borrower is an individual, company, group that owes a debt to a lender. This debt can be in the form of money, assets, or sometimes even services. 

  • Eligibility

Eligibility refers to the criteria a borrower must meet in order to avail a loan. For example, if you wish to study medicine, you will need to have a certain percentage in your 12th board exams and you will have to clear the entrance exams. Similarly, if you wish to take a loan, you will need to fulfill certain conditions set by the lender. These include having a minimum income, a certain credit score, etc.

Check out Money View’s eligibility criteria here.

  • Principal

Principal refers to the amount borrowed from the lender. However, the amount you repay will include both the principal as well as interest component.

  • Interest/ROI

Rate of interest refers to the percent a lender charges of the principal amount from the borrower. is dependent on factors such as the principal amount, lender policy, repayment term, credit score of the borrower, etc.

  • Repayment Term/Tenure/Period

Repayment terms refers to the amount of time the borrower has to repay the loan along with interest if any. 

  • EMI

EMI or Equated Monthly Installments refers to the payment made by the borrower to the lender each month to repay the loan taken. An EMI comprises both the principal and interest component of the loan.

The amount will depend on various factors such as the amount borrowed, interest rate imposed, and repayment term.

You can easily find out how much EMI you will have to pay by using our simple personal loan EMI calculator.

  • Amortization

Amortization table illustrates the schedule of your EMI payments and the impact it has on your principal and interest amount throughout the loan repayment period.

  • Credit score

A credit score is a 3 digit numerical representation of an individual’s creditworthiness and can range from 300 to 900. This number determines how eligible you are for a loan. If you have indulged in healthy credit practices such as repaying your loan on time, borrowing a mix of both secure and unsecure loans, etc., then your credit score will be high.

Most lenders require applicants to have a CIBIL score of 750 and above.

  • EMI Auto-Debit + NACH

You might have come across the option of enabling an auto-debit feature for some of your payments such as bills and EMIs. This is a setup that involves a bank mandate and allows a certain amount to be debited from your account each month. Not only will it be convenient for you, you will also not have to remember the due date for each and every payment as well.

In order to facilitate electronic payments that are periodic and repetitive in nature, the National Payments Corporation of India has implemented NACH or ‘National Automated Clearing House’ for financial institutions, banks, etc. 

  • Credit History

A credit history is a record of your credit habits including your debts and repayments. Your credit history is compiled by credit information companies from various sources such as banks, lending institutions, the government, collection agencies, etc. TransUnion CIBIL and Experian are two of the top credit information companies in India. Your credit history is used to determine your credit score.

  • Collateral

Collateral refers to an asset that is pledged as security or surety for loan repayment. This asset can be land, property, gold, etc. In case of loan default these assets can be seized and sold to make up for the debt.

  • Processing Fee/File Charges

When you take a loan, your lender will have to bear certain administrative charges to process as well as disburse the loan. 

  • Loan Foreclosure

Sometimes a borrower may come into a large sum of money which can be used to repay an existing loan in one go instead of continuing with monthly EMIs. This is referred to as loan foreclosure.

However, not all lenders allow this option and even if they do, it will be after a certain number of EMIs have been paid. Additionally, some lenders may also impose a foreclosure fee if this option is chosen.

  • Default/Delinquent 

Sometimes a borrower may fail to make his EMI payment as committed. This is  referred to as loan delinquency. When this happens continuously for a longer period of time (3 months or more), the loan is declared as NPA (Non-performing Asset).

  • Grace Period

While a borrower is expected to repay all EMIs on time, unfortunate circumstances can put a stop to this. In such situations, the lender may offer a short period of time post due date for repayment. This is referred to as the grace period.

  • Loan Agreement

A loan agreement is a contract between the lender and borrower that stipulates the terms and conditions of the loan being taken. This includes basic details such as the borrower’s name and KYC details, the amount and ROI, applicable fees and charges, etc. Both the lender and borrower will have to sign this contract prior to loan disbursal.

In Conclusion

While seasoned borrowers may know all these terms at the back of their hand, novices may be confused which is why it is never too late to go back to the basics. These are just some of the important loan related terms that you need to be aware of.

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