Unless you are in IT, you may not know exactly what bandwidth or bytes mean. If you are not a doctor, you may not understand what glomerulus or pulmonary fibrosis mean. Before you can make educated decisions in any area, you must know the specific language. The same is true when it comes to your finances.
Applying for a personal loan brings a whole slew of new vocabulary you should be familiar with. Here is a list of the most common terms to give you a good starting point.
Approval - After you apply, the lender runs a hard credit check. If they like what they see, they approve your loan. Approval means you have met the qualifications, and they are willing to lend you money.
APR - Annual percentage rate is the interest rate you receive on your loan. Personal loans offer fixed interest rates. The rate you receive when you apply is the rate for the life of the loan.
Cosigner - If you cannot qualify for a loan on your own, you can apply with another person as your cosigner. If they agree to be on the loan with you, the lender checks their credit history and yours. The cosigner will be required to repay the loan if you cannot.
Credit history - Your credit history starts the first time you apply for a credit card or borrow money. The main credit bureaus then track how you use the credit and how responsible you are at paying back your debts. Your credit history shows lenders how well you have paid back those debts over the years.
Credit score - Your credit score is a number describing your financial situation. Included in this number is your payment history and the amount of money you currently owe in other debts. Your credit score can also include your credit history length and other factors. Credit scores generally range from 580 to 850.
Debt consolidation - When you consolidate debt, you roll your debts into one payment. A person could apply for a personal loan of $10,000. They would use the loan money to pay off their credit card debt or other debts. Then, instead of having multiple loan payments, you have one loan payment. A personal loan can have lower interest rates than your credit cards interest rate.
Debt-to-income ratio - When applying for a personal loan, most lenders ask for your debt-to-income ratio. The percentage is figured by adding up your monthly debts, then dividing that number by your gross monthly income. If your debt-to-income ratio is higher than about 45 percent, you may have a hard time qualifying for a loan. You may see this percentage written as the DTI ratio in loan documents.
Fixed interest rates - Personal loans offer fixed interest rates meaning the interest rate will not fluctuate with the market. The rate you receive for the loan is the rate for the life of the loan. Your interest rate will not change based on the market.
Hard credit check - When applying for a loan, the lender will do a soft credit check to see if you prequalify for the loan. If you do, the lender then does a hard credit check. The lender checks your credit score, history, and DTI ratio. If you apply with a joint or cosigner, the lender will check their credit as well. The soft credit check does not affect your credit score; the hard credit check does. Every lender checks your credit if you choose to proceed with the loan.
Installments - An installment is the amount of money you must pay back each month. Monthly installments are the same as monthly payments. Personal loans offer fixed installments, which means the monthly payment does not change over the life of the term. You can pay more each month, but you must make at least the minimum amount with each installment.
Interest rate - This refers to the rate you are charged from the lender to borrow the money. Personal loan interest rates vary in amount. The rates can be as low as six percent, or as high as 40 percent. The rate you receive depends on your qualifications, the lender, and the loan amount.
Joint loans - A joint loan means you apply for the loan with someone else, like your spouse. If you apply for a joint loan, both applications are equally responsible for the loan. The lender pulls both applicant's credit score and history. The interest rate and amount you receive are based on both applicant's information. Both applicants are required to pay the loan back. If the loan is not paid back, it impacts both applicant's credit.
Payoff amount - As with all loans, you end up paying more than the original loan payment because of the interest. The payoff amount is the total you owe, including the interest, and the amount changes by the day. If you want to pay your loan off completely, be sure to ask for the payoff amount.
Payment discounts - Some lenders offer a lower interest rate if you make your monthly payments with automatic withdrawals. The discounts can be up to 0.50 percent lower than the rate you receive. The rate reduction is typically only for ACH payments.
Payment method fees - Some lenders may charge a fee based on how you make your monthly payments. Payments made through checks or over the phone may have an extra fee for some lenders.
Preapproval - Before you can be approved for a loan, you may first need to be preapproved. Preapproval comes through a soft credit check. Once a lender sees you can meet the preapproval qualifications, they do a hard credit check for complete approval.
Prequalification - Some lenders have set loan qualifications. In order to even apply for a loan, you must meet certain prequalification. An example would be that your credit score must be above 600 or you must make at least $60,000 a year to even apply for a loan.
Principal - The principal is the original 0amount of the loan, not including the interest. The principal amount is the amount you initially received. Because of interest, you end up paying back more than just the principal amount.
Secured loans - A secured loan requires collateral to help secure the loan. If you fail to repay the loan, the lender can take your collateral as part of your payment. Collateral can include vehicles, investments, insurance, or other valuables.
Soft credit check - Lenders run a soft credit check to see if you prequalify for a loan. They check your credit score, history, and debt-to-income ratio. Running a soft credit check does not hurt your credit.
Term lengths - This refers to the length of the loan. Most personal loan term lengths range from 12-months to five years. Your loan term length can depend on your credit history and the monthly payment amounts.
Unsecured loans - An unsecured loan does not require collateral to apply for the loan. Qualifying for an unsecured loan depends on your credit history and financial situation.
Now that you know the financial terms for personal loans, you can make a more informed decision. Let EQLender help you find the best personal loan for your needs.