Many people may wonder about common loan terms… words and phrases that are often tossed about when describing different types of loans that are assumed to be common knowledge.
These common loan terms represent very important parts of the lending process, but to the person who isn't entirely sure what the terms mean they can be quite intimidating and cause the person to feel very uneasy about getting a loan.
They might delay applying for a loan that they need because of a failure to understand common loan terms, and in doing so can miss out on better rates and the potential to save a lot of money in the long run.
Interest, Capital, and Interest Rates
Interest and interest rates are common loan terms that are a key part of the lending process, but many people might not know exactly how interest and interest rates work.
At its most simple, interest is the additional amount that you pay over the loan amount in order for the lender to make a profit off of you doing business with them. In other words, the interest that you pay is the amount that you pay for the service of lending, while capital is the amount that you repay because it is what you borrowed in the first place.
Interest rates are the percentage of the capital that you'll pay in interest… for instance, if you have an interest rate of 5% on a loan then you'll pay an additional 5% to the loan amount in interest.
Annual Percentage Rate (APR)
The annual percentage rate (also known as APR) is one of the common loan terms that some people have the hardest time understanding.
The annual percentage rate is most often seen on credit cards, and is an indication of how much interest you will be charged on your credit card balance over the course of the year.
The lower the APR is on a credit card, then the less you'll have to pay in interest as the year goes by… you should keep in mind, though, that the annual percentage rate can change over the course of the year due to fluctuations in the cost of living, inflation, and a change of interest rates that are set on the national level.
Collateral, Secured Loans, and Unsecured Loans
These common loan terms can cause quite a bit of confusion, especially to someone who is shopping for their first loan.
Collateral is an object of value that is used to guarantee repayment of a loan, and is the difference between secured and unsecured loans.
Secured loans are loans that have collateral backing the loan, and usually have lower interest rates… they charge lower rates for secured loans because if you fail to repay the loan then the lender can take possession of the collateral and sell it to regain their money.
Unsecured loans don't have collateral, but charge higher interest rates in exchange.
Equity
One of the common loan terms that seems harder to understand, equity is a major factor in secured loans that use real estate and the borrower's home as collateral.
Equity refers to the percentage of the home or real estate's total value in comparison to the amount still owed on the original loan used to purchase it which is known as a mortgage.
It's often referred to as the amount of the home or property that the owner actually “owns”, as opposed to the portion of the value that's still held under mortgage.
The more money a person pays toward their mortgage, the more equity they have in their home.
John Mussi
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