Top 25 Personal Loan Terminologies to Know

Life can throw unexpected expenses your way like a medical emergency, urgent home repairs, or unplanned wedding costs. In such situations, taking out a Personal Loan can give you quick access to funds and help you manage your finances without stress.

If you are a first-time borrower, you should know the Personal Loan terms and conditions. You should also know the principal amount, the loan tenure and the interest to calculate your monthly payment.

Besides, you should also know the Personal Loan terminologies used in the process.

What Are Personal Loan Terminologies?

Personal Loan terminologies are the basic terms you come across while borrowing, such as EMI, tenure, interest rate, collateral, and credit score. Knowing these terms helps you understand costs, compare offers, and choose the right loan confidently. It also ensures you don’t miss important details during the borrowing process.

Personal Loans come with their own set of terms that can be confusing if you’re new to borrowing. Let’s look at 25 terminologies that can help you understand the borrowing process with more clarity.

Top 25 Personal Loan Terminologies Every Borrower Should Be Familiar With

Here are a few of the most common terms you should know.

1. Annual Percentage Rate (APR)
2. Application Fee
3. Automatic Payment
4. Arrear
5. Balance Transfer
6. Credit History
7. Credit Score
8. Credit appraisal
9. Collateral
10. Co-applicant
11. Default on a Loan
12. Deferment
13. Debt Consolidation
14. Debt-to-Income Ratio (DTI) or Fixed Obligation to Income Ratio (FOIR)
15. EMI
16. e-NACH
17. Fixed Interest Rate
18. Floating Interest Rate
19. Guarantor
20. Lien
21. Loan Agreement
22. No Objection Certificate
23. Pre-approved Loan
24. Prepayment
25. Foreclosure

Personal Loan Terminologies Explained: Everything You Need to Know

Let’s explore Personal Loan terms in detail so you can be a well-informed borrower and make smarter decisions when taking a loan.

What is the Annual Percentage Rate (APR)?

APR shows the total yearly cost of borrowing for a Personal Loan. It includes the interest rate and loan fees, such as processing charges and any additional costs you may need to pay over the loan tenure.

What is an Application Fee?

An application fee is a one-time fee levied by the lender when you apply for a Personal Loan. It covers the administrative and processing costs of reviewing your application and ensures your documents are formally assessed.

What is an Automatic Payment?

Automatic payment allows your monthly payment to be debited directly from your bank account on the due date. It ensures timely repayment of your Personal Loan and avoids penalties or negative impact on your credit rating.

What is an Arrear?

An arrear occurs when an EMI is overdue and not paid on the scheduled date. This unpaid amount is calculated from the first missed payment and can negatively affect your credit history and future borrowing.

What is Balance Transfer?

A balance transfer allows borrowers to switch to a new lender. People often do this to enjoy lower interest rates or better loan offers, making their monthly repayments more affordable and reducing overall loan costs.

What is Credit History?

Credit history is a record of your past repayment terms and debts. Lenders use it to assess your ability to repay the loan and to determine suitable interest rates and eligibility for future borrowing.

What is a Credit Score?

A credit score is a numerical representation of your credit rating. The higher your score, the better your chances of securing an approved loan at favourable interest rates and with easier repayment terms.

What is Credit Appraisal?

Credit appraisal is the process in which the lender examines your documents, income, and financial profile. It determines your loan eligibility and interest rate, ensuring the lender lends responsibly based on your repayment capacity.

What is Collateral?

Collateral is an asset pledged to borrow a secured loan. Borrowers with an average credit history or low income may provide collateral to improve approval chances or obtain higher loan amounts.

What is a Co-applicant?

A co-applicant signs the loan application with you. Their credit score is considered, and monthly payments may be shared. Including a co-applicant can improve eligibility for higher amounts and better repayment terms.

What is a Default on a Loan?

Default occurs when a borrower fails to pay back the loan for a long period. It negatively affects your credit rating, making it harder to get future loans or access funds at favourable interest rates.

What is Deferment?

Deferment allows borrowers to pause repayment terms temporarily with lender approval. This means your monthly payments are delayed for a specific period without penalties, providing relief during financial difficulties.

What is Debt Consolidation?

Debt consolidation uses a Personal Loan to repay multiple high-interest debts. It simplifies monthly payments, reduces financial stress, and helps borrowers manage debt more efficiently with a single repayment schedule.

What is the Debt-to-Income Ratio (DTI) or Fixed Obligation to Income Ratio (FOIR)?

DTI shows the percentage of your income allocated to repayment terms. A lower ratio improves your chances of getting an approved loan, while a high ratio indicates higher risk and reduced eligibility.

What is EMI?

EMI or equated monthly instalment is the monthly payment you make to repay the loan, covering both principal and interest. A longer loan tenure lowers the EMI but increases total interest, while a shorter tenure increases monthly payments.

What is e-NACH?

e-NACH is a digital process that authorises automatic debit of your monthly payment from your bank account. It ensures timely loan repayment and helps borrowers avoid missing EMIs or incurring penalties.

What is a Fixed Interest Rate?

A fixed interest rate keeps your interest rate and loan payments unchanged during the loan tenure, giving predictable repayment terms. It allows borrowers to plan finances and budget without worrying about market fluctuations.

What is a Floating Interest Rate?

A floating or variable interest rate changes over time according to market conditions. This means your monthly payment may increase or decrease depending on RBI base rates and other external financial factors.

What is a Guarantor?

A guarantor backs your loan if the borrower fails to pay back the loan. This is often required for high principal amounts or unsecured loans, offering security to the lender in case of default.

What is Lien?

A lien gives the lender legal rights to your pledged asset if you fail to repay the loan. It is usually applied to secured loans, allowing the lender to recover funds from the collateral.

What is a Loan Agreement?

A loan agreement is an official document with all the terms of the agreement, including loan tenure, principal amount, and interest rate. Both lender and borrower must sign it before the loan is disbursed.

What is a No Objection Certificate (NOC)?

An NOC is issued once you have paid back the loan fully. It confirms that your principal balance and interest are cleared and acts as proof that you have no pending debt.

What is a Pre-approved Loan?

A pre-approved loan is offered to existing customers based on credit history and previous repayment terms. It usually comes with lower interest rates, faster approval, and simplified documentation for loyal borrowers.

What is Prepayment?

Prepayment occurs when you pay off part or all of the principal loan ahead of schedule. It reduces total interest and shortens the loan tenure, saving money in the long term. Some lenders charge a small fee.

What is Foreclosure?

Foreclosure happens when you fully repay the loan before the end of the loan tenure. Most lenders allow foreclosure after one year, often with a foreclosure fee, helping borrowers clear debts faster and save on interest.

Also Read: Things to Know While Closing a Personal Loan

Understanding Interest Rates: Fixed vs Floating

When taking out a Personal Loan, understanding the type of interest rate is essential, as it affects your monthly payment, loan tenure, and overall cost of borrowing. Here’s a quick comparison:

Role of Credit Score and Credit History in Your Loan Approval

Your credit history shows how you have repaid past loans or credit, while your credit score is a number summarising your creditworthiness. Lenders check both to see if you can repay the loan on time. A good credit score and clean credit history increase your chances of getting an approved loan at lower interest rates. Poor scores or missed payments may lead to rejection or higher rates, so maintaining a healthy credit record is essential.

How Loan Tenure Affects Your EMI and Interest Paid

The loan tenure you choose directly affects your EMI and the total interest you pay. Here's how:

• A longer loan tenure lowers your monthly payment, making it easier to manage your finances.
• A shorter tenure increases your EMI but reduces the total interest paid over the loan.
• Choosing the right tenure balances affordability and the overall cost of borrowing.
• Lenders may offer flexible repayment terms based on your income and preferences.

Common Fees and Charges to Know Before Taking a Personal Loan

When taking out a Personal Loan, it’s essential to understand the additional costs besides the principal amount and interest rate. Here’s a breakdown:

Conclusion

Having a good understanding of personal finance is crucial, especially when arranging funds for personal needs. Learning basic Personal Loan terminologies, like interest rates, repayment conditions, eligibility, and early repayment rules, helps you understand repayment terms and conditions and make informed decisions. With this knowledge, you can choose the right loan, manage your monthly payments effectively, and secure a deal that best suits your financial situation.

Frequently Asked Questions

What are the most important Personal Loan terminologies to understand before applying?

Before applying for a Personal Loan, understand key terms like Principal (the amount borrowed), Interest Rate (the cost of borrowing), EMI (the fixed monthly payment), and Loan Tenure (the repayment period).

How is the Annual Percentage Rate (APR) different from the interest rate?

APR includes the interest rate plus fees over the year, while the interest rate is only the cost of borrowing funds.

Can I switch lenders using a balance transfer? How does it work?

Yes, a balance transfer moves your existing loan to a new lender offering lower interest rates or better repayment terms.

What is the impact of loan prepayment and foreclosure on my loan?

Prepayment or foreclosure allows early repayment, reducing overall interest costs, but may involve prepayment or foreclosure fees depending on lender terms.

What documents are key to reviewing before accepting a Personal Loan?

Review the loan agreement, repayment schedule, APR, EMI details, processing fees, and any terms affecting the loan cost while taking a Personal Loan.

How does my credit score influence Personal Loan eligibility and rates?

A higher credit score increases the chances of approval, secures better interest rates, and allows access to larger loan amounts from lenders.

What fees should I expect when applying for and repaying a Personal Loan?

Common fees include processing fees, prepayment or foreclosure fees, late payment charges, and document verification costs.

What is the difference between fixed and floating interest rates?

Fixed rates remain unchanged over tenure, while floating rates vary with market conditions, affecting EMIs and total interest paid.

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