When borrowing money, it’s important to understand the terminology lenders use. The lending process can seem overwhelming for first-timers, but some general knowledge makes it much easier to understand what companies offer. Whether a person is in the market for a home loan, car loan, or personal loan, knowing what terms mean on every website is essential. Dutton Lending makes gathering information more straightforward, but not all companies spell it out for customers. These terms give people a great starting point for knowledge.
Interest Rate
An interest rate is the amount of money a lender charges for borrowing their money. This rate is a percentage of the total loan amount. For example, if a person borrows $10,000 at a 5% interest rate, they must pay $500 in interest throughout the loan. It’s important to note that interest rates can vary depending on the type of loan a person applies for and their credit score.
The principal is the amount of money you borrow from a lender. Before interest and fees get added, this is the total amount of money you receive from the lender. For example, when borrowing $10,000 from a lender, the loan’s principal is $10,000. You will need to pay back the principal, along with any interest and fees, over the course of the loan.
APR
APR stands for annual percentage rate. This is the total cost of borrowing money, including interest and fees, expressed as an annual percentage of the loan amount. The APR can vary depending on the type of loan a person applies for, their credit score, and other factors. Comparing APRs from different lenders when shopping for a loan is important, as it can help illustrate the actual cost of borrowing money.
Collateral
Collateral is property or other assets that a borrower pledges as security for a loan. If the borrower fails to repay the loan, the lender can seize the collateral to recoup their losses.
Many traditional lenders require some form of collateral to issue a secured loan. Online lenders specialize more in unsecured loans. The limits might be lower, but not having to worry about collateral is generally viewed as a huge positive for the consumer.
Credit Score
A credit score is a numerical rating of an individual’s creditworthiness. It’s based on credit history, including payment history, outstanding debts, and history length. A higher credit score can make qualifying for loans easier. It also leads to better interest rates in most cases.
Free tools exist to monitor and fix one’s credit score. It takes time, but getting a credit score in better shape is possible before applying for a loan.
Loan Term
The loan term is the amount of time a borrower agrees to take to repay a loan. It can vary from a few months to several years, depending on the type of loan and the lender’s requirements.
Borrowers should try to get a shorter loan term if they can afford the payments. That’s because these loans come with more favorable interest rates.
Origination Fee
An origination fee is a fee charged by a lender for processing a loan application. It is usually a percentage of the total loan amount deducted from the loan proceeds.
This fee shouldn’t be too large. Some lenders don’t charge any origination fees to differentiate themselves.
Prepayment Penalty
Most might think that making as big a payment as possible each month is a positive. However, some lenders have a prepayment penalty. A lender charges this fee if the borrower repays the loan too fast. It compensates the lender for money lost from interest.
Competition with online lenders has made prepayment penalties more and more obsolete. Dutton Lending encourages people to speed up the repayment process if possible. If they can’t or need even more time, they work with people to get a payment plan that works.
Debt-to-Income Ratio
The debt-to-income ratio is the amount of debt a borrower has compared to their income. Lenders use this ratio to determine whether the borrower can repay the loan.
In most cases, online lenders will be more lenient with debt-to-income ratios. They want to help as many people as possible, even if that means taking a risk on someone with low income and high debt.
Default
People want to avoid ever having to default on a loan. A default occurs when a borrower fails to make payments on their loan as agreed. It can result in legal action, damaged credit, and seizure of collateral.
Lenders try to work with borrowers as much as possible to avoid defaulting. It might involve developing an alternative repayment schedule or extending a loan. They don’t want people to default because it costs them money and forces them to recoup their losses.
Defaulting on a loan makes it much more difficult to get a similar one in the future. Although Dutton Lending and other lenders pride themselves on helping more borrowers than most, there comes a point where someone with a history of defaulting runs out of options.
Amortization
Avoid the word “default,” but embrace amortization. This refers to paying off a loan over a set amount of time with regular payments. Both the principal and interest are paid off.
Smarter Lending Done Right
These ten terms only serve as a starting point for people hoping to take out a loan. A lot of additional information can help people get a loan that works best for them.
Dutton Lending is one lender that helps out as many people as possible by answering questions and having a customer service team ready for beginners. Not only does Dutton Lending cater to beginners, but people who’ve previously taken out loans use them as a repeat option. The simplicity of taking out a loan online and not having to deal with many extras is very appealing to the average person.
Anyone who doesn’t learn about taking out a loan can set themselves up for getting taken advantage of. The last thing a person wants to do is pay extra fees and sign unfavorable terms because they don’t know what they are doing. Using Dutton Lending helps people avoid those situations as they learn about loans.
