Loan Terms You Must Know Before Applying for a Loan

Ever feel confused by financial terms when applying for a loan? Even though the application process may seem quite easy, the language used in loan agreements can sometimes be too much for both first-timers and seasoned borrowers. However, the upside is that comprehending such terms does not necessarily have to be challenging. Knowing some loan vocabulary will make your financial decision-making easier.

Understanding the real definition of the terms associated with the loan should always be a must, especially when we are seeking a loan for the first time or comparing different loans. In our blog, you will find definitions of common loan terms in easy language.

Thus, we provide some common loan terminologies with their simple definitions to help you out of your last-minute confusion. Read this blog to the end.

General Loan Terms You Must Know Before Applying for a Loan from Lenditt

A

Annual Percentage Rate (APR)

An annual percentage rate is a numerical expression of the percentage of the total cost you pay at the end of a year, including the interest rate and additional fees.  The APR also includes other borrowing costs, such as fees, but these highly depend on the lending institution or local regulations.

Active loan

A loan is considered active when it has been approved and disbursed but is not fully paid. As long as a balance remains, the loan will remain active, and the applicant must make payments according to the repayment plan.

B

Bad Credit

Bad credit is a poor credit score or history resulting from missed payments, failure to repay a loan, high credit utilisation, or other activities that negatively affect an individual's finances. It may be hard for someone with a low credit score to get a loan or to receive favourable terms and interest rates.

C

Cash Advance

A cash advance is a short-term loan that allows you to access funds quickly. This type of advance can be obtained through credit cards or certain financial institutions, depending on the financial product.

Cost of Borrowing

Cost of borrowing means the extra cost incurred in addition to the total cost of the borrowed amount. These costs may include interest expenses, processing costs, administrative costs, and other costs specified in the loan contract.

Credit Report

A credit report is an account of one’s loan and credit history, maintained by a credit bureau. The report usually contains information about one’s loans, credit cards, repayment history, account balance, public records, and recent credit inquiries. The lender looks at one’s credit report when making a loan approval.

Credit Score

A credit score is the numerical value that indicates how creditworthy you are. This number reflects your overall financial behaviour regarding your bank account, loans, credit cards and repayments. It gauges how likely you are to repay the money.

Cooling-off Period

A cooling-off period is a legally defined period during which qualified borrowers have the opportunity to withdraw from the loan contract without incurring severe penalties.

D

Digital Lending

Direct lending is done by lenders other than banks to provide loans to companies without requiring intermediaries such as an investment-backed private equity firm or a broker. The process entails all stages of borrowing, including application, verification, approval, and loan disbursement, through a mobile app. Borrowers do not need to visit a physical branch and can complete all these stages on their computer or mobile device.

E

Electronic Funds Transfer

An Electronic Funds Transfer (EFT) is a means of transferring money from one bank account to another without the use of paper checks or cash. An EFT can be used to transfer money for loans, repayments via direct debit, salary payments, and other financial operations within the bank.

Equated Monthly Payment (EMI)

An Equated Monthly Instalment (EMI) is the monthly payment typically made by a borrower to repay a loan over a stipulated time frame. An EMI usually comprises the principal and the interest on the outstanding amount of money borrowed.

I

Installment Loan

An installment loan refers to a loan that is repaid using a fixed number of repayments called installments within an agreed duration. An installment loan usually entails making payments that repay part of the principal, plus interest and other fees.

Interac e transfer

The Interac e-Transfer® service is a secure online system that allows people to transfer money from one bank account to another through email addresses or mobile numbers. The lending institutions utilize the Interac e-Transfer service to distribute approved loans or, in some instances, collect payments for the loans. This service is common in Canada owing to its speed, convenience, and security of transferring money electronically without any cash or cheque.

L

Loan Agreement

The loan agreement is a legal document between the borrower and the lender to specify the terms and conditions of the loan. It entails crucial details, such as the amount borrowed, cost of borrowing, repayment plan, fees & charges, and other related conditions that will lead to defaulting or termination of the loan agreement.

N

Non-sufficient Funds (NSF)

Non-Sufficient Funds (NSF) occurs when your bank account lacks sufficient balance to allow your loan payment and other valid withdrawals. In such cases, the bank will fail to process your transaction and levy the NSF fee on you.

P

Payday Loan

A payday loan is a high-interest, short-term loan that helps you manage your finances until you receive your next paycheck. They are usually lower in value and are supposed to be repaid within a very short time span, according to the lender's terms and provincial laws. 

Prepayment Penalty

A prepayment penalty is a charge a lender may levy on a borrower if a loan repayment is made before the stipulated repayment period. This charge serves to reimburse the lender for any losses that might be experienced due to prepayment of the loan.

Principal Amount

The principal is the total amount of money initially borrowed from the lender, without any interest or charges added. 

Pre-authorize debit

A PAD is a financial arrangement that provides the lender with the ability to deduct money from your bank account at predetermined times to cover your loan repayments as agreed upon by both parties. Rather than having to make repayments manually when they are due, your money is automatically withdrawn, reducing the risk of missing payments and incurring extra charges.

R

Repayment schedule

A repayment schedule is a document that outlines how and when repayments will be made. It details payment dates, the number of instalments, the loan term, and the total amount to be repaid over the repayment period. Depending on the loan contract, repayments can be made weekly, biweekly, semimonthly, or monthly.

T

Term

The loan term is the period during which the borrower must repay the loan in full, from the day the loan is issued to the last day of repayment. 

U

Unsecured loan

An unsecured loan is one in which the borrower is not required to pledge collateral, such as a house, car, gold, or savings, to secure the loan amount. In this case, the lender considers the salary, job, creditworthiness, and repayment capacity before granting a loan.

Frequently Asked Questions

1. Why is it necessary to learn about loan terms before applying for a loan?

Learning about loan terms will help you make a sound decision about the loan application process. You will be able to compare various loan terms, learn the cost of borrowing money, get to know your repayment terms, and not get caught up in any surprises after signing the loan contract.

2. Which loan terms should I focus my attention on?

The most important loan terms include the APR (Annual Percentage Rate), the loan amount, the repayment scheme, the loan term, the cost of borrowing, and any additional fees and prepayment penalties.

3. What is the main difference between a payday loan and an installment loan?

While a payday loan is usually a small amount borrowed for a short period and repaid by the next payday, an installment loan is paid off in installments.

4. Where can I find the loan terms and conditions before borrowing?

Loan terms and conditions are typically provided in the loan agreement and related disclosure documents shared by the lender before you accept the loan. It's important to read these documents carefully and ask questions if anything is unclear.