Key Terms to Understand When Taking a Loan

Before taking out a loan, you will come across a number of terms and conditions, some of which you may initially find puzzling. Here’s a brief explanation of the key terminology that you will encounter along the way.

1. Secured and Unsecured Loans

All loans can be broadly divided into two categories: secured and unsecured. The distinction is pretty straightforward, as secured loans are those backed by collateral (a car, house, or some other valuable asset). Unsecured loans don’t require collateral; instead, the borrower needs to prove his or her creditworthiness. Keep in mind that unsecured loans typically have higher interest rates, while secured loans can be riskier because your assets might be seized if you don’t repay the loan on time.

2. Credit score

A credit score is a three-digit number that ranges between 300 and 850 and demonstrates your creditworthiness. A high credit score will allow you to obtain loans more easily and also get lower interest rates. At the same time, a lower credit score will result in higher interest rates and a smaller number of loans available.

Payday loans are among the loans that don’t require a solid credit history. They have fewer requirements but have steep interest rates that range from 300 to 600 percent. Visit Payday Depot for more details if obtaining a payday loan is something you’re considering.

3. APRs and Interest Rates

There is a tendency to conflate the interest rate and the annual percentage rate (APR). The interest rate is essentially the amount you are charged for borrowing money. The APR is the total annual cost of taking out a loan, and it’s usually higher than the interest rate as it includes additional charges. Having a good credit score will allow you to access lower APRs. Consider both before taking out a loan because you’ll have a better idea of how much you’ll have to pay back in the end.

4. Repayment terms

There are plenty of loans available that will meet your needs, including auto, student, home equity, and mortgage loans. Check the terms in advance, as the length of time it will take to repay the loan will depend on its type and the lender. Repayment time will also impact your APRs: the longer the loan term is, the higher the annual percentage rate may be. At the same time, shorter-term loans will have lower interest rates overall but larger monthly payments.

5. Loan limit

A loan limit is the maximum amount of money a person or company can borrow from a lender. The bank or any other lender will give you a loan based on your creditworthiness and income. Remember that it will be much harder to get a large loan if you have a bad credit history. However, some lenders might allow you to borrow more than you can afford, so be sure to take into account your budget and ability to make repayments on time.

6. Gross Income

Your gross income is the sum of all of your annual earnings before any deductions or expenses. Lenders use your gross income to estimate how much of a monthly payment you can afford before approving a loan.

Taking out a loan is a task that requires you to understand the terminology involved. There are numerous other legal phrases in addition to the important ones that were stated above, so be sure to understand the specifics before signing any documents.