Loan FAQs: Terminology You Should Know Before You Take Out A Loan


Loan FAQ’s: Know and understand the terminology before your take out a loan

Though there are many different types of loans available, some things are common to all loans—and may be gibberish to the average consumer.

Before you get a loan, we’ll walk you through some terminology you can expect to run into and answer some common questions.

We’ll start off with common loan terms:

  • Principal: This is the amount of money you’ve borrowed. When you make payments on your loan, you’ll find that a portion of those payments goes to principal, and a portion goes to pay interest.
  • Down payment: Some types of loans—like home and car loans—will require you to pay a portion of the cost up-front as a down payment.
  • Interest (or APR): The amount of interest you’ll pay on the amount you’ve borrowed.
  • Fixed and adjustable rate: Loans can have a fixed or adjustable rate. A fixed rate stays the same for the life of the loan. An adjustable rate can go up or down on a periodic basis, and is usually tied to an outside market indicator, such as the prime interest rate.
  • Finance charges: All loans will have fees beyond the interest rate. Depending on the type of loan and your lender, you may need to pay these fees up-front or be able to roll them into the principle. Though you may find fee-free loans advertised, be wary of them: Chances are you will be paying a higher interest rate for the privilege, which may cost you more in the long run.
  • Cosigner: If your credit rating isn’t that great, you may need a cosigner to get a loan. This person is jointly responsible for paying. Having a parent cosign a loan can be a good way to help a student, without much credit history, get a first loan.
  • Prepayment penalty: Some loans will have an additional fee if you pay them off early. Be sure to read the fine print to ensure your loan doesn’t have this kind of penalty if you might pay it off early.

What types of loan are available?

You can get a loan for just about anything you plan to spend money on, whether it’s a home, a car, a big home improvement project, or a college education.

Loans can be secured or unsecured. For example, a home loan is secured by your home itself (which the bank can repossess if you don’t make payments), while credit card debt is considered unsecured.

You may be able to get loans from the government—like Stafford loans for students—but more often loans are managed by private lenders like banks and credit unions.

How much can I borrow?

Typically, your lender will determine how much you can borrow based on credit rating and your income. Check Bankrate’s mortgage and auto loan calculators to get an idea of how much you can afford.

Student loans are a little different since students tend to have low income and limited credit history. Typically, student loans are limited on the amount you can take out per calendar year, though some loans may rely on the credit rating of the parents. Because loan programs can vary depending on the school, speak to your school about financial options.

Why am I getting turned down for a loan?

Typically, this comes down to something your lender doesn’t like on your credit report. When you are turned down for a loan, your lender is obligated to tell you why. If the reasoning doesn’t make sense, you should check your credit report to ensure it is accurate. If not, this is a good time to correct inaccurate information.

It is good to keep in mind that just because you’ve been turned down by one lender doesn’t mean you’ll be turned down by all lenders: If you shop around, you should be able to find another lender that will consider extending credit to you.

When do I have to start paying off my loan?

You usually start paying your loan off in monthly increments as soon as you’ve taken it out. Be sure to ask your lender when your first payment is due if you are not sure.

Student loans, again, are different: You generally start paying them after you graduate. Some federal loans (typically in cases where you’ve proven financial need), you will not have to pay any interest on the loan while you were in school, either.

How can I pay off my loan faster?

This can be as simple as writing your lender a larger check for your monthly payment—many lenders will apply extra to the principal of your loan. Check with your lender to see if there is a special process. Even adding a small amount to your monthly payment can help your balance drop a faster.

Have mortgage-specific questions? Then check out our blog on mortgage FAQs!


Posted in: Personal Finance
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