“A Comprehensive Guide to Personal Loan Terminology”

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Understanding Personal Loans: Key Terms and Concepts

Personal loans are straightforward, but there are many terms and fine print to consider. Here are 16 essential terms related to personal loans and how they function.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) represents the yearly cost of borrowing money. It includes the loan’s interest rate and any required fees, such as an origination fee. Comparing APRs can help you identify the most cost-effective loan offer.

Borrower

The borrower is the individual who applies for, accepts, and receives the loan. They are responsible for repaying the loan according to the terms outlined in the loan agreement.

Cosigner

A cosigner agrees to repay the loan if the primary borrower fails to make payments. Adding a creditworthy cosigner can sometimes result in a lower interest rate. Cosigners are often close family members or friends due to the responsibility involved.

Credit Score

A credit score is a numerical representation of your credit risk based on your credit report. Lenders use this score to determine your loan eligibility and terms. Many lenders require a credit score of around 580 or higher, though some offer loans to those with lower scores.

Credit Report

A credit report is a record of your history with various credit accounts. The three main credit bureaus—Experian, TransUnion, and Equifax—compile this information. You can review your Experian credit report online for free.

Debt Consolidation

Debt consolidation involves combining multiple debts into one. This can lower your total monthly payments and simplify debt management. Many people use personal loans to pay off high-interest credit card balances, saving money on interest.

Fixed Interest vs. Variable Interest

Loans can have fixed or variable interest rates. Variable-rate loans may start with a lower rate but can change based on a benchmark rate. Fixed-rate loans have a consistent rate throughout the loan term. The initial rate is advertised as an APR and depends on various factors.

Hard Inquiry vs. Soft Inquiry

Hard inquiries occur when someone checks your credit report for a credit application, potentially affecting your credit score. Soft inquiries, such as when you check your own credit, do not impact your score.

Loan Amortization

Amortization is the process of repaying a loan with fixed payments divided between the principal and interest. The amortization schedule outlines your monthly payments and how they are allocated.

Loan Origination Fee

A loan origination fee is an upfront cost, often a percentage of the loan amount, deducted from the loan disbursement. The fee varies based on the lender, your credit, and loan specifics.

Prepayment Penalty

Some lenders charge a prepayment penalty for repaying a loan early. This fee can be a flat amount, a percentage of the remaining balance, or based on the interest that would have accrued.

Prequalification

Prequalification helps determine if you’ll likely be approved for a loan without affecting your credit score. It involves a soft credit inquiry and basic questions about your loan needs and income.

Principal

The principal is the amount of money you borrowed and still owe, excluding interest. Payments are divided between interest and principal, with extra payments reducing the principal balance.

Promissory Note

A promissory note is a written agreement where you promise to repay the loan. It outlines the loan’s terms, including the interest rate, monthly payment, and potential fees.

Term

The loan term is the duration you have to repay the loan. Longer terms result in lower monthly payments but more interest paid overall. Shorter terms save money by reducing the total interest paid.

Unsecured Loans vs. Secured Loans

Unsecured loans do not require collateral and are based on your credit history and income. Secured loans require an asset as collateral, such as a car or home, which the lender can claim if you default.

When Are Personal Loans a Good Idea?

Personal loans can be useful for consolidating high-interest debt, covering emergency expenses, or funding home improvements. However, consider other options like balance transfer cards or home equity loans, which may offer better terms.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you find the best loan options tailored to your needs.

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