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Guide to Common Loan Terms
23 Mar 2010
A Guide to Common Loan Terms
Many people struggle with loans jargon. Words and phrases that apply to the various types of loan are assumed to be common knowledge. These terms represent very important parts of the lending process, but to the person who isn’t entirely sure what they mean they can be quite confusing and actually quite difficult to find out.
Not knowing the terms might lead to you missing out on better rates and the potential to save a lot of money in the long run. Here’s a quick guide from Money Expert to some of the most common loan terms.
Collateral, Secured and Unsecured Loans
These common loan terms can cause quite a bit of confusion, especially to someone who is shopping for their first loan. Collateral is an object of value that is used to guarantee repayment of a loan, such as a property or a car. Secured loans are loans that have collateral backing the loan, and usually have lower interest rates as a consequence.
The lower rates are because if you fail to repay the loan then the lender can take possession of the collateral and sell it to regain their money. Unsecured loans don’t have collateral, but they generally have higher rates of interest because of the greater risk of the lender losing out entirely if the borrower defaults.
Equity is a major factor in secured loans that use the borrower’s home as collateral. Equity refers to the percentage of the home’s value in comparison to the amount still owed on the original loan used to purchase it, better known as a mortgage. It’s often referred to as the amount of the home or property that the owners actually “own”, as opposed to the portion of the value that’s still held under their mortgage. The greater proportion of the mortgage a person pays off, the more equity they have in their home.
Interest, Capital, and Interest Rates
Interest and interest rates are common loan terms that are a key part of the lending process, but many people might not know exactly how interest and interest rates work. At its most simple, interest is the additional amount that you pay over the loan amount in order for the lender to make a profit from you.
In other words, the interest that you pay is the amount that you pay for the service of lending, while capital is the amount that you repay because it is what you borrowed in the first place. Interest rates are the percentage of the capital that you’ll pay in interest. For instance, if you have an interest rate of 5% on a loan, then you’ll pay an additional 5% to the loan amount in interest.
Annual Percentage Rate (APR)
The annual percentage rate is most often seen on credit cards, and is an indication of how much interest you will be charged on your credit card balance over the course of the year. The lower the APR is on a credit card or loan, then the less you’ll have to pay in interest as the year goes by.
You should keep in mind, though, that the annual percentage rate can change over the course of the year due to fluctuations in the cost of living, inflation, and a change of interest rates that are set on the national level. For a good rate on loans, try visiting the Santander website.
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