When you’re debating loan options, such as mortgage, auto or personal loan offers, you may have come across some terms you didn’t quite understand. Loan jargon, common terms used in the finance business, may be more important than you think. Common industry terms reflect extra fees, penalties and some crucial parts of your loan agreement.
Annual Percentage Rate (APR)
The APR is clearly displayed on most loan options and is an important figure for you to note. The annual percentage rate represents how much the loan will cost your over 12 months. The APR reflects in interest rate, your repayment schedule and any other fees the lender is adding. The higher the APR, the more the loan is costing you over its term.
The eligibility criteria is all the standards you need to meet to get approved for the lender’s product. Common criteria includes a minimum loan amount, a minimum credit score and a minimum level of income.
If you don’t want to take out the minimum loan amount or have a lower credit score or less income than the lender requires, you won’t be approved for the loan. You can save yourself time and an unnecessary check on your credit report if you determine you don’t meet the eligibility criteria before applying.
Early Repayment Fees
An early repayment fee often sneaks up on borrowers. If you pay off the loan before the end of its term, you’re charged a fee. The fee varies by lender. Some loan options include an early repayment fee, while others do not. The prepayment fee may be a percentage of the total amount you borrowed and usually drops over time.
Collection costs are the extra fees a lender will charge if you fail to make your repayments in full or on time. The charges reflect what the lender expects to spend trying to collect past due payments from you. Collection costs may add up quickly and made it more difficult for you to pay the loan back. Collection costs should be spelled out on your loan agreement, so check the costs before you sign.
Payment Protection Insurance
Payment protection insurance, or PPI, is an insurance policy offer to borrowers. If the borrower experiences an event that qualifies under the PPI policy, such as a disability that prevents employment, the policy covers the loan repayments.
While many lenders offer PPI, it’s not required for credit approval. If a lender is requiring PPI, report the lender to your local financial authority.
Understanding loan jargon when you’re exploring your loan options may help you avoid making a costly mistake or getting a loan with poor terms. Unexpected loan surprises, such as an early repayment fee, can upset your finances if you’re not prepared.