Taking a personal loan for the first time can be overwhelming. Many borrowers apply for loans or credit lines without understanding the terminology, which can lead to mistakes and unexpected costs. Here’s a simple guide to 10 essential terms:
1️⃣ Principal Amount
- The original sum of money you borrow from the bank
- Interest is calculated based on this amount
- Always know how much you’re actually borrowing
2️⃣ Interest Rate
- The percentage charged by the lender on your principal
- Can be fixed (constant) or floating (changes with market rates)
- Affects the total repayment amount
3️⃣ EMI (Equated Monthly Installment)
- The fixed monthly payment you make to repay the loan
- Includes principal + interest
- Helps in budgeting your monthly finances
4️⃣ Processing Fee
- One-time fee charged by the lender to process your application
- Usually 1–2% of the loan amount
- Check if it’s deducted upfront or added to your loan
5️⃣ Tenure/Loan Term
- The duration over which you repay the loan
- Shorter tenure = higher EMIs, lower interest
- Longer tenure = lower EMIs, higher total interest
6️⃣ Prepayment/Foreclosure
- Paying off the loan before the tenure ends
- Some banks charge a fee for prepayment
- Reduces total interest outgo
7️⃣ Credit Score
- A number representing your creditworthiness
- Higher scores = easier loan approvals and better interest rates
- Maintain a healthy credit history
8️⃣ CIBIL Report
- Official credit report showing your loans and repayment history
- Banks check this before sanctioning a loan
- Errors in your report can affect approval chances
9️⃣ Collateral
- Asset pledged against a secured loan (e.g., gold, property)
- Personal loans are usually unsecured, so no collateral needed
- Secured loans may have lower interest rates
🔟 Late Payment Charges
- Fee charged for delayed EMI payments
- Can increase loan cost significantly
- Always pay EMIs on time
🌟 Final Takeaway
Understanding these 10 terms ensures you borrow responsibly, avoid hidden charges, and manage repayments effectively. Never rush into a loan without knowing what each term means and how it affects your finances.
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.
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