Taking out a personal loan can be a convenient way to manage expenses, but many first-time borrowers apply without fully understanding key terms. Knowing these terms helps you make informed decisions, avoid hidden costs, and manage repayments efficiently.
1. Principal Amount
- The original amount of money you borrow from the bank.
- Interest is calculated on this sum, so understanding it helps you know your repayment obligations.
2. Interest Rate
- The percentage charged by the lender on the principal amount.
- Can be fixed (remains the same) or floating (changes with market rates).
3. EMI (Equated Monthly Installment)
- The fixed amount you pay every month, including principal and interest.
- Knowing your EMI ensures you can budget effectively and avoid defaults.
4. Processing Fee
- A one-time fee charged by banks for loan approval.
- Typically ranges from 0.5% to 2% of the loan amount and is deducted upfront or added to the loan.
5. Tenure
- The loan repayment period, which can vary from a few months to several years.
- Longer tenures reduce monthly EMIs but may increase total interest paid.
6. Prepayment Charges
- Fees levied if you repay the loan before the tenure ends.
- Some lenders allow partial or full prepayment with minimal charges.
7. Credit Score
- A numerical representation of your creditworthiness based on past loans and repayment history.
- A higher credit score improves your loan approval chances and lowers interest rates.
8. Collateral
- An asset pledged to the bank as security for the loan.
- Personal loans are usually unsecured, but some loans (like gold or home loans) require collateral.
9. Default
- Failing to pay EMIs on time is considered default.
- Defaults can harm your credit score and attract penalties.
10. Loan-to-Value Ratio (LTV)
- The percentage of the asset’s value you can borrow.
- Important for secured loans like gold or home loans to understand your borrowing capacity.
Takeaway: Before applying for a personal loan for the first time, understanding these 10 key terms ensures you make informed decisions, avoid surprises, and manage your finances responsibly.
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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