Understanding Personal Loans: Key Terms and Insights

Personal loans are a straightforward financial tool, but they come with a variety of terms and conditions that can be confusing. At O1ne Mortgage, we aim to simplify the process for you. Here, we break down 16 essential terms related to personal loans, helping you make informed decisions. For any mortgage service needs, feel free to call us at 213-732-3074.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) represents the annualized cost of borrowing money. It includes the loan’s interest rate and any required fees, such as an origination fee. Comparing APRs across different loan offers can help you determine which one will cost you less in the long run.

Borrower

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

Cosigner

A cosigner is someone who 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. Due to the responsibility involved, cosigners are often close family members or friends.

Credit Score

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

Credit Report

A credit report is a record of your history with various types of credit accounts. The three main consumer credit bureaus—Experian, TransUnion, and Equifax—organize this information. You can review your credit report online for free and get monthly updates and real-time notifications about changes in your report.

Debt Consolidation

Debt consolidation involves combining several debts into one. This can lower your total monthly payments and make managing your debts easier. Many people use personal loans to pay off high-interest credit card balances, saving money on interest each month.

Fixed Interest vs. Variable Interest

Loans can have fixed or variable interest rates. Variable-rate loans often start with a lower interest rate, but the rate can change based on a benchmark rate. Fixed-rate loans have a slightly higher rate that remains constant throughout the loan term. The initial rate is advertised as an APR and depends on various factors, including your credit score and the loan amount.

Hard Inquiry vs. Soft Inquiry

Hard and soft inquiries are records of when someone checks your credit report. A hard inquiry often results from a credit application and can slightly lower your credit score. Soft inquiries occur in other situations, such as when you check your own credit, and do not affect your credit score.

Loan Amortization

Amortization is the process of paying down a loan with fixed payments that are divided between the principal balance and interest. Your loan’s amortization schedule outlines how much you’ll pay each month and how the payment is divided. Personal loans often have fixed interest rates, so the monthly payments remain the same throughout the loan term.

Loan Origination Fee

A loan origination fee is an upfront fee that you may need to pay when taking out a personal loan. It is often a percentage of the loan amount and is deducted from the loan disbursement. For example, a $5,000 loan with a 5% origination fee ($250) will result in a $4,750 disbursement, but you will have to repay the full $5,000 plus interest.

Prepayment Penalty

Most personal loan lenders do not charge a prepayment penalty, which is an additional cost for repaying your loan early. However, it’s essential to review the loan agreement to be sure. If a prepayment penalty exists, it may be a flat fee, a percentage of the remaining loan balance, or based on the interest that would have accrued over a specific period.

Prequalification

Prequalification can help you determine whether you’ll likely get approved for a loan without affecting your credit score. The lender may ask basic questions about your loan purpose, desired amount, and income. They often review your credit report, resulting in a soft inquiry. If prequalified, there’s a good chance you’ll get approved, but it’s not a guarantee.

Principal

The principal is the amount of money you borrowed and still have to repay, excluding interest. When you make payments, a portion goes toward the interest, and the remainder reduces the principal balance. Making extra payments toward the principal can help you repay the loan sooner and save on interest.

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, repayment term, and any potential fees or penalties.

Term

The loan term is the duration you have to repay the loan. You can often choose from several options, such as 36 or 60 months. A longer term results in lower monthly payments but may lead to higher overall interest costs. A shorter term can save you money as you’ll pay off the loan sooner and may qualify for a lower interest rate.

Unsecured Loans vs. Secured Loans

An unsecured loan does not require collateral, and your eligibility is based on your credit history, income, and existing debt. In contrast, a secured loan requires an asset as collateral, which the lender can take if you stop repaying the loan. Examples of secured loans include auto loans and mortgages.

When Are Personal Loans a Good Idea?

Personal loans can be used for various purposes, but they are not always the best option. High interest rates and fees can make them costly, especially if you have bad credit. However, there are situations where a personal loan can be beneficial:

• To consolidate higher-rate debt: Consolidating debts and credit card balances with a personal loan can save you money on interest and simplify your finances.
• For emergency expenses: Personal loans can provide quick funds for emergencies, such as auto repairs or medical bills.
• For home maintenance or improvements: Large personal loans can be useful for home projects, but a home equity loan or line of credit may offer lower rates and tax-deductible interest.

If you’re considering a personal loan, try to prequalify with several lenders and compare offers before signing a promissory note. At O1ne Mortgage, we are here to help you navigate the process. Call us at 213-732-3074 for any mortgage service needs.