If you’re applying for a personal loan, it is extremely important to familiarize yourself with its terms. Whether it’s the interest rate, APR, processing fees, prepayment penalties, or anything else that comes in between; proper clarity will help assess the value of your loan better. In this post, we will discuss each of these terms in detail.
If you’ve previously applied for any type of credit, you’ve probably come across the phrase ‘interest rate’. But what does it mean? Interest rate, with respect to a personal loan, refers to the monthly charge you’re required to pay for borrowing the funds. Most lending institutions charge a fixed interest rate on personal loans. That means the interest charge remains the same throughout the entire tenure of your loan.
Tenure refers to the time taken for paying off your loan. Personal loans come with flexible tenures ranging from one to six years. Lower tenures usually result in lower interest payments and vice versa.
Interchangeably known as the origination fee, a processing fee is the amount charged by lenders for processing and disbursing the funds. This amount is charged as a percentage of the loan amount and it usually ranges from 1% to 5%.
In terms of personal loans, foreclosure refers to the process of paying off your dues before the end of the term. As with processing fees, the foreclosure charges range from 2% to 5% on your loan amount. Note that the numbers might vary depending on the lender.
Collateral refers to the asset or property you own, and you are usually required to pledge it for securing a loan. Note that unlike secured loans that involve collateral, instant loans have no such option. That means you can get the loan without securing it with an asset or property.
Although most banks don’t yet have this facility, almost every leading alternative lender comes with this provision. Auto-debit is a facility where a fixed amount is automatically debited from your account every month. It is subsequently sent to your lending institution. Note that this amount is your monthly installment against the personal loan.
APR refers to the annual percentage rate and it is usually much higher than the interest rate. That is because it includes the interest rate, processing fee, and other additional fees charged by the lender. It is important to check the APR as it offers more clarity regarding the total amount you’re required to pay.
Your loan will be in default and you’ll be a defaulter when you do not repay the funds as per the terms specified in the lending agreement. Defaulting on loans will adversely affect your credit score and mar your chances of qualifying for better offers in the long run.
When you miss multiple payments or pay later than the pre-decided due date, your existing credit account will be deemed delinquent.
Now that you have a better understanding of these important personal loan terms, make an informed decision while selecting an offer.