Loan Terms You Ought To Know Before Borrowing Funds

  • Updated on: 10 Apr 2023
  • Published on: 22 Aug 2022
Loan Terms You Ought To Know Before Borrowing Funds

With fintech advancements, the lending sector in India has progressed by leaps and bounds. Today, consumers no longer have to stand in queues to get loans, as almost all financial undertakings can be completed online. While this ease of access is admirable, loans are still the same financial responsibility they always were. As such, it is well worth it to understand the instrument fully, and this means knowing the loan terms associated with it. While a majority of the exposure to these loan terms will be through promotional content, you are likely to encounter the entire glossary when reading through the loan documents.

What’s more, the latest RBI regulatory framework mandates lenders to issue borrowers a Key Fact Statement, which is a document containing vital loan information. Naturally, this statement will contain pertinent loan terms, and understanding what they denote is key to borrowing smartly. Here is a brief overview of the important loan terms to look out for when availing funds.

Credit score

Of the many finance terminology definitions to know, credit score is likely among the more important ones. Simply put, your credit score is a 3-digit score assigned to you by a credit agency. The CIBIL score is a popular credit score that lenders consult when assessing your creditworthiness. Generally, there is a minimum credit score for loan approval when borrowing funds, with most lenders requiring a score of at least 650.

APR

This loan terminology is an acronym for annual percentage rate, and the APR dictates the true cost of borrowing for a year. The APR is almost always higher than the interest rate offer advertised for a term loan. This is because it accounts for the interest payable, as well the other costs listed in the loan agreement.

Collateral

The collateral simply denotes the asset pledged in order to avail the loan. In many cases, the lender will not approve a sanction or go through with loan disbursement unless you pledge an asset that you own. These instruments are called secured loans and the value of the asset often impacts the principal amount of the loan.

Credit appraisal

This finance terminology refers to the assessment process conducted by a lender before approving a sanction. This involves checking the applicant’s credit score, fixed obligation to income ratio, income stability, and if the applicant has a history of being a loan defaulter. Credit appraisal is a key part of the process and lenders won’t approve applications without doing their due diligence.

Deferment

In the context of borrowing and lending funds, deferment refers to the provision where lenders allow you to pause payments for a set period. This is based on the agreement between borrower and lender, and mostly comes into play only in instances of financial hardship. Deferment terms will be listed in the loan agreement.

e-NACH

This is simply the digital upgrade of the NACH, which is a provision offered to you by lenders to automate EMI payments. The e-NACH provision is a framework that exists completely online. With an e-NACH mandate, you can authorise recurring payments from your account for a wide range of services.

EMI

This term is an acronym that stands for equated monthly instalment. In a loan agreement, it denotes the monthly amount due during the entire loan repayment process. When planning your loans, always check the EMI amount and ensure that it fits in your budget. Any discrepancies in the EMI details must be addressed immediately.

Lender

This term refers to the financial institution or credit lender in question. As per the latest RBI regulations, authorised lenders may be referred to as Regulated Entities (REs) or Lending Service Providers (LSPs), based on their categorisation.

Guarantor

A guarantor is an individual who agrees to share the financial responsibility of repaying the loan if the primary borrower fails to hold up their end. Guarantors are often required when the primary borrower requires a large sum of money but doesn’t have a strong enough profile to back the requirement.

Lien

This is a common loan terminology that you will come across when availing secured loans. Simply put, lien means the lender’s legal claim on your assets until you have completely repaid your debt. When availing a secured loan of any kind, take note of this term and any clauses associated with it.

Default

Default in any credit agreement means the act of non-payment. It is on one of the important credit terms to know as lenders have varying default penalties applicable. As such, knowing the meaning helps ensure that you have a better idea of the terms and conditions applicable.

Term

The term simply refers to the loan period or the tenure of the loan. It is the loan repayment window applicable and will be clearly listed on the loan agreement. You should note the term of the loan before approving or authorising disbursal as it does impact the cost of borrowing.

Loan agreement

This is a document shared to applicants by the lenders once the credit appraisal process is complete. This document formalises the loan and has all the vital information of the loan. You will have to approve the loan agreement, and will now also receive a Key Fact Statement that contains loan information.

Origination

This is sometimes listed as the origination fee or processing fees, and it means the cost applicable on your loan. These fees are charged by lenders for providing credit services and are sometimes expressed as a percentage rather than a flat amount. Keep an eye on these charges as they can be quite high.

Prepayment

Prepayment is the act of paying a portion of the outstanding loan or the entire outstanding amount ahead of the tenure. In all loan agreements, you should look for the prepayment terms and fees applicable as foreclosure of loans can save you a lot of money.

Fixed/Floating interest rate

Floating or fixed interest rate primarily refers to the interest rate applicable on the loan. The floating variant means that the interest rate may change based on market movements, whereas the fixed interest rate is locked in from day one. It is important to know the meaning of both to borrow efficiently.

Principal

The principal is the loan amount. This amount is also referred to as the sanction and will denote the full amount approved by the lender. There may be certain charges and fees applicable on the loan, which get deducted from the principal amount. Also, during loan repayment, the principal amount reduces with each payment you make.

While this isn’t an exhaustive list of the terms you may encounter when availing loans, understanding these important loan terms is vital. It can give you a leg up in negotiations with your lender, and help you make better borrowing decisions. However, if you come across other terms and have doubts about your loan or the offer made to you, get them cleared right away.

Most lenders will have dedicated support teams and relationship managers who can offer you needed insight. To ensure that you have a hassle-free experience, pick your lender wisely. One smart option is Fibe with whom you enjoy a completely digital, transparent and simplified experience.

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