As you grow older, you need to know at least the basics of your finances, including loans. However, there’s no beginner school to teach everyday people about loans and the terminology used to describe them. Usually, most people will end up Googling their questions or going to their local bank for help. If you are clueless about what loans are and more, read our list of loan terminologies below.

  • APR

APR (Annual Percentage Rate) is the yearly interest rate you’re charged for taking out a loan. Fixed APR Loan interest rates never change, while Variable APR Loan interest rates may change and aren’t guaranteed. To learn how to calculate APR, click here

  • Borrower

A borrower is the person who takes out the loan with the intent to eventually pay it back, along with any interest and other charges that are incurred. 

  • Bridge Loan

Bridge loans are short term loans (1 year or less) that allow a business or person to meet current financial obligations until they can secure permanent financial backing. This loan type is usually backed by collateral (ex: real estate) and has a high interest rate. 

  • Capitalization

Capitalization occurs when any unpaid loan interest you have is added to the amount you borrowed (prior to your first loan payment). Then, your new interest rate is calculated based on your new loan amount borrowed. 

  • Collateral

Collateral is an asset that can be used as a security measure when taking out a loan. Examples of collateral may include your home, car, or boat. If you fail to make your loan payments, the lender may be entitled to seize your collateral. 

  • Cosigner

Those who take out a loan have the option to have a cosigner. A cosigner is someone who agrees to pay off the borrower’s debt if they aren’t able to do so. Having a cosigner with a good credit history and score can help the borrower get approved. 

  • Default

Defaulting is when a borrower fails to make payments on their loan. What happens after you default depends on the type of loan you took out. 

  • Deferment Period 

During a deferment period, a person doesn’t have to pay off the principal loan amount or pay interest. Often, those who have student loans will have a deferment period during college or right after graduation.  

  • Financial Institutions

A financial institution (also known as a banking institution) is a company who handles monetary transactions. This includes dealing with loans, investments, mortgages, and more. Commercial banks, credit unions, and investment companies are just a few examples of financial institutions. 

  • Fixed Rate

When a loan has a fixed rate, it means that the interest rate stays the same for the lifetime of the loan. Many people prefer loans with a fixed rate because it makes payments more predictable and stable.  

  • Forbearance

Forbearance is when loan payments can be temporarily stopped or reduced in amount. This can greatly help someone avoid defaulting on their loan. 

  • Home Equity Loan

With a home equity loan, you are allowed to borrow your home’s value minus your outstanding mortgage balance (if you have any). The interest rate for this type of loan is typically lower and fixed. You receive the money from a home equity loan in a lump sum, and have to pay monthly for the life of the loan. Typically, this loan is taken out to cover home renovations or emergency expenses. 

  • Interest Rate

The interest rate is the portion of the loan which the lender charges to the borrower. The borrower must pay the lender interest for taking out the loan. 

  • Lender

A lender provides funds to an individual or business with the expectation that it will be repaid (with interest). A lender could be a financial institution, individual, or private or public group. 

  • Loan

A loan is a specified amount of money you borrow from friends, family, or financial institutions that you must pay back at a later date. 

  • Loan Consolidation

Loan consolidation occurs when someone uses a large loan to pay off a smaller loan. This can result in having lower monthly payments or interest rates. Car, student, and signature loans are just some of the loan types you can consolidate. 

  • Long-Term Loan

Long-term loans last anywhere from a few years to 15 years, and are usually paid back in monthly installments. Since the payments are spread over a longer period of time, the monthly payment amount and interest rates are lower. 

  • Payday Loans

Payday loans, also known as a cash advance loan, is a short-term loan (no more than a few weeks) with very high interest rates. Typically, taking out this type of loan is not recommended, but is done when someone needs cash in a hurry. To be approved for this loan type, a lender will need to verify that you are able to pay it back based on your income.  

  • Principal

A loan principal is the amount you borrow from a lender. Your principal amount will decrease over time as you pay off the loan.

  • Promissory Note

A promissory note is a written document stating the borrower will pay back the lender a certain amount of money at a future date. The document will also include other details like the loan term length, interest rate, and the lender’s signature.   

  • Minimum Payment

When you have a loan, you have to make monthly payments to satisfy the lender. If you cannot make the regular payment amount, you are required to at least pay the minimum amount that is needed to keep your loan. 

  • Secured Personal Loan

A secured loan is a loan that is backed by collateral like a car or home. In the event your loan defers, the lender has the right to seize your collateral as payment. 

  • Short-Term Loan

A short-term loan is an unsecured loan that only lasts a year or less. Whether someone qualifies for the loan will depend on their regular income and financial history. Payday loans are a type of short-term loan. 

  • Student Loan

Student loans are provided to students to help pay college expenses like tuition, boarding, and books. These loans typically have a low interest rate, and don’t have to start being paid back until after graduation. Student loans can be provided federal, private, or other institutions. 

  • Unsecured Personal Loan

An unsecured personal loan can be used for practically any personal expense, with no collateral necessary. You qualify for this loan based on your creditworthiness and your ability to pay it back. 

  • Variable Interest Rate Loan

This type of loan’s interest rate can change based on the market interest rate. Along with this, the payments that are due will fluctuate as well. 

These are just some of the many loan terminologies financial beginners need to know about. Interested in learning more about loans? Click here.