The Terminology and Vocabulary of Loans
- 17th September 2018
- Posted by: Loanable
- Category: Resources
When applying for and being approved, or possibly rejected for a loan, you will note various terms and words being used.
For many lenders, and borrowers, it is assumed that everyone knows what these terms and words mean, their definitions. However, not everyone does know their meanings.
Not everyone has the time to sit down and research and understand each term and how it applies to a loan, in addition, there are different types of loans, each which may use different terms with definitions.
Here we will attempt to list many of the more common terms and some of the vocabulary used in applying for and being granted a loan. We will also show the terms application, where we can.
In no alphabetical order:
APR/Annual Percentage Rate: This is the interest rate a borrower is charged for a loan over a 12 month period. It is different than a “representative rate” and also what is termed as an interest rate.
APR’s take into account the interest charged for a loan, in addition to any fees or other charges that may apply, for a 12 month period. This is why an APR can appear different, and higher, that what may be quoted as the loan’s interest rate.
Representative Rate: When loans are advertised, or shown as examples, a representative interest rate is usually what is given/shown.
This is the interest rate that 51% of those that apply to that lender for a loan receive as their interest rate. This means that 49%, may receive a lower or higher rate, or may be rejected for a loan.
Interest Rate: This is a percentage of the principal loan that is paid by the borrower for the a loan. This can differ as mentioned from the APR/Annual Percentage Rate.
Guarantor: A Guarantor is someone who signs for a loan along with the borrower, and agrees to make payments and repay the loan, should the borrower fail to make the payments, or default on the loan.
Borrower: The person actually borrowing the money, who the loan is granted to and for.
Secured Loan: Loans that are secured have something physical or tangible as collateral for the loan, such as a car, property, or even shares in a company, or other assets.
Unsecured Loan: Unsecured loans have no collateral or anything attached physically to the loan. There is nothing to repossess or take back should the borrower default on the loan. Credit cards, overdrafts, and other personal loans are forms of unsecured loans.
Repossession: The physical act of a lender taking back something that is acting as collateral in securing a loan. Again, this can be a car or a property.
Deficiency Balance: Once something has been repossessed for defaulting on a loan, the item repossessed, such as a car or property, is sold, usually at auction. If the sale does not completely pay-off the balance on the loan, there is said to be a deficiency balance owed. This balance then becomes unsecured, and is still owed by the borrower.
Default: Missing payments and being in arrears can be considered defaulting on a loan. For some lenders, being in arrears is not a default, until they send the borrower a formal notice of default.
Bad Credit Loan: Loans for borrowers with low credit scores, who may have had credit issues in the past, such as missing payments, defaults, or CCJ’s.
Finance Charges: Finance charges can be but not limited to the interest charged on a loan, in addition to any other fees that may be charged. Some lenders have an application fee, acceptance fee, and so forth.
Pre-payment Penalty or Early Pay Off Fees: Some loans have a pre-payment charge or penalty fee if you pay them off before the last payment date. This is to insure the lender receives the interest they expect from the loan as an investment. This penalty can be a percentage of the loan balance, or a month or two interest charges. For some loans the early penalty fee can decrease as the loan ages.
CCJ/County Court Judgment: A CCJ is a legal decision from a court stating a borrower has defaulted on a loan, and grants the lender a judgment which allows the lender additional powers to collect the loan. These additional powers can range from wage attachments, Charging Orders, to the use of Bailiffs.
Charging Order: Once a lender obtains a CCJ, they can apply for an Enforcement Order. An Enforcement Order is what allows the lender to make use of Bailiffs, wage garnishments, and Charging Orders.
A Charging Order is an order placed against the borrower’s property. The order will be paid when the borrower sells, or remortgages the property.
In very rare circumstances, a lender could ask a Judge to force the sale of a property to enforce the charge, this is very rare.
Terms and Conditions: These are the terms and conditions that outline the loan agreement, and are a part of the loan contract. They show the amount borrowed, the interest rate, the term of the loan, and other conditions, such as if the borrower defaults what process may be used to collect the loan.
The Term of a Loan: Term refers to how long the loan is for, a term may be 24 months, 36 months, or even 60 or 120 months in the example of a mortgage loan.
Principal Balance: This is the amount of money given to the borrower at the beginning of the loan process, this is the amount a borrower has borrowed for a loan.
Monthly Payment: This is the monthly payment that is due on the due date each month for the loan.
Due Date: This is the date each month the payment must be received by the lender for the loan. Technically, any payments after this date can be deemed late.
Grace Period: Some lenders have a “grace period” or a period of time after a payment due date that a payment can be received and not deemed late, or a late fee assessed.
Late Fee or Charge: This is a penalty, either a fixed amount, or a percentage of the outstanding loan balance, charged for a payment being received and posted late; after the due date.
Outstanding Balance: The amount still owed on a loan, after each payment has been made.
Charge-Off: An account is said to be charged-off when a lender feels the account is no longer collectable. The lender charges the account off their books. This does not mean the account is no longer owed, as it is still owed, and can be sold onto other collection agencies who then own the debt and can collect it.
Arrears: When a borrower misses or fails to pay their monthly payments, they are said to be in arrears.
Credit Score: A numerical expression based on various factors that indicates the probability of someone repaying a loan. It is representative of how a person handles their finances and debts.
Joint Application: An application for a loan made in more than one person’s name, such as a married couple applying for a loan, or partners applying together for a loan.
Equity: Equity is the difference between what someone owes on the balance of their mortgage, and the value of their property. This difference is called equity.
A property valued at £150,000, with an outstanding mortgage balance of £100,000, is said to have £50,000 in equity.
Loan-to-Value/LTV: LTV is the percentage of what something is purchased for, and the amount they are borrowing to make that purchase.
Someone buying a property for £200,000 and having £40,000 as a deposit, is only borrowing £160,00, so they have a LTV of 80%.
Second Charge: A loan that is secured against a property in addition to the property having a mortgage.
Underwriting: Underwriting is the process of verifying details about a loan and approving or denying a loan.
Variable Rate: This is an interest rate that can vary across the course of a loan. Many lenders use variable rates that are tied into the Bank of England’s basic rate, plus a percentage.
BOE: Bank of England