You will ask to borrow a specific amount of money from a lending institution, such as a credit union or bank when you apply for a personal loan. You will use the funds from your mortgage to pay for your house, use an auto loan to pay for your car, and use a personal loan for almost any purpose. You can use a personal loan to pay for your medical expenses or education, consolidate debt, or pay for a major household item like a new appliance or furnace.
Repaying your credit card debt is not the same as repaying your personal loan. How do you repay a personal loan? You will pay fixed-amount installments over the life of your loan until you complete repaying your loan.
Here are some of the common loan terms that you should know before applying for a personal loan:
- Principal — It is the amount you will borrow. For instance, if you are applying for a personal loan of $20,000, then $20,000 is the principal. The lender bases their calculation on the principal you owe to calculate the interest they will charge you. The principal amount decreases as you continue repaying your personal loan.
- Interest – You agree to repay the debt with interest when you take out a personal loan. The interest is the “charge” your lender charges you to allow you to use their money. You will repay it over time. You will pay both the portion of your payment that reduces your principal and monthly interest. The lenders express interest as a percentage rate.
- Annual Percentage Rate (APR) – The lender not only charges the interest when you take out any type of loan. They also charge fees to make the loan. You can get a clear picture of the actual cost of your loan with APR since APR incorporates any lender fees and your interest rate. The best way for comparing the affordability and value of the various personal loans is to compare the APRs of the different lenders.
- Term – The term is the number of months you have to repay your loan. The lender informs you of the interest and the term they offer once they approve your personal loan application.
- Monthly Payment – You owe a monthly payment to your lender every month during the term. Monthly payment includes the portion of the total interest you will cover over the life of your personal loan and the money to pay down the principal of the amount you owe.
- Unsecured Loan – There are unsecured personal loans, which means you do not have to put up collateral to get the loan. Take a look at guaranteed Payday loans, direct lenders, no third parties. You will put up the real property you are buying as collateral to the lender with an auto or home loan. However, the rates of the secured personal loans, that require collateral, are usually much better than the rates of unsecured personal loans.