Before getting a personal loan, the best thing you can do is to learn the terminology. It’s easier to browse the complicated world of loans if you know what different terms mean. Some lenders, especially unlicensed ones, might try to trick you by using terms or concepts that you don’t understand. Well, that’s not going to happen to you, because this article will make everything clear for you. From personal loan interest rates, to collateral, and other similar words. Let’s get into understanding the slang, and feeling like a professional when discussing about loans!
The Meaning of a Personal Loan and a Collateral
The first thing you need to make sure you understand is the actual meaning and purpose of a personal loan. A personal loan is the type of loan that you can use for various purposes. There are many reasons why people might need a loan, and some of the most common ones are: debt consolidation, house improvements, big events like weddings and funerals, or medical bills. But, don’t worry, if what you need a loan for is not on that list, remember that there are many other purposes that were not mentioned. You can always ask your lender for more information!
It’s good to know that, often, a personal loan is an unsecured type of loan. An unsecured loan is a loan that doesn’t require collateral. Now, collateral could be one of the first words that you don’t understand. A collateral is something that you are putting on the line, in case you cannot manage to pay your loan back. A collateral should be something expensive, like your house, or even a car. But, because it is an unsecured loan, your interest rate will be higher, because your lender is kind of taking a risk. If you want to know more about these introductory things, you could check out this article by Investopedia.
Personal Loan Interest Rates
You cannot be talking about personal loans without talking about personal loan interest rates. Actually, you cannot be talking about loans in general without discussing the matter of interest rates. Many people don’t know exactly what these are, or what they are influenced by. Personal loan interest rates are what’s in for the lender for lending you money. Think about it, if your lender would just give you a sum of money that you can pay back across many months, there would be no reason for them to lend you money in the first place. So, it is the thanks the lender received for doing you a favor.
Personal loans interest rates can be influenced by a bunch of factors, and one of them is creditworthiness. To put it simply, it shows lenders how trustworthy you are. So, there are a few things that will have an impact on your creditworthiness. One of them is your payment history, so always make sure to do all of your payments on time. If you have other loans, respect the contract that you signed. This will show future lenders that it’s safe for them to lend to you. Also, even if it might not be needed, even if you have a collateral, that makes you easier to trust.
DTI and EMI
So, you need a personal loan, and you keep hearing about DTI and EMI, but you don’t know what these are. DTI stands for Debt-to-income ratio, and it compares your income and your debt. DTI helps lenders understand how much of your monthly income is going towards paying back loans. It is calculated as a percentage, and it shows your ability to pay your debt. The higher the DTI percentage is, the harder will be for you to get a loan. Lenders have different rules, but most of them won’t give you a loan if your DTI is above 40%.
Now, EMI stands for Equated Monthly Installment; and it refers to the money you are actually going to be paying every month. When signing a contract, or discussing with a lender, make sure to look for the EMI amount. Remember, you will be paying back what you borrowed, but with the interest rate added to it. The EMI is fixed, and knowing it can help you organize your finances. Organization is what’s going to keep your financial safe. You should never borrow without having a well-thought plan beforehand. You need to be sure that you are able to pay, no matter if it required a collateral or not.
APR and Cosigner
APR stands for Annual Percentage Rate; is the annual cost you are paying for borrowing money. As with EMI, you should really look for APR before signing with a lender. The APR will include the actual payment towards the loan, but also the interest rate, and any other fees that you might need to pay. So, you shouldn’t only look at the money you borrowed, because you need to give back a little more than that. Knowing the APR can help you plan ahead when it comes to finances. You don’t need to ask for this information; your lender has to show it to you.
Now, cosigner might be a term you heard before, or even know what it means. A cosigner is usually needed when the lender doesn’t trust you enough alone. A cosigner is there to pay in case you cannot make a payment. Sometimes, adding a cosigner can lower your interest rate significantly. You could say with a family member, or even with a friend.
Conclusion
You are now familiar with the concept of personal loan interest rates, and you now understand the meaning of a lot of other terms, you are ready to lend! Borrowing money might seem scary, but researching and planning will be your best friends throughout this whole process. If any of the terms that were mentioned are still not clear enough, do further research. It’s best to be prepared and understand what the lender talks about.
