Personal Loan Terminology – Important Terms You Must Know

Posted on Tuesday, June 4th, 2024 | By IndusInd Bank

Going ahead with a personal loan application can seem daunting if you’re not familiar with the jargon involved. An idea of key loan terminology is crucial to making informed decisions and choosing the right loan product.

In this guide, let’s look at some common personal loan terms. You may encounter this terminology on loan application documents as well as in various stages of debt payoff.

Essential Personal Loan Terminology

Here is a look at the key personal loan glossary you may come across when dealing with these types of loans.

1. Principal Amount

The principal amount is the original sum of money borrowed from the lender. This is the core amount on which interest applies. It needs to be repaid over the loan tenure.

2. Interest Rate

The interest rate is the percentage charged on the principal amount for borrowing money. It can be fixed or variable:

Fixed Interest Rate: The interest rate remains constant throughout the loan tenure.

Variable Interest Rate: The interest rate can fluctuate based on market conditions.

3. Equated Monthly Instalment (EMI)

It refers to the fixed monthly payment made to repay the loan. EMI includes both the principal and the interest amounts. An EMI is calculated via a formula that considers the loan amount, interest rate, and tenure. Using a personal loan monthly EMI calculator helps estimate monthly payments.

4. Tenure

The tenure is the duration over which the loan is to be repaid. Personal loans typically have tenures that range from one to five years. Long tenures result in smaller EMIs but with more interest paid over the life of the loan.

5. Credit Score

A credit score is a numerical expression that represents a borrower’s creditworthiness. It is based on their credit history. Higher credit scores imply lower risk to lenders. This often results in better loan terms and lower interest rates.

6. Collateral

It is an asset that a borrower offers to a lender as security for a loan. Personal loans are usually unsecured, which means they do not need collateral. Nonetheless, secured personal loans require collateral and sometimes offer lower interest rates.

7. Processing Fee

A processing fee is a one-time charge by the lender for processing the loan application. It is usually a percentage of the loan amount and deducted from the loan disbursement.

• Prepayment and Pre-closure
• Prepayment: Paying off a part of the loan before the end of the tenure.
• Pre-closure: Paying off the entire loan before the scheduled tenure ends. Some lenders can charge a penalty for prepayment or pre-closure.

Also Read: Is Opting for Pre-Closure of a Personal Loan Right Option

8. Amortisation

It refers to the gradual process of paying off the loan via regular EMI payments for the tenure. Each EMI covers both interest and principal repayment, with the interest portion decreasing and the principal portion increasing over time.

9. Debt-to-Income Ratio (DTI)

It refers to the ratio of your monthly debt payments against monthly gross income. It helps lenders assess your ability to manage monthly payments and repay the loan. A lower DTI indicates better loan repayment capacity.

10. Instant Loan

An instant loan is a type of personal loan approved and disbursed quickly, often within a few hours. They are ideal for emergency financial needs and usually involve minimal documentation and fast processing.

11. Loan Agreement

A loan agreement is a formal contract between the borrower and the lender. It outlines the terms and conditions of the loan, which includes the loan amount, interest rate, tenure, EMI amount, and repayment schedule.

12. Personal Loan Monthly EMI Calculator

A personal loan monthly EMI calculator is an online tool that helps you calculate your monthly EMI based on the loan amount, interest rate, and tenure. It aids in financial planning by providing a clear picture of repayment obligations.

Understanding personal loan terminology is essential to make informed borrowing decisions. By familiarising yourself with these key terms, you can confidently navigate the loan application process.

As a reliable personal loan option, IndusInd Bank personal loans offer competitive interest rates, flexible repayment options, and a seamless application process to help you effectively meet your financial needs. Explore IndusInd Bank’s offerings and choose the best loan option for your requirements.

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Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.