When it comes to reading about loans, it can get confusing. If you’re new to this financial world then you’ll be hearing a lot of terms you haven’t heard before – and you’ll probably not have a clue what many of them mean! Questions like ‘what is APR?’ or ‘what is a guarantor?’ are common when researching loans and trying to get to grips with them – but don’t worry, help is at hand.
Today’s blog will help you get a better understanding of some of the most commonly used terms associated with loans by outlining what this lingo means and answering your most burning questions.
A
Acceptance rate – The acceptance rate is the number of people who are successful in their application for a loan or credit card.
Annual Percentage Rate (APR) – The annual percentage rate refers to the base interest rate applied to your loan per year, and may also include additional annual fees charged by the lender.
Arrears – Arrears are what the borrower will owe to the lender if they have missed any of their monthly payments. An agreement will be made between the two parties to ensure the arrears are met and the payments are made on time moving forwards.
B
Bad credit loans – Having a ‘bad’ credit score will mean lenders are often warier when it comes to lending you money, due to what is usually a history of you failing to meet repayments. Therefore, bad credit loans are specific to those people with a poor credit rating, allowing them to still lend if they need to – though they often come with considerably higher interest rates.
Borrower – the party lending money from another person or company.
Buy to let – Buy to let mortgages are specific to people who are taking out a mortgage with the intention of letting out the property to tenants. They tend to be assessed on how much you’ll make from the property, rather than your salary.
C
Credit check – Understanding what a credit check is will be vital when applying for any loan. Once you’ve inquired or applied, a lender will run a credit check on your financial history to check your eligibility for the loan. Details of your credit history and any outstanding credit agreements you have will be reviewed to decide whether you qualify for the loan.
Conveyancing – This is merely the term used to define the legal process a person goes through to a buy or sell a property.
D
Debt consolidation – If you have more than one existing debt, a debt consolidation loan can be used to merge several debts into one, creating a simpler and often more manageable way for you to pay back anything you may owe.
‘Decision in Principle’ (DIP) – This is a certificate or statement given by a lender to show that, ‘in principle’, they are prepared to lend a certain amount to a borrower for a mortgage. Note that lenders can refuse your applications, which could impact negatively on your credit score – and that this document is also known as an ‘Agreement in Principle’ or ‘Mortgage in Principle’.
Defaults – If a borrower fails to make their monthly payments, the creditor may ‘default’ the account, effectively or recording the missed payment or even cancelling the loan agreement. This is detrimental to the borrower’s credit history, and may well lead to the denial of future applications by lenders – as they will be deemed high risk.
E
Early settlement – You’re entitled to a settlement figure from your lender if you want to pay your loan off early. They will provide you with an amount owed to them including any fees and extra charges.
Early repayment charge – If you decide to pay your loan off early, this is a charge that your lender may decide to issue you in addition to the remaining money owed.
Equity – This is the amount of money between how much you have paid back and how much the value of the item you borrowed for is now worth. If it’s negative, it means the value of the item borrowed for has fallen below how much is left to pay on the loan. If it’s positive, it means you are owed this money back, though most borrowers will use this surplus as a deposit for their next loan or finance deal.
F
Fixed rate – You may have heard of the term ‘fixed rate APR’. This simply means that, if your loan came with a fixed rate, the interest accrued will stay at the same rate for the duration of the agreement – and, therefore, you won’t get any unexpected financial surprises.
G
Guarantor – A guarantor can be used when you don’t have a credit history yet or you’re borrowing an amount the lender may not be confident you’ll be able to pay back, in which case you get a guarantor to enter the agreement with you. This person will be responsible for paying the borrowed money back if you default on any payments.
H
Homeowner loan – These types of loans are only available to homeowners and are secured against their property if there is equity in it. To qualify for a homeowner loan you’re likely to need a good credit history. There are many types of home improvement loans, so do your research and make sure you’re applying for the right one.
I
Interest – Interest is the amount of money that the lender is charging you for borrowing – this will be paid back in addition to the primary monthly repayments agreed upon.
J
Joint application – A joint application is when more than one person applies for a loan together – for example, a husband and wife.
L
Lender – the person or company lending the money.
Loan – With all the different loans out there, you might be left thinking ‘what is a loan?’. In simple terms, a loan is a sum of money borrowed from a lender that is to be paid back, almost always with interest, over an agreed period of time.
Loan to value (LTV) – This phrase is more commonly associated with mortgages and is shown as a percentage. Put simply, it compares the loan amount to the value of the property. For example, if you’re lending a mortgage of £80,000 for a £100,000 house, you will be borrowing 80% LTV.
M
Monthly repayments – A monthly repayment is the amount of money a borrower pays back to the lender monthly in order to pay off the total amount of the loan.
Mortgage – A loan specific to buying a home. With mortgages, the property is used as security for the lender.
O
Offer of advance – This is a formal document that the lender will issue to the borrower that confirms they are happy to lend an amount of money to them.
P
Payday loan – A payday loan is a short-term loan that will usually have to be paid back within 31 days, and they often come with exceptionally high interest rates.
Payment holiday – This is a short period of time when loan repayments are temporarily paused or reduced – these can be given at the lender’s discretion.
Payment protection insurance (PPI) – An insurance that a borrower can take out that covers monthly loan payments in the case of you being unable to meet them due to redundancy or ill health.
Q
Qualifying criteria – This is the criteria a lender will require the borrower to meet in order to qualify for a loan. The basic criteria the borrower will need to meet is being aged 18+, a permanent resident of the UK and to have a regular income. You will likely find that lenders have extra criteria to meet, depending on the loan type.
R
Repayments – Loan repayments are often detailed within a schedule agreed between the lender and borrower. It will outline how they’re paid back, how often they’re made and the total amount each one will be.
Risk-based pricing – Lenders will often offer different loan interest rates and terms based on the borrower’s current financial circumstances, such as their credit history, salary, employment status and outstanding debts.
S
Stamp duty – This is a tax that you pay when buying a property, determined by the HMRC. There are different bands when it comes to the amount of tax you will pay, so it’s worth finding out which one will be applicable to you.
Standard variable rate (SVR) – SVR is a type of interest rate, generally associated with mortgages, that you will move on to once you have passed through the introductory interest rate payment period.
T
Total amount repayable – The total amount repayable is the value of the original loan plus the added interest and fees accrued throughout the repayment period.
Typical APR – Lenders will advertise a ‘typical’ interest rate, the ‘typical APR’. They must offer this rate to at least two-thirds of successful applicants, which means that one-third of applicants could be offered a different interest rate to the one advertised.
U
Unsecured loan – Unsecured loans are generally offered to people who aren’t homeowners as they won’t be secured against a property, and the maximum a person can typically lend on an unsecured loan is £25,000. If you’re a homeowner, we’d suggest you look at secured loans instead as they typically offer lower interest rates – and if you’re confused by the difference, read our explanation here.
V
Variable rate – A variable rate is somewhat the opposite of fixed rate. It means that the percentage of interest that is accrued can fluctuate throughout the repayment period of the loan.
There you have it – our straightforward guide to some of the most-used lingo in the world of loans! For more personal finance tips and information, dive into the Jolly Good Loans blog.