Personal loans can be a great financial tool, but understanding the various terms and concepts associated with them is crucial. In this article, we will explore the key terms related to personal loans and how they work. Whether you’re considering a personal loan for debt consolidation, emergency expenses, or home improvements, this guide will help you make informed decisions. And remember, for any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) represents the annualized cost of borrowing money. It includes the loan’s interest rate and any required fees, such as an origination fee. Comparing APRs can help you determine which loan offer will cost you less over time.

Borrower

The borrower is the individual who applies for a loan, accepts the loan offer, and receives the loan’s proceeds. The borrower is responsible for repaying the personal loan based on the terms outlined in the loan agreement.

Cosigner

A cosigner is someone who agrees to pay back the loan if the primary borrower fails to make payments. Adding a creditworthy cosigner can sometimes result in a lower interest rate. Cosigners are often close family members or friends due to the responsibility involved.

Credit Score

A credit score is a numerical representation of your credit risk based on information from your credit reports. Lenders use your credit score to determine if you qualify for a loan and the details of your loan offer. Many lenders require a credit score of around 580 or higher.

Credit Report

A credit report is a record of your history with various types of credit accounts. The three main consumer credit bureaus—Experian, TransUnion, and Equifax—organize this information and create credit reports. Reviewing your credit report can help you understand your credit standing.

Debt Consolidation

Debt consolidation involves combining several debts into one. This can lower your total monthly payments and make managing your debts easier. Many people use personal loans to pay off credit card balances with higher interest rates, saving money on interest each month.

Fixed Interest vs. Variable Interest

Loans may have fixed or variable interest rates. Variable-rate loans often start with a lower interest rate, but the rate can change based on a benchmark rate. Fixed-rate loans have a slightly higher rate that remains the same for the life of the loan.

Hard Inquiry vs. Soft Inquiry

Hard and soft inquiries are records of when someone checks your credit report. A hard inquiry often results from a credit application and can slightly affect your credit scores. Soft inquiries, such as when you check your own credit, do not affect your credit scores.

Loan Amortization

Amortization is the process of paying down a loan with fixed payments that are split between the loan’s principal balance and interest. The amortization schedule outlines how much you’ll pay each month and how the payment is divided.

Loan Origination Fee

A loan origination fee is an upfront fee that you may need to pay when taking out a personal loan. It is often a percentage of the loan amount and deducted from the loan disbursement. The fee can vary depending on the lender and your credit.

Prepayment Penalty

Some lenders charge a prepayment penalty for repaying your loan early. This penalty can be a flat fee, a percentage of the remaining loan balance, or based on the interest that would have accrued over a specific period. Most personal loan lenders do not charge this fee.

Prequalification

Prequalification can help you determine if you’ll likely get approved for a loan without affecting your credit score. The lender may ask basic questions and review your credit report, resulting in a soft credit inquiry. Prequalification is not a guarantee of approval.

Principal

The principal is the amount of money you borrowed and still have to repay, excluding interest. When you make payments, a portion goes to pay off the interest, and the remainder reduces the principal balance.

Promissory Note

A promissory note is the written agreement where you promise to repay the loan. It outlines the specific terms of the agreement, such as the interest rate, monthly payment, repayment term, and potential fees or penalties.

Term

The loan’s repayment term is the duration you have to repay the loan. Longer terms result in lower monthly payments but may lead to paying more interest overall. Shorter terms can save you money as you’ll pay off the loan sooner and may receive a lower interest rate.

Unsecured Loans vs. Secured Loans

An unsecured loan does not require collateral, and eligibility is based on your credit history, income, and existing debt. A secured loan requires collateral, such as an asset that the lender can take if you stop repaying the loan. Auto loans and mortgages are examples of secured loans.

When Are Personal Loans a Good Idea?

Personal loans can be used for various purposes, but they are not always the best option. Here are some good reasons to get a personal loan:

• To consolidate higher-rate debt: Consolidating debts with a personal loan can save you money on interest and simplify your finances.
• For emergency expenses: Personal loans can provide quick funds for emergencies, such as auto repairs or medical bills.
• For home maintenance or improvements: Personal loans can be helpful for large home projects, but consider a home equity loan or HELOC for potentially lower rates and tax-deductible interest.

Compare Personal Loan Offers Based on Your Credit

If you’re looking for a personal loan, try to prequalify with several lenders and compare offers before signing a promissory note. Use tools like Experian to access your credit reports and FICO® Scores for free and compare personal loan offers based on your unique credit profile.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we are dedicated to helping you with all your mortgage needs. Whether you’re looking to buy a new home, refinance your existing mortgage, or need advice on the best loan options, our team of experts is here to assist you. Call us today at 213-732-3074 to discuss your mortgage needs and find the best solution for you.