Personal Loan
Terms Explained

Annual Fee

A yearly charge some lenders or card issuers assess for access to a credit product, regardless of usage.

Annual Percentage Rate (APR)

The total yearly cost of borrowing, expressed as a percentage. APR includes the interest rate plus any lender fees, making it a more complete comparison tool than interest rate alone.

Co-Signer

A person who agrees to share legal responsibility for a loan. If the primary borrower misses payments, the co-signer is equally liable for the debt.

Collateral

An asset pledged to a lender to secure a loan. If the borrower defaults, the lender can seize the collateral to recover the outstanding balance.

Credit Inquiry

A request to view your credit report. Hard inquiries occur when you apply for credit and can temporarily lower your score. Soft inquiries do not affect your score.

Credit Score

A three-digit number (typically 300–850) that summarizes a borrower's credit history and predicts the likelihood of repaying debt. Higher scores indicate lower risk to lenders.

Credit Utilization

The percentage of your available revolving credit that you are currently using. Lower utilization generally helps your credit score.

Debt-to-Income Ratio (DTI)

The percentage of your gross monthly income that goes toward monthly debt payments. Lenders use DTI alongside credit score to assess repayment ability.

Default

Failure to repay a loan according to the agreed terms. Default typically occurs after a series of missed payments and triggers serious financial consequences.

FICO Score

The most widely used credit scoring model, developed by Fair Isaac Corporation. Scores range from 300 to 850.

Grace Period

A short window after a payment due date during which you can pay without incurring a late fee or penalty. Not all lenders offer one.

Hard Credit Pull

A credit inquiry initiated by a lender with your permission, typically when you formally apply for credit. Hard pulls appear on your credit report and can temporarily lower your score by a few points.

Installment Loan

A loan repaid in fixed, regular payments over a set period. Each payment typically covers both principal and interest, and the loan is fully paid off at the end of the term.

Late Fee

A charge added to your loan balance when a payment is not received by the due date. Late fees vary by lender and are specified in your loan agreement.

Loan Amortization

The process of spreading loan payments across the loan term, with each payment covering both interest and principal. Early payments are interest-heavy; later payments shift toward principal.

Loan Principal

The original amount borrowed, not including interest or fees. Monthly payments reduce the principal balance over the life of the loan.

Loan Term

The length of time you have to repay a loan, typically expressed in months. Common personal loan terms range from 12 to 60 months.

Minimum Payment

The smallest amount a borrower must pay each month to keep an account in good standing. Common with revolving credit like credit cards.

Origination Fee

A one-time fee charged by some lenders to process a loan. It is typically deducted from the loan proceeds or added to the loan balance.

Payday Loan

A short-term, high-cost loan typically due in full on the borrower's next payday. Often carries extremely high annualized interest rates.

Personal Loan

An unsecured installment loan that can be used for almost any purpose. Repaid in fixed monthly payments over a set term.

Prepayment Penalty

A fee some lenders charge if you pay off a loan early. It compensates the lender for interest income they expected to earn over the full loan term.

Prequalification

An initial assessment of a borrower's eligibility based on basic information, typically using a soft credit pull. It does not guarantee final loan approval.

Refinancing

Replacing an existing loan with a new one, typically to secure a lower interest rate, reduce monthly payments, or change the loan term.

Secured Loan

A loan backed by collateral — an asset the lender can claim if the borrower defaults. Mortgages and auto loans are common examples.

Soft Credit Pull

A credit check that does not affect your credit score. Soft pulls are used for pre-qualification, background checks, and personal credit reviews.

Unsecured Loan

A loan that does not require collateral. Approval is based on the borrower's creditworthiness, income, and other factors rather than a pledged asset.