Loan Terms You Must Know Before Applying for a Loan

A

Annual Percentage Rate (APR)

Annual percentage rate (APR) refers to the full annual cost of borrowing in the form of a percentage. The figure includes the interest rate and any additional fees that may be included in the lending agreement.

Annual income

Annual Income is the total income of a borrower in one fiscal year. The lender considers annual income when assessing a borrower's repayment ability and eligibility for a loan. 

Amortisation

Amortization means repayment of a loan through periodic payments of Equal Monthly Instalments (EMIs). Each EMI consists of the principal amount and the interest component till the complete repayment of the loan.

Automatic payment / Auto Pay

Auto Pay is the repayment system where the customers can enable automatic deduction of EMIs from the respective bank account on the due date of repayment.

B

Borrower

A Borrower refers to the person who has applied for a loan from the lender with the condition of repaying the total loan amount with interest in the prescribed loan period.

Bureau Score

Bureau Score refers to the credit score prepared through the credit bureau, taking into consideration the past behaviour of borrowers in making timely payments of loans.

Bounce Charges

These are charges that can be charged if an EMI payment does not go through due to cases like lack of sufficient money in the account, closed bank accounts, or failure of the auto-debit process. This charge varies from lender to lender.

C

Collateral

Collateral refers to the security provided by the borrower against which the loan is made. In case of default on the loan repayment, the lender is entitled to recover the dues from the borrower by selling off the asset that has been provided as collateral. 

Credit report

A Credit Report is the detailed report containing the entire credit history of the borrower that is kept by a credit bureau. Some prominent examples of credit bureaus are TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. This report contains details about the loan, credit card, repayment behaviour, balance, credit inquiry, and defaults and overdue payments.

Credit Utilisation Ratio

Credit utilisation ratio is the proportion of credit used by the borrower from the total credit available. It is believed that the lower the credit utilisation ratio, the better the credit management skills of a borrower and hence the positive impact on the credit score of the borrower.

Creditworthiness

Creditworthiness is the ability of a borrower to pay back the borrowed money depending on income, employment status, repayment record, current debts, and credit scores. This is one of the factors considered by a lender when granting loans.

Cooling-Off Period

Cooling-Off Period means the period within which the borrower can cancel a loan contract without being heavily penalised by the lender, depending on the lender's policy.

CIBIL Score

A Credit score is a three-digit numerical representation of your total financial liabilities. It indicates the creditworthiness of the borrower based on their credit history.

Credit History

It refers to the record of a borrower's past borrowing and repayment behaviour. It includes the history of the loans taken, credit cards, repayment record, defaults and outstanding balance, among others. Lenders use credit history to judge the repayment behaviour and financial discipline of the borrower.

D

Debt-to-income Ratio

Debt-to-Income (DTI) Ratio refers to the portion of a borrower's income that is spent on repaying existing loans and other debt obligations. Lenders use this ratio to check whether a borrower can repay the borrowed money. A lower DTI ratio usually means that the borrower has healthy finances and the loan will be approved.

Default

When a borrower does not repay a loan or EMI as per the repayment schedule, then it is known as a default. 

Digital Lending

Digital lending refers to the whole process of application, approval, verification, and receipt of the loan through online apps or websites. Borrowers can apply for the loan without having to visit the loan office physically.

Disbursement

Disbursement refers to the process in which the amount approved as a loan is transferred into the borrower's bank account.

Documentation Charges

Documentation Charges refer to the fees charged by the lender for preparing, processing, or maintaining the documentation of the loan. These are charged, if any, before loan disbursement.

Due Date

The Due Date is the specified date by which a borrower must pay the EMI or loan. 

E

e-KYC (Electronic Know Your Customer)

Lenders use e-KYC (Electronic Know Your Customer) to digitally verify the borrower’s identification. This usually includes checking official documents like Aadhaar, PAN, or any other approved documents that can help the lender identify the borrower.

Eligibility Criteria

The eligibility criteria are the set of criteria a borrower needs to fulfil to become eligible for a loan. This includes criteria like age, monthly income, employment status, credit score, residency, and more, as determined by the lender.

Electronic Mandate (e-Mandate)

An e-Mandate is a document where a borrower authorises a lender to deduct EMI payments from the borrower's registered account automatically.

Electronic Funds Transfer (EFT)

Electronic funds transfer (EFT) is the process through which money moves electronically from one bank account to another without involving cash or checks. Lenders use EFT to make loan payments and receive repayments.

EMI (Equated Monthly Instalment)

Equated monthly instalment (EMI) means a regular fixed payment that a person makes towards the loan every month. An EMI includes both the principal and the interest rate. 

F

Foreclosure

Foreclosure refers to the repayment of the whole loan balance in advance. 

Foreclosure Charges

Foreclosure Charges refer to the charges that the lender may levy when the borrower repays the full outstanding balance before the agreed term of the loan comes to an end.

G

Grace Period

The Grace Period refers to extra time offered by the lending institution after the EMI due date, where the borrower can pay without incurring any penalties. The existence of this extra period and how long it lasts depends on the lender’s policy.

H

Hard Inquiry

A Hard Inquiry is made by a lending agency when it examines a borrower's credit report as part of the loan evaluation process. It is typically done after the borrower submits a loan application.

I

Instant Online Loans

The term Instant Online Loan refers to a kind of loan which is processed on an online platform. Provided that the person is eligible for the loan, the amount approved is transferred directly into the borrower’s account.

Income to EMI Ratio

The Income to EMI Ratio shows the relationship between a person's income and EMIs. Lenders use this ratio to check whether a person is capable of handling more loan repayments.

Interest Rate

The interest rate is the amount your lender charges you for taking out a loan. It is generally represented as a percentage of the principal amount. 

K

Key Fact Statement (KFS)

Key Fact Statement is a standardized statement issued by regulated lenders that contains the essential facts about the loan. It usually includes the loan amount, interest rate, Annual Percentage Rate (APR), loan tenure, EMI, fees, and the total cost of the loan.

L

Loan Application

The Loan App refers to the formal application made by the borrower seeking a loan. The application will contain personal information, employment information, financial information, and identity information of the borrower.

Loan Agreement

A Loan Agreement refers to the legal document between the borrower and the lender that mentions the terms and conditions of the loan. It contains all the necessary information, such as the loan amount, interest rate, loan tenure, EMI, charges, and other details.

Late Payment Charges

Late Payment Charges are charges that can be levied if the borrower does not pay the EMI on time. They are mentioned in the loan agreement and might add up to the total interest rate. 

Loan Closure

Loan Closure is the process wherein the borrower completes the repayment of the total outstanding loan amount. Once the total loan amount has been paid off, the bank closes the loan account.

MMaturity Date

The Maturity Date is the last day on which the loan has to be repaid by the borrower according to the terms of the loan agreement. Once the debt is cleared on or before the maturity date, the account becomes nullified.

NNo Objection Certificate (NOC)

The No Objection Certificate (NOC) is a formal certificate provided to the borrower by the lender once the loan has been paid off by the borrower in full, along with interest and other charges. The NOC states that the lender does not object to closing the loan account and that there is no outstanding amount in the loan account. The borrower needs to preserve the NOC as it is proof of the loan being closed.

P

Personal Loan

A Personal Loan is an unsecured loan wherein the borrower can fulfil multiple personal requirements such as medical emergencies, education purposes, travel purposes, house renovations, marriages, or debt consolidation. It is a multi-purpose loan whose purpose is not limited to one objective. 

Paperless Loan

A Paperless Loan is a loan application process in which all application, processing, approval, and disbursement can take place via digital means without requiring any physical documents. The borrower can complete the entire loan process through electronic verification and digitised documentation.

Pre-Approved Loan

A pre-approved loan is a loan facility provided by the bank to eligible customers based on creditworthiness, repayment capacity, and existing relationship with the bank.

Prepayment

Prepayment means the partial or complete repayment of a loan within the agreed repayment period. Depending on the terms and conditions stipulated by the lender, a borrower can partially prepay the loan to lower the outstanding principal or repay the whole loan.

Prepayment Charges

Prepayment Charges refer to the cost charged by the lender when the borrower repays the loan before the completion of the loan period. 

Processing Fee

The Processing Fee is a charge levied by the lender once for the processing of a loan application. The fee covers the cost of assessing, verifying, and approving the loan application.

Principal Amount

The principal amount is the initial amount of money borrowed by the borrower, without any addition of interest, charges, or other fees. 

Q

Quotation (Loan Quote)

A loan quotation or loan quote refers to the estimated amount of the loan offered by the lender, which includes the amount of money, rate of interest, duration for repayment, EMI, and the fee applicable to the loan offered.

R

Repayment

Repayment refers to the process of repaying the borrowed loan amount, including interest and charges, according to the agreed-upon loan terms. Repayments of loans take place in the form of Equated Monthly Instalments (EMIs).

Repayment Schedule

The Repayment Schedule is a plan that describes how a borrower will repay a loan. 

Repayment Tenure

Repayment Tenure refers to the period within which a loan will be repaid in full.

S

Short-term Loan

A Short-term Loan is a type of loan that will be paid back within a comparatively shorter duration of time, and the period usually lasts from a few months to even one year, based on the policies of the lender and the type of loan being offered. Individuals take it to fulfil short-term monetary necessities like emergencies, unexpected expenses, or renovation expenses.

Secured Loan

A Secured Loan is a type of loan where the debtor is required to pledge some asset, including real estate, gold, or vehicles, as collateral for taking the loan. In the event of default on the loan, the creditor can recover the dues through the pledged asset. 

Sanction Letter

A sanction letter refers to an official letter from the lender once it approves a loan request made by a borrower. The main aspects of the loan, such as the approved amount, interest rate, repayment tenure, EMI, fees, and others, are outlined.

Sanctioned Loan Amount

The amount approved by the bank after evaluating the borrower's eligibility and capacity to repay the loan. 

Soft Inquiry

A Soft Inquiry is an inquiry into the credit report of the borrower that does not have an impact on his credit score. It takes place when a borrower wants to see their own credit report or when a lender conducts a preliminary evaluation of the borrower.

T

Tenure

Tenure means the period for which a loan runs from its disbursement till it is fully paid back. The borrower has the freedom to select a tenure for the loan depending on the repayment ability within the ambit of the lender’s requirements. The greater the tenure, the smaller the EMIs.

U

Unsecured Loan

It is a type of loan in which the borrower is not required to give any asset such as property, gold, or a vehicle as security for the loan. 

W

Waiver

Waiver refers to either partial or total elimination of any fee, charge, or penalty by the lender based on some specific situation. 

Frequently Asked Questions

1. Why should one know about the terms of a loan before applying for personal loans?

   One should be aware of the terms of the loan because it will help one in making wise choices while borrowing. It will also allow one to compare different types of loans and estimate the total cost of borrowing money. It will also make one familiar with the repayment terms and conditions of the loan.

   
   

2. Will learning about loan terms allow me to compare the loan options?

   Yes, knowledge of the typical loan terms will enable you to compare different loan options and decide on the most suitable option for your borrowing needs.

   
   

3. How can I learn about all the terms and conditions associated with my loan?

   All terms and conditions of the loan will be stated in the Loan Agreement and Key Fact Statement (KFS), which the lending institution provides before the loan proceeds. Borrowers are advised to study these documents carefully, as they contain all the details about the loan and other terms and conditions.

   
   

4. What will I do if I cannot understand some terms used in my loan agreement?

   If you encounter unfamiliar terms in the loan agreement, ask your lender before signing.