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5 Terms Every Borrower Should Know

Loans, Personal economy

If you’re planning on getting a loan, then it’s important that you know the terminology that comes with the deal. This way, you’re more prepared for what’s to come, and you look more professional and experienced to the lender. To educate yourself on the terminology, here are 5 terms every borrower should know.

1. Down Payment

A Down Payment is a term that’s used for the initial payment that the borrower makes when buying something that’s usually expensive (e.g. a house). It’s generally a percentage of the full price, and shows that the borrower is worthy of receiving the loan and minimizes some of the risk associated with expensive transactions.

Generally, the borrower will make a down payment and then pay the rest of the cost over a period of time. This lets your Average Joe purchase things that’re quite expensive, since he doesn’t have to pay the full price upfront.

2. Refinance

Refinancing is when the borrower changes the way he repays the loan or credit.  For example, the borrower and the lender settle on the loans details, including interest rates, payments dates and payment amounts. Sometimes, the buyer will want to revise the way that the payments occurs after the loan details have been established. When this happens, the loan has been refinanced.

3. Loan

A loan is when the lender gives the borrower a sum of money, so that the lender benefits in the long-run in the form of repayment of the initial loan plus other charges such as interest rates.

A successful loan benefits both the lender and the borrower in two ways: not only can the borrower purchase things that he potentially didn’t have the money for, but the lender receives more money than he initially had before the loan took place.

4. Interest Rate

An interest rate is the rate which is charged to the borrower for receiving a loan. In exchange for the borrower receiving the loan, they agree to pay the sum plus an additional percentage of the loan to the lender over a period of time. The interest rate is a percentage that is dependent on the loan details. There are a number of factors that influence the interest rate of the particular loan, such as the credit score of the buyer, the type of loan that’s being given, and the state of the economy.

5. Debt

Debt is the amount of money borrowed by the borrower to the lender. There are many different types of debt, the 2 most common ones being loans (including mortgages and car loans), and credit card debt.

Even though debt may seem like a liability at face value, it can come in both good and bad forms. Good debt can be used to purchase assets, which will help you to increase your income in the long run (things like real estate, investing and education). Bad debt comes in the form of liabilities that   take money out of your pocket.

Getting a loan can be a risky move if you’re not aware of what you’re doing. Learning the correct terminology is part of the process of educating yourself on being a borrower, so you’re more prepared of what’s to come.

 

 

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