It's often seen that most people apply for personal loans, gold loans, home loans, credit cards, and other types of credit lines without fully understanding them. Before taking out any type of loan, it's important to thoroughly understand its agreement, key terms, and rules. Let's explore the meanings of 10 important loan-related terms that everyone should know.
This is the actual amount you borrow from the bank or loan company. Interest is charged on this amount, and this amount decreases as you pay installments.
This is the percentage charged on the borrowed amount. It can be fixed (which doesn't change) or floating (which changes according to market rates). The interest rate is the most important factor in choosing any loan.
EMI stands for Equated Monthly Installment. This is a fixed amount paid each month that includes both principal and interest. EMIs are structured to ensure smooth repayment over the entire loan term.
This is the time period over which you repay the loan. For longer tenures, EMIs are lower, but the interest payment is higher. For shorter tenures, EMIs are higher, but the interest payment is lower.
This represents the full annual cost of the loan. It includes interest as well as all other charges. Looking at the APR gives you an idea of the actual cost.
Prepayment means paying off the loan amount early. This reduces the interest burden. However, the bank or company may sometimes impose a penalty, so it's important to understand the terms in advance.
The fee charged by the bank during the loan approval process is called a processing fee. This fee is either deducted upfront or added to the loan amount. Before choosing a loan, it's important to compare the fees of different banks.
This means foreclosing the loan prematurely. For this, you have to pay the remaining principal as well as some foreclosure charges.
This is the asset that is pledged against the loan, such as property, gold, or a fixed deposit. If the loan is not repaid, the bank can sell that asset to recover its funds.
This indicates how much the bank is willing to lend relative to the value of your property. A lower LTV means less risk for the bank. This determines the interest rate and loan terms.
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