When first examining financing options for a new credit card or car loan, the terms that you’re presented with can be overwhelming at first. Never fear, though, because loan vocabulary is pretty easy to understand when broken down. In order to help out with this beginning confusion, we have compiled a list of important terms to know, and ways to think about them easily.
A loan is when you ask a financial institution for a set amount of money. The institution agrees to give you that money, you agree to pay it back, and you agree to also pay an extra fee (called interest) every month that you have the loan.
This is an Annual Percentage Rate, or simply, the percent of interest you pay on your loan each year. When you hear APR, think interest rate. A lower APR means that you pay less total interest on your loan.
To refinance is to simply replace a current loan with a different loan. People do this to pay lower interest rates when another financial institution offers a promotion, or to pay a lower monthly payment on the money borrowed. Most of the time, refinancing can be done cheap and easily. A smart borrower is constantly on the lookout for a chance to refinance in a way that benefits them.
A credit score is a numerical score that’s assigned to you based on your credit history. Specifically, it allows financial institutions to get a good idea about how you’ve paid back your loans, credit cards, and anything related to how valuable of a borrower you are! Making payments on time is essential to a high credit score, and a high credit score gives you the best chance of getting any loan you’ll need.
A lien is integral to loan institutions. It’s the legal term for a loaner’s right to a borrower’s property if the borrower cannot make their payments. For example, if a financial institution loans you $13,000 to purchase a car, it would have you agree to legally give a lien on your car. That way, if you stop making your loan payments, the financial institution has the legal right to your car. Although this sounds like a nightmare, it’s extremely easy to avoid by making smart financial decisions and planning well for the future.
A delinquent loan occurs when the borrower is overdue in their payments, to the point where the financial institution is watching closely. Delinquency on a loan is awful for your credit score and lowers any institution’s willingness to grant you a loan in the future, so avoid it at all costs! Once again, simply making a rational plan to pay back your loans can easily prevent this.
To learn more about financial terms, visit our glossary section on the Financial 4.0 website and mobile app.