If you are going to apply for a consumer loan for the first time, there is a lot to understand. Of course, you have to decide how much you need to borrow and how much you can pay down on the loan each month. In such a process you will most likely come across new words and expressions that you have not been so much into before. In this blog post, we have therefore gathered some words and phrases that come up in connection with taking out a consumer loan, so that you should have the best possible overview when you decide to apply.
1. Loans without collateral vs. Loan with collateral
A consumer loan is usually a loan without collateral. This means a loan where you do not have to pledge mortgage for example housing or movable property. The fact that the loan is not secured is also the reason why the interest rate on consumer loans is higher than on other loans. In the case of a loan without collateral, the issuer of the loan must compensate for the risk of issuing a loan without collateral by demanding a higher interest rate. In contrast, a secured loan, such as a mortgage. Here, the bank will pledge the home you are buying so that the risk is reduced and they can offer you a lower interest rate.
A co-borrower is a borrower who is jointly and severally liable together with the principal borrower for the loan being serviced according to the repayment plan. For example, the partner may be a parent, cohabitant, spouse or friend. Read more about the co-borrower here.
3. Credit rating
Once you have applied for a consumer loan, we will take a credit assessment of you. A credit rating is required to verify that you are creditworthy and meet our consumer loan requirements. It is important for us and for you that your personal finances should be able to handle the debt burden the borrowing entails. We obtain credit information from Sweet Hardship.
4. Annuity loans
A consumer loan is often an annuity loan. This means that you pay down the loan with the same installment amount, until the loan is repaid. At the beginning of an annuity loan, the installment portion is small, while the interest portion is large. Gradually, the installment portion will rise and the interest portion will decrease. The sum of interest, fees and installments is the same each month.
5. Nominal interest rate
The nominal interest rate is the interest rate you receive from the bank, which appears on the loan document.
6. Effective interest rate
Effective interest rates are nominal interest rates + establishment costs + forward costs. Effective interest rate is affected by how often you pay on the loan and shows the current price of the loan.
7. Forward amount
The installment amount is what you pay on the loan each month through the repayment period. The installment amount includes interest, installments, termination fees and any loan insurance.
8. Interest-free month
If you need to pay a little less on your consumer loan during the period for which you have been granted a deduction, you will be able to pay off your monthly installments or installment exemptions. Astro Finance offers deduction for its customers up to twice a year.
We hope that, by reading this blog post, you will have a better understanding of some of the common words and phrases in consumer loans. Hopefully this will help in the search process.