Jun 10, 2025
Maybe you already know that a personal loan can be used to consolidate debt or pay for life’s big events. But have you ever wondered what “APR” stands for? Do you know the difference between a secured loan and an unsecured loan?
If you feel confused by financial terminology, you’re not alone. Loan agreements and the words they use aren’t things most people talk about every day.
That’s why we created this personal loans glossary of frequently-used words and terms you might run into as you compare lenders and loan agreements. For more in-depth information on some of the key lending terminology, look for recommended reading callouts.
Use this guide to get familiar with basic personal loans terminology. Then, as you consider your borrowing options, you’ll be able to better understand your choices better and apply for the loan that’s best for you.
Amortization is the process of paying down your loan balance over time in equal monthly payments. Typically, a larger chunk of payments made early in the life of the loan will go toward interest. As the borrower to pay down the loan, less interest is charged, and the amount of each payment that goes toward the principal increases. Toward the end of an amortized loan, most of the payment is principal while only a small amount of interest is charged.
APR stands for Annual Percentage Rate. APR is a combination of a loan’s interest rate plus lender fees, and it is shown as a percentage of the total loan amount. APR is the percentage of interest and fees a borrower can expect to pay in a single year.
Recommended reaading: What's the Difference Between APR and Interest Rate?
A borrower is a person or entity (like a company) that receives money from a lender. Also called a primary borrower, they’re responsible for paying back the debt or credit received from a lender.
Collateral is an asset that secures a loan. For a mortgage, the house is the collateral. For an auto loan, the car serves as the collateral. If a borrower defaults on a loan, the lender can claim the collateral to offset the cost of the defaulted loan.
A credit report contains information about a consumer’s credit history. It includes a record of on-time payments and the status of all credit accounts, including every loan and credit card the consumer currently has or had in the past. The three main credit reporting agencies are Equifax, Experian, and TransUnion.
Recommended reading: How to Read a Credit Report and What it Means
A credit score is part of a credit report. It’s a number from 300 to 850 assigned to a consumer based on their credit history, which can include bill payment history, outstanding debt, and the number of open credit card accounts. The higher your credit score, the more creditworthy lenders perceive the consumerto be (that is, they believe that the consumer is more likely to repay your loan on time). On the other hand, a lower score may make it harder to get a loan.
Debt consolidation is when borrowers combine balances from other credit accounts into one loan. In some cases, it makes sense for borrowers to bundle higher-interest debt owed to multiple creditors into one loan with a lower rate or a different repayment term. Debt consolidation can be a great way to save money on interest and simplify finances.
Learn more about debt consolidation.
Debt-to-income ratio, also known as DTI, is the percentage of a borrower’s monthly total income that goes toward paying their debts. Lenders calculate this percentage to determine if a borrower will be able to keep up with payments on any new debts. The lower the DTI, the more likely a borrower will be able to get approved for loans.
An interest rate is the percentage a borrower will pay each year to borrow money. As its name suggests, a fixed interest rate stays the same over the life of the loan. The monthly payment will also stay the same. The rate won’t change even if interest rates rise or fall. Personal loans typically come with fixed interest rates.
Gross income is the total amount earned before any taxes or deductions are taken out. It includes wages, profits, and any other type of earnings.
An installment loan is any loan that is paid back with a regular monthly amount. Examples include a mortgage, a car loan, and a personal loan.
Interest is the money lenders charge for borrowing money. It is a percentage of the total amount borrowed. For example, if you get approved for an $18,000 Discover® personal loan at 12.99% APR for a term of 72 months, you'll pay just $361 per month.
An origination fee is a charge for setting up a loan. It compensates the lender for the time they spend processing the loan. Not all lenders charge origination and other fees. For example, with Discover Personal Loans, there are no fees at all.
Payment term (also known as repayment term) refers to how long a borrower has to pay off a loan. The length of the payment term could affect the amount of interest they pay over the life of the loan and the monthly payment amount.
For example, if you pay off a loan as quickly as possible, you could lower your total interest paid. But that would increase your monthly payment. A longer repayment period could mean lower monthly payments, but more interest paid in total.
Sometimes a lender will charge a fee if a borrower pays off their loan before its final payment due date. Not all lenders charge prepayment penalties. Discover Personal Loans does not charge a prepayment penalty. In fact, with Discover Personal Loans, there are no fees of any kind. Be sure to review your loan agreement to see if one applies. Prepayment penalties and other lender fees can increase the total cost of borrowing.
Principal means the amount of money being borrowed. It does not include any interest, APR, or fees. For example, if you take out a personal loan for $18,000, that is the principal.
Refinancing means applying for a new loan to pay off an existing loan. If you've improved your financial standing and have a good repayment history, you may have the opportunity to refinance with the same lender or a different bank. A new loan could result in lower payments, lower interest rates, or a shorter term, depending on your situation and the interest rate you qualify for.
Recommended reading: Can You Refinance a Personal Loan?
Revolving credit lets you borrow up to your credit limit. As you pay down your balance, you can borrow up to that limit again. The most common example of revolving credit is a credit card. Because the amount you owe and your interest rate can vary, monthly payments can change, and there is no set number of payments.
A secured loan requires the borrower to put up collateral, such as a house or a car. If the borrower defaults on the loan, the lender can generally take possession of that collateral.
Underwriting is the process a lender uses to decide if the risk of offering a loan to a borrower is acceptable. The underwriting process can differ depending on what type of loan being applying for. With a personal loan, underwriting involves reviewing a borrower’s credit history and considering the risk of nonpayment. Underwriting for a mortgage is more involved: It includes an appraisal of the property and a review of the borrower’s personal finances, among other steps.
Recommended reading: Personal Loan Underwriting
An unsecured loan does not require the borrower to provide collateral. Personal loans, credit cards, and student loans are unsecured loans. This is an important distinction to understand: Personal loans are typically not secured and therefore should not put your collateral at risk.
Read What’s the Difference Between Secured and Unsecured Loans? to learn more.
Sometimes called floating or adjustable rates, variable interest rates change along with what’s happening in the larger financial market. If the Federal Reserve raises interest rates, for example, a variable rate will also increase.
With this glossary of personal loans terminology, you should be better equipped to evaluate which loan is right for you. When you’re ready to move forward with a personal loan, we can help you prepare.
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