Personal Loans Glossary and Terminology

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 loan glossary of frequently used words and terms you might see while researching, comparing lenders, reviewing loan offers, or preparing to apply for personal loans. 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 loan terminology. Then, you’ll have a better understanding of important financial terms, whether you’re considering borrowing options or simply working to improve your financial health.

Personal Loans Terminology

Amortization

Amortization is the process of paying down a 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 continues 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.

Annual Percentage Rate (APR)

APR stands for Annual Percentage Rate. APR is a combination of a loan’s interest rate plus lender fees, and it’s 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?

Borrower

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

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.

Credit Report

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

Credit Score

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. It can include bill payment history, outstanding debt, and the number of open credit card accounts. The higher the credit score, the more creditworthy lenders perceive the consumer to be. This means they believe that the consumer is more likely to repay their loan on time. On the other hand, a lower score may make it harder to get a loan.

Debt Consolidation

Debt consolidation is when borrowers combine balances from other credit accounts into one loan. Sometimes 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 could 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, debt-to-income ratio 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.

Default

Default is the failure to repay a loan as agreed. A loan is typically considered in default when several payments are missed or if a payment is over 90 days late. Defaulting can damage your credit score, affecting your financial health and ability to borrow again in the future.

Fixed Interest Rate

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

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.

Installment Loans

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

terest is the money lenders charge for borrowing money. It’s a percentage of the total amount borrowed. For example, if you get approved for a $15,000 Discover® personal loan at 11.99% APR for a term of 72 months, you'll pay just $293 per month.

Origination Fee

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

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.

Pre-approval

Pre-approval is an initial lender review that may estimate eligibility or terms but does not guarantee final approval

Prepayment Penalty

Sometimes a lender will charge a fee if a borrower pays off their loan before its final payment due date. That’s known as a prepayment penalty. 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

Principal means the amount of money being borrowed. It doesn’t include any interest, APR, or fees. For example, if you take out a personal loan for $18,000, that’s the principal.

Processing

Processing refers to the administrative handling of a loan application or a funded loan. This can include the collecting, verifying, and approval of loan documents.

Refinancing

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

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’s no set number of payments.

Secured Loan

A secured loan is a loan that 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.

Servicing

Servicing refers to the behind-the-scenes tasks of billing, payment collection, account management, and borrower support your lender does after your loan is funded.

Underwriting

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 the type of loan being applied for. With a personal loan, underwriting typically 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.

Recommended reading: What is Personal Loan Underwriting?

Unsecured Loan

An unsecured loan doesn’t require the borrower to provide collateral. Personal loans, credit cards, and student loans are unsecured loans. It’s important to understand that a personal loan typically isn’t a secured loan and therefore should not put your collateral at risk.

Variable Interest Rate

Sometimes called floating or adjustable rates, variable interest rates change along with what’s happening in the larger financial market. For example, if the Federal Reserve raises interest rates, a variable rate will also increase.

Now You're Ready to Get Started

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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