Loan refers to the lending of money by either one or more individuals, organizations, entities to other individuals, organizations, firms and so on. The individual or entity who receives the loan is referred to as the borrower. On the other hand, the individual or firm which lends the money is referred to as lender. The borrower is liable to pay interest on the principal amount until the debt is repaid. The borrower has to pay the principal amount along with the interest amount to the lender.
A document which evidences the debt known as promissory note will specify other things including the principal amount of borrowed money, the interest rate at the time of borrowing, repayment date, easy monthly installments and so on.
Let’s understand each and every basic terms associated with loans in simple words.
Principal Amount: The term principal amount in financial terms refers to the original sum of money borrowed in a loan or it also refers to the amount which is put into an investment (read for savings).
The total amount of interest which an individual pays on a loan is purely based on the principal sum.As the amount of principal declines, the interest on the same will also decline gradually.
Interest Rate: It is the rate at which amount is charged, expressed as a percentage of principal by a lender (the person or individual who lends the money) to a borrower for the use of assets. Usually, interest rates are noted on an annual basis and are referred to as annual percentage rate (APR). The borrowed assets can be anything ranging from cash, building, vehicle, gold, consumer goods and so on.
Repayment Date: The repayment date refers to the date by which the borrower must repay the principal and the interest amount on the loan in total.
Grace Period: Grace Period refers to the provision during a loan contract which allows the payment to be received for a certain period of time after the actual due date. During the grace period, the lender will not charge any kind of late fees and in case of late payment, it does not lead to cancellation or default of the loan.
Equated Monthly Installments (EMI): The term Equated Monthly Installments refers to the fixed payment amount which the borrower has to pay the lender during a specified dated during each calendar month which is spread evenly over a period of time till the completion of repayment of the loan. The equated monthly instalments are popularly referred to as EMI.
The EMI period is used to pay off both the principal amount as well as interest amount. Under an EMI plan, borrowers are allowed to make one fixed payment on a monthly basis. In this case, the borrowers know well in advance as to how much money they will have to pay towards their loan on a monthly basis which helps them to manage their monthly budget. The borrower can pay anything over and above the fixed EMI amount during the tenure of the loan period every month.
Loan Agreement: The Loan Agreement is a written contract between the borrower and lender which sets out the rights and obligations of each party regarding as a specified loan.
Accrued Interest: The term Accrued Interest refers to the interest amount which accrues (accumulates) on a loan and is liable on the borrower for repayment to the lender.
Surety: The term Surety refers to the guarantee of the debts of one party by another individual or entity or firm or organization. The person or the firm who acts as surety will assume the responsibility of paying the debt which includes both the principal as well as the interest amount to the lender in case if the borrower fails to repay the debt on time due to financial hardships.
Default: Default is the failure to repay the borrowed loan amount as per the rules. This may lead the borrower to face the legal course of action from the lender and this will also impact the credit rating of the borrower.
Loan Fees: The term loan fees refers to the one – time fee which is charged as a part of administrative or processing fee at the time of sanctioning of the loan. It usually differs from one bank to another and mostly depends on the loan amount.
There are different types of loans currently available in the country, prominent among them are
• Personal Loan
• Home Loan
• Car Loan
• Education Loan
• Gold Loan
Personal Loan is also referred to as unsecured loan. It is a kind of loan which is issued and supported only on the basis of borrowers creditworthiness and hence it is also known as Signature loans. This kind of loan can be obtained without any type of collateral.
Home Loan is the loan given by a bank or a mortgage company or any of the financial institution for the purchase of a house or for construction of a house. In case of a home loan, the owner of the house (property) will transfer the title to the lender on the condition that the title will be transferred back to the owner after the repayment of loan amount which includes both principal amount and interest amount.
Interest rates for a home loan will have either a fixed interest rate or floating interest rates which has to be borne by the borrower in addition to the payment of the principal amount.
The term Car Loan is also known as auto title loan. It is a short term loan, under which the borrower’s car title is used as collateral by the lender (bank or financial institutions). The borrower should be the ultimate owner of the vehicle.