Understanding your loan: A dozen terms you should know

The following are some basic terms you may hear when considering a loan. Understanding these will help you understand your loan better.

  1. Term – A loan’s term is a specified repayment schedule. An example of a loan term is a 5-year auto loan, where the term, or repayment schedule, is 60 months.

  2. Principal – In the context of loans, the principal is the amount of money you borrow from a lender. Principal plus interest and fees equals the total cost of the loan.

  3. Interest – Interest is what lenders charge borrowers for the loan. It is the cost of borrowing the principal, and is usually expressed as an annual percentage rate. There are two basic kinds of interest rate: Variable and Fixed.

    • Variable (or adjustable) rate – A variable rate loan, sometimes called an adjustable rate loan, is one where the rate can change (vary) over the term of the loan. Credit cards are an example of a variable rate loan. This is also called a floating rate loan.

    • Fixed rate – A fixed rate loan is one where the interest rate does not change (vary) over the term of the loan.

  4. Annual Percentage Rate – The Annual Percentage Rate, or APR, refers to the annual rate of interest charged to borrowers plus any additional costs or fees. The APR is typically higher than a loan’s stated interest rate, which does not include the additional costs or fees.

  5. Security – In the context of a loan, security is an item of value like a car or home, which is pledged as a guarantee of repayment of the loan. A good example of security is an auto loan in which the auto being purchased is also the security for the loan. The lender retains the title to the auto until the borrower has paid the loan in full.

  6. Pre-payment penalty – A prepayment penalty is a fee that some lenders charge if you pay off all or part of your loan early. Oregon State Credit Union does not charge prepayment penalties on consumer loans.

  7. Late fee – The late fee is a charge borrowers pay when they fail to make a scheduled payment by the due date. Many lenders offer a grace period.

  8. Grace period – A grace period is a set length of time after the date a loan payment is due. Payment can be made without penalty during the grace period.

  9. Loan fees – Any fee that a borrower pays for borrowing money is called a loan fee. Loan fees do not include money paid as interest on the loan. Examples include closing costs, annual fees and late fees.

  10. Closing costs – Closing costs are fees and expenses you pay when you close on a home or real estate loan.

  11. Mortgage points – Also known as discount points or simply points, these are paid to the lender in exchange for a lower interest rate on your mortgage.

  12. Title insurance – Title insurance protects the insured from a financial loss if a title defect is discovered after closing on a property. There are two policies: lender’s title insurance, which is purchased by the buyer, and owner’s title insurance, which is purchased by the seller. Both are a one-time, upfront cost that varies based on the price and location of the home or property being purchased.

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