Loan Jargon Explained

Picking the right loan can be a tricky minefield to navigate, but when you throw in all the financial jargon it can be like you are choosing a loan in another language, the applications may as well be written in Dalek for all the sense the applications can make at times.

If you feel exasperated by the financial jargon surrounding your loan application, take a quick look at our easy explanations on some of the most used loan jargon.

Loan Jargon 

Representative Example: Before you get a loan quote, you may see a 'representative example' of what the loan is likely to cost. Lenders only have to commit to give 51% of applicants this representative example. Your personal circumstances will dictate what a lender will offer you, which may not be the advertised representative example.

APR: this stands for 'Annual Percentage Rate' and is the amount of interest you pay on your over the course of a year. So if the APR is 4.1% you would pay 4.1% interest of the loan owing split across a 12 month period.

Credit rating/Credit Score: This is the numerical score given to you to rate your riskiness as a borrower. Your individual credit score will be calculated by the lender once you apply for a loan, and will take into consideration your past and current financial situation , your reason for wanting the loan and the lender's own requirements.

ERC  (Early Repayment Charge): This is the fee that some creditors apply to loans if you want to over pay on your monthly repayment plan to try and pay your loan off early. Not all lenders apply this fee and it will be in your loan's terms and conditions that you should always read through before signing.

Compare Loans

Repayment Period: This is the time in which it will take you to pay back your loan to the lender.  The longer the repayment period usually the cheaper the monthly installments are.

Interest: this is the amount you are charged by the lender on top of the loan for the use of the lender's money. It is often calculated at an annual rate but split monthly across the term of the loan.

Fixed Interest Rate: this is an interest rate that doesn't change with your lenders' interest rate changes. It allows you to lock in a certain rate for a specific amount of time which gives you fixed (unchanged) monthly repayments.

Variable Rate: This is an interest rate which can change, it can be tracked either against the Bank of England base rate or your lenders standard variable rate (SVR). Your monthly payments may differ if and when interest rates change.

Split Loan: this is when the interest applied to your own is set part at a fixed rate and part at a variable rate; (for fixed and variable definitions see above).

Interest Only: This is where for a set period of time you only pay off the accumulated interest on the loan amount and not the actual loan. The actual loan will eventually need to be paid off, but this type of loan repayment scheme keeps loan repayments down whilst you sort out your finances.

Compare Loans

Total Credit Cost: This is the total sum of the interest that needs to be paid over the course of your loan term, (the amount on top of the loan amount).

Total Amount Payable: this is the full amount needing to be paid back at the end of the loan term including the accrued interest.

CCJ: This stands for County Court Judgment. This will happen once a debtor has failed to pay the amount owed to the lender. CCJs are issued at the county court and are a way in which a creditor can claim back monies owing.

Debt consolidation Loan: this is a loan amount that you will take out to pay off all your outstanding loans from different creditors and place them under one creditor and one monthly repayment. This can be done to decrease monthly loan amounts by making them all 'under one roof' for a better interest rate.

Car Loan/Car Finance: A loan amount that you are given to finance the buying of a car only.

Hire Purchase: Many garages and other lenders offer hire purchase instead of personal loans which means that you don't officially own the car until the last payment has been made.

Unsecured Loan: Often these loans are for between £500 and £25,000 and can also be referred to as a personal loan. If you are looking at the lower end of the scale a credit card which gives you 0% interest might be a better. This loan can be used for almost thing legal from debt consolidation to financing a holiday. Since the debt is unsecured often lenders will want you to have a good credit history as they are more risky for the provider as there is no collateral the lender can call on if you don't meet the monthly repayments.

Compare Loans

Payday loan: these loans are usually for a relatively small amount. They are leant with very high interest rates on the premise that the borrower will pay the loan amount back when they next get paid.

Secured Loan: Often these loans are taken out for a relatively large amount, often from £25,000 - £100,000. The amount will be secured against your property making it less risky for the lender but more risky for the borrower because if you default on your loan repayments your home will be at risk for repossession. If you decided to take out a homeowner loan make sure you have a solid repayment plan which you can meet to minimize the risk to your home.

Collateral: Needed for secured loans, it is the property more often than not your home that you pledge as security for repayment of the loan. If you do secure your home against a loan, ensure to have a solid repayment plan in place or you may be a risk of losing your home.

Credit Limit Increase: Increasing the amount of money in your home loan.

Equity: This is the difference in what you owe (usually on a mortgage or homeowner loan) on your home and the value of your home. So if you owe £50,000 and your home is valued at £150,000 your equity in this case would be £100,000.

Compare Loans

The above post is intended to be informative but does not constitute advice - financial, legal or otherwise. Any opinions given are the author's own and do not necessarily reflect the views of SO Media or the Mitchell Farrar Group.

More Loan Guides