Are you shopping for a loan or credit card? There are some basic financial terms that you should know.
Only 39% of consumers know what the APR is on their credit cards. That lack of knowledge means that they could be paying an arm and a leg on their balance.
The more you know about interest charges and other basic loan terminology, the more money you can save. Are you ready to go to school and update your loan vocabulary?
Let’s get started!
Loan Vocabulary Words
When you apply for a loan, you need to understand the terms. These are the top terms that you need to know.
Amortized Loan: This is also called an installment loan. The interest and principal amounts are calculated over the life of the loan. This is then divided into equal monthly amounts that you’ll pay. This is common to see with loans from Quickloans like personal loans and auto loans.
APR: This is the annual percentage rate or the interest charges that accumulate in a year. The higher the APR, the more you’ll have to pay in interest.
Interest Rate: The interest rate is similar to the APR. The difference is that the interest rate is on the principle of the loan. The APR may include other costs like origination fees.
Fixed-Rate: A fixed-rate loan is one where you pay the same interest rate throughout the life of the loan, no matter what interest rates are. This is the type of loan you want to get when interest rates are low to lock in that rate for years to come.
Adjustable-Rate: With an adjustable-rate loan, the interest rate that you pay will go up or down with interest rates set by the Federal Reserve. These loans can have a fixed-rate for the first few months or years then the interest rate is reset, making your payments higher or lower.
Loan Terms: This is how long it will take to pay the loan in full with interest and fees. Terms can range from 30 days to 7 years and beyond. Mortgages have 30-year terms.
Additional Fee Terms
You have to read your loan contract very carefully. There are often fees associated with the loan that a lender may forget to tell you about. You don’t want to have to pay more for the loan if you don’t have to.
Prepayment Penalties: Let’s say you get a raise and decide to pay your loan off early. That means less interest you’ll pay to the banks. They make less money, so they’ll charge a prepayment penalty to try to recover those costs.
Origination Fees: These are also called administrative fees. This can be a flat dollar amount or a percentage of the loan.
Understanding Interest Charges and Loan Terminology
A loan can be a great tool to leverage. You can improve your financial position and make a big purchase like a car or a home.
You have to understand the basic vocabulary of loans like interest charges. That will prevent you from getting ripped off or paying more than you should.
If you’re ready for more financial advice, head over to the education section of this site to learn more about managing your finances.