Applying for and availing of a loan is easier than ever, and there are multiple options to choose from. Whether it is for wedding expenses, travel expenses, medical emergencies, or buying an asset, different loan options like personal loans, gold loans, and loans against securities offer flexibility and convenience. However, the lending space is filled with complex jargon that can be confusing.

In this blog, let’s take a brief look at some commonly used loan terms to help simplify loan agreements and make them easier to understand.

Annual Percentage Rate (APR):

The APR is the annual total cost of a loan that includes both the interest rate and additional fees charged by the lender (if any). APR is different from the loan’s interest rate. APR gives a more comprehensive and accurate picture of the true cost of borrowing, making it an important factor for comparison across different loan options.

For instance, say you take a loan at an interest rate of 10% per annum. If there are no additional fees, the APR is also 10%. However, if the lender charges a processing fee of Rs.5,000, the total cost of borrowing increases, and the APR becomes slightly higher than 10%. This is why it is always better to compare loans based on APR to ensure you’re getting the best deal.

Processing Fee:

This is a one-time fee charged by lenders to cover the cost of processing a loan application. This fee is typically a percentage of the loan amount and is deducted from the loan disbursement. While this fee may seem small, it adds to the overall borrowing cost and should be factored into loan comparisons.

Credit Score:

The credit score is a three-digit number that represents your creditworthiness. Lenders use this number assigned by the credit rating agencies like CIBIL to assess your ability to repay a loan. This score is calculated based on numerous parameters like repayment history, credit utilization, and overall financial behavior. A higher credit score improves the chances of your loan application getting approved with favorable terms, including lower interest rates and higher borrowing limits. A strong credit score can:

• Increase your loan approval chances
• Help secure better interest rates
• Enable access to larger loan amounts

The minimum credit score required for loan application varies with the lender and the type of loan.

Debt-To-Income Ratio:

DTI ratio measures what portion of your monthly income goes toward paying off debt. Lenders use this ratio to evaluate whether you can handle additional borrowing and to determine your ability to repay new loans.

A lower DTI ratio means your finances are in better balance, making it easier to qualify for loans. For instance, if 15% of your monthly income goes toward debt payments, it shows that you manage your finances well. However, a higher DTI ratio indicates that a large portion of your earnings is tied up in debt, which may raise concerns for lenders.

While your DTI ratio doesn’t directly affect your credit score, it plays a significant role in loan approvals. Lenders prefer a DTI ratio below 36% since it suggests financial stability. If your ratio falls between 36% and 42%, you may face additional scrutiny, while anything above 50% could make borrowing difficult. Keeping your DTI ratio in check helps you maintain financial flexibility and improves your chances of securing a loan with better terms.

Prepayment and Foreclosure:

Prepayment and foreclosure refer to repaying a loan before the scheduled tenure ends. While they sound similar, there is a distinction:

• Prepayment: Paying off a part of the loan before the end of the tenure, reducing the principal and future interest burden.
• Foreclosure: Paying off the entire outstanding loan amount before the agreed tenure, closing the loan early.

Some lenders charge penalties for prepayment and foreclosure, so it’s important to check the lender’s terms before opting for early repayment.

Cosigner:

A cosigner is someone who agrees to take responsibility for repaying a loan if you, as a primary borrower, fail to do so. Having a cosigner with a strong credit score helps you qualify for a loan with better terms in case you have a low credit score or limited credit history. A cosigner can:

• Improve loan approval chances
• Help secure lower interest rates
• Increase the loan amount eligibility

However, the cosigner is equally responsible for repayment, and any missed payments can impact their credit score.

Bilateral or Syndicated Loan:

A bilateral loan is a simple agreement between a single borrower and a single lender, often used for personal or small business financing. In contrast, a syndicated loan involves multiple lenders pooling funds to provide a large loan to a single borrower, typically for corporate financing or large projects.

Bilateral loans are common for smaller financial needs where one lender can fulfill the borrowing requirement. Syndicated loans, however, are used when the loan amount is too substantial for a single lender to handle alone, such as in mergers, acquisitions, or large infrastructure projects. Understanding these distinctions helps you determine the complexity of loan agreements, interest structures, and repayment conditions. In a loan agreement, syndicated loans include terms outlining lender participation, repayment schedules, and risk-sharing, while bilateral loans have simpler terms focusing on borrower-lender obligations.

Understanding loan-related terms empowers borrowers to make informed decisions and avoid surprises. Whether comparing loan offers, planning repayments, or negotiating terms, clarity on these terms can significantly enhance your borrowing experience.

If you’re looking for a reliable personal loan option, HDB Financial Services offers personal loans with competitive interest rates, flexible repayment tenures, and hassle-free processing. With minimal documentation and quick disbursal, an HDB personal loan can help you meet your financial goals with ease.