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Banking terms you should know when you apply for a loan

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Personal Loan Glossary: Banking Terms to Know

Do bankers speak a different language? It can definitely seem that way.

The financial world has its own language and before you take out a personal loan, it’s important you learn the basics of that language and banking terminology. The professional lenders at Regional Finance® believe having a good understanding of banking terminology can help you make smarter borrowing decisions and make the process of getting a loan less stressful. Here’s a quick overview of the key financial terms you’ll hear and should understand when you apply for a personal loan.

Gross Income vs. Net Income:

Collateral:

Collateral is something of value that you own that you use to secure a loan with an agreement that you will forfeit the item if you fail to repay the loan. Common collateral types include TV/music systems, real estate, or vehicles. If you do not repay your loan, the lending company has the right to take your collateral.

Secured Loan vs. Unsecured Loan:

Debt to Income Ratio / Debt Ratio:

Debt ratio, also called debt-to-income ratio, is a way of comparing the debts you must pay with how much money you make.

How To Figure Your Debt Ratio:

  1. To calculate your debt-to-income ratio, add up your total monthly debts and payments including mortgage or rent, car payments, credit card payments, personal loan payments, and child support.
  2. Next calculate your total monthly income, including your salary plus any bonuses and other income you receive, like alimony and child support.
  3. Lastly, divide the sum of your total monthly debts and payment by your total monthly income to get your debt ratio, which will be a percentage.

Installment Loans:

When you take out a personal installment loan, you get a check for the loan amount minus any prepaid fees. Then you pay the loan amount back [plus interest] in regular payments (usually monthly payments) for the agreed-upon term (number of months or years) of the installment loan.

If your personal loan has a fixed interest rate meaning that the loan interest rate does not change over the life of the loan, your installment loan payments will be the same every month.

Co-Signer:

A co-signer is a person who signs your loan application along with you. The co-signer can help you qualify for the loan and agrees to be responsible for paying off the loan amount if you are unable to do so. A good co-signer is someone with good credit and a steady income.

Some lenders require that the co-signer be a U.S. resident with a permanent address in the U.S.

APR:

Annual percentage rate (APR) is the yearly cost of a loan including interest and fees. The fees will vary depending on the type of loan you’re applying for, but can include:

Payoff Amount vs. Total Payment:

For personal loans, the payoff amount is the balance owed at any point in time in order to fully repay the loan. This amount changes frequently due to accruing interest. Most lending and personal loan companies require you to contact them directly to obtain a payoff amount.

The total payment is the total amount you must pay over the term of the loan including the money borrowed, interest, and fees. The payoff amount may be less than the total payment, depending on when you pay off the loan and the interest rate of the loan.

With these basic banking terms understood, you have become well-versed in the personal loan process and more prepared the next time you decide to apply for a loan. Of course, if you have any additional questions about personal loans, Regional Finance is here to help. Contact us today or find a branch location nearest you.

The information and materials provided on this website are intended for informational purposes only, and should not be treated as an offer or solicitation of credit or any other product or service of Regional Finance or any other company. This website may contain links to websites controlled or offered by third parties. We have not reviewed all of the third party sites linked to this website and are not responsible for the content, products, privacy policy, security, or practices of any linked third party website. The inclusion of any third party link does not imply any endorsement by Regional Finance of the linked third party, its website, or its product or services. Use of any third party website is at your own risk

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