1.Collateral

Collateral is an asset you offer to secure a loan, like a home or a car. It serves as a form of insurance for the lender. If you fail to repay, the lender can seize the collateral to recover the loan amount. This arrangement is common with secured loans, such as home loans or auto loans. It basically provides lenders with a sense of security, often leading to lower interest rates compared to unsecured loans.

2.Credit Score

Your credit score is a three-digit number, typically ranging from 300 to 900 in India, that reflects your creditworthiness. This score is based on your credit history, including payment patterns and the amount of debt you carry. A higher credit score generally means better loan terms, including lower interest rates, as it indicates lower risk to the lender. Most banks in India consider a score above 750 as ideal for personal and home loans.

3.Co-applicant

A co-applicant is someone who shares the responsibility of repaying a loan with the primary borrower. This arrangement is often used in larger loans, like home loans, where adding a co-applicant, such as a spouse or family member, can increase your loan eligibility. It not only spreads the repayment responsibility but can also improve your chances of getting approved and securing better loan terms, as lenders view it as additional security.

4.Interest Rate

The interest rate on a loan is the percentage of the principal amount charged by the lender for borrowing money. It can be fixed (remaining the same throughout the loan tenure) or floating (changing based on market conditions). In India, rates vary depending on the loan type and borrower’s profile.

5.Equated Monthly Instalment (EMI)

An EMI is the fixed monthly payment that you make to repay the loan. It includes both interest and principal portions, allowing you to pay off the loan gradually. EMIs make repayment predictable, as you know exactly how much to pay each month, which helps in budgeting. The EMI amount depends on the loan principal, interest rate and tenure.

6.Amortisation

Amortisation is the process by which a loan is gradually paid off through EMIs. In the initial phase, a larger portion of the EMI goes towards interest, with the principal portion increasing over time. This structure, known as the amortisation schedule, helps you understand how the loan balance reduces over the years.

7.Debt-to-Income Ratio (DTI)

The DTI ratio compares your total monthly debt payments to your monthly income, reflecting your ability to manage debt repayments. A lower DTI suggests that you have a balanced debt level relative to your income, making you more likely to be approved for a loan. In India, a DTI below 40% is generally considered favourable by lenders.

8.Mortgage

A mortgage is a loan specifically used to purchase property, with the property itself serving as collateral. In case of default, the lender has the right to take possession of the property through a process called foreclosure. Mortgages typically have longer repayment periods and lower interest rates compared to other loan types due to the security provided by the property.

9.Refinancing

Refinancing involves replacing an existing loan with a new one, typically to benefit from a lower interest rate or better terms. In India, home loan refinancing is common as it helps reduce monthly EMIs or shorten the loan tenure when market interest rates drop.

10.Top-ups

Top-ups are additional amounts you can borrow on an existing loan. They’re popular with home loans, where the borrower may need extra funds for purposes like renovation. Top-up loans usually carry similar interest rates as the original loan and are beneficial since they avoid the need for a separate loan application process.

11.Prepayment

Prepayment allows you to pay off a part or the entire loan amount before the end of the loan tenure. This can save on interest costs, although some lenders charge a fee for early repayment. Prepayment is a useful option if you have extra funds and want to reduce your debt burden quickly.

12.Grace Period

A grace period is an initial phase during which you are not required to make loan repayments. This period is common with student loans, allowing borrowers time to find a job post-graduation before repayment begins. However, interest often accrues during this time.

13.Moratorium

A moratorium provides a temporary suspension of loan repayments, typically during challenging times like a pandemic or natural disaster. Although repayments are paused, interest may still accumulate, extending the overall loan tenure.

14.Delinquent

A loan becomes delinquent when the borrower misses payments. Continued delinquency can damage your credit score and may lead to default if payments are not resumed. Delinquency often serves as an early warning sign for lenders regarding the borrower’s financial difficulties.

15.Loan Agreement

The loan agreement is a formal contract that outlines the terms and conditions of a loan, including interest rates, repayment schedule and penalties. It serves as a legally binding document that must be signed by both the borrower and lender, ensuring mutual understanding and compliance with the loan’s terms.