Personal Loan Terms and Definitions

A fee that is charged by the lender to the borrower to acquire the loan in addition to the interest rate.

Salary transfer is a requirement by many banks to qualify for a personal loan and the borrower must transfer their monthly salary to the bank from where the loan is taken.

A partial payment made at the time of purchase, with the balance to be paid later.

This is a scoring system that lenders issue people with to determine how credit worthy they are

If a borrower decides to clear the balance of his of her loan earlier than expected, in most cases, the finance provider will charge a penalty fee for doing so. Such fees are applied as a means for the lender to recoup a proportion of the interest that would have been charged over the agreed term of the loan.

Also called as fixed interest rate. This is a very simple method and hence is preferred by many. The percentage of the rate is calculated on the principal amount of the loan, and this is done for the entire time period for which the loan is taken. The interest figure along with the capital is then distributed over the entire repayment period to arrive at the amount of equated monthly installment (EMI). Though this method is very simple, its major drawback is that the impact of the repayment of the capital is not considered at all in the entire interest working.

Describes the maximum amount that a borrower can borrow from a financial institution for a specific program, i.e. Personal Finance or Vehicle Finance and so on.

The interest rate is charged only on the outstanding amount of a loan. In this case the interest rate is higher than the flat rate. Every month when the EMI results in a payment the capital portion is deducted from the total loan taken and then the remaining amount is charged an interest at the applicable rate. In this way, there is a gradual reduction of the capital and consequently of the base on which the entire interest working is done.

It is the payment of a debt or obligation and is usually referred to when a lender has a specific timeline to complete the payments which is in number of months or years dependant on the type of finance.

Interest is calculated on a reducing balance.  That means that the principal is reduced every year/month and interest is calculated on the outstanding balance at the end of the year/month

Arrangement fee is the cost of setting up a loan and is payable in advance.

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