Essential Loan Terms You Must Know Before Borrowing

Understanding loan terms is essential for better loan management. In this video, we’ll walk you through some key terms related to loans. We’ll begin with the loan amount, which refers to the money you borrow from a lender. The loan tenure, on the other hand, is the period between loan disbursal and the final EMI payment. The interest rate is the percentage charged by your lender for borrowing the loan amount.

Collateral is an asset pledged for secured loans. In case of non-payment, this collateral may be seized by the lender. We’ll also cover co-borrowers and co-signers, both of whom share responsibility for the loan but in different ways.

You might also encounter terms like grace periods, processing fees, and pre-payment options, all of which could affect your loan. Loan amortisation refers to a repayment schedule, while loan deferment might help if you face financial difficulties.

Finally, we'll explain credit appraisal, hard and soft inquiries, and FOIR, which lenders use to assess your loan eligibility.

Familiarising yourself with these loan terms could provide clarity and make the borrowing process smoother.

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Key Takeaways

Know your loan terms before borrowing to better understand and manage your financial commitments

The loan amount is the borrowed sum, with different loan types having varying maximum limits

Loan tenure refers to the period between loan disbursement and final EMI payment

The interest rate is the cost lenders charge for borrowing money

Loan disbursal happens when the approved loan amount is credited to your account

Collateral is an asset offered as security, subject to seizure if the loan is not repaid

A co-borrower shares ownership and liability, impacting loan eligibility through credit and income

A co-signer might take legal responsibility for loan repayment if the borrower defaults

Grace periods could provide temporary relief from loan payments, often seen in student loans

Processing fees cover administrative charges incurred during the loan application process

Loan-to-value ratio determines the maximum loan based on the collateral's market value in secured loans

Loan amortisation involves a repayment schedule with fixed amounts for principal and interest in each instalment

Frequently Asked Questions
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The loan-to-value ratio determines the maximum loan amount you could secure based on your collateral's market value. It might ensure a secured lending process by setting limits that reflect the collateral's worth. This could protect both you and your lender.
Pre-payment allows you to repay your loan before its tenure ends. This could help reduce the overall loan amount by saving on interest charges. This might offer you financial relief and faster debt clearance if you have extra funds to contribute earlier.
A co-borrower shares both ownership and liability in the loan. This means that as a co-borrower your credit and income are considered. A co-signer, on the other hand, might not share ownership but assumes legal responsibility for repayment. This is if the primary borrower fails to pay.
Loan deferment offers a grace period in which payments are temporarily paused due to specific circumstances, like financial hardship. Lenders might offer deferment after reviewing your documentation of the crisis. This could help ease repayment pressure during challenging times.
The Fixed Obligation to Income Ratio (FOIR) calculates how much disposable income you have after covering monthly fixed expenses. Lenders might use this ratio to assess your ability to repay the loan, ensuring that your financial obligations are manageable.
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