Personal Loan Terms Everyone Should Know

When researching personal loans, you’ll often run into lender jargon that can leave you wanting just to hit apply and hope for the best outcome. Ignorance is bliss, right? Not when it comes to making important financial decisions. 

Understanding the terminology in a loan application before you apply empowers you to get a personal loan at the best rate available, decide what kind of loan and lender are right for you, and grasp all the terms and conditions of a loan with ease.

Luckily, we’ve made it easy by compiling a glossary of all the essential terms you’ll need to know when shopping for a personal loan. We don’t expect you to memorize all of these, so feel free to bookmark this article for any time you need a loan vocabulary refresher.

Annual Percentage Rate (APR)

A loan’s APR is the amount of interest and other related fees you are required to pay to borrow money each year. In other words, the APR is the total annual cost for you to get a loan.


A cosigner for a loan is a secondary individual who signs a loan application along with the applicant. Adding their name to the application means that they are also adding their income and credit score for consideration, which (if both are positive) may increase the odds of a personal loan approval. By signing on the dotted line, this secondary individual agrees to become equally responsible for the repayment of the loan, even if the primary borrower defaults.


A person’s creditworthiness is a creditor’s assessment of an applicant’s ability to repay their debt in the future based on several factors. Check out our related article on understanding your credit score for more details. 

Debt Consolidation

Debt consolidation is a manner of debt refinancing that involves taking out a personal loan to pay off one or more debts. Typically this is done to simplify multiple monthly payments into one loan payment and save money by having a lower interest rate. 


Defaulting on a loan is when you fail to repay your loan according to the terms laid out in your loan agreement.


Accounts are considered delinquent upon failure to make the minimum monthly payment by the most recent due date followed by failure to take action once contacted by the creditor 30 days after the missed payment. If the account is delinquent more than 60 days, creditors will begin the process of turning the account over to third-party debt collectors. Delinquency can have a major negative impact on a borrower’s credit rating and score, with additional decreases the longer the payments remain outstanding. Additionally, fees and penalties may be charged by creditors for delinquencies. 

Fixed Interest Rates

When an interest rate is fixed, it means that the interest rate agreed upon at the time of approval will not change for a predetermined amount of time. Whether that amount of time is a portion of the loan term or its entirety depends on the terms and conditions of the particular loan.

Installment Loans

Installment loans are for a fixed amount of money that includes some sort of payment plan or schedule. Examples include auto loans, home loans, student loans, and personal loans.

Interest or Interest Rate 

The interest of a loan is what you pay to borrow that amount of money. An interest rate is a percentage of the loan amount itself and does not account for any additional charges or fees.

Origination Fees

Some lenders charge an origination fee for submitting their loan application and granting the loan. The fee is typically calculated as a percentage of the principal loan amount.

Prepayment Penalty

When you pay off all or a portion of your loan earlier than the scheduled term, some lenders may charge you a prepayment penalty: a fee that compensates the lender for the interest you didn’t pay because you made a smaller number of payments than expected.

Prime Rates

As the name suggests, the prime rate is the best (i.e., lowest) interest rate a lender can charge a borrower. Prime rates vary from lender to lender and are offered to applicants with excellent credit.


Principal is the total sum of money borrowed and does not include interest. As you pay off the loan, the principal will decrease.

Repayment Term

A repayment term is the length of time a borrower has to pay back their loan in full.

Secured Loans

Secured loans, such as auto loans and mortgages, are typically backed by collateral (e.g. your house, car, etc.). If you do not repay the loan per the terms of the lender agreement, your lender can collect your collateral as a form of payment.

Unsecured Loans

Unsecured loans, such as personal loans, are not backed by collateral.

Variable Interest Rates

Variable interest rates are subject to change during the loan term and are often tied to a lender’s prime rate. If your lender is offering you a variable interest rate, your loan agreement should note how this rate is calculated and the specific circumstances that will cause it to change.

Armed with this handy glossary, you can feel confident navigating the process of applying for and reviewing loan offers. Make sure you fully understand the terms of your loan before you sign anything, and don’t be afraid to shop around for options until you find the right loan for you.

At Credit Direct, we want to make sure you select the personal loan that will help you achieve your financial goals. Apply online to check offers in minutes with no effect to credit score. If you have questions at any time during the application process, our helpful loan agents are just a phone call away.

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