6 key terms to know before you apply for a personal loan

When you apply for a loan, you are supposed to follow a long-drawn process that kicks off with background research and culminates into disbursal of money directly to your bank account. Everything else falls within this spectrum.

Some applicants tend to get overwhelmed with the information available on public platforms. Meanwhile, one should at least be aware of the few key terms at the time of applying for a personal loan. Although it will not change the outcome of your loan application, it will surely prepare you well before you sign the dotted line.

6 key terms

I. Credit score: When you apply for a loan, lenders invariably check your creditworthiness. This shows whether you have the ability to repay the loan on time. This is indicated by a three-digit number between 300-900. It is calculated by credit information companies such as CRIF High Mark based on your credit data.

II. Prepayment or foreclosure: When you borrow a loan, there could be some scenario wherein you intend to clear your dues before the final due date. This process of clearing the loan beforehand is referred to as prepayment or foreclosure. This could involve some charges.

III. Fixed rate of interest: Interest rate is charged either at a fixed rate of interest or at variable rate. Variable interest means the rate of interest changes during the loan tenure. For instance, when the economy goes through a low-interest rate cycle, the rates could decline.

Conversely, they rise when the economy goes through a high-interest rate cycle. However, personal loans typically carry a fixed rate of interest which means it does not change during the tenure of loan.

IV. Processing fee: Lenders tend to charge a fee for processing the loan which is known as processing fee. Banks typically disburse the loan after deducting the processing fee from the loan applicant. For instance, when the loan amount is ₹5 lakh and processing fee is ₹5,000 then the borrower will receive ₹5 lakh (-) ₹5K = ₹4.95 lakh.

V. Auto debit: It is common practice to allow banks to deduct a particular amount every month from the bank account in the form of EMI (equated monthly instalment). This provision of deducting EMI by the lender from the borrower’s bank account is known as auto debit.

VI. Collateral: It refers to the security which a loan applicant gives to the lender against which the loan is disbursed. The value of this security is generally higher than the amount of loan. For instance, the RBI revised the rules with regards to gold loan under which the amount of loan should not exceed 75 percent of the price of gold.

It is worth mentioning that personal loans typically do not require collateral since they are unsecured loans. It is secured loans which require collateral.

Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.

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