Key Takeaways
- Understanding loan terminology helps borrowers make informed decisions.
- Key terms like interest rates, tenure, and principal impact loan costs.
- Loan transparency ensures fair and responsible borrowing.
- Knowing these terms can help you find the best option when considering where to loan money in Singapore.
Taking out a loan is a significant financial decision, and understanding the details of your loan agreement is crucial. Many borrowers focus only on the loan amount and repayment period, often overlooking critical loan terminology that directly affects the total cost of borrowing. Before applying for a loan, it is essential to familiarise yourself with these terms to ensure you make a well-informed decision and avoid unexpected charges.
This guide will walk you through key loan terms you need to know before borrowing money from a licensed money lender like 118 Credit.
What Are the Most Important Pieces of Loan Terminology To Know?
1. What Is an Interest Rate and How Does It Affect Your Loan?
The interest rate is the cost of borrowing money, expressed as a percentage of the principal amount. It can be fixed (remains the same throughout the loan tenure) or variable (fluctuates based on market conditions). A lower interest rate reduces the overall cost of the loan, making it a key factor when comparing lenders.
2. What Is a Principal Loan Amount?
The principal is the original loan amount borrowed. Your total repayment amount includes the principal plus the interest accrued over the loan tenure. Managing your principal effectively ensures you do not borrow more than necessary.
3. What Does Loan Tenure Mean and How Does It Impact Repayments?
The loan tenure refers to the duration over which the borrower must repay the loan. A longer tenure results in lower monthly instalments but may lead to higher overall interest payments. Use an online EMI calculator to estimate your monthly payments based on different tenure options.
4. What Is a Monthly Instalment and How Is It Calculated?
The monthly instalment is the fixed amount a borrower must pay each month to repay the loan. It includes both principal and interest components. Lenders usually provide a repayment schedule detailing how each payment contributes to principal reduction and interest costs.
5. What Are Late Payment Fees and How Can You Avoid Them?
Late payment fees are penalties imposed when a borrower fails to make a payment on time. These fees vary between lenders and can significantly increase the cost of borrowing if payments are frequently delayed. Always check the lender’s late fee policy before signing an agreement.
6. What Are Processing Fees in a Loan Agreement?
Processing fees are charges incurred for loan approval and disbursement. Licensed money lenders may charge a one-time processing fee, typically deducted from the loan amount before disbursement.
7. What Is the Effective Interest Rate (EIR) and Why Is It Important?
The Effective Interest Rate (EIR) represents the true cost of borrowing, including fees and compounding effects. It provides a more accurate comparison of loan costs than the advertised interest rate.
8. What Is Collateral and How Does It Secure a Loan?
For secured loans, collateral is an asset pledged as security for the loan. If the borrower fails to repay, the lender can seize the collateral to recover the debt. Examples include property, vehicles, or valuable assets.
9. What Is a Credit Score and How Does It Affect Loan Approval?
A credit score is a numerical rating that represents a borrower’s creditworthiness. Lenders use this score to assess the risk of lending money. A high credit score increases the chances of loan approval and favourable interest rates.
10. What Is Loan Refinancing and When Should You Consider It?
Refinancing involves taking a new loan to replace an existing one, usually to secure better terms, such as lower interest rates or a longer repayment period. This is commonly done for home loans and business financing.
Why Does Loan Transparency Matter When Borrowing Money?
Loan terminology and agreements can be complex, and a lack of transparency may lead to misunderstandings, hidden fees, and financial difficulties. Borrowers should ensure they fully understand the terms and conditions before signing a loan contract. 118 Credit, as a licensed money lender, upholds transparency by providing clear loan terms, and helping borrowers make informed financial choices.
Understanding loan terminology is essential when applying for a loan. Key terms like interest rates, principal, loan tenure, and fees significantly impact the total cost of borrowing. By familiarising yourself with these terms, you can make more informed financial decisions and choose a loan that best suits your needs.
If you want to know where to loan money and want to explore your options, 118 Credit Singapore provides clear, transparent, and fair loan agreements. Contact us at 118 Credit to learn more about our loan services and make a confident borrowing decision today.
