Personal Loans Glossary: Learn The Basics

Personal Loan Terminology

This easy-to-reference glossary may help you read your new loan agreement with confidence and understand what each clause of the document means. From APR to cosigners vs. co-borrowers, we’ve got you covered.

• Amortization

  Amortization

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  Definition:

  Amortization refers to listing the loan’s repayment schedule over the life of the loan, which the lender does when processing the loan. An amortization schedule shows how much of each payment goes toward the principal, interest, and escrow (if applicable).

  Example:

  A loan can also be re-amortized. For example, if you make a lump sum payment, your remaining payments can be recalculated. This helps you see how much interest you’ll save over the life of the loan and how quickly you could pay it off. This information can help you decide if making an extra payment is worth it.

  Questions to ask:

  • What types of debt do you currently have (e.g., student loans, credit cards, mortgages)?

  • What is your credit score, and how do you manage your credit? Do you carry a balance or do you pay it off?

  • Do you have any outstanding loans or financial obligations?

  • What is your current strategy for debt repayment and credit monitoring?

  How to prepare:

  • Review your credit report and current debt situation.

  • Gather any relevant documents, such as loan statements or credit reports.

  • Reflect on how you’ve handled debt in the past and what strategies might work best moving forward.

  • Approach your financial planning with clarity and a readiness to take action toward your goals.

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• Annual Percentage Rate

  Annual Percentage Rate

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  Definition:

  APR is the total yearly cost of borrowing money, including both the interest rate and any applicable fees. It gives you a more complete picture of what you’ll actually pay over the life of a personal loan.

  Example:

  If two personal loans have the same interest rate but one includes an origination fee, the loan with the fee will have a higher APR. Comparing APRs helps you understand which loan is truly more affordable.

  Questions to ask:

  • What APR are you being offered, and how does it compare to other loan options?

  • Are there fees included in the loan that increase the APR?

  • Is the APR fixed or variable?

  • How will the APR impact the total cost of the loan over time?

  How to prepare:

  • Review your credit score—stronger credit can help you qualify for lower APRs.

  • Use a personal loan calculator to estimate your total repayment costs.

  • Compare offers from multiple lenders to find the most competitive APR.

  • Read the fine print to understand what’s included in the APR.

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• Loan Term

  Loan Term

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  Definition:

  The loan term is the length of time you agree to repay your personal loan, typically ranging from 12 to 84 months. It directly affects both your monthly payment and the total interest paid over the life of the loan.

  Example:

  A shorter loan term may mean higher monthly payments, but you’ll likely pay less interest overall. A longer term can lower your monthly payments but increase the total cost due to more interest paid over time.

  Questions to ask:

  • How long do you want to take to repay the loan?

  • Can you afford higher monthly payments in exchange for paying less interest?

  • Are there any penalties for early repayment?

  • What loan term options does your lender offer?

  How to prepare:

  • Use a personal loan calculator to estimate monthly payments for different loan terms.

  • Compare loan term options from different lenders to find the best fit.

  • Review your budget to see what monthly amount is manageable.

  • Be clear on the trade-offs between short and long loan durations.

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• Principal

  Principal

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  Definiton:

  The principal is the original amount of money you borrow with a personal loan, not including interest or fees. It’s the base amount your interest payments are calculated from.

  Example:

  If you take out a $10,000 personal loan, that $10,000 is the principal. As you make payments, part of each one goes toward reducing the principal, while the rest covers interest. Borrowing only what you need can help minimize the total interest you’ll pay.

  Questions to ask:

  • How much money do you actually need to borrow?

  • Can any of your planned expenses be reduced or covered another way?

  • How does the loan amount impact your total repayment over time?

  • What would your monthly payment look like at different principal amounts?

  How to prepare:

  • List out the specific costs you’re covering with the loan.

  • Use a personal loan calculator to test different loan amounts.

  • Evaluate your budget to see what monthly payment is manageable.

  • Borrow only what you need to help keep interest costs low.

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• Debt Consolidation

  Debt Consolidation

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  Definition:

  Debt consolidation is the process of combining multiple debts—like credit cards or other loans—into a single personal loan, ideally with a lower interest rate and one monthly payment.

  Example:

  If you have three credit cards with high interest rates, you could take out a personal loan to pay them all off. You’d then have just one loan to manage, potentially with a lower rate and a fixed payoff timeline.

  Questions to ask:

  • What debts do you currently carry, and what are their interest rates?

  • Could consolidating them into one loan save you money or simplify repayment?

  • Do you qualify for a lower interest rate with a personal loan?

  • Are there any fees or penalties for paying off your current debts early?

  How to prepare:

  • Gather statements from all debts you’re considering consolidating.

  • Compare total balances, interest rates, and minimum payments.

  • Use a debt consolidation calculator to see potential savings.

  • Review personal loan offers to find the best rate and terms.

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