Make sure you understand these financial terms before you take out a loan

To produce this publication, we teamed up with our partners at Fairlane Financial.

Let’s face it, finances can be confusing. When applying for a loan, you have to deal with related terminology and it can undoubtedly be intimidating if you don’t know the definition of words.

As part of Financial Literacy Month, our partners at Fairlane Financial told us a few common words you will hear if you apply for a loan.

 

Amortization

Amortization

You will often hear lenders talking about an amortization period if you apply for a mortgage. This is the time you will need to pay off your mortgage or loan in full. You will pay the majority of interest at the start of the amortization period. Part of each mortgage or loan payment is used to pay off the principal (the amount you borrowed), and part is used to pay the interest costs. The part of your payment used to pay interest charges decreases over time as you make your payments. Once you approach the end of your amortization period, most of your payment will go towards paying the principal. Unpaid payments may change your amortization period. It will take you longer to pay off your loan and you will pay more interest.

Tip: The amortization period and the duration of your mortgage are two separate things. The amortization period is the period you need to pay off your mortgage in full. Duration is the period during which you are legally required to repay your current lender at a fixed interest rate (if your duration is fixed or “locked”). The term of a mortgage loan generally ranges from six months to five years.

 

TAP

The APR is the annual percentage rate. This is the interest rate applied to a loan each year. Unlike the interest rate, the APR also includes the additional costs associated with your loan, such as the cost of insurance or evaluation fees.

 

Credit insurance

Credit insurance

Most financial institutions offer credit insurance or optional loan insurance. There are several types of credit insurance. Here are some of the most common types and the benefits of each:

  • Job Loss Insurance: Some or all of your loan payments could be covered if you accidentally lose your job.
  • Disability Insurance: Some or all of your loan payments may be covered if you have an illness or injury that prevents you from working.
  • Life insurance: in the event of death before the full repayment of your loan, life insurance will be used to pay or reduce the outstanding balance.

Credit insurance can help you stay in control of your loan payments and protect your credit score in the event of an unexpected situation.

 

Term of the loan

You and your lender will agree on a loan term, which is how long your loan will last. A longer term allows you to benefit from affordable payments since these extend over a longer period. However, it will cost you more in interest charges. A shorter duration means higher payments, but less interest to pay.

 

Privilege

loan Privilege

If you decide to secure your loan with the value of your home, your lender will apply a “lien” on your property. This is mostly used with mortgage loans. If you don’t pay off your mortgage, the lender can, in principle, become the owner of your home. The lien acts as protection for the lender.

 

Penalty for early repayment

Some loans come with a prepayment penalty, which means that if you pay off your loan sooner than expected (before the end of the loan term), you may have to pay fees. The prepayment penalties vary from one lender to another. Usually, the prepayment penalty is equivalent to some or all of the interest on the outstanding balance. It is always a good idea to ask your lender if there is a prepayment penalty, especially if your goal is to pay off your loan faster.

 

Secured loan or unsecured loan

credit loan

If you are a homeowner, your lender could give you the option of choosing a secured loan. The latter is accompanied by an asset, which is usually a house. It allows you to borrow more money (compared to an unsecured loan) and take advantage of a lower interest rate, which ultimately allows you to have lower payments.

Are you not an owner? No problem. Since an unsecured loan has a contract rather than an asset, you have several options for unsecured loans that do not require you to own.

 

Knowledge is power

As a borrower, it is important for you to understand the terms of the loans in order to be well equipped to make the best credit choices. If you want to know more about your borrowing options, you can get a free, no-obligation quote from Fairlane Financial. Just visit Fairlane.ca and enter some information to receive your personalized quote in minutes.

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