Variable rate loans! Annual Percentage Rate (APR)! Secured
Loans! Unsecured Loans ! Confused? You won't be after reading this article.
A Guide to Common Loan Terms
By John Mussi
Many people may wonder about common loan terms… words and phrases that are
often tossed about when describing different types of loans that are assumed to
be common knowledge.
These common loan terms represent very important parts of the lending
process, but to the person who isn't entirely sure what the terms mean they can
be quite intimidating and cause the person to feel very uneasy about getting a
They might delay applying for a loan that they need because of a failure to
understand common loan terms, and in doing so can miss out on better rates and
the potential to save a lot of money in the long run.
Interest, Capital, and Interest Rates
Interest and interest rates are common loan terms that are a key part of the
lending process, but many people might not know exactly how interest and
interest rates work.
At its most simple, interest is the additional amount that you pay over the
loan amount in order for the lender to make a profit off of you doing business
with them. In other words, the interest that you pay is the amount that you pay
for the service of lending, while capital is the amount that you repay because
it is what you borrowed in the first place.
Interest rates are the percentage of the capital that you'll pay in interest…
for instance, if you have an interest rate of 5% on a loan then you'll pay an
additional 5% to the loan amount in interest.
Annual Percentage Rate (APR)
The annual percentage rate (also known as APR) is one of the common loan
terms that some people have the hardest time understanding.
The annual percentage rate is most often seen on credit cards, and is an
indication of how much interest you will be charged on your credit card balance
over the course of the year.
The lower the APR is on a credit card, then the less you'll have to pay in
interest as the year goes by… you should keep in mind, though, that the annual
percentage rate can change over the course of the year due to fluctuations in
the cost of living, inflation, and a change of interest rates that are set on
the national level.
Collateral, Secured Loans, and Unsecured Loans
These common loan terms can cause quite a bit of confusion, especially to
someone who is shopping for their first loan.
Collateral is an object of value that is used to guarantee repayment of a
loan, and is the difference between secured and unsecured loans.
Secured loans are loans that have collateral backing the loan, and usually
have lower interest rates… they charge lower rates for secured loans because if
you fail to repay the loan then the lender can take possession of the collateral
and sell it to regain their money.
Unsecured loans don't have collateral, but charge higher interest rates in
One of the common loan terms that seems harder to understand, equity is a
major factor in secured loans that use real estate and the borrower's home as
Equity refers to the percentage of the home or real estate's total value in
comparison to the amount still owed on the original loan used to purchase it
which is known as a mortgage.
It's often referred to as the amount of the home or property that the owner
actually “owns”, as opposed to the portion of the value that's still held under
The more money a person pays toward their mortgage, the more equity they have
in their home.
You may freely reprint this article provided the following author's biography
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About The Author
John Mussi is the founder of Direct Online Loans who help homeowners find the
best available loans via the
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