Many people feel uncertain when it comes to financial terms, and you are not alone. Loan contracts and the language used within them are not part of everyday conversation for most people. That is why we have compiled this glossary of common terms you might encounter while comparing lenders and loan agreements. This guide will help you become more familiar with basic loan terminology, so when reviewing your borrowing options, you will have a clearer understanding of your choices and can apply for the loan that suits you best.
Key Takeaways
- Understanding Loan Terms: This glossary provides clear explanations of common loan-related terms, assisting South African borrowers in better understanding their options when applying for personal loans.
- Amortisation and Interest Rates: Key concepts such as amortisation and interest rates are explained, illustrating how loan repayments evolve over time, with interest gradually decreasing as more is paid towards the principal.
- Secured vs Unsecured Loans: The glossary outlines the difference between secured and unsecured personal loans, highlighting that unsecured loans do not require collateral, while secured loans are backed by assets.
Key Terms and Definitions
Amortisation
Amortisation refers to the gradual reduction of your loan balance through regular, equal monthly payments. In the early stages of repayment, a larger portion of each payment covers interest. As you continue making payments, the interest charged decreases, and a greater share of each payment is applied to the principal. By the end of the repayment period, most of each payment is directed towards the principal, with only a small portion allocated to interest.
Annual Percentage Rate (APR)
APR, or Annual Percentage Rate, represents the total yearly cost of borrowing, factoring in both the interest rate and all associated lender fees. Calculated as a percentage of the overall loan amount, it provides a clear understanding of the combined interest and fees you will incur over the course of a year.
Application Fee
Certain lenders charge a fee for managing and processing your loan request.
Automatic Payment
A fixed amount is withdrawn from your account each month on a specified date.
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Borrower
An individual or organisation that obtains funds from a lender. The borrower, also known as the primary borrower, is responsible for repaying the loan or credit provided by the lender.
Collateral (or Security)
Collateral refers to an asset used to secure a loan. For example, a home serves as collateral in a mortgage, while a vehicle acts as collateral in an auto loan. Should the borrower fail to repay, the lender can take possession of the collateral to recover the loan amount.
Credit Agencies/Credit Bureaus
These institutions gather credit data on consumers and supply credit reports to lenders, employers, and landlords to assist them in making informed decisions.
Credit Rating/Score
A credit score is a key component of your overall credit profile. It is represented as a numerical value, typically ranging from 300 to 850, and is derived from an individual’s credit history. Factors such as bill payment consistency, outstanding balances, and the number of active credit accounts all contribute to this score. A higher score indicates that lenders view you as more reliable, suggesting that you are more likely to repay loans on schedule. Conversely, a lower score can create obstacles in obtaining loans, as lenders may perceive you as a higher risk.
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Credit Report
A credit report offers a detailed overview of an individual’s financial history related to credit. It includes records of all credit accounts, such as loans and credit cards, along with your payment history, both past and present. This document provides a comprehensive view of how you have managed credit over time, serving as a critical tool for lenders when evaluating your creditworthiness.
Debt
Debt refers to any amount of money owed, usually as a result of borrowing. This can involve obligations to banks, individuals, or financial institutions, where the borrower is expected to repay the borrowed funds under specific terms.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio (DTI) is a financial measure expressed as a percentage, comparing your monthly debt payments to your total monthly income. Lenders use this figure to assess whether you can manage additional debt. A lower DTI indicates greater financial flexibility, making it easier to qualify for loans, while a higher DTI may suggest potential difficulties in managing new debt repayments.
Debtor
A debtor refers to an individual or organisation that has financial obligations that they are required to repay.
Debt Administration
When a debtor faces challenges in meeting their monthly financial commitments, a debt administrator, typically an attorney, can approach the court to request an extension of the loan period. The administrator will assess the debtor’s essential living costs and allocate the remainder of their income towards settling their debts. In many cases, these payments are automatically deducted from their salary to ensure that the outstanding balances are settled.
Debt Consolidation
Debt consolidation involves merging multiple credit balances into a single fixed-rate loan. This strategy can benefit individuals who owe money to several creditors at higher interest rates by combining these debts into one loan with a more favourable interest rate or adjusted repayment terms. This approach may help reduce the overall cost of interest and simplify financial management.
Debt Review
Debt review is a structured approach provided by debt management professionals to assist debtors in managing their financial obligations. These specialists negotiate more manageable repayment terms on behalf of the debtor, often securing lower interest rates to make the payments more affordable and sustainable.
Default
A default occurs when a debtor fails to meet the required loan repayment obligations within the agreed-upon timeframe.
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Equity
Equity is the difference between the current market value of a property and the outstanding amount owed on the loans associated with that property.
Finance Charges
Finance charges represent the total cost a borrower incurs for borrowing money, including both the interest and any additional fees or charges required to secure the credit.
Fixed Interest Rate
The interest rate refers to the percentage charged annually for borrowing money. As the term suggests, a fixed interest rate remains unchanged for the entire duration of the loan, meaning your monthly repayments will remain constant. This rate does not fluctuate, regardless of broader economic conditions or changes in interest rates. Personal loans generally come with fixed interest rates.
Gross Monthly Income
Your gross income is the total amount you earn before any deductions, such as taxes or retirement contributions, are applied. This figure includes all forms of income, including wages, profits from business activities, and any additional sources of earnings.
Index
An index serves as a key indicator of the prevailing economic climate, assisting in determining adjustments to interest rates for loans with variable or adjustable rates.
Insolvent
A debtor is classified as insolvent when they lack sufficient funds to meet their financial obligations. In such cases, assets may be sold to satisfy outstanding debts.
Installment Loan
An installment loan is a type of loan that is repaid through regular monthly payments. Common examples include mortgages, car loans, and personal loans, where each repayment is a fixed amount until the debt is fully settled.
Interest Rate
The interest rate is the cost applied to borrowed money, generally expressed as a percentage of the principal loan amount.
Line of Credit
A line of credit allows for borrowing funds up to a specified limit, typically with a variable interest rate. Borrowers can access these funds as needed, with repayment terms similar to those of a traditional loan.
Loan Agreement
The loan agreement is a formal contract that outlines the responsibilities and rights of both the lender and the borrower, detailing the terms of the loan arrangement.
Loan Amount
The loan amount refers to the total sum borrowed from the lender, which is then deposited into the borrower’s bank account for use.
Married in Community of Property
In South Africa, if a couple marries without signing an antenuptial contract, their marriage will automatically be considered in community of property. This means all assets and debts are combined into one estate. Both partners share any income and are equally responsible for debts.
Maximum Loan Amount
The maximum loan amount is the highest sum that can be borrowed under the terms of the loan agreement.
Minimum Loan Amount
The minimum loan amount refers to the smallest sum the lender will allow to be borrowed under the terms of the loan agreement.
Monthly Loan Repayment
The monthly loan repayment is the amount to be paid each month to the personal loan provider.
Net Monthly Income
Net monthly income is the total income remaining after tax and deductions.
Note
A note is a written agreement to pay a specified amount under agreed terms, also known as a promissory note.
Origination Fee
An origination fee is a charge for initiating a loan, which covers the lender’s time and effort in processing the application. Not all lenders apply origination or additional fees.
Payment Term
The payment term refers to the duration allowed to repay a loan. The length of this term affects the total interest paid and the monthly instalment amount.
Personal Loan
A personal loan is an agreement in which one party borrows a specific sum from another, to be repaid over a predetermined period. It serves as a solution for both short- and long-term cash flow issues.
Personal Protection Plan
A personal protection plan clears the remaining loan balance if the borrower passes away, becomes permanently disabled, or is diagnosed with specified serious illnesses.
Point
A point represents 1% of the total loan amount.
Prepayment Penalty
Some lenders may impose a fee if a loan is repaid early, before the final due date. Always check the loan agreement to determine if this fee applies, as it may increase the overall cost of borrowing.
Prime Rate
The prime rate is the most favourable interest rate offered by lenders on short-term loans to qualified customers. Annual Percentage Rates (APRs) are typically based on the prime rate plus an additional margin.
Principal
The principal refers to the amount borrowed, excluding any interest, APR, or fees.
Refinancing
Refinancing involves obtaining a new loan to settle an existing one. If your financial situation has improved and you have a solid repayment record, you may have the option to refinance through either your current lender or a different institution. This could lead to reduced repayments, lower interest rates, or a shorter loan term, depending on your circumstances and the interest rates available to you.
Revolving Credit
Revolving credit allows you to borrow repeatedly up to a set limit. As you reduce the balance, you regain access to borrow up to that same limit again. A common example is a credit card. Since both the amount owed and interest rates can fluctuate, your monthly payments may vary, and there is no fixed number of instalments.
Secured Personal Loan
A secured personal loan with a fixed interest rate requires collateral, which could include assets such as savings accounts, stocks, bonds, or certificates of deposit.
Sequestration
When a debtor is unable to meet their monthly repayment obligations, they may be compelled to sell personal assets. These assets are liquidated to help reduce or pay off the outstanding debt. Sequestration is often a time-consuming and costly process.
Term of Loan
The term of a loan refers to the period during which a borrower is required to fully repay the loan, including any accrued interest and charges.
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Title
Title refers to the legal recognition of an individual’s or entity’s right of ownership over property, granting them full control and authority over its use and transfer.
Total Loan Repayment
Total loan repayment refers to the complete sum a borrower will repay, encompassing both the original loan amount and the interest accrued over the repayment period.
Underwriting
Underwriting is the detailed process lenders undertake to evaluate the risk associated with approving a loan for a borrower. This evaluation varies depending on the type of loan. For personal loans, lenders review the borrower’s credit history and assess the likelihood of repayment failure. In the case of mortgages, the process is more comprehensive, involving an assessment of the property’s value and a thorough review of the borrower’s financial standing.
Unsecured Personal Loan
An unsecured personal loan is a type of loan that has a fixed interest rate and does not require any collateral or assets as security from the borrower.
Variable Interest Rate
A variable interest rate, also known as a floating or adjustable rate, fluctuates in line with changes in the broader financial markets. This means that the interest you pay may increase or decrease over the loan’s term, impacting your monthly repayments.
Conclusion
This glossary serves as a valuable resource for South African borrowers, providing clear definitions of common loan terms. By familiarising yourself with these financial concepts, you will be better equipped to understand loan agreements and make informed decisions about borrowing. Whether you’re considering a personal loan, mortgage, or another type of credit, having a solid grasp of the terminology will help you navigate the process with increased confidence and clarity.
Frequently Asked Questions
What’s the difference secured and unsecured personal loans?
Secured loans are backed by assets, like a house or car, but unsecured loans don’t need any collateral. Because they pose a higher risk for lenders, unsecured loans usually come with higher interest rates.
What is amortisation?
Amortisation is the process of gradually paying off a loan through regular monthly payments, with an increasing portion applied to the principal over time.
How is APR different from the interest rate?
APR (Annual Percentage Rate) encompasses both the interest rate and any associated fees, reflecting the total cost of borrowing. In contrast, the interest rate only indicates the cost of the loan itself.
What happens if I default on my loan?
Defaulting occurs when you miss payments, which can result in penalties, legal action, and a negative impact on your credit score.
What is the debt-to-income ratio (DTI)?
DTI, or debt-to-income ratio, reflects the portion of your monthly income dedicated to paying off debts. A lower DTI indicates greater financial flexibility in managing new loans.
