Loan Terminology Glossary: Words to Know Before You Sign That Contract

When you’re cash-strapped, you can always find help via a personal loan, which you can use to deal with emergency expenses and finance your kid’s tuition or this week’s groceries. 

However, signing a contract with a lender can be nerve-wracking. As you read through the fine print, you’ll find yourself swimming in unfamiliar and highly technical words and phrases. If you can’t understand such terminologies, evaluating an offer will be challenging—you might not even know if you’re getting a good deal. 

So before you sign anything, check out this comprehensive loan terminology glossary.   

💸 Fund Your Personal Goals with a Personal Loan

Whatever your goals, use a personal loan to make them happen. Here at Moneymax, you can find the personal loan that suits your goals and repayment capacity. 

Compare your options and apply right away:

Provider	Loan Amount	Monthly Add-on Rate	Minimum Annual Income	Approval Time
UnionBank Personal Loan	Up to ₱2 million	1.29%	₱250,000	As fast as 5 minutes
UNO Digital Bank Personal Loan	₱10,000 to ₱500,000	2%	₱420,000	7 banking days
Metrobank Personal Loan	₱20,000 to ₱2 million	1.25% to 1.75%	₱350,000	7 banking days
BPI Personal Loan	₱20,000 to  ₱3 million	1.2%	₱180,000	5 to 7 banking days
Tonik Credit Builder	Up to ₱20,000	Up to 4.84%	Inquire with Tonik	2 banking days
Tala Loan	₱1,000 to ₱25,000	0.43% to 0.5% daily	None	24 hours
HSBC Personal Loan	₱30,000 to ₱500,000	0.65%	₱168,000	5 to 7 banking days
CIMB Personal Loan	₱30,000 to ₱1 million	As low as 0.83%	₱180,000	2 banking days
Maybank Personal Loan	₱50,000 to ₱1 million	1.3%	₱300,000	5 to 10 banking days
RCBC Bank Personal Loan	Up to ₱2 million	0.90%	₱360,000	5 to 7 banking days
SB Finance Personal Loan	₱30,000 to ₱2 million	2%	₱180,000	5 banking days
CTBC Bank Personal Loan	₱500,000 to ₱2 million	1.39% to 1.79%	₱180,000	1 to 5 banking days
PSBank Personal Loan	₱20,000 to ₱250,000	1.75% or 2.5%	₱180,000	5 to 9 banking days

Personal Loan Terminology Glossary: 24 Terms to Understand

Is the interest rate different from the annual percentage rate? You’ll learn that and more in this mini loan dictionary.   

📌 Amortization 

This is the process of dividing your total debt into equal installments over an agreed loan term. Simply put, it’s your monthly payment until loan maturity.

Amortization includes both the principal and the interest.  

📌 Annual Percentage Rate (APR) 

This is the overall or total cost of borrowing money from the lender. It includes the interest rate and other fees, such as closing costs. This means the APR is usually higher than the interest rate.

📌 Borrower 

A borrower is a person who borrows money from a financial organization like a bank or a lending company. 

Read more: 8 Tips for Responsible Borrowing: How to Manage a Personal Loan

📌 Co-Borrower 

This loan terminology refers to a person who applies for a loan with another borrower. For example, if you and your friend borrow money from a bank to start a business together, you will be each other’s co-borrower. 

📌 Collateral  

This refers to an asset the borrower will pledge to the lender to get a loan. You can pledge a variety of assets, like a car, a house, and even business inventory, as collateral. If you fail to pay back the loan, the lender will seize the collateral. 

📌 Co-Signer 

This loan terminology refers to a person who co-signs a loan with a borrower and agrees to pay it back if the borrower fails to pay it back. The difference between a co-borrower and a co-signer is the co-borrower can access the loan funds while the co-signer can’t. 

Read more: What Happens to Unpaid Debt in Case of Death?

📌 Credit Score  

This is one of the most important personal loan terms you should know. A credit score is a number that tells the lender how responsible and trustworthy a borrower is. 

With a high credit score, you have better chances of loan approval. You can even get better rates and terms. 

If you have a low credit score, the lender will consider you a risky borrower. Fortunately, you can improve your credit score by paying off existing loans and making on-time payments. 

You can get your credit report from the Credit Information Corporation.^[1]

📌 Debt Consolidation 

Debt consolidation is the process of combining multiple debts into one loan. That way, you have only one monthly payment. 

It’s useful if you’re juggling multiple loans since you’ll have just one due date to remember. You can also save money if the combined loan has a lower interest rate.

Read more: How Many Concurrent Personal Loans Can You Have?

📌 Default 

This loan terminology refers to a borrower’s failure to pay back the loan after a certain period of time. Each bank or lender enforces different standards and rules when judging a default. Read the fine print to see how your lender defines a default. 

📌 Early Payment Fee 

Some lenders call this the early settlement fee. Regardless, this is the fee you need to cover if you want to completely pay back your loan before its maturity. 

Remember, banks and lenders earn from interest. If you finish your loan earlier than agreed upon, they won’t be able to charge interest anymore. An early payment fee is a strategy to recoup what they could’ve earned. 

📌 Extension Fee

If you’re having a hard time paying off your loan, you may ask the lender for an extension. When your application for an extension is approved, you’ll need to pay the associated fee. 

However, note that a loan extension means increasing your interest payment in the long run. 

📌 Grace Period

A grace period is the time after your due date during which you’re allowed to still make a payment. Payments made within the grace period won’t be considered late and won’t incur penalties like late payment fees. 

Grace periods vary from lender to lender. Read your contract to learn more. 

📌 Gross Income 

Gross income is the borrower’s total earnings before taxes, contributions, (e.g., Pag-IBIG, SSS, PhilHealth, etc.), and other deductions are subtracted from the said amount. Lenders check a borrower’s gross income to determine their repayment capacity. 

📌 Interest  

Interest is the amount the lender charges for their money. Your monthly payment is composed of the principal and the interest. 

Banks and lending companies charge two types of interest rates: 

• Fixed interest rate – This interest rate stays the same over the duration of the loan. It doesn’t go up or down, resulting in expected and specific monthly payments. 
• Variable interest rate – Also known as adjustable interest rate, this rate goes up or down, depending on prevailing market conditions. Nevertheless, the fluctuating rate should stay within the benchmark rate in your loan contract.   

Read more: A Beginner’s Guide to Interest Rates and How They Work

📌 Late Payment Fee 

You need to pay this when you miss your payment due date. Depending on the lender, you may be charged either a specific amount or somewhere between 3% to 8% of the overdue amount, whichever is higher. 

For instance, UnionBank charges a ₱500 or 6% penalty fee on late payments.^[2]

📌 Loan Origination Fee 

This loan terminology refers to expenses related to the processing of your loan application. This fee usually covers underwriting, funding, and other administrative procedures. Usually, the loan origination fee is a small percentage of your total loan amount. 

📌 Loan Term 

The meaning of loan terms is the length of time you need to pay back your loan. For example, if you get approved for a five-year personal loan, you’ll need to pay it back within five years. 

Some banks and lenders also use “loan tenor” to refer to a loan term. 

Read more: Need Financial Aid? Check Out 7 Types of Loans in the Philippines

📌 Maturity 

Your loan matures on the date you make the final payment for your loan. In other words, it’s your final due date. You’re expected to settle all your obligations on the said date. 

📌 Principal 

The principal is the actual amount you borrow from the lender. It doesn’t include interest and other associated fees. 

When you pay back the loan, your monthly payments include the principal, the interest, and applicable fees (e.g., late payment fee). 

📌 Refinancing

Refinancing is the process of paying off your existing loan/s with another loan. It’s usually a strategy to take advantage of better terms and lower interest rates. 

For a better picture, consider this: your existing loan (Loan A) has a high interest rate. You stumble upon Loan B, which has lower interest and friendlier payment terms. If you get approved for Loan B, you can enjoy its lower rates. 

📌 Renewal Fee 

When you’re done paying a loan, the lender may give you an option to renew it. If you renew a previously completed loan, you need to pay a charge, aptly called the renewal fee. 

📌 Revolving Credit

A revolving credit is a loan feature where you can borrow up to a maximum amount, pay it back, and borrow again when necessary. In other words, your loan is automatically renewed as long as you pay it back. 

This scheme is more often seen in credit cards. However, some banks, like PSBank, offer it as a loan product.^[3] 

📌 Secured Loan 

This is also a must-know personal loan term. A secured loan is a type of loan that requires collateral. 

You need to pledge an asset, such as a house or a car, to get the loan. If you fail to pay your secured loan, the lender will seize your collateral. 

📌 Unsecured Loan 

The exact opposite of a secured loan, this loan terminology refers to a type of loan that doesn’t require collateral—meaning you don’t have to pledge an asset. However, the lender may impose stricter requirements and higher interest rates. 

Read more: Secured Loan vs. Unsecured Loan: Which One Best Fits Your Needs?

Final Thoughts 

When you apply for a personal loan, don't let the barrage of technical words confuse you. You need to fully understand the features, terms, and conditions of a lending product.

Other than reading through this loan terminology glossary, don’t hesitate to ask your loan officer for clarification on unfamiliar jargon. 

Sources:

• ^[1] Credit Information Corporation
• ^[2] UnionBank Personal Loan
• ^[3] PSBank Flexi Personal Loan with Prime Rebate