Getting a loan is commonplace these days. But given the legal and technical aspects that are required in getting one, it’s no surprise that a lot of borrowers seem a little confused by all the jargon flying around. While normally it’s the responsibility of the company to brief people on these matters, that’s not what usually ends up happening.
This can be very disadvantageous for the borrower, as they can be trapped in a legally binding loan without their knowledge. Those that do credit card processing for loan companies have encountered these cases far too often: they’re difficult to deal with and rather expensive to take to court, even if you do end up winning your case.
The best way to avoid this issue is to be informed about loans in the first place. Here are three legal terms that are sometimes used when it comes to loans and a brief overview of what they mean.
Interest-Only Repayment Loan
It’s highly likely that you won’t encounter this term until you’ve actually entered an agreement under it. This kind of load works differently from your usual amortization in that you only pay for the interest per month, with the principal amount you borrowed being due only after all the interest is paid off at the end of the loan period.
This payment scheme is usually given to students or to borrowers who don’t have a lot of initial capital to repay it. Since only the interest per month is paid, it’s a lot easier on the borrower than normal loans would be.
APR (Annual Percentage Rate)
You’ve heard this used a lot when it comes to hearing about fees that you’ll get when you apply for a loan. The APR stands for the annual rate that the lender will earn from their investment when you borrow from them. But why is this important?
It’s simple: the APR is a good representation of everything you can reasonably expect to have paid once the entire debt is paid in full. Most people will only look at the principal amount and the interest it has over time, but what they can forget is that there are also fees and other surcharges that a loan can accrue over time.
Finally, this is a term that you may not even be aware of until you’ll need to pay off the last of your loan. Settlement costs is an additional surcharge tacked on as the final cost of closing the loan. This is more common in mortgages as there may be several factors (such as refinancing and other similar activities) that could’ve changed the total amount due.
It’s easy to get lost in all the jargon and technical talk flying around whenever you’re talking about something as important as loans, but it’s important to remember to keep a cool head. Under the law, your lender or credit company has the obligation to inform you about your finances, whether you’ve paid them all or not.