APR, Collateral, & Interest Rates, Oh My! Your Guide to Loan Terminology

May 3, 2019

Whether for emergencies, tuition, bills or their own personal reasons, millions of Americans take out loans every year. Loans provide a form of assistance and allow you to stop worrying about immediate finances. However, finding the right loan for you and navigating the application process is not always easy.

Learning about how loans work and what to look for before you borrow money from a particular lender can help the process seem less intimidating, and can also protect you from being scammed by loan sharks.

This is why we’ve compiled a handy guide to loan terminology that every person must know:

1.    Annual Percentage Rate (APR)

APR stands for “annual percentage rate.” This is a reflection of the total interest rate of a loan expressed as a yearly rate. For example, if your APR is 12%, you’ll pay 1% each month in interest.

To calculate APR, interest and other fees are taken into account to provide you with a single percentage figure to help you understand what you are being charged for borrowing. It is essential to go low rather than high, of course, as a high APR can be dangerous for your credit score. Compare the cost of different loans using the APR to find the right one for you.

2.    Collateral

Collateral is an asset a lender accepts to assure the repayment of a loan from the borrower. In case the borrower does not repay the loan on time, the lender can seize the asset and recover the losses.  Examples of typical collateral include:

• real estate property
• vehicles
• future paychecks
• investments

Remember, an accredited lender will never ask you to provide them personal documents (such as a passport or birth certificate) to be used as collateral.

3.    Unsecured and Secured Loans

Secured loans are protected by collateral, while unsecured loans are not. How do you know which one is right for you? Due to the lack of security through a collateral, unsecured loans might have higher interest rates than secured loans, and the loan amounts might be smaller. Furthermore, when applying to an unsecured loan, the lender might have considerations such as a high credit score and a reliable income to approve the application.

4.    Interest Rates

Similar to the APR, an interest rate reflects the annual cost of a loan a borrower must pay, expressed as a percentage of the principal loan. However, unlike APR, it does not include payment charges and additional fees to provide the total yearly cost.

Interest rates vary, based on whether they are for small businesses, home, automobile, or from an online vendor.

5.    Debt Consolidation

To consolidate loans mean to combine multiple loans into a single one. Consolidation can help make a loan more affordable by combing debts into one with more favorable terms, such as a lower interest rate, or one that allows an extension in the loan term.

Debt consolidation is a good idea for those with good credit, consistent cash flow, and a dedication to avoiding future debt. It isn’t a great option for those with debt that can be paid off in less than a year or exorbitant debt totaling a large portion of their income.

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Feeling better about deciphering all that loan lingo? Ready to apply for your own personal loan? Illinois Lending offers in-person and online loans with interest rates comparably lower than payday loans. Check it out today.