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Banking terms you should know when applying for a loan

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Do bankers speak a different language? It can definitely seem that way.

The financial world has its own language and before you take out a loan, it’s important you learn the basics of that language. Regional Finance® believes having a good understanding of key words can help you make smarter borrowing decisions and make the process of getting a loan less stressful. Here’s a quick overview of the key financial terms you’ll hear when applying for a loan.

Gross income vs. net income:

Collateral: 

Collateral is something of value that you own, like your car/truck or a TV/music system, etc., that you use to back your commitment to repay a loan. If you do not repay your loan, the lender has the right to take your collateral.

Secured loan vs. unsecured loan:

Debt to income ratio or debt ratio:
Debt ratio is a way of comparing the debts you must pay with how much money you make.

How To Figure Your Debt Ratio:

  1. Add your total monthly debt payments including mortgage or rent, car payments, loan and credit card payments, and child support.
  2. Figure out your monthly income, including your salary plus any bonuses and other income you receive, like alimony and child support.
  3. Divide your total monthly debt payment by your total monthly income to get your debt ratio, which will be a percentage.

Installment loan:
When you take out an installment loan, you get a check for the loan amount minus any prepaid fees. Then you pay the money back plus interest in regular payments (usually each month) for the agreed-upon term (number of months or years) of the loan.

If your loan has a fixed interest rate (does not change over the life of the loan), your payments will be the same every month.

Co-Signer:

A co-signer is a person signs your loan application along with you. The co-signer can help you qualify for the loan and agrees to be responsible for paying off the loan if you do not. A good co-signer is someone with good credit and a steady income.

Some lenders require that the co-signer be a U.S. resident with a permanent address in the U.S.

APR:
Annual percentage rate (APR) is the yearly cost of a loan including interest and fees. The fees will vary depending on the type of loan you’re applying for, but can include:

Payoff amount vs. total payment:

For loans, the payoff amount is the balance owed at any point in time in order to fully repay the loan. This amount changes daily due to accruing interest. Most lenders require you to contact them directly to obtain a payoff amount.

The total payment is the total amount you must pay over the term of the loan including the money borrowed, interest, and fees. The payoff amount may be less than the total payment, depending on when you pay off the loan.

The information and materials provided on this website are intended for informational purposes only, and should not be treated an offer or solicitation of credit or any other product or service of Regional Finance or any other company. This website may contain links to websites controlled or offered by third parties. We have not reviewed all of the third party sites linked to this website and are not responsible for the content, products, privacy policy, security, or practices of any linked third party website. The inclusion of any third party link does not imply any endorsement by Regional Finance of the linked third party, its website, or its product or services. Use of any third party website is at your own risk.

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