Suggestion: This is a glossary page. For ease of reading, it has been composed as a listicle in alphabetical order.
Confused About Loan Terms?
Navigate your loan journey by thoroughly understanding the common terms used during the loan process. Understanding the financial landscape is the first step towards responsible borrowing. Whether you are applying for your first loan or managing an existing one, don’t let the terminology overwhelm you.
This comprehensive glossary explains all the essential loan terms you will encounter during the loan process, from application to settlement.
What is a Loan?
A loan is a sum of money you borrow from a bank or an NBFC (Non-Banking Financial Institution) that must be paid back with interest over a period of time.
What is a personal loan? (Personal loan kya hota hai?)
A personal loan is an unsecured form of credit – you do not need to put up collateral (like a car or your house) to access money. It is a flexible loan that you can use for diverse needs, like medical emergencies, home renovations, debt consolidation, etc.
A-Z Glossary of All Essential Loan Terms
A
- Amortization: It is the process of paying off debt gradually over time through regular installments. Each repayment is divided between principal and interest accrued.
B
- Bureau Score ( also called credit score): It is a 3-digit number that shows your creditworthiness. It is used by lenders to determine the risk of lending money to you. A higher score means better creditworthiness and lower interest rates.
C
- Collateral: It is an asset, such as a car or your house, that you offer to the lender as security for a loan. If you are unable to repay the loan, the lender can seize the collateral. Personal loans typically do not require collateral.
D
- Debt-to-income ratio (DTI): It is a percentage that reflects the amount of monthly income you use to pay off debts. Lenders use DTI to check whether you can afford to take out a new loan.
E
- EMI (Equated Monthly Installment): It is the fixed amount you repay to the lender every month until the loan and interest is fully repaid.
F
- Fixed rate: The interest rate of your loan remains the same throughout the loan tenure.
- Floating rate: The interest rate of your loan changes based on market fluctuations.
G
- Grace period: A short period after the payment due date during which the borrower can repay an installment without suffering a late fee.
H
- Hard inquiry: When a lender reviews your credit report to decide whether or not to lend you money, it is called a hard inquiry. It may temporarily lower your credit score by a few points.
I
- Interest rate: It is the percentage of the principal charged by the lender for the use of their money. You can also call it the “cost of borrowing”.
K
- KYC (Know Your Customer): It is a mandatory process where lenders verify the identity and address of the borrower, using documents such as your PAN or Aadhar.
L
- Loan disbursement (meaning): It is the final stage of the loan process where the funds are transferred directly into your account. It is the moment the loan amount is credited into your account.
- Loan repayment schedule: It is a detailed table provided by your lender that outlines every installment you need to make, the amount, the date, and how it is split between principal and interest.
- Loan settlement: Loan settlement is the event when a borrower is unable to pay the full amount that is due, and the lender agrees to accept a lower amount to close the account. The event stops the debt collection process, but may negatively impact your credit score for several years.
- Loan tenure (meaning): It is the duration for which the loan is sanctioned to you. It determines the time you have to pay the money back. A longer tenure results in lower installment amount, but a higher total interest at the end of the tenure. A shorter tenure means higher EMIs but less total interest.
M
- Moratorium period: It is a temporary period during which the borrower does not need to make any repayments. However, interest may still accrue during this time.
N
- NBFC (Non-Banking Financial Company): These are the companies that provide financial services (such as loans) but do not have a full banking license. They are regulated by the RBI and may offer relatively faster processing timelines in some cases.
O
- Outstanding balance: The amount of your loan that remains to be repaid (principal + interest) at any given point in time.
P
- Prepayment (also called “foreclosure”): It is the event when you pay a loan off (either partially or completely) before the tenure ends. Some lenders may charge a “foreclosure fee”, while others may allow it for free after a certain duration of tenure has passed.
- Principal amount: The original sum of money you borrow – the amount that is credited into your bank account.
- Processing fee: It is a one-time administrative fee that a lender charges to cover the cost of profile evaluation and processing your loan application.
R
- RBI (Reserve Bank of India): It is the central bank of India that regulates all banks and NBFCs to ensure fair lending practices.
S
- Sanction letter: It is a formal document issued by the lender stating that your loan has been approved. It contains details like interest rate, approved amount, tenure of the loan, etc.
U
- Unsecured loan: It is a loan for which you don’t need to put up collateral or security. The most common examples are credit cards and personal loans.
Responsible Lending and Borrowing with InstaMoney
It is critical to understand the terms you commonly encounter during the loan process to avoid being caught off guard by the fine print. To practice responsible borrowing, always ensure that your loan tenure fits your monthly budget. Understand the “What is loan” basics accurately before committing to a financial agreement.