Business
Loan
Confused
by the Language of Loans
Anybody
seeking a qualified loan or a mortgage can be understandably
confused by the language used throughout the process.
Confusion of this kind makes the already difficult and
vastly important business of obtaining a loan even more
testing than it is already. It is important that in
taking on a loan you make sure you are aware of exactly
what it is you are agreeing to. With this in mind, below
is a selection of important and commonly used terms,
along with their definitions. Make sure you properly
understand what each term means, and the process of
getting a loan or mortgage will be infinitely easier.
You might even find yourself a better deal.
Mortgage: Though often
thought of as being different, mortgages are in reality
just a type of loan. They are loans in which a person’s
property is used as a guarantee on the person repaying
the loans. Failure to repay the loan, take out to purchase
the property in the first place, could result in the
loss of the property. In this situation the property
is collateral in the arrangement.
Collateral: This is
simply whatever is put on the line to guarantee the
repayment of any loan or mortgage. Usually, the collateral
is the property of the borrower. Collateral is a necessary
part of any secured loan.
Secured Loan: Such
a loan is one where collateral is involved in order
to guarantee that the lender gets their money back.
Clearly, as opposed to an unsecured loan, there is greater
risk for the borrower in that failure to repay could
see them losing their house. On the other hand, interest
rates are better than if the loan were unsecured, as
there is less risk to the lender. Take a look at ASDA
Finance for good rates on both homeowner
loans and unsecured
loans.
Interest: This is basically
the profit made by the lender for their role in the
process. The rate is given as a percentage, and added
on to the amount to be repaid. Interest rates vary,
but a typical rate is around 8%. Alliance and Leicester,
for example, currently have a typical APR of 7.7% on
loans.
(Rates correct at the time of writing: 15/04/2008,
and may be changed at the discretion of the lender.)
Equity: Typically one
of the least understood terms in the language of loans,
equity denotes the percentage of the value of a property
against whatever amount is still owed on any given mortgage.
An example would be a house worth £400,000 where
£100,000 of the mortgage has been repaid. In this
case, equity would be 25%. A simple definition is the
amount of the property actually owned by the resident
as opposed to by the mortgage provider.
