Personal Loan Glossary: Key Terms Explained

How to Use This Glossary

Personal loan paperwork is full of terms that can seem daunting, but you don't need a finance degree to understand them. This glossary defines the essential vocabulary you'll encounter when researching, applying for, or repaying a personal loan.

Each entry provides a concise, plain-English explanation. Use the alphabetized sections (A–D, E–H, I–L, M–P, Q–Z) to quickly find the term you need. Definitions come from reputable sources, including the U.S. Consumer Financial Protection Bureau and large financial institutions, ensuring accuracy and clarity.

• Look up terms in alphabetical order or use your browser's search function (Ctrl+F or Cmd+F) for quick reference.
• Each term is defined in simple language without overwhelming jargon.
• You'll find cross-references to related terms where helpful.

Sources: Consumer Financial Protection Bureau, Discover

A–D Terms

Explore foundational terms that start with the letters A through D, including APR, collateral, credit score, debt-to-income ratio, and default.

Annual Percentage Rate (APR) is the cost of borrowing money on a yearly basis, expressed as a percentage rate. It reflects not only the interest rate but also any points, broker fees, and other charges you pay to obtain the loan. This makes APR a more complete measure of a loan's cost than the interest rate alone.

Collateral is an asset that secures a loan; if the borrower defaults, the lender can take it. Personal loans are commonly unsecured, meaning they do not require collateral, but some lenders offer secured personal loans.

Credit score is a number created from a scoring model that uses information from your credit history. Lenders use it to assess your creditworthiness, which influences loan approval and terms.

• APR: The yearly cost of borrowing, including interest and certain fees.
• Collateral: An asset that backs a loan and can be seized if you default.
• Credit score: A numerical summary of your credit history used by lenders.
• Debt-to-income (DTI) ratio: All your monthly debt payments divided by your gross monthly income. Lenders use it to gauge your ability to manage payments.
• Default: Failure to repay a loan as agreed, typically after missing several payments.

Sources: Consumer Financial Protection Bureau, Discover

E–H Terms

This section covers essential terms that start with E through H, including fixed-rate loans, interest, and installment loans.

A fixed interest rate remains the same for the entire life of the loan. This means your monthly principal and interest payment stays predictable, which can simplify budgeting. Some personal loans offer fixed rates, while others have variable rates that can change over time.

An installment loan is a type of loan where you borrow a sum of money and repay it in fixed amounts, called installments, over a set schedule. A personal installment loan is a closed-end loan, meaning the lender gives you all the money at the beginning. You then repay the loan in regular payments until it's paid off.

Interest is what the lender charges you for borrowing money, expressed as a percentage of the amount borrowed. The interest rate, along with any fees, makes up the total cost of the loan.

• Fixed rate: An interest rate that does not change during the loan term.
• Interest: The cost of borrowing, expressed as a percentage of the loan amount.
• Installment loan: A loan repaid through regular, fixed payments. Personal loans are a common type.

Sources: Consumer Financial Protection Bureau, Discover

I–L Terms

Explore terms from I through L, including loan term and loan-to-value ratio. Loan-to-value ratio is a metric comparing the loan amount to the value of the collateral, often used in secured loans.

Loan term (or repayment term) is the length of time you have to repay the loan. Personal loan terms vary by lender and product, and the exact length can range from short to long. A longer term usually means smaller monthly payments but more interest paid over time.

Loan-to-value (LTV) ratio is a measure used by lenders that compares the amount of the loan to the appraised value of the collateral. It is commonly used in mortgages and also applies to secured loans, helping lenders assess risk.

• Loan term: The duration over which you must repay the loan.
• Loan-to-value ratio: The loan amount divided by the value of the collateral.

Sources: Consumer Financial Protection Bureau, OneMain Financial, Discover

M–P Terms

This group includes origination fee, principal, and prepayment penalty.

An origination fee is a one-time, upfront operational fee a lender charges to cover the cost of processing your loan. The fee amount and whether it is deducted from the loan proceeds vary by lender, so check your loan estimate for details.

Principal is the original amount of money you borrow, excluding interest and fees. Your monthly payments consist of principal and interest, and as you pay down the principal, the interest you owe each month can decrease.

A prepayment penalty is a fee some lenders charge if you pay off all or part of your loan early. If your lender includes this penalty, it can reduce the benefit of paying off the loan ahead of schedule, so it's worth checking.

• Origination fee: An upfront fee charged by the lender to process your loan.
• Principal: The amount you borrow, excluding interest and fees.
• Prepayment penalty: A fee for paying off your loan earlier than the scheduled term.

Sources: Consumer Financial Protection Bureau, OneMain Financial

Q–Z Terms

Complete your understanding with terms from Q through Z, including secured loans and unsecured loans. For a definition of default, see the A–D Terms section.

A secured loan requires you to put up collateral, such as a house or a car, to back the loan. If you fail to repay, the lender may take the collateral to recover the remaining debt. Personal loans can be secured, but many are unsecured.

An unsecured loan does not require collateral. Lenders may evaluate other factors such as creditworthiness when setting rates and terms, which can differ from secured loans.

• Secured loan: A loan backed by collateral.
• Unsecured loan: A loan not backed by collateral.

Sources: OneMain Financial, Discover