6 Terms to Know Before Borrowing Money: APR, Interest Rate, & More…

When we take a loan, we make sure that we’re getting the best one. Knowing the terms related to borrowing money will help you in shortlisting affordable options. Essentially, there are 5 things you must know—what is an APR, Interest Rate, Loan Term, Principal Amount, and Repayment Schedule. If you know these basics, figuring out whether your loan is safe to take or not becomes very easy. These are what we’ll be talking about in this article.

Principal

The amount you borrow in a loan is called the “principal” amount. This is the sum you’ve received from the bank or lender. Taking a loan means returning this amount plus the interest rate (keep reading to understand what it is and how it works).

Loan Term

The period you borrow a loan for is known as your loan term. Let’s suppose that you’ve borrowed an online cash advance for 2 months. This means you’re expected to repay the principal plus interest within two months. The longer your loan term is, the higher will be the interest you pay, further increasing the cost of your loan.

Interest Rate

If you’re borrowing money, even in the most traditional forms the person who lends you will expect to gain something in return. To compensate for giving you the cash for an “x” amount of time, lenders charge an interest rate on your loan for a year. This percentage can either be fixed or variable depending on the market conditions. 

It is just a percentage of the principal amount that you have to additionally pay back. So let’s say you took a loan of $1,000 at an interest rate of 10 percent per annum, for 5 months. This means you need to pay back $1,041 in total within 5 months. The lower your interest rate is, the less you have to pay back on top of the principal amount.

For example, taking a cash advance in America is convenient because of the lower interest rates, longer repayment periods, and faster approvals. There are no collateral requirements or credit score checks so do check them out. For emergencies, relying on these safer options can prove to be useful.

Repayment Schedule

Before you take a loan, the lender outlines certain terms and conditions on how and when they expect the money to be returned. Some loans follow a lump-sum repayment model while others allow you to pay back in installments (like quick loans in America). 

In summary, the time frame within which you’re supposed to repay your loan including interest is known as the repayment schedule. 

If you don’t check carefully how much time until you need to repay your loan, are there any prepayment penalties or not, and what are the late fees, you’ll find yourself exposed to unnecessary charges. It’s best to understand how the repayment fits into your budget before taking any loan.

Loan Fees

Apart from the interest rate, there are other charges for borrowing a loan as well. The very first cost you’ll be tackling is the origination fees (or loan processing fees). These amounts are usually nominal compared to your principal and they’re not included in the interest.

What is APR?

APR (Annual Percentage Rate) is the annual cost you pay for borrowing a loan. It includes the interest rate for your loan and origination fees. 

Naturally, considering a loan’s APR is beneficial rather than depending on the interest rate alone. Some lenders tend to charge higher fees and if you're attracted by the low interest rates, the overall cost of getting that loan will still be higher for you.

Wrapping Up

The terms we have mentioned will surely help you make better choices when choosing a loan. To compare your options, checking the APR, repayment schedule, and how the payments sit in your monthly budget are the only crucial factors to know. Terms that offer you lowest APRs, a flexible repayment timeline without penalties on prepayments will save you a lot of extra cost.

If you have any more questions, please feel free to write to us in the comments below!