Personal Loans: Glossary of Terms
Are you shopping around for a personal loan but don’t know what anything means?
If you don’t know your credit utilisation rate from your credit score, or the difference between secured and unsecured loans, this is the guide you need!
All the personal loan terminology explained here is in alphabetical order, so it should be easy for you to find the meaning to a specific term.
Annual Percentage Rate (APR)
The Annual Percentage Rate, or APR, is the interest rate your lender charges you for your personal loan.
Lenders express APR as a percentage of your principal, or total loan amount.
Your APR is purely your finance charge. It does not include other charges like establishment and monthly administration fees.
Your rate that includes all fees, and thus tells you the true cost of your personal loan, is the comparison rate.
Australian Credit Licence (ACL)
Any institution that wishes to engage in credit activities must obtain an Australian Credit Licence (ACL) before starting business.
Companies apply for an ACL via the Australian Securities & Investments Commission (ASIC) and should display their ACL number on their website.
Before applying for a personal loan, you can check a company’s ACL status using the ASIC Connect service.
Australian Securities & Investments Commission (ASIC)
The Australian Securities & Investments Commission (ASIC) is Australia’s financial services regulator.
As well as regulating businesses and deciding the outcome of ACL applications, ASIC also provides services for consumers to check the ACL status of lenders before applying for a personal loan, credit card, or other finance product.
Bad credit can be a huge obstacle to obtaining a personal loan or other types of credit. You will typically have “bad credit” if you regularly miss payments.
Maxing out your credit cards and only repaying the minimum amount, or having serious credit infringements on your credit file may also lead to bad credit.
If you have bad credit, you will usually have a low credit score.
Have you ever had a personal loan where you had a lump-sum payment to make at the end of the loan term? That’s a balloon loan!
As an alternative to a lump-sum payment, you might be able to refinance your loan instead. If you do this, beware that your interest rate may be different on your new loan depending on your recent financial behaviour and circumstances.
Bankruptcy is a process that legally declares you as unable to meet your debt obligations. You can enter voluntary bankruptcy, or one of your creditors can apply for a court to declare you bankrupt.
In most cases, you will be “in your bankruptcy” for three years and one day from the date of your bankruptcy declaration. During this period, you will usually need to make payments to a bankruptcy trustee, who will manage your bankruptcy to pay some cash back to your creditors.
Bankruptcy can be a fresh start for your finances. However, in the short term, bankruptcy can be catastrophic for your credit file and permanently exclude you from specific lenders and products.
The commencement date, which some lenders may call your start date, is the date your loan starts. This date is usually the day you receive the loan funds. However, your credit agreement terms may come into effect the day you sign your documentation.
Your comparison rate is an excellent indicator of the actual cost of a personal loan. Most lenders build most of their fees into their comparison rate, making this the best basis for comparing loans from different lenders.
If a lender offers what seems an unusually low comparison rate, ask to see their fees schedule. The lender might have an artificially low comparison rate because they charge many of their fees outside of this!
Receiving a conditional loan offer is exciting, and the moment you’ve been waiting for since you sent your application!
If a loan offer is conditional, it means the lender needs to see some further details before granting final approval. What the lender requires will usually not be a surprise. During the application process, most will tell you that they’ll need to see things like ID documents and proof of income.
Lenders perform credit checks whenever you apply for a loan or another finance product.
What a credit check looks like depends on the lender. Many lenders will simply look at your credit score and decide it’s a yes or a no based on a number. Here at NOW Finance, we also look at your credit file to get to know you a little better so we can hopefully go ahead with your application.
Your credit score, or your credit rating, is a number. Theoretically, your credit score summarises the contents of your credit report. However, this isn’t always true, and different credit bureaus also give different weighting to the factors that influence your score. This is one of the reasons why NOW Finance actually looks at your credit file instead of merely deciding the outcome of your application based solely on your credit score.
Comprehensive credit reporting (CCR)
Since 2017, it has been mandatory for the “Big Four” banks to provide comprehensive credit reporting, or CCR. Many smaller banks, non-bank lenders, and other credit providers also voluntarily supply information to credit bureaus. This has led to changes in credit scoring, as CCR highlights positive credit behaviours. In contrast, the prior system only highlighted negative aspects like missed payments.
Credit Utilisation Rate
Your credit utilisation rate is simply the percentage of your available credit that you’re using at a given time. If your credit cards are always close to maxed out, you’ll have a high credit utilisation rate. If you always clear your balance each month, you’ll have a low credit utilisation rate.
If you have credit cards with combined credit limits of $40,000 and combined balances of $10,000, your credit utilisation rate is 25%.
A lower credit utilisation rate is usually better for your prospects of getting a personal loan.
If you take out a personal loan to repay all your current debts, that’s debt consolidation! Debt consolidation can help release you from vicious rotating credit traps such as credit cards when you’re only making the minimum repayment each month.
A debt consolidation loan may also lower your interest rate, reduce your repayments, and give you a date when you’ll be debt-free. All you need to do is ensure you don’t take on added debt while you repay your consolidation loan!
Debt to Income Ratio
Do you use most of your monthly income to repay debts? If so, you’ll have a high debt to income ratio. In contrast, if you pay hardly any of your income towards debt repayments, your debt to income ratio is low. If you want to calculate this percentage yourself, simply divide what you pay towards debts each month by your gross monthly income.
In line with responsible lending regulations, lenders will check whether you can afford a loan when you make an application, so the lower your debt-to-income ratio, the better.
You’re in default if you do not meet your obligations as set out in your credit agreement.
If you miss one single payment, a lender will usually not send you a default notice. However, failure to catch up with repayments, or missing consecutive payments, may see your account fall into default.
If you default on a credit agreement, lenders will send you a default notice. The default will also show on your credit file, severely affecting your chances of successfully applying for credit in future.
A deferred payment is a debt that you can repay at a later date. In the context of a personal loan, this may take the form of a payment holiday immediately after your commencement date.
For example, if you take out a personal loan, but your lender gives you the option not to make a repayment until the third month, the first two months payments have been deferred.
Establishment fees are one-off fees paid at the start of your loan, hence their name. Your establishment fee covers your lender’s costs for setting up your account and getting the cash paid to your bank account.
Most lenders build their establishment fees into their comparison rate. Still, it’s worth checking with any lender before applying for a personal loan!
The date you have circled on your calendar when you’ll make your final loan repayment? That’s your expiry date, assuming you’ve made all your repayments on time!
Fee Schedule and Terms
The boring stuff you never want to read but always should, a lender’s fee schedule and terms tell you all the fees they will (or might) charge, and when or under what circumstances they charge them.
Most lenders will include most fees in their comparison rate. However, ensure you’re aware of other fees that not every customer will incur, like late payment or early termination fees.
With fixed-rate loans, the lender tells you your interest rate when you get the loan, and it doesn’t change. Subsequently, your repayments stay the same throughout your loan term, too. Great for budgeting and planning your finances!
If a lender conducts a credit check that will be visible to lenders during future credit searches, it’s a hard enquiry. It pays to know when lenders do a credit check, as too many hard enquiries in a short time will negatively affect your credit score.
When you get a personal loan, you don’t just repay the amount you borrow, although that would be a fantastic deal! Most of your cost of borrowing will come from the interest rate, which is your main charge for borrowing the money.
Lenders advertise their interest rates as an annual percentage rate (APR). When looking for a loan, pay close attention to the comparison rate, as loans with a low interest rate may have much higher charges and be more expensive overall.
Joint Personal Loan
Joint personal loans may enable you to borrow a higher amount.
For a joint personal loan, both you and your partner apply for the loan, and lenders decide the outcome of your application based on both your credit histories. While you may be able to borrow more with a joint loan, you should also be aware that if one party doesn’t meet their obligations, you can still be held liable for the debt.
If you borrow cash for 72 months, that’s your loan term!
Most lenders include their monthly fees in your comparison rate. Your monthly fee covers things like servicing and administration of your account, such as account statements and any customer service issues requiring a resolution. Double check before you apply for a loan that your chosen lender includes this fee in your comparison rate!
NOW Finance is a non-bank lender, as you can borrow money from us, but we’re not a bank. While banks mostly rely on deposits into bank accounts to fund lending, non-bank lenders do not have customers with deposit accounts. Therefore, non-bank lenders fund their products via wholesale money markets.
However, this doesn’t mean any institution can call themselves a lender. Any institution wanting to lend money must have an Australian Credit Licence (ACL) issued by the Australian Securities & Investments Commission (ASIC). All lenders should display their ACL number on their website, and you can check its validity before making a personal loan application using ASIC Connect.
That’s all a non-bank lender is! A company that isn’t a bank but from where you can borrow money.
As with monthly fees, most lenders include ongoing fees in your comparison rate. When shopping around for a personal loan, you may find lenders that use the term interchangeably with or as an alternative to monthly fees.
If you find a lender offering what looks like an unusually low comparison rate, check they have included their ongoing fees in the rate!
Personal Finance Broker
If you’re looking for a personal loan, credit card deal, or a new car insurance policy, you might go to a personal finance broker. Finance brokers provide services helping you to find a range of financial products to suit your needs.
Personal Loan Broker
Personal loan brokers specialise in finding loans for their customers. If you’re looking specifically for a loan rather than deciding between a loan or a credit card, using a loan broker might be better than going to a general finance broker.
Personal loan brokers can connect you with lenders specialising in loans suiting your needs, whether that’s a debt consolidation loan, vehicle purchase loan, or something else.
Personal Loan Lender
NOW Finance is a personal loan lender, as is any financial institution, whether a bank or otherwise, from whom you can borrow cash.
Some consumers confuse brokers with lenders, but you don’t borrow money from a broker.
Your principal is the total amount borrowed, or the amount you still owe on a personal loan.
For example, if you get a loan for $30,000, your principal is $30,000.
This differs from the total amount repayable, which includes your comparison rate comprising of your interest rate and other charges on top of your principal.
RBA Base Rate
The Reserve Bank of Australia (RBA) sets the base rate. Since March 2020, the RBA announces the base rate each month in a “Monetary Policy Decisions” media release following its board meeting.
The RBA base rate can influence the cost of borrowing, if the lender chooses to pass on the rate change. For example, if you have a variable interest rate personal loan and the base rate goes up, your repayments could increase.
If you take out a new loan to repay your current one, that’s refinancing. Refinancing a loan might enable you to get a better interest rate, lower your repayments, or become debt free quicker. While you will need to go through another loan application process, it can be worth it if you’re able to enjoy any of these benefits.
You can also refinance all your existing debts by using a personal loan to pay them off, leaving you with one repayment. This type of refinancing is typically called debt consolidation.
Depending on your circumstances, your lender may contact you during your loan term to offer the chance to refinance your loan.
If you put up an asset, such as your house or car, as security for a loan, you have a secured loan. Thanks to offering this security, you might be able to borrow more or get lower interest rates on a secured loan. However, by offering your asset as security you give your lender the right to take possession and sell it to ensure they get their money if you default.
Before you apply for a personal loan with NOW Finance, you can get your rate. To give you your rate, we perform an AccessSeeker check on your credit file.
Such a check is known as a soft enquiry because it doesn’t affect your credit score and lenders are unable to see your history of soft enquiries.
If your lender requires you to pay a fee to repay your loan in full early, that’s a termination fee. Some lenders do not charge termination fees after you have had your loan for a specific period.
Some lenders refer to these as early repayment charges or fees, or discharge fees.
If you think you might repay your loan early or make extra repayments, ensure you check for termination fees!
If you don’t offer an asset as security to get a personal loan, you have an unsecured loan. Unsecured loans are riskier for lenders, as there isn’t an asset they can sell if you default. Therefore, you will usually be able to borrow lower amounts and get a higher interest rate with unsecured loans.
While you don’t risk losing your home or another asset if you default on an unsecured loan, lenders may pursue court action against you to try and get their cash.
If you must pay your lender anything before they give you your cash, this is an upfront fee.
Most lenders don’t charge upfront fees like application fees, so you should think carefully before applying for a loan with lenders that do.
If your interest rate can go up or down during your loan term, you have a variable rate loan. With such a loan, your interest rate can change in line with the RBA cash rate, depending on whether the lender choose to pass this change on. This means your regular repayment amount may go up or down, too.
Your Glossary of Personal Loan Terms
We hope reading this fills you with confidence about all the terms and phrases you see when shopping around for personal loans or other financial products. If you think we’ve missed something or there’s a term you’re still unclear on, get in touch and let us know! We’ll get back to you with a definition and update this article to help other readers like you in the future!