Personal Loans: Glossary Of Terms

Personal Loans Glossary

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Important Notes

These are a general explanation of the meaning of terms used in relation to personal loans.

Loan policy wording may use different terms or phrasing, so you should read the terms and conditions of the relevant policy to understand the inclusions and exclusions of that loan. You cannot rely on these terms to the part of any loan you may purchase.

Refer to the product disclosure statement (PDS) of any product you are considering, and Canstar’s FSG.

The table below displays a snapshot of secured and unsecured personal loans on Canstar’s database with links to providers’ websites. The results are sorted by Star Rating (highest to lowest), and are based on a three-year loan of $20,000 in NSW. 

Annual Percentage Rate:

This is the total charge for the loan including fees and interest, expressed as a percentage, which allows you to compare across the market.

Application Fee:

A fee some lenders charge for the service of arranging and processing the application of your loan.

Asset:

An asset is a resource controlled and owned by an individual or entity, as a result of purchasing or transferring ownership of the resource. In order to be an asset, the resource must be expected to produce some future economic benefits (profits) for the individual or entity who owns and controls it.

Automatic Transfer:

A system that is set up to automatically transfer money from a one bank account into another account at a certain point in time to coincide with bills or payments.

Bankruptcy:

This is when someone’s debt problems get so serious that they are unable to pay their existing debts and bills. When this happens, it’s possible to apply to a court to be made bankrupt – which means that any assets you have, such as savings, will be used to pay off your debts. Normally, a person will be discharged from bankruptcy after one year, but it will still have a negative impact on their credit rating and may stop them getting credit or a loan in the future.<

Basis points:

A basis point is equal to 0.01% interest. For example, 50 basis points is an interest rate of 0.50%.

Comparison Rate:

Includes the interest rate, payments, and most ongoing and upfront fees and charges, in one single interest rate that reflects the total annual cost of the loan. On the Canstar website, all comparison rates for personal loans are based on a $10,000 loan over 3 years. Read the Comparison Rate Warning on our website.

Credit Rating:

An assessment of the credit-worthiness of individuals and corporations, based on their borrowing and repayment history. Find out how to check your credit rating, and how to improve your credit rating.

Credit Report:

A report from an authorised agency that shows the potential borrower’s credit history. Lenders access the information in your file to help them decide whether to lend to you. They can also record a default on your file if you make loan repayments late, or don’t pay a utility bill. Every time you make an application for finance, an entry is recorded on your file showing the lender you applied to, the type of finance, the amount and the date. Find out more about what’s included on your credit report.

Current Rate:

The interest rate advertised by institutions, not including fees, discounts and special offers.

Debt Consolidation (Consolidation Loan):

Debt consolidation means taking out one loan to combine and repay multiple loans or credit card debts that you may have. This is often done to secure a lower interest rate, secure a fixed interest rate, or for the convenience of repaying only one loan at a time. Find out more about debt consolidation options.

Default:

When a consumer fails to fulfil obligations to make the necessary repayments on a loan.

Down-payment:

The initial payment of the personal loan, usually a small proportion of the total price.  The same thing as a principal payment.

Drawdown Rate:

The date on which the borrower first uses the loaned money.

Equity:

The residual claim to ownership that the purchaser holds over what they have bought with a loan. For example, when someone has purchased a car with a loan for $20,000 and has made repayments of $4,000, then the owner has equity on the car of $16,000.

Extra Repayments:

Some loans (usually only variable rate loans) allow you to make extra payments above your scheduled monthly repayments, which offers the possibility of paying off the loan sooner and lowering your total cost paid. You could pay less in interest over the life of your loan if you make extra repayments; however, an early repayment fee may apply. Find out more about it here.

Fixed Rate:

These loans allow a borrower to lock in an interest rate for a particular period of time. The interest rate that the borrower pays will remain the same for that amount of time, regardless of changes in the RBA cash rate. At the end of the fixed rate period, the loan will revert back to a variable rate unless the loan contract is modified with the lender.

Guarantee:

Any undertaking that promises to pay an amount of funds upon the presentation of a claim or some other defined event. If you have a guarantor co-sign your personal loan with you, then they are required (“guaranteed”) to pay your monthly repayments if you do not make your required repayments (a “default”).

Interest In Advance:

When interest payments are charged at the beginning of a period, rather than the end. Usually only available with fixed interest loans.

Interest In Arrears:

When interest payments are charged at the end of a period.

Maximum Loan Amount:

The maximum amount that can be borrowed under the loan agreement.

Minimum Loan Amount:

The minimum amount that the lender requires the borrower to borrow under the loan agreement.

Personal Loan:

A loan taken out for a personal reason such as big-ticket household items including an overseas holiday, a car, furniture, elective surgery, or a wedding. Personal loans can be either secured or unsecured (see below).

Redraw:

A loan feature that enables the borrower to withdraw extra repayments they’ve already paid towards the loan. Usually, this is only allowed if they are far enough ahead on loan payments. This is not available on all loans.

Repayment Holiday:

A period of no payments, which the borrower can apply for if they are ahead on their payments.

Secured Loan:

A loan where the borrower pledges the right to ownership of an asset as collateral for their debt. This collateral usually acts as some kind of insurance for the loan provider, as they can sell the security item if the borrower defaults on their loan. Therefore, because of the lower risk to the lender, secured loans offer lower interest rates than do unsecured loans.

Unsecured Loan:

A loan where the borrower does not pledge any asset as collateral for their debt. Due to the lack of collateral, there is a higher risk to the lender, and therefore the interest rates attached to unsecured loans are generally higher than those for secured loans.

Variable Rate:

An interest rate that fluctuates according to changes in the official cash rate set by the Reserve Bank of Australia. A variable interest rate can go up or down over time, varying your interest repayment cost.

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