Application (or “Establishment” or “Processing”) Fee: An amount charged for setting up and processing your loan.
Asset: An item of value that you own or are in control of; your house, a motor vehicle, or shares.
Basis Point: A unit of measure used in finance to describe the percentage change in the value of interest rates. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. For example if interest rates fall from say 5.50% to 5.0% it means that the rates have dropped 0.50 basis points.
Alternatively if the rate is 5.50% and is increased to 6% then rates are increased by 0.50 basis points.
Borrowing Capacity: Is the amount you can borrow, based on your income and expenses.
Comparison Rate: The true cost of the loan – fees, charges, as well as interest – expressed as percentage. The Comparison Rate is an indicative interest rate that is designed to help members identify the 'true cost' of a loan. This is an important rate, required to be displayed next to the interest, and is there so you can easily compare the real costs of various loans with different conditions. It's important to consider all the features and benefits of the loan - rather than only focusing on the Comparison Rate. Benefits such as redraw, 100% offset and ability to make additional repayments / flexible repayment periods can make a difference to the attractiveness of a loan.
See also Interest Rate.
Debt Consolidation: Taking out a personal loan in order to pay off many separate loans (like credit card debts, for example), often done to secure a lower rate of interest and gain the convenience of only having to pay off a single debt. This is a fairly common and very handy use of a personal loan.
Default: When a loan customer doesn’t meet their obligations for paying back the loan.
Drawdown Date: The date on which you first access the borrowed the funds.
Extra (or “Additional”) Repayments: Payment you make towards the loan in addition to your normal repayments. This allows you to pay back the loan sooner, saving you money in the long run. Not all loans offer this.
Fixed Rate Interest: This means your interest rate, and therefore the amount you repay, won’t change for the fixed rate period of the loan. This means your repayments won’t go down…but they won’t go up, either. A fixed rate can be handy for planning you budget. You might also see this called “Fixed Interest”, a “Fixed Rate”, or simply described as “Fixed”. See also Interest Rate and Variable Rate Interest.
Holidays and Travel: Yes, it’s perfectly fine to take out a personal loan so you can go and see the Grand Canyon, tow a caravan around Australia for a year, or order a beer in every German city.
Interest: What you pay back in addition to the Principal. It’s the amount charged for the use of the money you borrowed.
Interest Rate: The cost associated with borrowing money. This rate is dependant on whether you take a secured or unsecured loan.
Maximum Loan Amount: Maximum Loan Amount is also calculated on serviceability and borrowing capacity.
Personal Loan: In the simplest terms, a loan for anything other than a house.
Preapproval: Having the loan locked and loaded and ready to go! A handy function which means you don’t have to have your purchase sorted out, then juggle the loan application to have it ready before the deal goes cold. Having preapproval can be a great negotiating tool for things like car purchases.
Principal: The amount of money you borrow. Need to borrow, for example, exactly $18,532 to buy that new boat? That’s the principal you’ll borrow. Interest is calculated on this amount.
Redraw Facility: A feature of some loans that allows you to “withdraw” ” the extra / additional repayments you’ve already paid back into the loan. If this is a feature of a loan, you may need to first meet certain requirements, like paying off a certain amount, before you can redraw.
Renovations: Need/want a new kitchen? A hot tub? An outdoor dining area with six-burner barbeque, pizza oven, and tastefully modern weather-resistant furniture in a range of earthy yet neutral tones? Yes, a personal loan can get you these.
Repayment: An amount you pay back towards the loan at a scheduled time.
Secured: A loan with some form of collateral (like a motor vehicle) is a secured loan. Because the collateral lowers the risk the institute takes when it lends you the money, it means a lower rate of interest may apply. See also Unsecured.
Serviceability: Serviceability is the ability of a borrower to meet loan repayments, based upon the loan amount, the borrower’s income, expenses and other commitments.
Loan Term: A loan for a specific amount that has a specified repayment schedule over the period which the loan agreement is in force.
Unsecured: When a loan has no collateral, and thus is a higher risk for the financial institute. Because of this, unsecured loans will have higher interest rates. See also Secured.
Variable Rate Interest: An interest that changes in relation to the official cash rate set by the Reserve Bank. This means repayments on your loan can go up…or down, depending on how the rates change. This might also be called “Variable Interest”, a “Variable Rate”, or simply described as “Variable”. See also Interest and Fixed Rate Interest.
This glossary is a generalised guide. It covers basic loans terms generally used by financial institutes like banks and credit unions. It helps you get ready to talk to a lending specialist about loans.
The most important thing to remember is that every financial institute is different. It’s important to clarify with the lender the exact conditions and features of your loan. But with this glossary, you’ll be able to have the conversation and not be confused.