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Terminologies To Remember When Applying for a Loan Philippines

Taking out a loan, whether it’s for beefing up your business capital or a home improvement project – can be a smart move. However, if you don’t understand certain loan terminologies, chances are that you might be at a disadvantage when it comes to evaluating a loan offer or comparing loan products from multiple lenders.

So in this article, we’ll cover the basic terminologies to remember when applying for a loan in the Philippines so you can make a more informed decision when borrowing money.

A Few Reminders

 

      “Loan terms” is used to describe the different details of a loan such as the repayment period, monthly payments, and fees.

      When applying for a loan, the borrower has the right to demand for the loan terms or agreement before finalizing any borrowing.

      It’s important to understand and review loan terms carefully to check for any hidden clauses that could potentially cost you money.

 

List of Basic Terms When Applying for a Loan in the Philippines

 

 1. Loan Repayment Period

This refers to how long you’ll have to repay what you borrow. If you’re getting a personal loan, your loan might have a 2-year term, meaning your payments will be spread out over a period of 2 years. A car loan, on the other hand, may have a 5-year term.

To have a clearer view of how the loan repayment periods will take place, you may ask your lender for an amortization schedule.

 

2. Amortization Schedule

This shows you how your regular payments are applied to your loan balance over time. Typically, this will reflect the following:

      How much of each payment goes to principal and interest

      How your principal balance decreases after every payment

      The total amount of interest paid over time

The longer your loan repayment period is, the lower your monthly payments are, but a longer loan repayment period can also translate to a higher interest rate over the life of the loan.

 

3.  Interest Rate and Fees

The interest rate is equivalent to the percentage you’ll pay for the loan while the fees are what the lender can charge you to obtain the loan. The usual interest rates are usually on a monthly basis but sometimes, lenders use the word “Annual Percentage Rate” (APR) which corresponds to the total cost of repaying the loan over the course of a year.

In terms of fees, there are several important ones to look out for in your loan terms and conditions, including:

      Application fees

      Annual fees

      Closing costs (in the case of a mortgage or home refinance loan)

      Prepayment penalties

      Late payment penalties

4. Principal

This refers to the original sum of money borrowed before interest and other fees are added on. Payments on your principal will help decrease your loan amount but it does not include interest payments yet.

 

5. Grace Period

A grace period is a period of time after the due date where in payments may be made without penalty. A grace period of 15 days is the norm but may still differ from one lender to another.

 

6. Gross Income

Gross income refers to the total amount of income you earn before taxes and before other deductions are taken out of your paycheck. When considering you for a loan approval or not, a lender may ask for your gross income to calculate your debt-to-income ratio (DTI). By computing this ratio, a lender can gauge how much money they should lend to you.

 

7. Collateral

Collateral is an asset that you can pledge as a backup to a lender. The usual types of collateral include real estate, vehicles, and investments. For example, when you take out a car loan or mortgage, the car or house can be your collateral to secure your loan in case you are unable to make payments anymore, for whatever reasons. If you fail to repay your loan, the lender can repossess your car or foreclose your home.

Read also:

      Benefits of Using Collateral Loans to Borrow Money in the Philippines

      5 Smart Tips on Buying Foreclosed Properties in the Philippines

 

8. Secured Loan

A secured loan is one that has a collateral as a back up. If you default on the loan, the lender can seize the asset. Like mentioned above, some common examples of unsecured loans are home loans and car loans.

 

9. Unsecured Loan

An unsecured loan is one that does not have collateral attached to it. Some common examples of unsecured loans are credit cards. When you take out an unsecured loan, the lender cannot seize your personal assets.

 

And that’s it! We hope we have helped in expanding your financial vocabulary as this is essential when embarking on signing a loan agreement. The more you know, the more you can benefit from your loan and have a harmonious relationship with your lender.

 

Ready to take out a loan? RFC is here to help! RFC offers a wide range of loans such as SME Business Loans, Business Expansion loans, Franchising loans, and many more. Apply for one now through this link.

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