A guide to common loan terminology
Applying for a loan often involves unfamiliar terms and industry jargon. Whether you’re looking at a home loan, personal loan, or car loan, understanding common loan terminology can help you better interpret the information provided.
Below is a glossary designed to explain key loan terms in plain language, so you can review loan information with greater clarity.
Loan terminology glossary
Amortisation
The process of paying off a loan gradually over time through regular repayments, which typically cover both principal and interest.
Default
When a borrower fails to make loan repayments as agreed under the loan contract.
Establishment fee
A fee charged by some lenders to cover the cost of setting up a loan. This may include credit checks, application processing, and administrative costs.
Interest
The cost charged by a lender for borrowing money, usually calculated on the outstanding loan balance.
Interest rate
The percentage of the principal charged by the lender for borrowing the money. Interest rates may be fixed or variable, depending on the loan terms.
Principal
The original amount of money borrowed, excluding interest, fees, or charges.
Repayment
A payment made toward paying back a loan. Repayments are usually made in regular instalments over the loan term.
Secured loan
A loan that is backed by an asset, such as a car or property, which the lender may claim if repayments are not made as agreed.
Term
The length of time over which a loan is scheduled to be repaid.
Unsecured loan
A loan that is not backed by an asset. Approval is typically based on factors such as income, credit history, and overall financial circumstances.
Other important loan terms
Comparison rate
A rate that includes the interest rate and most fees and charges associated with a loan. It is designed to help consumers compare the overall cost of different loan products. Comparison rates may not include all fees and charges.
Credit score
A numerical summary of information in a credit report. Credit scores are one of several factors lenders may consider when assessing an application.
Early repayment fee
A fee that may be charged if a loan is repaid in full, or additional repayments are made, before the end of the loan term. Whether this fee applies depends on the loan terms.
Guarantor
A person who agrees to repay a loan if the borrower does not meet their repayment obligations, in accordance with the loan agreement.
Home loan terminology glossary
Loan-to-Value Ratio (LVR)
The ratio of the loan amount to the value of the property, usually expressed as a percentage. LVR is commonly used by lenders to assess the level of risk associated with a home loan.
Mortgage
A loan used to purchase property, where the property itself is used as security. If repayments are not made as agreed, the lender may have the right to take possession of the property under the loan terms.
Offset account
A transaction account linked to a home loan. The balance held in the offset account is typically used to reduce the amount of interest calculated on the loan.
Redraw facility
A feature that may allow borrowers to withdraw additional repayments they have made on their home loan, subject to the lender’s terms and conditions.
Stamp duty
A tax charged by state or territory governments on property purchases. The amount payable varies depending on the property value, location, and buyer circumstances.
Additional resources for Aussie borrowers:
- Moneysmart: A government website providing free and impartial financial advice.
- ASIC: Offers information on financial products and services, including loans.
