Personal loan glossary

Application fee: The fee charged to cover the lender’s costs for setting up the loan and producing all the necessary documentation. This fee may also be known as the approval or establishment fee.

Arrears: An amount that has not yet been paid and is overdue for payment.

Asset: Something of which you have ownership, such as a bank account, shares and bonds, or physical property like a car, house or land.

Basis point: A unit of measure used to refer to the percentage change in values or interest rates. One basis point is equivalent to 0.01%, or 1/100th of a percent.

Borrower: A person or entity that obtains money from a lender.

Borrowing power: The maximum amount of money that you can borrow; i.e. the amount that a lender will allow you to borrow. Someone with lots of assets and little or no debt will have more borrowing power than someone with no assets and large debts.

Break fee: The fee that your lender can charge if you end your fixed-rate loan before the end of the fixed-rate term specified in your contract. The break fee is designed to compensate the financial institution for any loss it may incur as a result of the fixed-rate loan ending before its agreed term.

Budget: An estimate of your income and expenditure for a specific time frame, which enables you to make plans to achieve a financial objective.

Cash flow management: Refers to the practice of monitoring and optimising how much money is earned and expensed, in order to forecast upcoming financial needs.

Collateral: (also known as security) An asset of value that you pledge to your lender that may be seized if you default on your loan repayments. An example is your car.

Comparison rate: A comparison rate is designed to let you compare the true cost of one loan versus another, to help you avoid choosing a low-rate loan that looks attractive but may cost you more in the long run. It is expressed as an annual percentage rate and includes the loan's interest rate as well as any upfront and ongoing fees and charges. Lenders are legally required to show customers a comparison rate alongside a product's interest rate.

Compound interest: Interest that is payable on the accrued interest as well as the original principal.

Credit limit: The maximum amount you can borrow.

Credit report: Your credit history is obtained from a credit report that is produced by an authorised credit reporting agency.

Credit reporting agency: (also known as credit bureau) A company that collects and distributes information with respect to your financial behaviours and credit history. They analyse and report your credit score to prospective lenders.

Credit score: (also known as credit rating) Your credit score is a numerical rating that estimates your likelihood to repay your personal loan, or your creditworthiness. A higher credit score reflects more positively as this indicates a better repayment history.

Debt consolidation: A form of debt refinancing where one loan is taken out to pay off multiple debts.

Default: A default occurs when a borrower fails to make the required payments on a debt according to the loan agreement.

Drawdown: The payment of loan funds from a loan provided by a bank.

Drawdown date: The date that your loan funds are used for the first time.

Early repayment fee: A fee charged if you pay your loan ahead of the agreed schedule.

Establishment fee: The fee charged to cover the lender’s costs for setting up the loan and producing all the necessary documentation. This fee may also be known as the application or approval fee.

Extra repayments: Some personal loans may provide the opportunity for you to make additional repayments above the minimum repayment amount. This enables the loan to be repaid faster and reduces interest charges.

Fixed interest rate: An interest rate that is charged or paid at the same rate for a set period, usually one to five years.

In-principle approval: (also known as conditional approval or pre-approval) When your personal loan is approved in principle, your lender provisionally agrees to lend you a certain amount of money, based on the initial information provided and subject to certain conditions. An in-principle approval does not provide an absolute guarantee that your loan will be fully approved.

Interest: Your lender’s charge for the funds that you have borrowed for your loan, or the investment return on funds that are in a savings or deposit account.

Late payment fee: A fee charged if you miss making your minimum payment, plus any overdue amount, by the scheduled due date. To avoid this fee, make sure your minimum payment is made on time by setting up a regular automatic direct debit.

Lender: The bank or financial institution from which you borrow the funds.

Liabilities: Any debts or financial obligations.

Lien: The right of a person or entity to retain possession of an item until the debt owed is repaid.

Loan term: The length of time it takes to completely pay off your personal loan.

Maximum loan amount: The amount your lender calculates as the most you can afford to repay.

Ongoing fees: Any regular payments you are charged in addition to the loan interest applied. Examples of ongoing fees include annual fees and monthly account keeping fees.

PPSR: Personal Property Securities Register (PPSR) is a public noticeboard of security interests in personal property. If your personal loan is secured, your lender may register a security interest over the collateral pledged.

Principal: The amount owed on your loan. Interest is calculated on the principal.

Principal and interest repayments: A repayment plan where you are able to start repaying the principal as well as the interest.

Product disclosure statement: (also known as PDS) This is a document required by law that discloses information such as risks, benefits, fees and key features of a financial product.

Redraw facility: A facility that allows you to access any additional repayments that you have made to your personal loan. Additional payments can lower the interest that you pay on your loan. Redraw is often only available on variable rate loans or with limited access for fixed rate loans.

Refinancing: You refinance when you pay off or extend an existing loan and set up a new loan with the same bank or a different financial institution.

Renovate: To repair or improve something, especially a home or building.

Repayments: The amount that you must pay within the time frame specified in your loan contract, for example, monthly.

Repayment frequency: The schedule for making your repayments, which could be weekly, fortnightly or monthly, depending on your loan contract.

Repayment type: The method in which you pay down your loan. The two most common repayment types are principal and interest repayments, and interest only repayments.

Security for a loan: An asset, for example, property, that’s used to secure your loan. If the loan is not repaid, the lender may take possession of and sell the asset to get their money back.

Secured personal loan: A personal loan is ‘secured’ when you have used an asset as collateral, or security, against the personal loan. An example of collateral is a car. If you miss the agreed repayments the lender can take possession of the asset and sell it to repay the debt. Because there is less risk to your lender when an asset is pledged, the lender may offer a lower interest rate for a secured personal loan.

Serviceability: Your ability to meet loan repayments, according to the size of your personal loan, your income, expenses and other commitments.

Split loan: Refers to a loan that has a certain portion at a fixed rate, and the remainder at a variable rate.

Stamp duty: The tax on written documents and certain transactions imposed by the state government, such as car registrations, mortgages and property transfers.

Standard rate: The normal percentage amount that a financial institution charges when you borrow money.

Statement frequency: How often you will receive account statements summarising all your financial transactions over a set period.

Target market determination: (also known as TMD) This document outlines who a product is suitable for, and any conditions regarding how the product can be distributed. (Please note a TMD does not provide financial advice.)

Tier: The interest rate band you are charged as determined by your creditworthiness.

Top up: An increase to your existing personal loan to free up extra cash by borrowing extra money against your loan, providing you are able to make the extra repayments.

Unencumbered security: Refers to any asset that is not subject to any creditor claims or liens.

Unsecured personal loan: A personal loan is ‘unsecured’ when you don’t need to provide any collateral, or security, to apply for the loan. Rates for unsecured personal loans are typically higher than secured personal loans. However, the application process can be quicker as you won’t need to provide any details of assets pledged.