Personal Loan Glossary: Terms Every Borrower Should Know

Loan paperwork is full of terms that aren't always explained clearly. Here's a plain-language glossary of the ones you'll encounter most often.

Core terms

• Principal: The original amount you borrow, before interest.
• EMI (Equated Monthly Instalment): The fixed monthly payment covering both interest and a portion of principal.
• Tenure: The total repayment period, usually expressed in months.
• Interest rate: The percentage rate charged on the outstanding loan amount, typically annualised.
• APR (Annual Percentage Rate): An all-inclusive cost figure reflecting the interest rate plus one-time charges like processing fees - the number that best reflects the true cost of a loan.

Fees and charges

• Processing fee: A one-time charge for underwriting and disbursing the loan, usually a percentage of the loan amount.
• Foreclosure/prepayment charge: A fee some lenders charge if you repay the full outstanding balance before the end of the tenure.
• Penal/late payment charge: A fee charged when an EMI payment is missed or delayed.

Assessment and disclosure terms

• CIBIL score: A three-digit credit score (300-900) reflecting your credit history and repayment behaviour.
• KFS (Key Fact Statement): A mandatory, standardised disclosure document lenders must provide before you accept a loan, summarising the all-inclusive cost and terms.
• Cooling-off/look-up period: A window after loan acceptance during which you can exit by repaying just the principal and proportionate APR.
• Co-applicant: A second person applying jointly, whose income/credit is jointly assessed and who shares equal repayment responsibility.

Structural terms

• Unsecured loan: A loan not backed by any pledged collateral/asset.
• Reducing balance interest: Interest calculated on the outstanding (shrinking) principal balance, rather than the original full amount.
• NACH: The electronic mandate system used for automatic monthly EMI debits.

Why this matters

Understanding these terms means you can read a loan offer or Key Fact Statement and actually evaluate it, rather than relying on a lender's summary of what it means for you.