Bank loan vocabulary exercise exercise

Choosing a loan can be a difficult experience. If you want to get the best deal, you have to do a lot of work (searching for loans, contacting banks, applying for loans etc...). And some banks and lending institutions don't make it easy. They use vocabulary/terminology which most normal people may have heard before, but do not fully understand. This can cause problems in the future for those who have taken out the loan.

To help you understand what these different words and phrases for loans mean, you will find an exercise below that will explain them in normal English. Doing this exercise will help you both understand and remember this lending vocabulary better and ensure that you can decide which loan is best for you.

Exercise: Commonly used loan vocabulary

Read the following conversation between Peter and Eric. Peter is advising his friend Eric what he has to think about when deciding which loan to choose.

From the context, try to guess what the meaning of the words/phrases in bold are. Then do the quiz at the end to check if you are right.

Eric:'Peter, you know a lot about loans. I'm looking for a personal loan at the moment to build a swimming pool and don't want to make any mistakes.'

Peter:'No problem. Are you looking to get a secured loan where the loan is guaranteed by your property, or an unsecured loan where it's not connected to your property?'

Eric:'I'd prefer to not go for a secured loan. I don't want the bank to take my house if can't pay the loan back. I'd prefer an unsecured loan.'

Peter:'An unsecured loan is less risky for you, because there's no possibility of losing your property. But because it's more risky for the lender or bank, the interest rate is higher. So it's more expensive, you'll pay a higher interest rate on the loan. How much do you want the principal of the loan to be?'

Eric:'What does the principal of the loan mean?'

Peter:'The principal means the amount of money you want to borrow.'

Eric:'The principal will be £15,000. I'd like a repayment period of four years, so I will have paid all the money back to the bank in that time. Also, is the interest rate the same as the Annual Percentage Rate?'

Peter:'More or less yes. The Annual Percentage Rate or APR does show how much interest you pay on the loan each year that you have the loan. But the APR also includes fees or additional costs that the bank charges you for obtaining the loan, like loan processing or administration fees. So, if the bank charges a yearly interest rate of 6% on loans, with the fees and additional costs included, you'll actually pay them 6.14%. This 6.14% is what is called the Annual Percentage Rate. Have you thought what type of interest rate you want the loan to have?'

Eric:'Well, I thought about variable rate. You know, an interest rate which can go up and down because of the changes in inflation.'

Peter:'That's one option. There's also fixed rate, where the interest rate you pay on the loan stays the same throughout the whole repayment period of the loan. Then there's split rate, where part of the interest you pay is variable and the other part is fixed.'

Eric:'I'll have to look into it. I've heard about a preferential rate. What type of interest rate is that?'

Peter:'If you are an existing customer of a bank or lending institution, sometimes the bank will offer you an interest rate on a loan that is lower than what they normally offer. This is what a preferential rate is.'

Eric:'Ok. I'll speak to my bank.'

Peter:'Eric, what you must do when deciding on choosing a loan is to look at the terms and conditions for it.'

Eric:'That's the loan contract information, which people often call the small print.'

Peter:'That's right. You need to read it. It contains all the information about the fees that you have to pay to the bank for the loan. You know the additional costs like processing the loan application or for administration. Also, in the terms and conditions you'll find what the charges are. This is what you have to pay the bank if one of your repayments is late. For some loans, the charges can be really high.'

Eric:'I don't think I'll have a problem repaying it. In fact, I should be able to pay off the loan early. Although I'm going to ask for a 4 year repayment period, I should be able to pay the loan off in a little over 3 years.'

Peter:'That could be a problem. Have a look in the small print to see what it says about redemption penalties. Some banks and lending institutions charge you money if you try to repay the loan back early. These are called redemption penalties.'

Eric:'Thanks, I will.'

Now do the QUIZ below to make sure you understand the meaning of this vocabulary.

Quiz: Bank loan vocabulary

Below is a definition/description of each of the words in bold from the above text. Now choose the word/phrase from the question's selection box which you believe answers each question. Only use one word/phrase once. Click on the "Check Answers" button at the bottom of the quiz to check your answers.

When the answer is correct, two icons will appear next to the question. The first is an Additional Information Icon "". Click on this for extra information on the word/phrase and for a translation. The second is a Pronunciation Icon "". Click on this to listen to the pronunciation of the word/phrase.

1. A type of interest rate which can change during the time of the loan, is called

Variable rate:
(adjective) 'variable rate' or 'flexible rate' is one of three main ways/methods that you can pay interest on a loan. It basically means that the interest you pay will change/vary during the length of repaying a loan. The interest rate will change depending on the rate of inflation (the increase in the price of products in the economy as a whole) and others factors. To choose a 'variable rate' on a loan could be a gamble, because although the amount you paid in interest can go down, it can also go up. The other two main methods of paying interest, are: 'fixed rate' (where the interest you pay doesn't change throughout the period of a loan) and 'split rate' (where a part of the interest you pay on a loan is 'fixed rate' and the other part is 'variable rate'). In Spanish: "tasa variable".

Variable rate:

2. The amount of time to pay back a loan to a bank or lending institutions, is called the

Repayment period:
(noun) The 'repayment period' is the total length of time that it takes a customer to repay/pay back the loan to the the bank or lending institution. The 'repayment period' is always established/confirmed before the loan is given to the customer. With many loans, the customer can decide within limits how long they want the 'repayment period' to be, e.g. 2 years, 10 years etc... For longer 'repayment periods', the customer's monthly repayments (how much they pay to the bank per month) to the bank for the loan will be less than for shorter 'repayment periods', but the overall cost of the loan will be more expensive because of the more years of interest on the loan. With many loans it is possible to change the 'repayment period' when you have already started to pay back the loan. But, if you want the 'repayment period' to be shorter than you agreed to when you accepted the loan, the bank will often charge you 'redemption penalties', which is extra money you have to pay on top of the loan. In Spanish: "período de reembolso/pago".

Repayment period:

3. A lower rate of interest that somebody is given on a loan because they are an existing customer of a bank, is a

Preferential rate:
(noun) Many banks and lending institutions offer their existing customers a reduced rate of interest from what they normally offer to non-customers on any new loan that they take out with them. This reduced/lower rate of interest is called a 'preferential rate'. The banks or lending institutions do it to reward their existing customers and to make sure that they continue to use their loans/financial services. But be aware, you can often find a lower rate of interest on a loan from another bank or lending institution than what you can be offered in a 'preferential rate'. In Spanish: "tasa preferencial".

Preferential rate:

4. Another name for the 'small print', is the

Terms and conditions:
(noun) Basically, the 'terms and conditions' or 'small print' contains details of the legal agreement between the customer(borrower) and the bank or lending institutions(lender). It details all the responsibilities that both the lender (e.g. not change the interest rate) and borrower (e.g. repay the loan) have to do and what will happen if either of them don't do them (e.g. charge the customer for late payment). It's very important that when you are taking out a loan that you read the 'terms and conditions' on the loan contract, because a bank or lending institution can include 'terms' (e.g. paying fees that they didn't tell you about etc...), and 'conditions' (e.g. take legal possession of your property if you can't pay the loan) that can cost you more money or cause you problems in the future. In Spanish: "términos y condiciones".

Terms and conditions:

5. A type of loan where you won't lose your property or assets if you can't repay it, is called an

Unsecured loan:
(noun) This is a type of loan where repayment isn't guaranteed by the customer's (borrower's) possessions, property or assets (e.g. car, business, property etc...). So, the person won't lose their property/possessions to the bank or lending institution if they don't pay it back. But they will be taken to court and it will affect their credit rating. 'unsecured loans' are common when people want to borrow small amounts of money (e.g. a small business or personal loan). Because there is a bigger risk of the person borrowing the money not repaying it than with a 'secured loan' (where the loan is guaranteed by their possessions, property or assets), interest rates are normally higher on 'unsecured loan' than on 'secured loans'. In Spanish: "préstamo sin garantía".

Unsecured loan:

6. The actual amount of money that a customer/borrower receives when they take out a loan, is called the

Principal:
(noun) Banks and lending institutions call the original quantity of money that a customer/borrower receives when they take out a loan, the 'principal'. For example, if you get a loan for $35,000, the 'principal' is $35,000. The 'principal' does not include the interest or fees you will have to pay the bank or lending institution for getting a loan from them, e.g on a loan of $35,000, when you add interest and fees, you will probably repay the bank $40,000 for the loan. In Spanish: "principal".

Principal:

7. A type of interest rate which doesn't increase or decrease during the time of the loan, is called

Fixed rate:
(adjective) 'fixed rate' is one of three main ways/methods that you can pay interest on a loan. It basically means that the interest you pay doesn't change/vary during the length of repaying a loan. So you know that you will be paying the same amount of interest throughout the whole period of the loan. To choose 'fixed rate' on a loan could be a gamble, because there is a possibility that if the rate of inflation (the increase in the price of products in the economy as a whole) goes down, you could be paying more interest on the loan than if the loan had a 'variable rate' of interest (where the interest rate can go up or down). Another method of paying interest on a loan is called 'split rate' (where a part of the interest you pay on a loan is 'fixed rate' and the other part 'variable rate'). In Spanish: "tasa fíja".

Fixed rate:

8. The extra money/charges that you have to pay a bank for paying back a loan early, are called

Redemption penalties:
(noun) When a bank or lending institution gives you a loan, they calculate how much interest you pay on it based on your individual situation (the risk of you defaulting/not paying it back) and on the repayment period of the loan (the amount of time you have agreed to repay the loan to them). Generally, banks or lending institutions give a lower interest rate for people who agree to longer repayment payments. This is because they have more years to earn interest from the loan. If a customer wants to repay a loan earlier than what they agreed to when they took out the loan (e.g. repay a loan in 3 years instead of 5 years), the bank or lending institution will lose the interest they would have earned if the customer had continued with the agreed repayment period (e.g. a loss of 2 years of interest). As a result, banks and lending institutions charge the customer to pay back a loan early. This is called 'redemption penalties'. You will find how much the 'redemption penalties' are for repaying a loan early in the terms and conditions of the loan contract. In Spanish: "sanciones redencíon".

Redemption penalties:

9. The extra costs that you have to pay the bank for getting a loan, are called

Fees:
(noun) 'fees' is the name for the additional charges that a bank or lending institution charge a customer/borrower for getting a loan with them. There are lots of different types of 'fees' (e.g. appraisal fee, solicitor/attorney fee, credit report fee, application fee, administration fee etc...) that a bank or lending institution can charge their customers for a loan. The 'fees' a customer can be charged on a loan depend on both the type of loan that the person is getting (a personal loan, mortgage etc...) and the bank or lending institution (some charge more 'fees' than others). So, it's important to find out what 'fees' you have to pay before signing a loan contract. With some loans the 'fees' have to be paid at the beginning of the loan. With other loans, the 'fees' are included in the 'Annual Percentage Rate' and paid over the whole duration of a loan. In Spanish: "cuotas/cargos".

Fees:

10. The interest rate you pay each year for a loan which includes the additional costs/fees for getting/having the loan, is called the

Annual Percentage Rate:
(noun) Is also called the 'APR'. This is a combination of the annual/yearly interest that somebody pays on a loan, plus the additional fees/charges that a bank or lending institution charge a person for getting or having a loan with them (e.g. administration fees, processing fees, service fees etc...). As a result, the 'APR' is a better indication of how much you will pay the bank or lending institution for a loan than the interest rate. For example, if you borrow $10,000 for 5 years, with annual interest of 6%, and the bank charges you $480 loan fees, you have to pay the bank for the loan a total of $13,480. So, the percentage you actually pay the bank per year for the loan is 6.96%. This 6.96% is what is called the 'APR'. Unfortunately, as with everything in finance and banking, it is a bit more complicated than this. So, you should read how the bank or lending institution generates the 'APR' for the loan in the terms and conditions. In Spanish: "tasa porcentual anual".

Annual Percentage Rate:

11. The name of the extra money a customer has to pay a bank if they are late with a payment, are called

Charges:
(noun) A 'charge' or 'bank charge' is the commonly used name for a type of 'fee' that a customer/borrower has to pay a bank or lending institution if they do something that they have agreed not to do in the loan contract. Common examples are when a customer/borrower has to pay a 'charge' for paying a repayment to the bank late or paying off a loan earlier than they originally agreed to. In fact, most banks and lending institutions no longer call this extra money that their customers have to pay them 'charges'. They normally call them 'fees' instead (e.g. late payment fee, policy cancellation fee etc...). They believe it makes them sound better. You should check the terms and conditions in the loan contract to see what 'charges' or 'fees' you may have to pay. In Spanish: "cargo".

Charges:

12. A type of loan interest rate which is a mixture of variable and fixed rates, is called

Split rate:
(adjective) 'split rate' or 'mixed rate' is one of three main ways/methods that you can pay interest on a loan. It basically means that part of the interest that you pay on a loan is 'fixed rate' (it doesn't change/vary during the length of repaying a loan) and the other part of the interest is 'variable rate' (where the interest rate can go up or down throughout the period of the loan). Normally, when the interest you pay is 'split rate', 50% of the interest is 'fixed rate' and 50% is 'variable rate'. With some loans with 'split rate', you may pay a 'fixed rate' of interest at the beginning of repaying the loan (e.g. the first 3 years) and then pay a 'variable rate' for the rest of the time. Banks and lending institutions normally only offer the option of having 'split rate' interest on large loans, like mortgages. In Spanish: "una tasa de un parte fíja y la otra variable".

Split rate:

13. A type of loan where you can lose your property or assets if you can't repay it, is called a

Secured loan:
(noun) This is a type of loan where repayment is guaranteed by the customer's (borrower's) possessions, property or assets (e.g. car, business, property etc...). So, the person can possibly lose their property/possessions to the bank/lending institution (who then sell it/them to recover the loan money) if they don't/can't pay it back. 'secured loans' are common when people want to borrow large amounts of money (e.g. a mortgage), but are also used with some small loans (e.g. a car loan). Because there is a smaller risk of the bank or lending institution losing the money than with a 'unsecured loan' (where the loan is not guaranteed by the customer's/borrower's possessions, property or assets), interest rates are normally lower on 'secured loans' than on 'unsecured loans'. In Spanish: "préstamo garantizado".

Secured loan:

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Practice

Now that you understand the new vocabulary, practise it by creating your own sentences with the new words/phrases.

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