Amortization, APR, ARMs – the world of borrowing can be overwhelming with too many choices and too much jargon. Here at Citizens Bank, we’re ready to provide the guidance you need to make smart borrowing decisions. Let’s start by demystifying seven borrowing terms you’re likely to hear:
1. Amortization
This is the process of paying a loan back in installments according to a set schedule. For example, a seven-year auto loan spreads out your payments over seven years. To make sure that a potential loan will fit your budget, it’s important to find out what your monthly principal and interest payment will be according to the amortization schedule. Check out our handy online amortization calculator!
2. APR
Your annual percentage rate, or APR, shows you the annual cost of borrowing money, shown as a percentage of the outstanding balance. The lower your APR, the lower your cost. Depending on the type of loan, an APR may include not only your interest rate but also additional fees, making it a more accurate representation of the overall costs, which can be helpful when comparing loans.
3. Credit Score
This is a measure of your creditworthiness, distilled into a number between 300 and 850, assigned to you by each of the three main credit reporting companies (Equifax, Experian, and TransUnion). Your credit score is a major factor in whether you qualify for a loan, and at what interest rate. Factors that will influence your score include your history of on-time payments, the length of your credit history, and your credit utilization (the amount of money you borrow compared to your credit limit). You’re entitled to a free credit report once a year from each credit reporting company.
4. DTI
Lenders want to ensure that you have the ability to make regular payments on your loan. That’s why they may take a look at your debt-to-income (DTI) ratio, which compares your expenses to your income. The lower your DTI, the easier it will be to comfortably afford a mortgage or credit card payment.
5. Interest Rate
This is your basic cost of borrowing money, expressed as a percentage of your loan amount, but not including additional costs as an APR does. Interest is determined by your lender based on prevailing market rates as well as your credit score. Depending on what kind of loan you’re getting, your interest rate may be fixed for the life of the loan, which gives you the certainty that your rate won’t go up. It may also be adjustable, as in an adjustable-rate mortgage, or ARM, which is fixed for a period of time before readjusting periodically based on current mortgage rates for the remainder of the term. Interest rates can also be variable (as for most credit cards), going up or down with the market.
6. Revolving Credit
With this type of borrowing, your lender sets a credit limit and gives you the ability to borrow money on multiple occasions, up to that limit. You can access more money by repaying what you’ve borrowed, and you only have to pay interest on the amount you use. Widely used types of revolving credit include credit cards and home equity lines of credit (HELOCs).
7. Secured/Unsecured Loans
When you take out a secured loan, like a mortgage or auto loan, the lender has the ability to repossess the collateral you put up (your house or car) if you fail to repay in order to recoup their loss. Thus, secured loans present less of a risk to lenders and often offer more affordable interest rates. Unsecured loans, which are supported only by the borrower’s credit score, include most credit cards, many personal loans, and student loans.
How Can We Help You?
We’ve been providing personalized financial services to East Tennesseans for over 85 years and we’re proud to have been recognized as a Top Lender by the Independent Community Bankers of America for 2021. No matter where you are in your financial journey and where you want to go, we’ll be delighted to assist. Search here for a branch near you, or contact us here.