What is a Lien and Other Words Used When Obtaining a Loan?Alison Beard
Acquiring different types of loans for a variety of purposes can sometimes lead to confusion in the language that is used. Sometimes, words are used that an individual has never heard of before. One of the words that many people have not heard before and do not fully understand is a lien. Below will explain common words used when securing a loan, such as liens, term, and interest.
What is a Lien?
Liens are often used when securing a loan with an asset and are almost always used with any loan relating to a vehicle. Vehicle loans include loans to finance a vehicle, lease a vehicle, or title loans. In these cases, a lien will be placed on the vehicle for the duration of the loan and will immediately be removed upon repayment.
A lien secures the lender’s interest in the asset, such as a vehicle, and lets other lenders know that there is money owing on the asset. The lien allows the asset to be pledged as collateral while the individual borrowing the money can still use the asset. The benefit of liens on vehicles is that you can continue to keep and drive the car as usual, even though it is being used as collateral for a loan. The lien will not impact the borrower in any aspect. They can still use the car, and the insurance will not be affected. This is why many individuals choose to finance vehicles or use their car to borrow money through a title loan.
What is a Loan Term and How Does it Affect Interest?
A loan term is the amount of time for the loan to be repaid. For example, if the loan term is one year, then equal payments will be made throughout the year until it is repaid. Within the loan term, there can be a variety of options for the timing of payments. Often, individuals will make monthly or bi-weekly payments throughout the term of the loan. The timing of payments all depends on the borrower’s needs and preferences and lenders typically allow the borrower to decide if they would like to make bi-weekly or monthly payments.
Additionally, the term of the loan depends on the borrower’s needs. Longer loan terms are desirable in order to keep the payment smaller as the loan is spread out for a longer period of time. The disadvantage of a longer loan term is that more interest can accumulate over time. Although the interest rate would stay the same regardless of the loan term, interest is based on an annual rate so the longer the loan, the more interest that is paid. However, many individuals often opt for the longer loan term then make extra or larger payments if they are able to. This will ensure that the payments are lower than a shorter loan term, but extra payments can be made to pay it off quicker in order to avoid paying more interest. The length of the loan term is often the borrower’s decision. It all depends on how large or small they want the payments to be. Ask your lender what the payments would be under a variety of loan terms to decide which best suits your needs.
What is Interest?
Interest is the price paid for borrowing money. When repaying a loan, you will pay off both the principal amount loaned out and the interest. The interest rate is often a set rate and you are told upfront what this rate is. The rate depends on the market, banks, the Bank of Canada, and how risky the loan is. More risky loans often come with higher interest rates, however, these loans are more easily attainable. An interest rate is the per cent of interest that is paid annually. For example, if you are borrowing $1,000 at a 10% interest rate, then you are paying $100 in interest annually or approximately $8 monthly.
It can be helpful to be educated in the language that is often used by financial institutions. This will ensure that you can fully understand contracts and the representatives you are speaking with. However, do not be afraid to ask questions if you are unsure of anything.