As a private lender, it is essential to be familiar with some of the terms used in the industry when carrying out transactions and particularly giving out loans. Most of these terms come up on the standard document request form, which clients fill out before drafting loan documentation.
- Amortization: The accounting practice of lowering the book value of a loan regularly over a predetermined length of time.
- Collateral Asset: A loan is collateralized when a borrower’s asset is utilized to secure the loan. If the Borrower can’t pay back the loan, the lender is guaranteed an alternative source of repayment in the form of collateral.
- Balloon Payment: Interest-only payments are made each month, with the outstanding principal balance repaid after the loan period.
- Default Rate: If a borrower defaults a payment when due or a case of default occurs as defined in the terms and agreement of the loan, the default rate will be charged to the pending interest until the default is sorted. It usually is higher than the standard interest rate.
- Lien Seniority: This describes the priority status of a lien’s liquidation regarding other obligations on the property. When the Borrower’s credit obligations are paid, the loan has a greater priority than the senior lien. As a result, lenders frequently demand first-position loans.
Other commonly used terms that lenders need to get used to include maturity date, prepayment penalty, interest rate, and guarantor. To get more understanding of required lending terms as a lender, click here.
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