Demystifying Loan Terminology
At Public Service Credit Union, we believe that understanding loan terminology is crucial for making informed financial decisions. We're committed to transparency and want to help you navigate the borrowing process with confidence. Let's break down some essential loan terminology and highlight some of our unique policies:
Principal
The principal is the original amount of money you borrow from a lender. For example, if you take out a $200,000 mortgage, that $200,000 is your principal.
Interest
Interest is the cost of borrowing money, typically expressed as a percentage of the principal. It's how lenders make money on loans. There are two main types:
Fixed Interest Rate: The interest rate remains the same throughout the loan term.
Variable Interest Rate: The interest rate can fluctuate based on market conditions.
At Public Service Credit Union, we currently offer only fixed-rate loans. This policy provides our members with the benefit of predictable payments throughout the life of their loans. You won't have to worry about your payments increasing unexpectedly due to market fluctuations, which can make budgeting easier and provide peace of mind.
Annual Percentage Rate (APR)
The APR includes both the interest rate and any additional fees or costs associated with the loan, giving you a more comprehensive view of the loan's total cost.
Loan Term
This is the length of time you have to repay the loan. Common terms include 15 or 30 years for mortgages, 3-7 years for auto loans, and 1-5 years for personal loans.
Collateral
Some loans require collateral, which is an asset (like a house or car) that secures the loan. If you default on the loan, the lender can seize the collateral. At Public Service Credit Union, we place significant importance on collateral when approving loans.
“Understanding these terms and our specific policies can help you make more informed decisions when borrowing”
Down Payment
A down payment is an upfront payment made when purchasing a big-ticket item like a house or car. It's usually a percentage of the total purchase price. For mortgage loans at Public Service Credit Union, we require a 20% down payment. This policy helps ensure our members have a significant stake in their property and often results in better loan terms.
Amortization
This refers to the process of paying off a loan through regular payments. An amortization schedule shows how each payment is split between principal and interest over the life of the loan.
Credit Score
Your credit score is a numerical representation of your creditworthiness. While many lenders use this to determine loan approval and interest rates, Public Service Credit Union currently does not use credit scores for loan approval or to adjust interest rates. We believe in looking at the bigger picture of your financial health.
Debt-to-Income Ratio (DTI)
DTI is the percentage of your monthly gross income that goes toward paying debts. At Public Service Credit Union, we use DTI as a key factor in loan approval. Our current policy requires a DTI under 40% for loan approval, based on your gross income. This helps ensure that our members can comfortably manage their loan payments along with their other financial obligations.
It's important to note that we use gross income (your income before taxes and other deductions) to calculate DTI. This typically results in a lower DTI ratio compared to using net income, which can be beneficial for borrowers.
Origination Fee
This is a fee charged by lenders to process a new loan application. At Public Service Credit Union, we only charge an origination fee for mortgage loans, and it's a flat fee rather than a percentage of the loan amount. We're proud to offer no application or origination fees for consumer loans like vehicle or personal loans.
Understanding these terms and our specific policies can help you make more informed decisions when borrowing from Public Service Credit Union. We're always here to answer your questions and help you find the right loan for your needs. Our unique approach to lending focuses on your overall financial picture, not just a credit score number.
Remember, knowledge is power when it comes to your finances. Stay informed, and you'll be well on your way to making smart borrowing decisions. Feel free to reach out to our loan specialists for personalized guidance on how our policies can benefit you!