Topic: Loans, loan-related terminology in English 2

VOCABULARY REVIEW: Loans

Need to review common terms relating to loans, lending, etc.? We've got you covered!

Principal
Meaning:
The principal is the base amount borrowed before any interest, fees, or penalties are added. Loan payments are usually divided between paying down the principal and covering interest. In the early stages of many loans (especially mortgages), a larger portion of each payment goes toward interest rather than principal.
Usage notes:
Commonly used in banking, accounting, and legal contexts
Often contrasted with interest
Examples:
Only a small portion of her monthly payment reduces the principal.
Once the principal is paid off, the loan is considered settled.

Interest rate
Meaning:
The interest rate represents the cost of borrowing money and is expressed as a percentage of the principal. Rates can be fixed (remain the same throughout the loan) or variable/adjustable (change over time based on market conditions). Even a small difference in interest rates can lead to large differences in total repayment.
Usage notes:
Frequently paired with annual, fixed, or variable
A key factor in loan comparisons
Examples:
A higher interest rate increases the total cost of the loan.
She chose a fixed interest rate to avoid future uncertainty.

Amortization
Meaning:
Amortization refers to the structured repayment of a loan through regular installments over a set period. Each payment includes interest and a portion of the principal. An amortization schedule shows how much of each payment goes toward interest versus principal at different stages of the loan.
Usage notes:
Common in mortgage and auto loans
Often used as a noun (amortization schedule)
Examples:
The amortization schedule shows that interest decreases over time.
Longer amortization periods reduce monthly payments but increase total interest.

Collateral
Meaning:
Collateral is property or assets pledged to secure a loan. It reduces risk for the lender because the asset can be sold to recover losses if the borrower defaults. Secured loans generally have lower interest rates than unsecured loans because of this reduced risk.
Usage notes:
Used mainly with secured loans
Can include property, vehicles, or investments
Examples:
The car served as collateral for the auto loan.
Without collateral, the borrower was charged a higher interest rate.

Default
Meaning:
To default means to fail to meet the terms of a loan agreement, usually by missing payments. Defaulting can lead to serious consequences, including legal action, damaged credit scores, and loss of collateral.
Usage notes:
Can be a noun (in default) or verb (to default)
Often appears in legal or formal contexts
Examples:
After six missed payments, the loan was declared in default.
Defaulting on the loan affected his ability to borrow in the future.

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