Loan Terms and Conditions 101: Common Jargon Explained

A loan agreement is a written contract between a borrower and a lender that spells out all the details of a loan. Think of it as the “rulebook” that governs how the loan works, what both sides have promised, and what happens if either side doesn’t follow through.

You will likely encounter this basic loan terminology in most loan agreements:

1. Principal

The principal is the actual amount of money you borrow from the bank. For example, if you apply for a PHP 500,000 bank loan, that’s your principal. This is separate from the extra costs you’ll eventually pay, such as interest or service fees.

2. Interest

Interest is the cost of borrowing money, expressed as a percentage of your loan. Think of it as the price you pay the bank for letting you use their funds. As an example, if your personal loan is PHP 1 million with a 10% yearly interest, you’ll pay PHP 100,000 in interest per year (on top of repaying the principal).

3. Default Interest

Default interest is a higher interest rate charged when you miss your loan payments. It’s like a penalty on top of your regular interest, meant to encourage timely payments.

For instance, if your usual rate is 10% per year, the default interest might be 15–20% applied to the overdue amount. This means that the longer you delay, the more expensive your loan will become.

4. Interest Rate

An interest rate is the percentage that tells you how much you’ll pay for borrowing money. It can be fixed (stays the same throughout the loan) or variable (changes after specific periods depending on market conditions).

For example, a home loan might have a fixed rate for the first five years, after which it adjusts to a variable rate. The interest rate directly affects how much you pay monthly and overall.

5. Prepayment

Prepayment means paying off your loan early, either partially or in full, before the agreed-upon schedule. For example, you might receive a bonus from work and decide to use it to settle a portion of your auto loan ahead of time.

Prepaying can save you money because you’ll reduce the interest charged on future payments. However, some banks may charge a prepayment penalty to make up for lost income. Ask your bank if there are penalties for paying off your loan early.

6. Repayment Plan

A repayment plan is the schedule you follow to pay back your loan. It shows how much you need to pay, how often (usually monthly), and for how long until the loan is fully settled. A three-year term loan, for example, might require 36 equal monthly payments. The plan also outlines how payments are split between principal and interest.

7. Secured or Unsecured

Loan types can be secured or unsecured. A secured loan is backed by collateral — something valuable like your house or car. If you can’t pay, the bank can take this collateral to recover losses.

Because the bank has extra protection, secured loans usually come with lower interest rates. On the other hand, an unsecured loan doesn’t require collateral. Since the bank takes on more risk, the approval for unsecured loans is typically based on your creditworthiness, income, and history.

8. Maturity Date

The maturity date is the last day of your loan, when the final payment is due, and the loan should be fully repaid. For example, if you took a 5-year loan starting January 2025, the maturity date would be January 2030. On this date, you must have settled the entire principal and any remaining interest.

9. Collateral

Collateral is an asset you pledge to the bank as security for a loan. Common examples are houses for housing loans or motorcycles for motor loans. If you default on your loan, the bank has the right to take and sell the collateral to recover what you owe.

10. Events of Default

An event of default is a specific situation where the bank considers you to have broken the terms of your loan agreement. It’s not just about missing payments — it can also include giving false information, failing to maintain insurance, becoming insolvent, or selling collateral without consent.

When an event of default occurs, the bank may “accelerate” the loan, meaning it can demand full payment immediately.

11. Co-Borrower

A co-borrower is another person who signs the loan agreement with you, which means this person shares equal responsibility for repayment. The co-borrower can be your spouse, family member, or business partner.

Having a co-borrower can increase your chances of loan approval and get you better terms, since the bank sees two incomes and credit profiles instead of one. However, you are both legally responsible for the full loan amount.

12. Waiver of Demand or Notice

Waiver of demand or notice means you agree the bank doesn’t have to formally remind you or send multiple notices before taking action if you miss a payment or break the loan terms. In other words, once you default, the bank can act right away.

13. Assignment of Rights

An assignment of rights allows the bank to transfer your loan to another institution, such as another bank or an investor. This doesn’t erase your responsibility to pay; it simply means you may end up paying a different party than the one you originally signed with.

14. Set-Off

Set-off is the bank’s right to take money from your other accounts with them to cover overdue loan payments.

For example, if you owe PHP 20,000 on your loan but also have a savings account with PHP 50,000, the bank can deduct the amount from your savings to settle the overdue balance. This clause ensures the bank can recover funds even if you miss payments.

For example, if you owe PHP 20,000 on your loan but also have a savings account with PHP 50,000, the bank can deduct the amount from your savings to settle the overdue balance. This clause ensures the bank can recover funds even if you miss payments.

For anybody entering into a loan agreement, understanding the terms and conditions of a loan matters for three key reasons:

• Prevents Unpleasant Surprises. Many borrowers only look at the loan term itself (loan amount and monthly repayment). Knowing terms like “grace period” or “prepayment charge” ensures you won’t be caught off guard by extra costs.
• Protects Your Rights. Loan agreements don’t just list your obligations; they also spell out your rights. By understanding the wording, you’ll know when you’re entitled to dispute charges, restructure your loan, or request information from the bank. This helps you know the exact coverage of the loan that you will avail.
• Manages Your Finances Effectively. Terms like “maturity date,” “principal,” and “collateral” directly affect your financial planning. If you fully understand them, you can create a repayment plan that aligns with your budget and future goals.

The terms and conditions are not meant to intimidate; they are designed to ensure fairness and clarity for both sides. By decoding the common terms of loans and jargon, you can confidently review agreements and make informed borrowing decisions.

While banks craft their agreements with terms that ensure clarity and fairness, the responsibility still lies with the borrower to read the fine print and ask the bank for clarifications. Don’t sign until you feel certain. Remember, a loan is a partnership. The clearer the communication, the smoother the journey.