What are the basic elements of a loan or mortgage?
Principal, interest, term & repayments.
Here we explain a number of the basic terms and definitions used in home loans, mortgages and business finance:
- Principal
- Interest
- Term
- Repayments
- Amortisation
Loan principal
"Principal" is the amount of money you borrow from the Lender when you take out a home loan, mortgage, or other finance.
Loan interest
"Interest" is the fee the lender charges you for the use of their money. The interest charge on your loan depends on the amount of money you borrow, the interest rate, and the term of the loan.
Loan term
"Term" is the agreed period you have to repay your loan. For some loans, this could be a year or less, while for most home loans it is 25-30 years.
Loan repayments
Over the term of the loan, you make repayments on a regular basis - typically monthly. These repayments generally cover the interest charge and a portion of the principal.
Loan amortisation
This is a scary sounding term but it's just another way to describe the repayment of your debt. Over the term of the loan, your regular repayments are said to "amortise" the loan. To learn more about mortgages & home loans, talk to an MFAA member.
Want another mortgage & home loan tip?
Mortgages & home loans: what's the difference? Check out Essential #03
