Loan Capital: Terminologies Used - SS2 Accounting Lesson Note

Interest rate: The interest rate is the percentage of the principal that the lender charges the borrower as a fee for borrowing the money.

Term: The term is the length of time over which the loan must be repaid.

Repayment schedule: The repayment schedule specifies the frequency and amount of each payment that the borrower must make to repay the loan.

Collateral: Collateral is an asset that the borrower pledges as security for the loan. If the borrower defaults on the loan, the lender can seize the collateral to recoup their losses.

Covenants: Covenants are terms and conditions that the lender imposes on the borrower to ensure that the borrower will repay the loan. These may include restrictions on the borrower's financial activities or requirements to maintain a certain level of financial performance.

Amortization: Amortization is the process of spreading out the repayment of a loan over a set period of time, typically through equal monthly payments that include both principal and interest.

Maturity: The maturity date is the date on which the borrower must repay the entire loan balance, including principal and interest.

Refinancing: Refinancing is the process of taking out a new loan to pay off an existing loan. This may be done to take advantage of lower interest rates or to extend the loan term.

Secured vs. unsecured loans: A secured loan is backed by collateral, while an unsecured loan is not. Secured loans typically have lower interest rates because the collateral reduces the lender's risk.