Make Sure You Understand These Financial Terms Before Getting a Loan

Make Sure You Understand These Financial Terms Before Getting a Loan

Written by Fairstone
Fact-checked by Caitlin Wood
Last Updated July 20, 2020

For this post, we’ve teamed up with our partners at Fairstone 

Let’s face it, finances can be confusing. When you apply for a loan, you’ll be faced with loan terminology, and it can be intimidating if you don’t understand what the terms mean. 

In honour of Financial Literacy Month, our partners at Fairstone shared some common financial terms you’ll hear when applying for a loan. 


You’ll often hear lenders talk about an amortization period when applying for a mortgage. The amortization period is the time it will take to pay off the entire mortgage or loan. You’ll pay the most interest at the beginning of your amortization period. A portion of each mortgage or loan payment goes toward the principal (the amount you actually borrowed), and another portion goes towards interest. The portion of your payment that goes toward interest reduces over time with each payment you make. So, by the time you reach the end of your amortization period, the bulk of your payment will go towards your principal. Missed payments can throw off your amortization period – it will take you longer to pay off the loan and you’ll pay more interest. 

Tip: Don’t confuse your amortization period with your mortgage term. Your amortization period is the time it takes to pay off all of your mortgage. Your term is the length of time you’re legally obligated to pay back your current lender at a set interest rate (if your term is fixed or locked in). A mortgage term typically ranges from six months to five years.


APR stands for annual percentage rate. The annual percentage rate is how much you’ll be charged each year for borrowing money. Unlike interest rate, APR also takes into account additional fees associated with your loan, like insurance costs or appraisals. 

Creditor insurance 

Most financial institutions offer optional creditor insurance or loan insurance. There are different types of creditor insurance available – here are some of the common types of creditor insurance and the benefits they offer:

  • Job-loss insurance: Some or all of your loan payments may be covered if you involuntarily lose your job
  • Disability insurance: Some of all of your loan payments may be covered if you experience an illness or injury that prevents you from working
  • Life insurance: In the event you pass away before your loan is paid off, life insurance can pay or reduce your outstanding balance 

Creditor insurance can help you stay on track with loan payments and protect your credit score when you experience an unexpected event. 

Loan term 

You and your lender will agree upon a loan term – this is the length of your loan. A longer loan term lends itself to more affordable payments since they are spread out over a longer period of time. However, you will pay more money towards interest with a longer loan term. A shorter loan term means your payments will be higher, but you’ll pay less interest overall. 


If you choose to secure your loan with the value of your house, your lender will place a “lien” on your property. This is most common with mortgage loans. If you don’t pay back your mortgage, the lender can technically assume ownership of your house – so the lien acts as a layer of security for the lender.

Prepayment penalty 

Some loans have prepayment penalties, meaning if you pay off your loan early (before your loan term ends), you may have to pay a fee. Prepayment penalties vary from lender to lender. Typically, a prepayment penalty requires you to pay all or some of the interest on the outstanding balance. It’s always a good idea to ask your lender if there are prepayment penalties, especially if your goal is to pay off your loan early. 

Secured vs. unsecured loan

If you’re a homeowner, your lender might give you the option of choosing a secured loan. A secured loan is backed by the value of an asset, which is typically a house. A secured loan can allow you to borrow more money (compared to an unsecured loan), and access a lower interest rate, which ultimately results in lower loan payments. 

Not a homeowner? No problem! Since an unsecured loan is backed by a contract, rather than an asset, there are plenty of unsecured loan options you can choose from that don’t require homeownership. 

Knowledge is Power

Understanding loan-related terms empower you as a borrower and can help you make the best choice when it comes to borrowing money. If you’re interested in learning more about your borrowing options, you can get a free, no-obligation loan quote from Fairstone. Simply visit, enter a few simple details and receive your personalized loan quote in minutes. 

Rating of 5/5 based on 2 votes.

Fairstone Financial is a leading alternative lender in Canada, they have been helping Canadians since 1923. Their mission is to provide Canadians, with fair to good credit, with an affordable alternative to payday loans.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Make Smarter Borrowing Decisions

Whether you have good credit or poor credit, building financial awareness is the best way to save. Find tips, guides and tools to make better financial decisions.

Save With Loans Canada

Special Offers

50 Free Trades Offer

50 Free Trades Offer
Ends August 31st, 2022

Almost $500 in commission-free trades. Code “50TRADESFREE”. Conditions apply.

View Offer
Earn 5% Cash Back With Neo

Earn 5% Cash Back With Neo
No annual fee!

Earn an average 5%¹ cash back at thousands of partners and at least 1%² cashback guaranteed.

View Offer
Build Credit With Refresh

Build Credit With Refresh

Build credit while spending money with the Refresh Financial VISA card.

View Offer
Build Credit For $7/Month

Build Credit For $7/Month

With KOHO’s prepaid card you can build a better credit score for just $7/month.

View Offer
Industry Spotlight

What's happening with Canada's credit industry?

addy ⎯ Making Real Estate Accessible To All Canadians

addy ⎯ Making Real Estate Accessible To All Canadians

Check out our interview with addy; a platform that allows Canadians to invest in different properties across Canada with as little as $1.

Read Post
Find The Best Rate
In Your Region
Best Personal Loan Provider by Greedy Rates

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Keep Track Of Your Credit Score

Subscribe with Credit Verify to monitor your credit rating and get your free credit score.