Glossary

The loan glossary

65 words lenders use, defined in a sentence or two, each linked to the guide that takes it further.

A

ACH

The electronic bank network used to deposit loan funds and draw automatic payments. Authorizing ACH lets a lender pull payments directly from your account.

Amortization

The schedule that pays a loan off in equal payments. Early payments are mostly interest; later ones are mostly principal, because interest is charged on a shrinking balance.

Annual fee

A yearly charge some credit lines or cards carry regardless of use. Factor it into the real cost when comparing a card-based option.

APR (annual percentage rate)

The yearly cost of a loan as a percentage, including the interest rate plus most required fees. On a loan with fees, the APR is higher than the interest rate, which makes it the better number for comparing offers of the same amount and term.

Authorized user

Someone added to another person's credit card account who can use the card. The account's history can appear on the authorized user's credit report, which can help build credit without taking on the primary responsibility for the debt.

Autopay

Automatic payments drawn from your bank account on a schedule. Some lenders give a small rate discount for enrolling; make sure the account can cover each draw.

B

Balance transfer

Moving a credit card balance to another card, often at a low promotional rate for a set period. Usually carries a transfer fee, and the rate jumps when the promotion ends.

Balloon payment

A large final payment due at the end of some loans that keep earlier payments low. If you can't pay or refinance it, you can be forced to sell or default.

C

Capitalized interest

Unpaid interest that is added to your loan balance, so you then owe interest on a larger amount. It commonly happens on student loans after a grace period, deferment, or forbearance ends.

Cash-out refinance

Replacing your mortgage with a larger one and taking the difference in cash. It uses home equity for other costs but resets your mortgage and adds closing costs.

Co-borrower

Someone who applies with you and shares both the debt and access to the funds or property. A lender considers both incomes and both credit profiles.

Collateral

Something of value, such as a car or house, pledged to back a loan. If you default, the lender can take it to recover what's owed.

Cosigner

Someone who signs a loan with you and promises to repay it if you don't, without owning the money or property. Their credit is on the line and the debt shows on their report.

Credit counseling

Guidance from a nonprofit agency that reviews your budget for free and may set up a debt management plan to lower card interest. Different from debt settlement.

Credit report

A record of your borrowing and payment history kept by the three nationwide bureaus. You can get it free weekly at AnnualCreditReport.com and should dispute any errors.

Credit score

A number, often 300 to 850, that summarizes your credit report to predict repayment risk. Higher scores usually mean lower rates. FICO and VantageScore are the common models.

Credit union

A member-owned, not-for-profit financial cooperative. Credit unions often offer lower loan rates and small-dollar products like PALs, and typically require membership.

Credit utilization

The share of your available revolving credit that you are using, as a percentage. Lower utilization generally helps your credit score; it is one of the larger factors in most scoring models.

Credit-builder loan

A small loan whose proceeds are held in a locked account while you make fixed monthly payments. When it is paid off you receive the money, and the on-time payments are reported to help build a credit history.

D

Debt consolidation loan

One new loan used to pay off several debts, leaving a single payment. It helps only if the new APR is lower and the term isn't stretched so far that extra interest cancels the gain.

Debt settlement

Negotiating with creditors to accept less than you owe, usually through a company that charges fees. It can hurt your credit, forgiven debt may be taxable, and results aren't guaranteed.

Debt-to-income ratio (DTI)

Your monthly debt payments divided by your gross monthly income, as a percentage. Lenders use it to judge whether you can take on a new payment; lower is generally better.

Default

Failing to repay as agreed, usually after a series of missed payments. It badly damages credit, and on a secured loan the lender can seize the collateral.

Delinquency

A payment past its due date. Delinquencies are reported to the credit bureaus, typically once 30 days late, and lower your score.

Disbursement

The moment the lender sends the loan funds, often by direct deposit. Any fee taken from the loan is subtracted before you receive the rest.

F

Federal student loan

A student loan made by the U.S. Department of Education, with a fixed interest rate set by law and borrower protections such as income-driven repayment, deferment, and forgiveness paths. Available after filing the FAFSA form.

Finance charge

The dollar cost of credit on a loan: the interest plus the fees that count under Regulation Z. It appears alongside the APR on a loan disclosure.

Fixed rate

An interest rate that stays the same for the life of the loan, so the payment doesn't change. Most personal and auto loans are fixed-rate.

G

GAP insurance

Coverage that pays the difference between what you owe on a vehicle and its value if it's totaled or stolen while you have negative equity. Useful mainly on long or low-down-payment loans.

Grace period

A short window after a due date during which a payment won't trigger a late fee. Not all loans offer one; the agreement says.

H

Hard inquiry

A lender's check of your credit when you formally apply. It can lower your score a little and shows on your report for up to two years; many within a short rate-shopping window often count as one.

HELOC (home equity line of credit)

A revolving credit line secured by your home, usually with a variable rate. You draw as needed during a set period, then repay. The home is at risk if you default.

Home equity loan

A fixed-rate loan secured by the equity in your home, paid out in a lump sum. Often cheaper than an unsecured loan, but your house is the collateral.

I

Income-driven repayment

A set of federal repayment plans that base your monthly student loan payment on your income and family size rather than the amount you owe. Available on federal loans only.

Installment loan

A loan repaid in fixed, scheduled payments over a set term, such as a personal, auto or student loan. Contrast with revolving credit.

Interest rate

The yearly price of borrowing the money itself, charged on the balance you still owe. It does not by itself include fees, which is why the APR can be higher.

L

Late fee

A charge for a payment made after its due date or grace period. The amount and timing are set in your loan agreement.

Lender

The company that actually makes the loan, sets your rate and terms, and is paid back. A loan-matching site or broker is not the lender.

Loan broker

A middleman who connects borrowers with lenders, sometimes for a fee. A legitimate broker doesn't demand an upfront fee to 'guarantee' a loan.

Loan term

How long you have to repay, usually in months. A longer term lowers the monthly payment but almost always raises the total interest you pay.

Loan-matching service

A website that collects your request and passes it to lenders and partners in its network, which then decide whether to make an offer. It's not a lender and doesn't set your terms.

Loan-to-value (LTV)

The loan amount divided by the value of the asset securing it, as a percentage. A high LTV, such as owing more than a car is worth, limits refinancing and signals negative equity.

N

Negative equity

Owing more on a loan than the asset is worth, common on long car loans. Also called being 'upside down'; it complicates selling, trading in or refinancing.

O

Origination fee

A fee some lenders charge to make a loan, often 1% to 8% of the amount, usually deducted from what you receive. It raises your APR and your cost of borrowing.

P

Payday alternative loan (PAL)

A small loan from a federal credit union with capped fees and rates, created as a safer substitute for payday loans. Requires credit union membership.

Payday loan

A small, short-term, very high-cost loan due on your next payday, often with an APR in the triple digits. Easy to roll over into a cycle of debt; approach with great caution.

Preapproval

A more thorough conditional offer after a lender reviews more of your information, sometimes with a hard inquiry. Stronger than prequalification but still not final approval.

Prepayment penalty

A fee some loans charge if you pay off early. Many personal loans have none; always check, because a penalty can cancel the savings from paying ahead.

Prequalification

An early, informal estimate of the loan and rate you might get, based on limited information and usually a soft inquiry. It is not an approval or a guarantee.

Principal

The amount you borrow, before interest and fees. Each payment is split between interest and principal; paying down principal is what reduces the balance.

Principal balance

The part of what you still owe that is unpaid principal, not interest. Interest each period is charged on this balance.

Private student loan

A student loan made by a bank, credit union, or online lender. The rate and terms depend on the borrower's or a cosigner's credit, and it generally lacks the repayment and forgiveness protections of a federal loan.

R

Rate shopping

Comparing offers from several lenders in a short window. Credit scoring models usually treat multiple inquiries for the same type of loan within roughly 14 to 45 days as a single inquiry.

Refinance

Replacing an existing loan with a new one, usually to get a lower rate or different term. It's worth it when the savings beat any fees before you'd pay the loan off anyway.

Revolving credit

A credit line, like a credit card, that you can borrow against repeatedly up to a limit, with a payment that changes as the balance does. Contrast with an installment loan.

S

Secured credit card

A credit card backed by a refundable cash deposit, usually equal to the credit limit. It reports to the credit bureaus like a regular card, which makes it a common way to build or rebuild credit.

Secured loan

A loan backed by collateral, such as a car or home, that the lender can take if you don't pay. Secured loans often have lower rates but put the asset at risk.

Soft inquiry

A credit check that doesn't affect your score, such as a prequalification or your own review. Only you see most soft inquiries.

Student loan refinancing

Replacing one or more existing student loans with a new private loan at a new rate and term. Refinancing federal loans into a private loan permanently gives up federal protections such as income-driven repayment and forgiveness.

Subsidized loan

A federal student loan for undergraduates with financial need, on which the government pays the interest while you are in school at least half-time and during certain other periods. An unsubsidized loan charges interest the whole time.

T

Total cost of borrowing

Everything you repay minus the amount you actually received: interest plus fees, in dollars. The clearest way to compare loans with different rates, terms or fees.

Truth in Lending Act (TILA)

A 1968 federal law, carried out by Regulation Z, that requires lenders to disclose the APR, finance charge, amount financed and total of payments in a standard way so you can compare offers.

U

Underwriting

The lender's process of verifying your information and deciding whether to approve the loan and on what terms. It's the step between applying and a final yes or no.

Unsecured loan

A loan not backed by collateral, approved mainly on your credit and income. Most personal loans are unsecured; rates are usually higher than for secured loans.

V

Variable rate

An interest rate that can rise or fall over time with a benchmark, which changes your payment or the number of payments. Common on HELOCs and some credit lines.