Entry V · The Library

A glossary of lending terms

56 terms you will meet on a credit application, a loan agreement or a servicing statement, defined without jargon and cross-referenced to the entries that explain them properly.

Reference entry · Educational content · Not an offer of credit

A hand writing on a loose sheet of paper with a pen at a desk. — The fastest way to stop being intimidated by a loan document is to be able to define every word in it.

Terms defined: 56
Letters used: 20
Showing: 56

A B C D E F G H I J L M N O P R S T U V

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A 5 terms

Acceleration clause: The provision that lets a lender declare the entire remaining balance immediately due after a default, instead of pursuing only the missed instalment. On secured lending it is the step that precedes repossession or foreclosure. See default and acceleration.
Adjustable rate: A rate that changes over the life of the loan according to a stated formula, normally an index plus a margin, subject to caps. Also called a variable rate.
Amortisation: The process of retiring a debt through scheduled payments in which each instalment covers the interest accrued and reduces the principal by the remainder. Early payments are mostly interest; later ones are mostly principal.
Amount financed: A Truth in Lending disclosure: the credit actually provided to you, after prepaid finance charges are deducted. If it is lower than the sum you signed for, the gap is fees taken off the top.
Annual percentage rate (APR): The cost of credit expressed as a yearly rate, including interest and most finance charges. Distinct from the interest rate, which prices only the money. See rate versus APR.

B 2 terms

Balloon payment: A final payment substantially larger than the regular instalments, arising when the schedule does not fully amortise the balance over the term. It normally has to be refinanced or paid in a lump sum.
Borrower: The person legally obliged to repay under the note. Where more than one person signs, liability is usually joint and several: each is responsible for the whole debt, not a share of it.

C 6 terms

Capitalisation: Adding unpaid accrued interest to the principal balance, so that future interest is calculated on the larger figure. Common at the end of a deferment or forbearance period.
Charge-off: An accounting step in which a creditor writes a delinquent balance off its books as unlikely to be collected. It does not cancel the debt; the balance is still owed and is often sold to a collection agency.
Co-signer: Someone who signs the note alongside the borrower and is fully liable for the debt from day one, whether or not the primary borrower is pursued first. The obligation appears on the co-signer’s credit file.
Collateral: A specific asset pledged to secure a loan, which the lender may look to for repayment if you default. See secured and unsecured loans explained.
Credit report: The record held by a consumer reporting agency of your accounts, balances and payment history. You are entitled to obtain yours and to dispute inaccurate entries.
Credit utilisation: The proportion of your available revolving credit currently drawn. It is one of the largest inputs to a credit score and one of the fastest to change.

D 5 terms

Debt-to-income ratio (DTI): Total recurring monthly debt obligations divided by gross monthly income, including the proposed new payment. A core measure of capacity in underwriting.
Default: A breach of the agreement as the agreement defines it. Usually broader than missing a payment: it can include letting required insurance lapse, misrepresentation on the application, or selling pledged collateral.
Deficiency balance: The amount still owed after collateral has been sold and the proceeds applied, where those proceeds did not cover the balance plus costs. Whether it can be pursued depends on the loan type and state law.
Delinquency: The state of being behind on payments, usually measured in thirty-day increments. Delinquency precedes default and is separately reported to credit bureaus.
Disbursement: The release of loan funds, to you or on your behalf to a third party such as a dealer or settlement agent.

E 2 terms

Equity: The difference between what an asset is worth and what is owed against it. Negative equity means the balance exceeds the value.
Escrow: An account held by a servicer into which a portion of each payment is placed to fund property taxes and insurance as they fall due. Common on mortgages; the amount is recalculated periodically.

F 4 terms

Finance charge: A Truth in Lending disclosure: the total dollar cost of the credit, comprising interest and most fees. The APR is this figure expressed as an annual rate.
Fixed rate: A rate that does not change for the life of the loan. The payment is predictable, which is the whole point of it.
Forbearance: A temporary, agreed reduction or suspension of payments. Interest normally continues to accrue and may be capitalised at the end, so the debt grows even though nothing is being paid.
Foreclosure: The legal process by which a lender enforces a lien on real property and sells it to satisfy the debt. Procedure differs substantially between judicial and non-judicial states.

G 2 terms

Grace period: The number of days after a due date within which a payment can arrive without a late fee. Different from the due date itself and often the most practically useful number in the fee schedule.
Guarantor: A party who agrees to pay if the borrower does not. Distinct from a co-signer in that a guarantor is often pursued only after the borrower has failed, though the agreement decides this.

H 1 term

Hard enquiry: A credit check recorded on your file when you apply for credit, visible to other lenders and capable of affecting your score slightly. Enquiries for the same product within a short window are usually treated as one shopping event.

I 2 terms

Index: The published benchmark rate to which a variable-rate loan is tied. The rate you pay is the index plus a fixed margin.
Interest rate: The periodic charge for the use of borrowed money, expressed as an annual percentage of the outstanding balance. It excludes fees, which is why it can differ from the APR.

J 1 term

Judgment lien: A claim placed on property after a creditor wins a court judgment. One route by which an unsecured debt can end up attached to an asset.

L 3 terms

Late fee: A charge applied when a payment arrives after the grace period. Its size and trigger are set out in the fee schedule.
Lien: A legal claim against a specific asset securing a debt. Perfected by public filing or title notation, and ranked in priority against other liens on the same asset.
Loan-to-value ratio (LTV): The loan balance divided by the value of the collateral. A primary driver of both approval and pricing on secured lending.

M 2 terms

Margin: The fixed percentage added to an index to produce the rate on a variable-rate loan. The index moves; the margin does not.
Maturity date: The date the final scheduled payment is due and the loan is intended to be fully repaid.

N 1 term

Note: The written promise to repay, setting out amount, rate, payment and maturity. Sometimes called a promissory note; it is the operative instrument in the file.

O 1 term

Origination fee: A charge for making the loan, often expressed as a percentage of the amount and frequently deducted from the advance. It is included in the finance charge and therefore raises the APR.

P 5 terms

Payoff amount: The sum required to close the loan on a specified date, comprising principal, interest accrued to that date, and any fees. It is higher than the balance shown on a statement and it is only valid to its quoted date.
Perfection: The steps that make a security interest effective against third parties, such as recording a mortgage or noting a lien on a vehicle title. Perfection establishes priority.
Precomputed interest: A structure in which the total finance charge is calculated at the outset and built into the balance. Early payoff does not automatically save the unearned portion unless a rebate method applies.
Prepayment penalty: A charge for repaying early, sometimes on a declining schedule over the first years of the loan. Not present on all products; find out which category yours falls into before signing.
Principal: The amount borrowed and still outstanding, excluding interest and fees. Interest on a simple-interest loan is charged on this figure.

R 3 terms

Refinance: Replacing an existing loan with a new one, usually to obtain a lower rate, a different term, or cash out of accumulated equity. It is a new loan, with new fees and a new agreement to read.
Repossession: A secured lender taking possession of pledged personal property, most often a vehicle, after default. In many states it can proceed without a court hearing provided the peace is not breached.
Revolving credit: A facility with a limit that can be drawn, repaid and drawn again, such as a credit card or line of credit. Interest normally compounds on an unpaid balance.

S 4 terms

Secured loan: A loan backed by a specific pledged asset as well as by your promise to repay. Cheaper than unsecured borrowing because the lender has a second route to recovery.
Servicer: The company that administers a loan day to day — collecting payments, issuing statements, handling escrow — which may or may not be the lender that originated it.
Simple interest: Interest calculated on the outstanding principal, typically accruing daily. Paying early reduces the interest charged; paying late increases it.
Subordination: An agreement in which a lienholder consents to rank behind another lien on the same asset. Frequently required when a first mortgage is refinanced while a second lien remains in place.

T 3 terms

Term: The length of the repayment schedule. Lengthening it lowers the payment and raises the total cost, which is why it deserves as much attention as the rate.
Total of payments: A Truth in Lending disclosure: the sum of every scheduled payment over the life of the loan. Comparing it to the amount financed is the plainest test of how expensive a loan is.
Truth in Lending Act (TILA): The federal statute requiring standardised cost disclosures on consumer credit, including the APR, finance charge, amount financed and total of payments, so that offers can be compared.

U 3 terms

Underwriting: The lender’s assessment of whether and on what terms to lend. See what lenders look at in an application.
Unsecured loan: A loan backed only by your promise to repay, with no specific asset pledged. Priced higher because the lender’s remedy on default runs through collection and the courts.
Usury: The charging of interest above a legal maximum. Caps are set by state law and vary widely; some products and lender types are exempt.

V 1 term

Variable rate: See adjustable rate. A rate that moves with a stated index, within contractual caps.

Reminder

These definitions describe general United States consumer lending practice and are provided for education. Your own agreement may define a term differently, and where it does, your agreement governs. Loan Information Center is not a lender, broker or law firm.

Return to the library, or read reading a loan agreement before you sign, where most of these terms appear in the order you will meet them.