Glossary

Ability to Pay – the borrower’s ability to service a loan from his or her disposable income, also meaning cash flow. This is called ‘capacity’ in banking; it is an important factor in obtaining a loan. Also look into the five C’s of credit.

Amortization – distribution of payments on a loan over multiple periods. This term is used for two separate processes: amortization of loans and amortization of assets. In relation to a loan, the direct meaning is the repayment of loan principal over time.

APR (Annual Percentage Rate) – otherwise known as (APR), is the annual rate charged for borrowing or earned through investment. This is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does include compound interest over the duration of the loan. Loans or credit agreements can vary when it comes to the structure of their interest rates, transaction fees, late penalties and other variables. A standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders.

Arrangement Fee – an administration charge made by lenders for arranging credit. This is usually for a mortgage or a business loan, and occasionally for financing a car. An Arrangement Fee must be quoted in your written offer of credit, in addition to your Credit Agreement.

Bad Credit Loan – a type of personal loan offered to borrowers with weak, bad, or no credit at all. Lenders charge higher interest rates to borrowers with poor credit than they do to borrowers with good credit. A low credit score signals bad credit, while a high credit score is an indicator of good credit.

Balance – is the amount available in an account for withdrawal or use. This is determined by summing up all cleared or credited deposits and deducting all withdrawals, debits, and service charges. The balance of an account can also be the total amount of money owed to a third party such as a credit card company, utility company, mortgage banker or other types of lender or creditor.

Bankruptcy – a legal process of which a borrower protects and liquidates assets to repay outstanding debts. The bankruptcy process starts with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common.

Budget – a financial plan for a defined period, whether it be personal or business. This will include individual cash flows, available resources, monthly expenses, assets, and liabilities. Both past spending and personal debt are considered when you are creating a personal budget.

Capitalization – an accounting technique, that can be used in relation to long-term debt, and it consists in adding the unpaid interest to the principal. This technique can be applied once during the life of the loan when repayment starts, or at intervals, such as after deferment or on an annual basis.

Cash Advance – a service provided by many credit card companies, that consists in allowing the cardholders to withdraw cash up to a defined limit, through an ATM or over the counter at a bank. There is a predetermined limit for a cash advance. This is an expensive transaction.

Cash Loan – a type of short-term loan, also known as payday loan. The Lender holds the checks until the borrower’s next payday when loans and the finance charge must be paid in one lump sum.

Collateral – an asset pledged by a borrower to a lender, usually in return for a loan. Collateral is property offered as security for repayment of a loan, to be forfeited in the event of default.

Collection Agency – an entity contracted by lenders to recover outstanding debts or accounts that are in default. The lending company itself may also have a division or subsidiary that acts as its collection agency.

Credit Bureau – an agency that collects and researches individual credit information and sells it for a fee to creditors. This information further serves as part of the decision making process for loan approval. There are dozens of credit bureaus across the U.S.. The most common credit bureaus are Equifax, Experian, and TransUnion.

Credit Check – a verification of credit performed by a company to establish if a potential consumer is creditworthy. Credit checks for apartment rentals, car purchases, etc. are common.

Credit History – a record of a borrower’s payment history that reflects his or her ability to repay a loan. Credit history is the main factor used for the calculation of the credit rating by potential lenders and is used as well by banks as a qualifier for new loans.

Credit Report – a detailed summation of an individual’s credit history prepared by a credit bureau. Credit bureaus collect this information and compile credit reports based on their findings. Lenders use these reports along with other details to determine the viability of a loan applicant.

Credit Score – a number based on an analysis of a person’s credit history. The credit score represents the creditworthiness of an individual, and their ability to repay a loan. Lenders use credit scores to determine who qualifies for a loan. What interest rate the loan applicants will be offered depends on level of the credit score.

Creditworthiness – represents the ability to borrow money. The evaluation performed by lenders determines the possibility of whether a borrower may default on his debt obligations.The better one’s creditworthiness, the more likely it is that a bank or other financial institution will extend credit.

Debt – an amount of money borrowed by one party, which is owed by another. The party who owes the funds is a debtor or debitor, and the one to whom debt is owed is called a debtee, creditor, or lender.

Debt Collection – the process of going after payment for debts owed by individuals or businesses.

Debt Consolidation – the process of combining all your unsecured debts into a single monthly payment. This is a form of debt refinancing. Multiple debts are combined into a single, larger piece of debt. This usually comes along with more favorable repayment terms such as a lower interest rate and lower monthly payment.

Debt Settlement – a technique of repaying the debts, that implies the creditor agreeing to accept less than the amount you owe as full payment. This is also known as debt arbitration, debt negotiation or credit settlement.

Debt to Income Ratio – the percentage of a consumer’s monthly gross income that goes toward paying debts. This is one method lenders measure an individual’s ability to manage monthly payments and repay debts.

Debt Trap – a difficult situation in which a borrower is led into a debt trap because their loan payments, as they can’t afford the scheduled payments on the principal of a loan. These debt traps are usually caused by high-interest rates and short terms for repayment on loans. These structures strongly favor the lender.

Default – a violation of an agreement to pay the debt in predetermined amounts at allotted times. This occurs when a debtor is unable to meet the legal obligation of debt repayment.

Delinquent Loan – any form of debt for which payment has not been made on time. There are consequences for being delinquent, people who are late with a credit card payment may be forced to pay a late fee.

Direct Lender – This is a term that small lenders sometimes use to distinguish themselves from mortgage brokers.

Direct Lending – a form of debt resources in which lenders other than banks grant loans to end-users without intermediaries.

Disbursement – a payment made on behalf of a client to a third party for which reimbursement is subsequently sought from the client. Disbursing money is part of cash flow, it refers to a method of payment for a wide range of transactions.

Down Payment – an initial amount paid at the time of acquisition, this is the type of payment made to facilitate an expensive purchase. A down payment is standard for the purchase of a home.

Due Diligence – reasonable steps taken by a person to satisfy a legal requirement, especially in buying or selling something. Due diligence is also an investigation of a business or person before signing a contract.

Emergency Loans – the short-term loans, which are supposed to satisfy people’s urgent financial need. Some lenders require borrowers to return the total amount over 30 days, others allow clients to pay off the total amount within 60 days.

Equity – generally refers to the value of an asset after deducting the value of liabilities. Personal equity is that portion of equity ownership that is held to one’s own benefit or invested as an integral part of the assets of a legal entity.

Fair Debt Collection Practices Act – Fair Debt Collection Practices Act is a section of the Consumer Credit Protection Act that advocates fairness in the collection of consumer debts. It also provides clarification for challenging debt information to ensure its validity.

Fixed Rate – an interest rate on a liability that remains the same either for the entire term of the loan or part of the term. This interest rate does not fluctuate, allows the borrower to accurately predict their future payments.

Grace Period – a predetermined time beyond a due date during which a financial obligation may be met without penalty or cancellation. During this period late fees are not charged, and the late payment does not result in default or cancellation of the loan.

Grant – funds that do not have to be repaid by the recipient, or products disbursed or gifted by one party such as a government department, corporation, foundation or trust, to a recipient.

Guaranteed Approval Loans – a type of approval practice that means that a lender will accept to lend you money irrespective of your financial circumstances.

Guarantor – a person that endorses a three-party agreement to guarantee that the first party will fulfill obligations to the second party. If the obligations aren’t fulfilled, then the guarantor assumes liability for them.

Hand-to-Hand Money – cash paid in hand to bind a contract.

Home Loan – a home loan is an amount of money lent by a financial institution or bank to buy a house. They are of adjustable or fixed interest rate and payment terms.

Installment Loan – a type of loans where the principal and interest are repaid in equal payments at periodic intervals. These loans are commonly secured by the item purchased or by the personal property of the borrower. The installment loans are usually used for buying items that they cannot be purchased with cash. Installment loans usually carry a fixed interest rate.

Instant Approval Loans – refer to the payday loans for which the lending decision is issued instantly. This isn’t always the case though, and is merely a way of providing you conditional approval to keep you satisfied while issuers pull credit reports on you.

Insolvency – the inability of an individual to meet its financial obligations as they come due. A person is considered to be insolvent when the party has ceased to pay its debts in the ordinary course of business.

Interest Rate – it represents the cost of the money. In case of lending, it is expressed as a percentage of principal. It is applied by a lender to a borrower for the use of assets. Anyone can lend money and charge interest, but it’s usually banks or other financial institutions. Banks will also charge higher interest rates if they think there’s a lower chance the debt will get repaid. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed. In case of deposits, banks pay interest rates on deposits to encourage people to make deposits; Financial Institutions use the deposits from savings or checking accounts to fund loans. This explains why the interest rates on current accounts are lower than the interest rate on credit.

Joint Application – an application for a loan made by several persons, for example, the memebers of a family, a couple.

Lender – an entity that lends money to a borrower for a stated period, and for a fixed or variable rate of interest.

Line of Credit – the most you can borrow under a revolving credit arrangement with a credit card issuer, bank, or mortgage lender. A line of credit is a flexible loan from a financial institution to an individual. A line of credit will charge interest as soon as money is borrowed. Borrowers must be approved by the bank first, and this is based on the borrower’s credit rating and relationship with the bank.

Loan Agreement – a formal document that provides evidence that a loan exists. A loan agreement states the interest rate, the repayment period, the collateral (if any) and any special terms. The main purpose of a loan contract is to define what the parties involved are agreeing to, what responsibilities each party has and for how long the agreement will last. A loan agreement should comply with state and federal regulations. This protects both lender and borrower, should either side fail to honor the agreement.

Loan Fee – For the most part fees help a lender to cover costs associated with underwriting and processing a loan. Regarding the credit market, mortgage loans tend to have the broadest fee requirements.

Loan Forgiveness – this procedure means you are no longer expected to repay your loan. There are a variety of ways this can come about. Banks sometimes choose to forgive a portion of your debt as part of a restructured loan deal to help you pay off the remainder.

Maturity of a Loan – the final payment date of a debt instrument, when the principal and all remaining interest is due to be paid.

Mortgage – a loan intended for buying property or a home, that is secured by that property or real estate.

No Credit Check Loans – a type of loan in which no credit check is conducted by the lender. These are unsecured and are usually geared towards individuals who have poor credit score.

One Hour Loans – This is slightly different from all the other payday loans on the market. A one hour loan doesn’t mean that you are guaranteed your money within an hour! This is the time it usually takes to get a loan approved online. It is not representative for the speed of entire service. It is possible that you may receive your money within an hour, but this is not typical.

Online Loans – payday loans that are offered through a website or another internet-based portal. They have similar criteria as conventional loans such as underwriting, loan terms, interest rates and structure, but the application can be filled out online. There are certain benefits of the online loan process, as it lowers the need for slow paper-based processing and simplifies the application process.

Origination Fee – a fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount.

Overdraft – a loan arrangement under which a bank extends credit up to a maximum amount. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it, or there is not enough to cover the withdrawal.

Pawn Shops – a business that loans money to people who bring in personal property as equivalent collateral. If the loan cannot be repaid on time, the collateral may be sold by the pawn shop.

Payday Loan – a short-term & high-cost loan, this money will be lent at a high rate of interest on the basis that it will be repaid when the borrower receives their next paycheck.

Personal Loan – personal loans are a type of loans that is backed only by customer’s promise to repay as there is no involved collateral. For this reason, they are also known as unsecured loans.

Predatory Lending – the unfair, deceptive, abusive or fraudulent practices of some lenders during the beginning stages of the loan origination process.

Principal – the original sum of money borrowed in a loan or put into an investment.

Qualifying Criteria – this is known as the “ability-to-repay rule” and requires a list of borrower’s personal assets and liabilities, income and expenses and credit history. Approval will happen with good criteria, a decline will happen with bad.

Refinance – refinancing is the process of replacing an existing loan with a new loan. This typically occurs when a business or person revises the interest rate, payment schedule, and terms of a previous credit agreement.

Repayment Schedule – a detailed outline of a borrower’s loan agreement with a lender that shows the original loan amount, when the payments are due, and how much of the payment goes to pay the principal and the interest.

Repossession – the legal process by which a lender takes possession of assets or property pledged as collateral in case a borrower defaults on a loan.

Rollover Loan – a type of loan where a bank allows a borrower to continue owing money after the repayment date of a loan. Then the borrower agrees to pay interest at a particular rate and to pay back the money at a designated time.

Secured Loans – loans that are protected by an asset or collateral. The borrower pledges an asset, this loan then becomes a secured debt owed to the creditor.

Subprime Loan – a loan issued to a borrower with bad credit. Subprime loans tend to have a higher interest rate than the prime rate offered on conventional loans.

Title Loans – a short-term loan that requires borrowers to offer their vehicle title as collateral. Borrowers who receive title loans must allow a lender to place a lien on their car title, and temporarily surrender the hard copy of their vehicle title, in exchange for the loan.

Total Amount Repayable – the actual amount you are paying during the loan term. This is the total amount you owe to your lender, which includes interest.

Unsecured Loans – a type of loan that is issued and supported only by the borrower’s creditworthiness, as opposed to pledging collateral. Borrowers must usually have high credit scores to be approved for unsecured loans.

Variable Rate – an interest rate on a loan or security that fluctuates over time. Your payments will vary throughout the duration of this loan.

Wage Garnishment – a legal process that instructs a third party to garnish payments directly from a debtor’s wage or bank account. This may continue until the entire debt is paid or arrangements are made otherwise to pay off the debt.