Key Borrowing Terminology

Look at the loan documentation provided to you by the lender. If there are terms you do not know, check the definitions below.  Be sure to understand the terms and conditions of your loan before you sign for it.

Adjustable Rate Mortgage (ARM)

A mortgage that offers a low introductory interest rate for a fixed period of time and then changes to mortgage whose interest rate changes annually.

Amortization Schedule

A chart showing the repayment of a loan over time including principal and interest payments.

Annual Percentage Rate (APR)

The rate charged per year for a loan including both the interest rate and finance charges.  The APR allows you to compare one loan to another.  Fees for not paying the loan as agreed are not included in the APR.

Application Fee

The fee charged to apply for a loan.

Appraisal

The study done to determine the worth of collateral. For example, an appraisal is conducted on a home before a mortgage is approved.

Auto Loan

A loan provided for the purchase of a new or used vehicle.

Average Daily Balance (ADB)

A method used to calculate credit card finance charges. At the end of a billing cycle, the credit card company will take the average of your balance for each day of that month.

Balloon Payment

A very large payment that is due at a later date of a loan term. This is typically included when monthly payments do not significantly reduce the principal balance.  The payments are only covering interest.

Capacity

In making a loan decision, the lender looks at the customer's gross monthly income as an indication that he can repay the loan.

Capital

In making a loan decision. The lender looks at the customer's savings and investments to determine if the customer has the money to complete the loan transaction.

Closing Costs

Finance charges paid by the customer associated with the creation of a new loan.

Collateral

An item that has value and secures the loan.  The home purchased with a loan is the collateral when you have a mortgage.  The car purchased with a loan is the collateral with an auto loan.

Credit

In making a loan decision, the lender looks at the customer's past repayment history of other debts to determine if the customer is likely to repay the loan.

Credit Card

A short-term borrowing instrument that allows a customer to make a purchase now and pay later, normally with interest and fees and up to a credit limit.

Credit Report

A report providing information on a customer's past borrowing and repayment activity.

Credit Score

A numerical score meant to represent a customer's likelihood that he/she will repay future debt based on information in credit reports.

Fixed Rate Mortgage

A mortgage loan that charges the same interest rate for the term of the loan. Fixed rate mortgage has same monthly payment amount (principal and interest).

Foreclosure

The process of claiming property when a homeowner is unable to make full principal and interest payments on his/her mortgage. This allows the lender to seize the property (the collateral), evict the homeowner and sell the home, as stipulated in the mortgage contract..

Good Faith Estimate

An estimate of the interest rate and finance charges that will be assessed in exchange for a loan.

Guarantee

A pledge made by a third party that a customer is capable of repaying a loan. If the loan is not repaid, the guarantor will take responsibility for it.

Interest Rate

A charge made in exchange for borrowing money for a certain period of time.

Introductory Rate

A lower interest rate charged at the beginning of a loan term to make the loan more attractive.

Late Charge

A penalty fee charged for late payment of a debt.

Lien

A legal claim against collateral (for example a home or a vehicle) that is recorded and stays until a debt is repaid.

Line of Credit

A predetermined amount of money that can be borrowed at any time.

Loan Agreement

A contract between a lender and a customer that describes the details of a loan and each party's responsibilities.

Loan To Value (LTV)

The comparison between the amount of the money being lent and the value of the collateral being put up for the loan. In a conventional mortgage loan, the LTV is 80% of the value of the home. In general, the lower the LTV the lower the risk to the lender.

Mortgage

A loan for a home.  Generally, the home is pledged as collateral in exchange for the loan.

Personal Loan

An unsecured loan made to a customer based on the customer's credit history.

Point

An amount equal to1% of the mortgage that can be paid in advance by the consumer in exchange for a reduction in the interest rate.

Prepayment Penalty

A financial penalty charged when a consumer attempts to pay ahead or pay off a loan early.

Private Mortgage Insurance (PMI)

A monthly insurance payment that a borrower makes to a mortgage lender as a way to protect the lender in case the consumer defaults on his/her mortgage.

Promissory Note

A legal document signed by a consumer pledging the repayment of a debt within a certain period of time.

Revolving Loan

A loan in which a customer can borrow, repay, and borrow again for a certain period of time and up to a certain credit limit.

Secured Loan

A loan that features the pledge of collateral (home, vehicle, etc.) in exchange for the loan.

Term/Installment Loan

A loan that is designed to repaid on a regular basis over a certain period of time.

Truth in Lending Act (TILA)

A federal law that mandates lenders disclose the terms and conditions of lending products.

Unsecured Loan

A loan that does not have collateral attached to it. Instead, it is granted basis on the credit history of the consumer.