Financial Terms by Letter
A
Adjustable-rate mortgage (ARM)
A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.
Affinity fraud
A type of investment scam where fraudsters target members of identifiable groups based on things like religion, age, or ethnicity.
Affordability
An individual's capacity to bear the cost of a particular item or service, typically a property.
Alternative credit data
Financial data not traditionally included in credit reports, such as rent or utility payments, which can help assess a borrower's creditworthiness.
Amortization
The process of paying off a debt over time through regular payments.
Annual Percentage Rate (APR)
The annual rate charged for borrowing, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan.
Appraisal
A professional assessment of the value of something, typically property.
Asset
A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
Automatic withdrawal
A system where funds are taken out of an account on a set date to cover bills or payments.
B
Bad credit
A description of an individual's credit history indicating that they carry a high credit risk.
Balloon payment
A large payment that is much greater than the regular installment payments and is due at the end of a loan or lease.
Bank statement
A monthly or quarterly document provided by the bank that summarizes the activity in an account over a set period.
Bankruptcy
A legal process involving a person or business that is unable to repay their outstanding debts.
Benchmark
A standard or point of reference against which things may be compared.
Bi-weekly payment
A payment made every two weeks, typically as a method to pay off a debt faster.
Borrower
An individual or entity that borrows money from a lender with an agreement to pay it back, typically with interest.
Breach of contract
A violation of any of the terms or conditions in a contract without legal excuse.
Bridging loan
A short-term loan that provides immediate cash flow used to meet current obligations before securing a more permanent financing solution.
Broker
An individual or firm that is licensed to buy and sell financial instruments on behalf of its clients.
C
Capital
Wealth in the form of money or assets, used in a business by a person, partnership, or corporation.
Capitalization rate
The rate of return on a real estate investment property based on the expected income that the property will generate.
A short-term loan taken against a credit line, usually at a higher rate of interest.
Cash flow
The net amount of cash and cash equivalents being transferred into and out of a business.
Cash flow loan
A loan where the borrower's cash flow is taken as a measure of value for repayment capability.
Collateral
An asset or property that a borrower offers to a lender to secure a loan.
Collateral loan
A loan secured by an asset, allowing the lender to take possession of the asset if the loan is not repaid.
Collection agency
A company hired by lenders to recover funds that are past due or accounts that are in default.
Compound Annual Growth Rate (CAGR)
The mean annual growth rate of an investment over a specified period of time longer than one year.
Compound interest
Interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.
Compound rate
The rate at which interest accumulates or is paid on an investment or loan, with interest being calculated on the principal plus all accumulated interest.
Consumer Financial Protection Bureau (CFPB)
A U.S. government agency that ensures banks, lenders, and other financial companies treat consumers fairly.
Cooling-off period
A mandatory, legally binding period of time during which a consumer can withdraw from an agreement without penalty.
Co-signer
A person who signs a loan or credit agreement alongside the primary borrower, agreeing to take responsibility for the debt if the borrower defaults.
Credit check
A review of an individual's credit history by a lender or business to assess their creditworthiness.
Credit counseling
A service that provides guidance and support on consumer credit, budgeting, and debt management.
Credit enhancement
Methods or tools used to improve the credit risk profile of a business or individual to help them secure a loan or achieve better loan terms.
Credit report
A detailed breakdown of an individual's credit history prepared by a credit bureau.
Credit risk
The risk of loss arising from a borrower's inability to repay a loan or meet contractual obligations.
Credit score
A numerical representation of a person's creditworthiness, based on an analysis of their credit files.
Credit union
A member-owned financial cooperative that provides traditional banking services.
Creditworthiness
An assessment of the likelihood that a borrower will default on their debt obligations.
D
Debt
Money borrowed from a lender and expected to be paid back with interest.
Debt collector
An individual or agency that pursues the payment of debts owed by individuals or businesses.
Debt consolidation
The act of taking out a new loan to pay off other liabilities and consumer debts.
Debt instrument
A tool or mechanism by which an entity raises funds through debt.
Debt service
The cash that is required to cover the repayment of interest and principal on a debt.
Debt trap
A situation where a debt is difficult or impossible to repay, typically because of high interest payments.
Debt-to-income ratio
A personal finance measure that compares the amount of debt you have to your overall income.
Default
The failure to repay a debt including interest or principal on a loan or security.
Default fee
A charge levied against a party who does not fulfill their obligations under a contract.
Default interest
The rate charged on the outstanding balance of a loan when a borrower fails to make timely payments.
Deferment
A temporary postponement of payment on a loan that is allowed under certain conditions.
Delinquency
A situation in which a borrower misses or falls behind on loan payments.
Direct deposit
An electronic transfer of funds from an entity to a bank account, usually a worker's salary.
An institution that offers loans without using a third-party service or middleman.
Disbursement
The act of paying out or disbursing money.
Disclosure
Making known relevant information or facts, often related to financial matters or business practices.
Disclosure statement
A document that outlines the terms and conditions of a loan or other financial transaction.
Due date
The specified day by which a payment is meant to be received.
E
Early repayment fee
A charge that may be levied on a borrower who pays off a loan before its scheduled end date.
Electronic Funds Transfer (EFT)
A system of transferring money from one bank account directly to another without any paper money changing hands.
Employment verification
A process where a potential lender or employer confirms the employment status and salary of a potential borrower or job applicant.
Equity
The difference between the market value of a property and the amount owed on it.
Equity loan
A loan where the borrower uses the equity of the property as collateral.
Equity release
A financial product that allows homeowners to obtain cash from the equity or value built up in their home.
Exemption
A deduction allowed by law to reduce the amount of income that would otherwise be taxed.
F
Fair Credit Reporting Act (FCRA)
A US federal law that regulates the collection, dissemination, and use of consumer information, including consumer credit information.
Fair Debt Collection Practices Act (FDCPA)
A US federal law that limits the behaviors and actions of third-party debt collectors collecting debts on behalf of another person or entity.
Fee schedule
A detailed list of fees and charges that can be billed for specific services or activities.
Fiduciary
A person or organization that has the power and obligation to act on behalf of another in situations that require trust, honesty, and loyalty.
Finance charge
The total cost of a loan, including the actual interest costs and any other charges.
Financial counseling
Professional guidance to help individuals manage their finances and reduce debt.
Financial literacy
The ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.
Fixed interest
An interest rate that does not change over the lifetime of a loan.
Fixed-rate loan
A loan with an interest rate that remains the same for the entire term of the loan.
Fixed-term loan
A loan that must be repaid in a specified period, often years or months.
Floating interest rate
An interest rate that is allowed to move up and down with the rest of the market or along with an index.
Forbearance
A special agreement between the lender and the borrower to delay a foreclosure. The literal meaning of forbearance is “holding back.”
Foreclosure
The legal process by which a lender takes control of a property, evicts the homeowner, and sells the home after a homeowner is unable to make full principal and interest payments on his or her mortgage.
G
Garnishment
A legal method by which payments towards a debt owed by an individual can be taken directly from their paycheck.
Grace period
A time period during which a borrower is allowed to pay the loan without being hit with fees or penalties.
Gross income
An individual's total personal income before taking taxes or deductions into account.
Guarantor
A person who agrees to repay a borrower's debt should the borrower default on agreed terms.
H
Hard inquiry
A type of credit check that may affect an individual's credit score, usually initiated by a financial institution after receiving an application.
Home equity
The current market value of a homeowner's unencumbered interest in their real property.
I
Implicit interest rate
The interest rate in a lease or other financial arrangement that is not explicitly mentioned or detailed.
Income verification
A process where a lender or other entity confirms the income of a borrower.
Installment
Regularly scheduled payments that a borrower agrees to make to a lender.
A loan that is repaid over time with a set number of scheduled payments.
Interest capitalization
The addition of unpaid interest to the principal balance of a loan, making the borrower responsible for paying interest on interest.
Interest rate
The amount charged, expressed as a percentage of the principal, by a lender to a borrower for the use of assets.
Interest rate swap
A financial derivative in which two parties agree to exchange interest rate cash flows, based on a specified principal amount.
Interest-only payment
A loan repayment strategy in which the borrower pays only the interest for some specified period.
Invoice financing
A method used by businesses to borrow money based on amounts due from customers.
J
Joint account
A bank account held by more than one person, each individual having the right to deposit and withdraw funds.
K
Know Your Customer (KYC)
The process used by a business to verify the identity of its clients and assess potential risks.
L
Late fee
A charge made by a lender or credit card company for an unpaid amount at the end of the billing cycle.
Lease
A contract by which one party gives land, property, services, etc., to another for a specified time, usually in return for a periodic payment.
Legal action
Steps or actions taken to resolve disputes between parties, usually in court.
Lender
An organization or person that lends money.
Liability
An amount owed for borrowed funds, which may include an obligation for which an individual or entity is responsible.
Lien
A claim or legal right against assets that are typically used as collateral to satisfy a debt.
Lienholder
A person or entity that holds a lien or, in other words, has the right to keep possession of a property until a debt owed by that property's owner is paid.
Liquidate
To convert assets into cash or cash equivalents by selling them on the open market.
Loan agreement
A contract between a borrower and a lender which regulates the mutual promises made by each party.
Loan amount
The specific amount of money that is lent to the borrower.
Loan application
A formal request for a loan, typically consisting of personal, financial, and employment information.
Loan calculator
An online tool used to calculate monthly payments and the total cost of an installment loan over time.
Loan cap
A limit on the maximum amount that the interest rate on an adjustable-rate mortgage can be raised over a specific term.
Loan cycle
Refers to the process in which a borrower applies for a loan, receives the money, repays the loan, and applies for another.
Loan extension
An agreement to extend the term of a loan, giving the borrower more time to repay the amount owed.
Loan origination
The process by which a borrower applies for a new loan, and a lender processes that application.
Loan term
The length of time that the borrower has to repay a loan.
Loan-to-value ratio (LTV)
A financial term used by lenders to express the ratio of a loan to the value of the purchased asset, like property.
M
Maturity date
The final date by which the full amount of a loan must be repaid.
Maximum loan amount
The maximum amount a borrower can request for a specific type of loan.
Microloan
A small amount of money lent to a new business at a low-interest rate.
Mortgage
A specific type of loan that is used to buy real estate. In a mortgage agreement, the buyer borrows money from a lender to buy a home or other real estate.
N
Negative amortization
Occurs when the payments on a loan are less than the interest that accrues, causing the balance owed on the loan to increase.
Net income
The total earnings calculated after deducting taxes, allowances, and other items from gross income.
No credit check loan
A loan granted without the lender checking the borrower's credit history.
Non-binding loan estimate
An unofficial estimate provided by a lender of the costs involved in taking a mortgage.
Non-performing loan
A loan that has not been fully repaid within the past due period.
Non-recourse loan
A type of loan that is secured by collateral, where the borrower is not personally liable if they default.
Non-sufficient funds (NSF)
Occurs when an account does not have enough money to cover a transaction, leading to a 'bounced' check or disrupted ACH transfer.
O
A short-term loan that can be applied for and processed online.
Origination fee
A charge by the lender for processing a new loan application, used as compensation for putting the loan in place.
Overcollateralization
Occurs when the value of the collateral for a loan exceeds the loan's value.
Overdraft
An extension of credit that is granted when an account reaches zero.
Overdraft
An extension of credit from a lending institution when an account reaches zero. It effectively allows the individual to continue withdrawing money even if the account has no funds.
P
Payday loan
A short-term, high-interest loan that is typically required to be paid back on the borrower's next payday.
Payment plan
An agreement with a lender to repay borrowed money over a specific time frame with set monthly payments.
Peer-to-peer lending
A method of lending where individuals can lend or borrow money directly from each other, typically facilitated by an online platform, without the use of a traditional financial institution.
Penalty
A financial punishment imposed on an individual for not adhering to a contract or law.
Personal Identification Number (PIN)
A numerical code used in many electronic financial transactions to secure the user's data or access.
Post-dated check
A check written with a date in the future, indicating when the check can be deposited.
Pre-approval
A preliminary approval from a lender stating that a borrower would likely be approved for a certain loan amount, based on certain information.
Predatory lending
Unscrupulous actions carried out by lenders to entice, induce, and assist a borrower in taking out a loan that they cannot afford.
Prepayment
Paying off all or part of a loan before its due date.
Prepayment penalty
A charge imposed by a lender on a borrower who wants to pay off part or all of a loan early.
Prime rate
The interest rate that commercial banks charge their most credit-worthy customers.
Principal
The amount of money that is borrowed or still owed on a loan, excluding interest.
Principal balance
The current amount owed on a loan, not including interest.
Privacy policy
A statement or a legal document that discloses how a company gathers, uses, discloses, and manages a customer's data.
Promissory note
A legal document in which one party promises to pay another party a specific amount of money at a certain time or on demand.
Q
Qualifying ratio
Criteria used by lenders to determine the maximum loan amount an individual qualifies for.
R
Rate cap
A limit on how much the interest rate can change, either at adjustment time or over the life of the mortgage.
Recourse
The lender's right to seek repayment of a loan through the borrower personally if the collateral is insufficient.
Refinance
The process of obtaining a new mortgage in order to reduce monthly payments, lower interest rates, take cash out of your home for large purchases, or change mortgage companies.
Refinancing
Replacing an existing loan with a new loan, typically with better terms.
Registration
The act of recording names or details on an official list.
Renewal
Extending the term of a loan, often after the initial term has expired.
Repayment
The act of paying back money previously borrowed from a lender.
Repossession
The action of retaking possession, especially of property in which a security interest is provided as collateral for a loan.
Responsible lending
Lending practices that are conducted in a safe and responsible manner to ensure borrowers are issued credit products that are suitable for their needs and financial situation.
Revolving credit
A type of credit that does not have a fixed number of payments, such as credit cards.
Revolving loan
A type of loan that allows borrowers to draw, repay, and redraw from available funds.
Risk assessment
Evaluation of the potential risks involved in a proposed investment or undertaking.
Rollover
The process of renewing a loan or other type of debt by establishing it as a new loan.
S
Secured creditor
A lender that provides a loan backed by collateral, ensuring repayment if the borrower defaults.
Secured loan
A loan in which the borrower pledges an asset (e.g., a car or property) as collateral.
Securitization
The process of turning assets, especially loans, into securities that can be purchased by investors.
Securitized loan
A loan that has been bundled with other loans and turned into a security for investment.
Service charge
An additional fee charged for a service.
Settlement
An official agreement intended to resolve a dispute or end a disagreement.
A loan scheduled to be repaid in less than a year.
Simple interest
Interest computed only on the principal amount, without compounding.
Soft inquiry
A credit report check that doesn't affect an individual's credit score.
Standing order
An instruction given to a bank to pay a fixed amount to another account regularly.
State regulations
Laws and rules established by state governments.
Storefront lender
A type of lender with physical locations where borrowers can apply for and receive loans.
Subprime borrower
A borrower with a lower credit score, representing a higher risk for lenders.
Subsidized loan
A loan on which interest is not accrued while the borrower is in an approved deferment status.
T
Term loan
A loan from a bank for a specific amount with a specified repayment schedule and a fixed or floating interest rate.
Terms and conditions
The details in a contract or financial agreement.
A short-term loan in which the borrower's car title is used as collateral.
Title search
A process to determine the legal ownership of property and if there are any claims on it.
Transparency
Clarity and openness in business practices.
Trustee
An individual or organization which holds or manages assets for the benefit of another.
U
Underwriter
A person or company that underwrites an insurance risk or a financial entity that assumes responsibility for another's financial risk.
Underwriting
The process by which lenders evaluate the risk of insuring a home loan and then determine if it's a risk they're willing to take.
Uniform Commercial Code (UCC)
A comprehensive set of laws governing commercial transactions between U.S. states.
Unsecured loan
A loan that is not backed by collateral.
Unsubsidized loan
A type of student loan on which interest starts accruing from the date of disbursement until it's fully paid off.
Usury
The illegal action or practice of lending money at unreasonably high rates of interest.
V
Validation
The process of checking or proving the validity or accuracy of something.
Variable interest rate
An interest rate that can fluctuate over the duration of the loan, based on an underlying benchmark interest rate or index.
Variable rate
A rate that can change, typically in relation to an index or a base rate, such as the prime rate.
Verification
The process of establishing the truth, accuracy, or validity of something.
W
Write-off
A reduction of the recognized value of something, often for accounting purposes, when it's deemed uncollectible.
Y
Yield
The income return on an investment, typically in the form of interest or dividends received.
Z
Zero-down payment
A mortgage option where a borrower can obtain financing to purchase a home without providing a traditional down payment.