Loan Glossary

Plain-language definitions of the terms you meet when comparing loans — from APR and amortization to LTV, PMI and underwriting. Each entry explains what the term means, why it matters, and how it affects what you pay.

A

• Adjustable-Rate Mortgage (ARM) — A mortgage whose interest rate changes periodically after an initial fixed period.
• Amortization — Paying off a loan in scheduled installments where each payment covers interest and principal.
• Annual Percentage Rate (APR) — The yearly cost of borrowing, including most fees, expressed as a percentage.
• Appreciation — An increase in the value of an asset over time.

B

• Balloon Payment — A large lump-sum payment due at the end of a loan with low regular payments.
• Bankruptcy — A legal process for dealing with debts you cannot repay.
• Basis Point — One hundredth of a percentage point (0.01%).
• Bridge Loan — A short-term loan used to bridge the gap between two transactions.

C

• Cash-Out Refinance — Refinancing a mortgage for more than you owe and taking the difference in cash.
• Charge-Off — When a lender writes off a debt as unlikely to be collected.
• Closing Costs — Fees paid at the completion of a mortgage, typically 2-5% of the loan amount.
• Co-Signer — A person who agrees to repay a loan if the primary borrower defaults.
• Collateral — An asset a lender can seize if a secured loan is not repaid.
• Compound Interest — Interest charged on both the original amount and on previously accrued interest.
• Conforming Loan — A mortgage within the maximum size the government-sponsored enterprises will buy.
• Conventional Loan — A mortgage not backed by a government agency such as the FHA, VA or USDA.
• Credit Bureau — A company that collects and sells credit information.
• Credit Limit — The maximum you can borrow on a revolving account.
• Credit Mix — The variety of credit accounts on your credit report.
• Credit Report — A record of your credit accounts and payment history.
• Credit Score — A number summarising your creditworthiness, used by lenders.
• Credit Union — A member-owned financial institution that often offers lower loan rates.
• Credit Utilization — The share of your available revolving credit that you are using.

D

• Debt Avalanche — A debt payoff method that targets the highest interest rate first.
• Debt Settlement — Negotiating to pay less than the full amount owed on a debt.
• Debt Snowball — A debt payoff method that targets the smallest balance first.
• Debt-to-Income Ratio (DTI) — Your total monthly debt payments divided by your gross monthly income.
• Default — Failing to repay a loan according to its terms.
• Deferment — A period during which loan payments are postponed, often on student loans.
• Delinquency — A loan payment that is overdue but not yet in default.
• Depreciation — The decline in an asset's value over time.
• Discount Points — An upfront fee paid to lower a mortgage's interest rate.
• Down Payment — The upfront portion of a purchase you pay yourself rather than borrowing.

E

• Escrow — An arrangement where a third party holds funds, often for taxes and insurance on a mortgage.

F

• Finance Charge — The total cost of credit, including interest and certain fees.
• Fixed Interest Rate — An interest rate that stays the same for the life of the loan.
• Forbearance — A temporary pause or reduction of loan payments granted by the lender.

G

• Grace Period — A set time after a due date during which payment can be made without penalty.
• Gross Income — Your income before taxes and deductions.

H

• Hard Credit Inquiry — A credit check by a lender when you apply for credit, which can lower your score slightly.
• Home Equity — The difference between your home's value and what you owe on it.
• Home Equity Line of Credit (HELOC) — A revolving line of credit secured by your home's equity.
• Home Equity Loan — A fixed-rate lump-sum loan secured by your home's equity.

I

• Interest Rate — The percentage a lender charges on the principal you borrow.
• Interest-Only Loan — A loan where you pay only interest for an initial period.

J

• Jumbo Loan — A mortgage larger than the conforming loan limit.

L

• Lien — A lender's legal claim on an asset used as collateral.
• Loan Estimate — A standardised disclosure of the terms and costs of a mortgage application.
• Loan Forgiveness — Cancellation of all or part of a debt without repayment.
• Loan Servicer — The company that collects your loan payments and manages the account.
• Loan Term — The length of time over which a loan is repaid.
• Loan-to-Value Ratio (LTV) — The loan amount divided by the value of the asset securing it.

M

• Minimum Payment — The smallest amount a lender requires each month on a revolving balance.
• Mortgage — A loan secured by real estate, repaid over a set term.
• Mortgage Broker — An intermediary who matches borrowers with mortgage lenders.

N

• Negative Equity — Owing more on a loan than the asset securing it is worth.
• Net Income — Your income after taxes and deductions.

O

• Origination Fee — A lender charge for processing a new loan.

P

• Payday Alternative Loan (PAL) — A small credit-union loan designed as a lower-cost alternative to payday lending.
• Payoff Amount — The total needed to settle a loan in full on a given date.
• Personal Guarantee — A promise by a business owner to repay a business loan personally if the business cannot.
• Pre-Approval — A lender's conditional commitment to lend, based on verified income and credit.
• Pre-Qualification — An initial, soft-check estimate of how much you might borrow.
• Prepayment Penalty — A fee for repaying a loan earlier than scheduled.
• Prime Rate — A benchmark rate banks use to price some variable-rate loans.
• Principal — The amount borrowed, separate from interest and fees.
• Private Mortgage Insurance (PMI) — Insurance that protects the lender when a conventional down payment is below 20%.

R

• Rate Lock — An agreement holding a quoted interest rate for a set period.
• Recourse Loan — A loan where the lender can pursue the borrower beyond the collateral.
• Refinancing — Replacing an existing loan with a new one, usually to lower the rate or change the term.
• Reverse Mortgage — A loan that lets older homeowners convert home equity into cash.
• Revolving Credit — Credit you can draw from, repay and reuse, such as a credit card or line of credit.

S

• Secured Loan — A loan backed by collateral the lender can seize if you default.
• Simple Interest — Interest calculated only on the principal, not on accrued interest.
• Soft Credit Inquiry — A credit check that does not affect your credit score.
• Subprime — Describing borrowers with weaker credit or the loans made to them.

T

• Teaser Rate — A low introductory interest rate that rises after a set period.
• Term Loan — A loan repaid in fixed installments over a set period.
• Title Insurance — Insurance protecting against defects in a property's ownership.
• Trade Line — An individual credit account listed on your credit report.

U

• Underwriting — The lender's process of assessing and approving a loan application.
• Unsecured Loan — A loan not backed by collateral.
• Usury Rate — The maximum interest rate a lender may legally charge.

V

• Variable Interest Rate — An interest rate that can change over time with market conditions.

Put it into practice

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