Dictionary of Personal and Business Loan Terms

Are you looking to apply for a personal or commercial loan but feel lost in the sea of unfamiliar terms and jargon? Don’t worry, you’re not alone. The world of finance can be overwhelming, and understanding the language used in loan agreements can be a daunting task. That’s why we’ve compiled a glossary of the 100 most important loan terms to help guide you through the process.

Whether you’re a first-time borrower or a seasoned veteran, having a strong understanding of loan terminology can help you make informed decisions about your financial future. This comprehensive glossary covers everything from annual percentage rates (APRs) to collateral and credit scores, making it a valuable resource for anyone seeking a loan.

Some of the most important terms to know when applying for a loan include the loan principal, which is the amount of money you borrow, and the interest rate, which determines how much you’ll pay in interest over the life of the loan. Other key terms include origination fees, late payment fees, and prepayment penalties, all of which can impact the cost of your loan.

It’s also important to understand the difference between secured and unsecured loans. A secured loan requires collateral, such as a car or house, while an unsecured loan does not. Understanding the pros and cons of each type of loan can help you make an informed decision about which one is right for you.

In addition to personal loans, this glossary also covers commercial loan terms, including business credit, cash flow, and inventory. Whether you’re starting a new business or expanding an existing one, understanding these terms can help you navigate the complex world of commercial lending.

Overall, having a strong understanding of loan terminology is essential for anyone seeking a loan, whether personal or commercial. By using this glossary as a guide, you’ll be well on your way to making informed decisions about your financial future.

Accrued interest: Accrued interest is the interest that accumulates on a loan or other financial instrument over time. It is the interest that has been earned but not yet paid. Accrued interest is typically calculated daily or monthly and is added to the loan balance until it is paid off.

Amortization: Amortization is the process of paying off a loan over time through a series of regular payments. Each payment includes both principal (the amount borrowed) and interest (the cost of borrowing), with the majority of the payment going towards interest at the beginning of the loan term and gradually shifting towards principal as the loan is paid down.

Annual percentage rate (APR): The Annual Percentage Rate (APR) is the cost of borrowing money expressed as an annual percentage. It includes not only the interest rate but also any fees or charges associated with the loan. The APR is a standardized way of comparing the cost of different loans and is required by law to be disclosed to borrowers.

Appraisal: An appraisal is an evaluation of the value of a property, such as a home or business, conducted by a professional appraiser. The appraiser takes into account factors such as the condition of the property, its location, and comparable sales in the area to determine its market value. An appraisal is typically required by lenders before they will approve a loan.

Assets: Assets are any resources that a person or business owns that have economic value. Examples of assets include cash, investments, real estate, equipment, and inventory. Assets are important in lending because they can be used as collateral for a loan, which reduces the lender’s risk.

Balance: The balance of a loan is the amount that is owed at any given time. It includes both the principal (the amount borrowed) and any interest that has accrued to date. The balance of a loan decreases over time as payments are made.

Balloon payment: A balloon payment is a large payment that is due at the end of a loan term. It is typically used in loans with shorter terms, such as three to five years, and is often associated with mortgages and car loans. The balloon payment is typically equal to the remaining balance of the loan and must be paid in full when the loan comes due.

Bankruptcy: Bankruptcy is a legal process in which individuals or businesses that are unable to pay their debts can seek protection from their creditors. There are several types of bankruptcy, but the most common are Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, assets are liquidated to pay off creditors, while in Chapter 13 bankruptcy, a payment plan is established to repay debts over a period of three to five years.

Borrower: A borrower is a person or business that receives a loan from a lender. The borrower is responsible for repaying the loan, including any interest and fees, according to the terms of the loan agreement. The borrower’s creditworthiness is evaluated by the lender before the loan is approved.

Business plan: A business plan is a document that outlines the goals, strategies, and financial projections for a business. It typically includes information on the market for the business, the products or services it will offer, its management team, and its financial plan. A business plan is often required by lenders before they will approve a loan for a new business.

Capital: Capital refers to the money or other assets that a person or business has available to invest or use for other purposes. In lending, capital is an important factor in determining creditworthiness, as it represents the borrower’s ability to repay the loan.

Cash flow: Cash flow refers to the amount of cash that a person or business has coming in and going out over a given period of time. Positive cash flow means that more cash is coming in than going out, while negative cash flow means the opposite. Cash flow is an important consideration in lending, as lenders want to ensure that borrowers have enough cash coming in to cover their loan payments.

Collateral: Collateral is any asset that a borrower pledges as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral to recoup their losses. Common forms of collateral include real estate, vehicles, and equipment.

Collections: Collections refers to the process of attempting to recover unpaid debts from borrowers who have defaulted on their loans. This can involve contacting the borrower directly, hiring a collections agency, or pursuing legal action. Lenders may also sell the debt to a third-party collections agency in order to recoup their losses.

Commercial loan: A commercial loan is a loan that is made to a business for commercial purposes, such as financing the purchase of equipment or real estate, or for working capital. Commercial loans typically have higher interest rates than consumer loans and may require collateral or a personal guarantee.

Commitment fee: A commitment fee is a fee charged by a lender to a borrower to guarantee that the loan will be available when the borrower is ready to use it. The fee is typically a percentage of the loan amount and is paid upfront. The commitment fee is designed to compensate the lender for the time and resources required to prepare the loan.

Consolidation loan: A consolidation loan is a loan that is used to pay off multiple debts, such as credit card balances or other loans. The goal of a consolidation loan is to simplify debt repayment and reduce overall interest charges. Consolidation loans can be secured or unsecured, depending on the borrower’s creditworthiness.

Credit history: Credit history refers to a record of a borrower’s past borrowing and repayment behavior. This includes information such as the borrower’s credit accounts, payment history, and outstanding balances. Lenders use credit history to assess a borrower’s creditworthiness and determine the terms of the loan.

Credit score: A credit score is a numerical rating of a borrower’s creditworthiness, based on their credit history. Credit scores range from 300 to 850, with higher scores indicating better creditworthiness. Lenders use credit scores to determine the interest rate and other terms of the loan.

Debt: Debt refers to the amount of money that is owed by a borrower to a lender. This can include loans, credit card balances, and other forms of debt. Lenders use debt-to-income ratio and other factors to assess a borrower’s ability to repay their debt.

Debt-to-income ratio: Debt-to-income ratio is a financial metric that compares a borrower’s debt to their income. It is calculated by dividing the borrower’s total debt by their gross monthly income. Lenders use debt-to-income ratio to assess a borrower’s ability to repay their debt and determine their creditworthiness.

Default: Default occurs when a borrower fails to repay their loan according to the terms of the loan agreement. This can result in penalties, additional interest charges, and damage to the borrower’s credit score. Lenders may take legal action to recover the outstanding debt.

Delinquency: Delinquency refers to a borrower being late on their loan payments. The number of days past due that a payment is considered delinquent varies by lender and loan type. Delinquency can result in late fees, additional interest charges, and damage to the borrower’s credit score.

Disbursement: Disbursement refers to the process of distributing loan funds to the borrower. The disbursement process may involve a single lump sum payment or multiple payments over time. Lenders may require documentation and verification of the borrower’s expenses and use of loan proceeds before disbursement.

Discount points: Discount points are fees paid by a borrower to lower their interest rate on a loan. Each discount point typically costs 1% of the loan amount and can lower the interest rate by a set percentage, such as 0.25%. Discount points can be beneficial for borrowers who plan to hold the loan for an extended period of time.

Down payment: A down payment is an upfront payment made by a borrower when purchasing a property or taking out a loan. The down payment is typically a percentage of the total purchase price or loan amount. Lenders may require a down payment as a form of collateral and to reduce their risk.

Equities: Equities refer to the value of a borrower’s assets minus their liabilities. In lending, equities are used to assess a borrower’s financial position and ability to repay their debt. Borrowers with high equities are typically seen as less risky and may receive more favorable loan terms.

Escrow: Escrow is a financial arrangement where a neutral third party holds funds or assets, typically during the process of a real estate transaction. The escrow agent acts as an intermediary between the buyer and seller to ensure that the terms of the transaction are met before releasing the funds or assets. The funds or assets are held in an escrow account until all the conditions of the transaction are met. Escrow is commonly used in real estate transactions, but it can also be used in other situations where a neutral third party is needed to hold funds or assets.

Fair Credit Reporting Act (FCRA): The Fair Credit Reporting Act is a federal law that regulates the collection, dissemination, and use of consumer credit information. The FCRA gives consumers the right to access their credit reports and dispute inaccurate information. It also requires credit reporting agencies to maintain reasonable procedures to ensure the accuracy of credit information and to investigate consumer disputes. The FCRA sets limitations on who can access a consumer’s credit report and for what purposes. Violations of the FCRA can result in legal action against the credit reporting agency or other parties involved.

Fair Debt Collection Practices Act (FDCPA): The Fair Debt Collection Practices Act is a federal law that regulates the actions of debt collectors. The FDCPA sets rules for debt collection practices, including prohibiting debt collectors from using abusive, deceptive, or unfair practices. Debt collectors must identify themselves when contacting a debtor and provide certain information about the debt. They are not allowed to call at unreasonable times or harass the debtor. The FDCPA also gives consumers the right to dispute a debt and to request that the debt collector cease all communication.

Fannie Mae: Fannie Mae is a government-sponsored enterprise that was created to provide stability in the secondary mortgage market. Fannie Mae purchases mortgages from lenders, which provides liquidity for the lenders to make additional loans. Fannie Mae then pools the mortgages and sells them as mortgage-backed securities to investors. The goal is to make home ownership more affordable by providing liquidity to the mortgage market and increasing the availability of mortgage financing.

Federal Deposit Insurance Corporation (FDIC): The Federal Deposit Insurance Corporation is a U.S. government agency that provides insurance for deposits at banks and savings institutions. The FDIC was created to provide confidence in the banking system and prevent bank runs during times of economic crisis. The FDIC insures deposits up to a certain amount per depositor per institution. If a bank or savings institution fails, the FDIC will pay depositors up to the insured amount. The FDIC also regulates and supervises banks and savings institutions to ensure their safety and soundness.

Federal Home Loan Mortgage Corporation (FHLMC): The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, is a government-sponsored enterprise that provides liquidity for the secondary mortgage market. Like Fannie Mae, Freddie Mac purchases mortgages from lenders, pools them, and sells them as mortgage-backed securities to investors. The goal is to make home ownership more affordable by providing liquidity to the mortgage market and increasing the availability of mortgage financing. Freddie Mac operates under the oversight of the Federal Housing Finance Agency.

Federal Reserve: The Federal Reserve is the central bank of the United States, which was created in 1913 to regulate the nation’s financial system. It is responsible for setting monetary policy, such as controlling the supply of money and credit, and regulating banks and other financial institutions. The Federal Reserve is also responsible for implementing policies to achieve maximum employment and stable prices. It is composed of a Board of Governors in Washington D.C. and twelve regional Reserve Banks.

FHA loan: An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD). These loans are designed to make it easier for people with lower credit scores or smaller down payments to buy homes. The FHA insures the loan, which means that if the borrower defaults, the lender will be paid back by the government. However, borrowers must pay a mortgage insurance premium (MIP) as part of their monthly mortgage payment.

finance charge: A finance charge is a fee that a lender charges a borrower for the use of credit or for extending credit. It includes interest, as well as any other fees, such as origination fees, application fees, and processing fees. The finance charge is expressed as an annual percentage rate (APR), which allows borrowers to compare the costs of different loans. It is important to understand the finance charge when taking out a loan, as it can significantly impact the total cost of borrowing.

Fixed rate: A fixed rate is an interest rate on a loan that remains the same for the entire term of the loan. This means that the borrower’s monthly payment will remain the same as well. Fixed-rate loans are popular with borrowers who prefer to have a predictable payment amount, as they can budget accordingly. However, fixed-rate loans may have higher interest rates than adjustable-rate loans, especially if interest rates are low.

Foreclosure: Foreclosure is the legal process by which a lender takes possession of a property that has been used as collateral for a loan. This occurs when a borrower fails to make their mortgage payments for an extended period of time. The lender can then sell the property in order to recoup the amount owed on the loan. Foreclosure can have serious consequences for the borrower, including damage to their credit score and difficulty obtaining credit in the future.

Freddie Mac: Freddie Mac (Federal Home Loan Mortgage Corporation) is a government-sponsored enterprise (GSE) that purchases mortgages from lenders and then sells them as securities to investors. By doing so, Freddie Mac helps to increase the availability of mortgage credit and lower the cost of borrowing. Freddie Mac was created by Congress in 1970 to provide liquidity to the mortgage market and is regulated by the Federal Housing Finance Agency (FHFA).

garnishment: Garnishment is a legal process by which a creditor can collect a debt by taking money directly from a debtor’s paycheck or bank account. This is typically done as a last resort after other collection efforts have failed. Garnishment can only be done with a court order, and the amount that can be garnished is limited by law. It is important for debtors to understand their rights when it comes to garnishment and to seek legal advice if they are facing this situation.

Grace period: A grace period is a period of time during which a borrower is not required to make payments on a loan, usually after the due date has passed. The grace period is intended to give the borrower some flexibility in making payments and to avoid late fees or penalties. The length of the grace period and the terms for using it are typically specified in the loan agreement.

Guarantee: A guarantee is a promise made by a third party to assume responsibility for the repayment of a loan if the borrower is unable to do so. Guarantees can be made by individuals, organizations, or government agencies. A guarantee can help borrowers to qualify for loans that they might not otherwise be able to obtain. However, guarantors are typically required to have good credit and financial standing, and they may be required to provide collateral or other security.

Home equity loan: A home equity loan is a type of loan that allows homeowners to borrow against the equity they have built up in their home. The loan is secured by the home and typically has a fixed interest rate and a fixed repayment term. Home equity loans can be used for a variety of purposes, such as home improvements, debt consolidation, or education expenses. However, borrowers should be aware that if they default on the loan, they could lose their home.

Homeowner’s insurance: Homeowner’s insurance is a type of insurance that provides coverage for damage or loss to a home and its contents. It can also provide liability coverage if someone is injured on the property. Homeowner’s insurance is typically required by lenders when a home is purchased with a mortgage loan. The cost of the insurance premium is based on a variety of factors, such as the location of the home, the age of the home, and the amount of coverage needed.

Interest: Interest is the cost of borrowing money. It is typically expressed as a percentage of the amount borrowed and is added to the amount owed. Interest is the way that lenders make money on loans, and it is an important factor to consider when borrowing money. The amount of interest charged depends on a variety of factors, such as the borrower’s credit score, the type of loan, and the length of the loan term.

Interest rate: The interest rate is the percentage of the loan amount that a borrower must pay in addition to the principal amount. It is the cost of borrowing money and is typically expressed as an annual percentage rate (APR). The interest rate is a key factor in determining the total cost of a loan and can vary depending on a variety of factors, such as the borrower’s credit score, the type of loan, and the length of the loan term.

Joint and several liability: Joint and several liability is a legal concept that applies to situations where two or more people are responsible for a debt. Under joint and several liability, each person is individually responsible for the entire debt. This means that if one person is unable to pay their share of the debt, the other person or persons may be required to pay the full amount. Joint and several liability can be used in situations such as business partnerships or co-signed loans.

Judgment: Judgment refers to a court decision against a borrower who fails to repay a loan. In other words, it’s a formal decision made by a court that orders the borrower to repay the lender. A judgment may also include a court order to seize the borrower’s assets or property to satisfy the debt. Having a judgment against you can negatively impact your credit score and make it difficult to secure future loans or credit. It’s important to pay your debts on time to avoid the possibility of a judgment.

Late fee: A late fee is a penalty charged by the lender when the borrower fails to make a payment by the due date. This fee is usually a percentage of the outstanding balance and is meant to incentivize timely payments. Late fees can add up quickly and make it harder to pay off the loan, so it’s important to make payments on time to avoid them.

Lender: A lender is an individual or institution that provides funds to a borrower with the expectation of repayment, usually with interest. Lenders can be banks, credit unions, or other financial institutions, as well as individuals such as friends or family members. Lenders evaluate borrowers’ creditworthiness and ability to repay before approving a loan.

Liability: Liability refers to the legal responsibility for something, such as a debt or obligation. In the context of loans, liability typically refers to the borrower’s obligation to repay the loan. Liability can also refer to a company’s legal responsibility for damages caused by its products or services.

Liabilities: Liabilities refer to the debts and obligations of a person or business. This can include loans, credit card balances, and other debts. Liabilities are important to consider when evaluating someone’s financial health, as excessive liabilities can be a sign of financial instability.

Line of credit: A line of credit is a type of loan that allows the borrower to access funds as needed, up to a certain limit. It’s similar to a credit card in that it’s a revolving line of credit that can be used and repaid multiple times. Interest is only charged on the amount of the line of credit that is used, not the full amount.

Loan agreement: A loan agreement is a legal contract between a borrower and lender that outlines the terms of the loan. This includes the amount borrowed, the interest rate, the repayment schedule, and any other fees or conditions. Loan agreements are legally binding, so it’s important to read and understand all of the terms before signing.

Loan application: A loan application is a formal request made by a borrower to a lender for a loan. The application typically includes personal and financial information such as income, employment history, credit score, and the amount and purpose of the loan. The lender uses this information to evaluate the borrower’s creditworthiness and determine whether to approve the loan.

Loan officer: A loan officer is a representative of a financial institution who is responsible for evaluating loan applications and determining whether to approve or deny them. Loan officers typically work for banks, credit unions, or other financial institutions. They also work with borrowers to help them understand the loan process and navigate any issues that arise during the loan application process.

Loan servicer: A loan servicer is a company that manages the repayment of a loan on behalf of the lender. Loan servicers collect loan payments, manage the borrower’s account, and provide customer service to the borrower. In some cases, the lender may be different from the loan servicer.

Loan term: The loan term refers to the length of time over which a loan will be repaid. This can range from a few months to several years, depending on the type of loan and the lender’s requirements. The loan term also affects the amount of interest paid over the life of the loan.

Loan-to-value ratio (LTV): The loan-to-value ratio is a measure of the amount of a loan compared to the appraised value of the collateral. For example, if a borrower wants to purchase a house for $200,000 and the lender requires a 20% down payment, the loan amount would be $160,000 (80% of the purchase price) and the loan-to-value ratio would be 80%. Lenders use the LTV to evaluate the risk of the loan and determine whether to approve it.

Margin: The margin is the amount of interest that is added to the index rate to determine the total interest rate on a variable-rate loan. For example, if the index rate is 3% and the margin is 2%, the total interest rate would be 5%. The margin is set by the lender and can vary depending on the borrower’s creditworthiness and other factors.

Market value: Market value is the price that a willing buyer would pay for an asset, such as a property or a car, in a free and open market. The market value is determined by supply and demand and can fluctuate over time. Lenders may use market value to evaluate the collateral for a loan and determine the loan-to-value ratio.

Mortgage: A mortgage is a loan that is used to purchase a property, such as a house or commercial building. The borrower pledges the property as collateral for the loan, and the lender has the right to take possession of the property if the borrower defaults on the loan. Mortgages typically have a fixed or variable interest rate and a repayment period that can range from 10 to 30 years.

Mortgage broker: A mortgage broker is a professional who acts as an intermediary between borrowers and lenders in the mortgage process. The broker helps borrowers find the best mortgage product for their needs and works with lenders to secure financing. Mortgage brokers can offer a range of loan products from different lenders and can help borrowers navigate the complex mortgage process.

Mortgage insurance: Mortgage insurance is a type of insurance policy that protects the lender in the event that the borrower defaults on the loan. Mortgage insurance is typically required for borrowers who have a down payment of less than 20% of the home’s purchase price. The insurance premium is paid by the borrower and can be included in the monthly mortgage payment.

Mortgage loan: A mortgage loan is a type of loan that is used to purchase a property. The loan is secured by the property, which serves as collateral for the loan. Mortgage loans typically have a fixed or variable interest rate and a repayment period that can range from 10 to 30 years. The borrower makes regular payments to the lender over the life of the loan.

Negative depreciation: Negative depreciation is a term used to describe a situation where the value of an asset, such as a property, decreases over time. This can occur due to a variety of factors, such as a decline in the local real estate market or a decrease in the property’s condition. Negative depreciation can be a concern for borrowers who are underwater on their mortgage, meaning they owe more on the property than it is worth.

Origination fee: An origination fee is a fee charged by the lender to cover the costs associated with processing a loan application. The fee is typically a percentage of the loan amount and is paid by the borrower at closing. Origination fees can vary depending on the lender and the type of loan.

Overdraft: An overdraft occurs when a bank account is overdrawn, meaning there are not enough funds available to cover a transaction. Overdrafts can occur due to a variety of factors, such as a check that bounces or a debit card transaction that is processed before a deposit clears. Banks may charge an overdraft fee to cover the cost of processing the transaction and to compensate for the risk of non-payment.

Payment: Payment refers to the act of transferring money or funds from the borrower to the lender to repay the loan. The payment amount is typically determined by the terms of the loan agreement, which specifies the interest rate, repayment schedule, and any fees or charges associated with the loan. Payments are usually made on a regular basis, such as monthly, until the loan is fully repaid. Failure to make payments on time can result in late fees, default, and damage to the borrower’s credit score.

Personal loan: A personal loan is a type of loan that can be used for any purpose, such as consolidating debt, making a large purchase, or covering unexpected expenses. Personal loans are typically unsecured, meaning they do not require collateral, and are based on the borrower’s creditworthiness. The loan amount, interest rate, and repayment terms are determined by the lender based on the borrower’s credit history, income, and other factors. Personal loans may have fixed or variable interest rates, and the repayment period can range from a few months to several years.

Pre-approval: Pre-approval is the process of applying for a loan and receiving a tentative approval decision from the lender before officially applying for the loan. Pre-approval typically involves providing the lender with information about your income, credit score, and other financial information to determine if you are eligible for the loan and what terms you may qualify for. Pre-approval is not a guarantee of approval, but it can help borrowers understand their borrowing options and make informed decisions about their finances.

Prepayment penalty: A prepayment penalty is a fee charged by some lenders if a borrower pays off all or part of a loan before the end of the agreed-upon term. Prepayment penalties are designed to protect lenders from lost interest income and can be a percentage of the remaining loan balance or a flat fee. Borrowers should carefully review loan agreements to determine if prepayment penalties apply and how much they may be before agreeing to the loan terms.

Prime rate: The prime rate is a benchmark interest rate used by banks and other lenders to set their own interest rates for loans and other financial products. The prime rate is typically based on the federal funds rate, which is set by the Federal Reserve, and is influenced by economic factors such as inflation, employment, and GDP. The prime rate is often used as a reference point for adjustable-rate loans, such as mortgages and credit cards, and is updated periodically to reflect changes in the market.

Principal: Principal refers to the original amount of money borrowed in a loan. It does not include any interest or fees that may be added to the loan balance over time. The principal amount is typically repaid in installments over the life of the loan, along with interest and any other fees or charges. Paying down the principal balance can help borrowers save money on interest charges over time and reduce the total cost of the loan.

Promissory note: A promissory note is a legal document that outlines the terms and conditions of a loan, including the amount borrowed, interest rate, repayment schedule, and any fees or charges associated with the loan. The promissory note serves as a binding agreement between the borrower and lender and can be used as evidence in court if there is a dispute over the loan. The promissory note also outlines the consequences of defaulting on the loan, such as late fees, collection efforts, and damage to the borrower’s credit score.

Property tax: Property tax is a tax on the value of real estate property, including land and buildings, that is paid by the property owner to the local government. The amount of property tax owed is typically based on the assessed value of the property, which is determined by a government agency. Property taxes are used to fund local services, such as schools, roads, and public safety, and are usually paid on an annual or semi-annual basis.

Refinance: Refinance refers to the process of replacing an existing loan with a new loan that has different terms and conditions. Refinancing can be used to lower monthly payments, reduce interest rates, or change the repayment schedule. Borrowers may choose to refinance their loans if they can secure better terms, such as a lower interest rate or a longer repayment period, which can save them money over the life of the loan.

Repayment plan: A repayment plan is an agreement between a borrower and lender to modify the original terms of a loan in order to make payments more manageable for the borrower. Repayment plans may involve extending the repayment period, reducing the interest rate, or adjusting the payment schedule. Repayment plans are often used by borrowers who are struggling to make their loan payments on time and may be at risk of default.

SBA loan: An SBA loan is a type of loan that is guaranteed by the U.S. Small Business Administration (SBA). SBA loans are designed to help small businesses obtain financing for a variety of purposes, such as starting a business, expanding operations, or purchasing equipment. SBA loans typically offer favorable terms, such as lower interest rates and longer repayment periods, and may require collateral or a personal guarantee from the borrower.

Secured loan: A secured loan is a type of loan that is backed by collateral, such as a home, car, or other valuable asset. The collateral serves as security for the lender in case the borrower defaults on the loan. Secured loans may offer lower interest rates and longer repayment periods than unsecured loans, but the borrower risks losing their collateral if they are unable to repay the loan.

Security interests: Security interests refer to the rights that a lender has over a borrower’s property in the event of default on a loan. Security interests may involve collateral, such as a car or home, or may be in the form of a lien on the borrower’s assets. Security interests are designed to protect the lender’s investment and may give the lender the right to repossess or foreclose on the collateral in order to recover their losses.

Simple interest: Simple interest is a type of interest that is calculated only on the principal amount of a loan or investment, without taking into account any interest that may have accumulated over time. Simple interest is typically calculated as a percentage of the principal and is paid or charged at regular intervals, such as monthly or annually. Simple interest is often used in personal loans and other consumer loans, as well as in investments such as bonds and certificates of deposit.

Soft inquiry: A soft inquiry is a type of credit check that does not affect the borrower’s credit score. Soft inquiries are typically used for background checks, pre-approvals, or promotional offers, and do not involve a full review of the borrower’s credit history. Soft inquiries can be initiated by the borrower or by a third party, such as a lender or credit card company.

Subprime loan: A subprime loan is a type of loan that is made to borrowers with poor credit or a high risk of default. Subprime loans typically have higher interest rates and fees than prime loans, and may require collateral or a co-signer. Subprime loans can be used for a variety of purposes, including personal loans, auto loans, and mortgages.

Term: A term refers to the length of time over which a loan must be repaid. Loan terms can range from a few months to several years, depending on the type of loan and the borrower’s creditworthiness. Longer loan terms generally result in lower monthly payments but may also result in higher interest charges over the life of the loan.

Title: Title refers to the legal ownership of a property or asset. In the context of a loan, title is often used to refer to the ownership of a car or home that is being used as collateral for the loan. The lender may require the borrower to provide proof of title in order to secure the loan.

Title insurance: Title insurance is a type of insurance that protects the lender and borrower against any legal claims or disputes that may arise over the ownership of a property. Title insurance is typically required by the lender as a condition of the loan, and may be paid for by the borrower or the seller of the property.

Truth in Lending Act (TILA): The Truth in Lending Act is a federal law that requires lenders to disclose certain information about a loan to the borrower, including the annual percentage rate (APR), finance charges, and other fees. The TILA is designed to promote transparency and fairness in lending and allows borrowers to compare different loan offers to determine which one is best for their needs.

Underwriting: Underwriting is the process of assessing the risk associated with a loan and determining whether the borrower is eligible for the loan. Underwriting may involve reviewing the borrower’s credit history, income, employment status, and other factors to determine their ability to repay the loan. Underwriting is typically conducted by the lender and may be done manually or using automated systems.

Unsecured loan: An unsecured loan is a type of loan that does not require the borrower to provide collateral in order to secure the loan. Instead, the lender relies on the borrower’s creditworthiness and ability to repay the loan. Unsecured loans typically have higher interest rates and stricter eligibility requirements than secured loans, but do not put the borrower’s assets at risk.

Usury: Usury refers to the practice of charging an excessively high rate of interest on a loan. Usury is illegal in many states and can result in penalties and fines for lenders who engage in this practice. The maximum allowable interest rate varies by state and type of loan, and is typically set by state law or regulation.

Variable rate: A variable rate is an interest rate that can change over time, based on fluctuations in the market or other factors. Variable rates are often used for adjustable-rate loans, such as mortgages or credit cards, and can result in lower initial payments but may also result in higher interest charges over the life of the loan.

Verification of employment: Verification of employment is a process by which a lender verifies a borrower’s current employment status, income, and other employment-related information. This may involve contacting the borrower’s employer directly or requesting documentation, such as pay stubs or tax returns.

Verification of income: Verification of income is a process by which a lender verifies a borrower’s income from all sources, including employment, investments, and other income streams. This may involve reviewing tax returns, pay stubs, bank statements, or other documentation.

Verification of assets: Verification of assets is a process by which a lender verifies a borrower’s assets, such as savings accounts, investments, and real estate holdings. This may involve requesting documentation, such as bank statements or property deeds, and verifying the value of the assets.

Veterans Affairs (VA) loan: A Veterans Affairs loan is a type of mortgage loan that is guaranteed by the Department of Veterans Affairs and is available to eligible veterans, service members, and their spouses. VA loans typically offer more favorable terms and lower down payment requirements than other types of loans, and may also offer lower interest rates.

Wage garnishment: Wage garnishment is a legal process by which a creditor can obtain a court order to deduct a portion of a debtor’s wages directly from their paycheck to repay a debt. The amount that can be garnished varies by state and type of debt, but is generally limited to a certain percentage of the debtor’s disposable income.

Walk away: Walk away refers to the decision by a borrower to stop making payments on a loan and to abandon the collateral that was used to secure the loan, such as a home or car. Walking away from a loan can have serious consequences for the borrower, including damage to their credit score and the loss of their collateral.

Yield: Yield refers to the return on an investment, expressed as a percentage of the initial investment. Yield can be calculated in different ways, depending on the type of investment and the period of time being measured. For example, the yield on a bond may be calculated based on the interest payments received by the bondholder over the life of the bond.

Zoning: Zoning refers to the local government regulations that control how land can be used in a particular area. Zoning laws typically define the allowable uses for different types of land, such as residential, commercial, or industrial, and may also specify building height, setback requirements, and other restrictions. Zoning regulations can have a significant impact on the value of real estate and the types of businesses that can operate in a particular area.

Test what you learned in this article:

Question 1: What is the definition of amortization?
a) The process of reducing the principal amount of a loan over a period of time.
b) The amount of money that a borrower owes to a lender, excluding interest and fees.
c) The process of taking a loan out for a longer period of time to reduce monthly payments.
d) The percentage rate at which interest is charged on a loan.

Question 2: Which of the following is a characteristic of a secured loan?
a) The loan is not backed by any collateral.
b) The loan is backed by collateral, such as a car or a house.
c) The loan is offered only to borrowers with excellent credit scores.
d) The loan is offered at a variable interest rate.

Question 3: What is a balloon payment?
a) The final payment on a loan that is significantly larger than the previous payments.
b) A payment made by a borrower to a lender to reduce the principal amount of a loan.
c) A payment made by a lender to a borrower for early repayment of a loan.
d) A payment made by a borrower to a lender to cover the cost of interest.

Question 4: What is the difference between a fixed-rate and a variable-rate loan?
a) A fixed-rate loan has a variable interest rate, while a variable-rate loan has a fixed interest rate.
b) A fixed-rate loan has a fixed interest rate, while a variable-rate loan has a variable interest rate.
c) A fixed-rate loan has a shorter term than a variable-rate loan.
d) A fixed-rate loan has a higher interest rate than a variable-rate loan.

Question 5: What is the definition of collateral?
a) The process of repaying a loan in equal installments over a period of time.
b) The amount of money that a borrower owes to a lender, including interest and fees.
c) Property or assets that a borrower pledges to a lender as security for a loan.
d) The percentage rate at which interest is charged on a loan.

Question 6: Which of the following is an example of an unsecured loan?
a) A mortgage loan.
b) A car loan.
c) A personal loan.
d) A student loan.

Question 7: What is the difference between simple interest and compound interest?
a) Simple interest is charged on the principal amount only, while compound interest is charged on both the principal and the accrued interest.
b) Simple interest is charged at a higher rate than compound interest.
c) Simple interest is only used for short-term loans, while compound interest is used for long-term loans.
d) Simple interest is charged on a daily basis, while compound interest is charged on a monthly basis.

Question 8: What is the definition of default?
a) The process of making payments on a loan ahead of schedule.
b) The process of extending the term of a loan to reduce monthly payments.
c) The failure to make timely payments on a loan.
d) The process of transferring the ownership of collateral to the lender.

Question 9: What is a prepayment penalty?
a) A fee charged by a lender for early repayment of a loan.
b) A fee charged by a lender for late payment on a loan.
c) A fee charged by a borrower for extending the term of a loan.
d) A fee charged by a borrower for paying off a loan in equal installments.

Question 10: Which of the following is a characteristic of a line of credit?
a) The borrower receives a lump sum of money and pays it back over a period of time.
b) The borrower can draw on the credit line as needed, up to a certain limit.
c) The borrower is required to make fixed monthly payments on the amount borrowed.
d) The borrower is not charged interest on the credit line.

Correct Answers:
1 – (a) The process of reducing the principal amount of a loan over a period of time.
2 – (b) The loan is backed by collateral, such as a car or a house.
3 – (a) The final payment on a loan that is significantly larger than the previous payments.
4 – (b) A fixed-rate loan has a fixed interest rate, while a variable-rate loan has a variable interest rate.
5 – (c) Property or assets that a borrower pledges to a lender as security for a loan.
6 – (c) A personal loan.
7 – (a) Simple interest is charged on the principal amount only, while compound interest is charged on both the principal and the accrued interest.
8 – (c) The failure to make timely payments on a loan.
9 – (a) A fee charged by a lender for early repayment of a loan.
10 – (b) The borrower can draw on the credit line as needed, up to a certain limit.