Loan Glossary
Understanding loan terminology is key to making informed borrowing decisions. Search or browse our comprehensive glossary of 50 terms.
A
APR (Annual Percentage Rate)
The total yearly cost of borrowing money, expressed as a percentage. APR includes the interest rate plus any fees charged by the lender, making it the best way to compare loan costs.
Amortization
The process of paying off a loan through regular payments over time. Each payment covers both principal and interest, with early payments going mostly toward interest.
B
Bad Credit
A credit score typically below 580 (FICO) that indicates higher lending risk. Borrowers with bad credit may still qualify for loans but often at higher interest rates.
Balloon Payment
A large final payment due at the end of a loan term after a series of smaller payments. Common in some auto and mortgage loans.
C
Collateral
An asset (like a car, home, or savings) pledged to secure a loan. If the borrower defaults, the lender can seize the collateral to recover their money.
Co-signer
A person who agrees to repay a loan if the primary borrower cannot. Co-signers are often used to help borrowers with poor credit qualify for loans or better rates.
Credit Bureau
An agency that collects credit information and creates credit reports. The major bureaus are Equifax, Experian, and TransUnion.
Credit Limit
The maximum amount you can borrow on a credit card or line of credit. Your available credit decreases as you borrow and increases as you repay.
Credit Report
A detailed record of your credit history, including loans, credit cards, payment history, and public records like bankruptcies.
Credit Score
A three-digit number (300-850) that represents your creditworthiness based on your credit history. Higher scores typically result in better loan terms and lower interest rates.
Credit Utilization
The percentage of your available credit that you're using. Lower utilization (under 30%) is better for your credit score.
D
Debt Consolidation
Combining multiple debts into a single loan, often with a lower interest rate. This simplifies payments and can reduce total interest paid over time.
Debt-to-Income Ratio (DTI)
The percentage of your monthly income that goes toward debt payments. Lenders use DTI to assess your ability to take on additional debt—lower is better.
Default
Failure to repay a loan according to its terms. Defaulting severely damages your credit score and may result in collection actions or loss of collateral.
Delinquency
Being late on loan payments. Delinquency is typically reported to credit bureaus after 30 days and negatively impacts your credit score.
Direct Deposit
Electronic transfer of funds directly into your bank account. Many lenders require direct deposit for loan disbursement.
Disbursement
The release of loan funds to the borrower. This typically happens after loan approval and document signing.
E
Early Payoff
Repaying a loan before the scheduled end date. This can save money on interest but may incur prepayment penalties with some lenders.
F
Finance Charge
The total cost of borrowing, including interest and all fees. This is the dollar amount you pay over and above the loan principal.
Fixed Interest Rate
An interest rate that stays the same throughout the life of the loan. This provides predictable monthly payments and protection from rate increases.
Forbearance
A temporary postponement or reduction of loan payments granted by a lender during financial hardship.
G
Grace Period
A period after the payment due date during which you can pay without incurring late fees. Not all loans offer grace periods.
H
Hard Credit Inquiry
A credit check that occurs when you formally apply for credit. Hard inquiries can temporarily lower your credit score by a few points.
I
Income Verification
The process lenders use to confirm your income through pay stubs, tax returns, or bank statements.
Installment Loan
A loan repaid through fixed, regular payments over a set period. Personal loans, auto loans, and mortgages are all types of installment loans.
Interest Rate
The percentage charged by a lender for borrowing money. Unlike APR, the interest rate doesn't include fees, so APR gives a more complete picture of costs.
J
Joint Loan
A loan with two or more borrowers who share equal responsibility for repayment. Both parties' credit and income are considered.
L
Late Fee
A penalty charged when a loan payment is made after the due date. Late fees vary by lender and are typically a flat amount or percentage.
Lien
A legal claim on an asset used as collateral for a loan. The lien is removed when the loan is paid off.
Line of Credit
A flexible loan that allows you to borrow up to a limit and repay as needed. Interest is only charged on the amount borrowed.
Loan Agreement
A legal contract between borrower and lender outlining all loan terms including amount, rate, fees, and repayment schedule.
Loan Term
The length of time you have to repay a loan. Longer terms mean lower monthly payments but more total interest paid over time.
M
Minimum Payment
The smallest amount you must pay each month to keep your account in good standing. Paying only minimums extends repayment time.
O
Online Lender
A financial institution that operates primarily online, often offering faster approval and funding than traditional banks.
Origination Fee
A one-time fee charged by lenders for processing a new loan. Origination fees typically range from 1% to 8% of the loan amount.
P
Payday Loan
A short-term, high-interest loan typically due on your next payday. These should be avoided due to extremely high APRs (often 300-500%).
Personal Loan
An unsecured loan that can be used for almost any purpose. Personal loans typically have fixed rates and terms from 1-7 years.
Pre-qualification
A preliminary assessment of whether you might qualify for a loan. Pre-qualification usually involves a soft credit check and doesn't guarantee approval.
Prepayment Penalty
A fee charged for paying off a loan early. Many personal loans don't have prepayment penalties, but always check your loan terms.
Prime Rate
A benchmark interest rate used by banks to set rates on various loans. Variable rate loans often adjust based on the prime rate.
Principal
The original amount borrowed, not including interest or fees. As you make payments, the principal balance decreases.
R
Refinancing
Replacing an existing loan with a new one, typically to get a better interest rate or different terms.
Revolving Credit
A type of credit that replenishes as you pay it down. Credit cards and lines of credit are revolving credit.
S
Secured Loan
A loan backed by collateral. If you default, the lender can seize the collateral. Secured loans often have lower interest rates than unsecured loans.
Soft Credit Inquiry
A credit check that doesn't affect your credit score. Pre-qualification checks and checking your own credit are soft inquiries.
Subprime
A category for borrowers with credit scores below 670 who are considered higher risk. Subprime loans typically have higher interest rates.
T
Truth in Lending Act (TILA)
A federal law requiring lenders to disclose loan terms and costs clearly to borrowers before they sign.
U
Underwriting
The process lenders use to evaluate your creditworthiness and determine loan terms. It involves reviewing credit, income, and other factors.
Unsecured Loan
A loan that doesn't require collateral. Most personal loans are unsecured, relying on your creditworthiness rather than assets.
V
Variable Interest Rate
An interest rate that can change over time based on market conditions. Variable rates may start lower than fixed rates but can increase.
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