Financial jargon shouldn't stand between you and a good loan decision. This glossary defines every term you're likely to encounter when applying for a personal loan, business loan, or mortgage. Use the alphabet links to jump to any section.
A
- Amortization
- The process of paying off a loan through scheduled payments over time. Each payment covers both interest and principal. Early payments are mostly interest; later payments are mostly principal. A full amortization schedule shows the exact breakdown for every payment.
- APR (Annual Percentage Rate)
- The total annual cost of borrowing, including the interest rate and all mandatory fees, expressed as a percentage. Always higher than the interest rate alone. The most accurate number for comparing loan offers. See our APR guide.
- Assets
- Items of value owned by a borrower — savings, real estate, vehicles, investments. Lenders review assets to assess financial stability and potential collateral. Strong assets can compensate for a weaker credit score in some underwriting situations.
- Adjustable-Rate Mortgage (ARM)
- A mortgage with an interest rate that changes periodically based on a benchmark index. Typically starts lower than a fixed rate for an initial period (e.g., 5/1 ARM = fixed for 5 years, then adjusts annually). Riskier than fixed-rate for long-term borrowers.
B
- Balloon Payment
- A large lump-sum payment due at the end of a loan term. Common in some commercial loans and some adjustable-rate mortgages. Dangerous if you can't refinance or don't have the cash — plan for it explicitly.
- Bankruptcy
- A legal process allowing individuals or businesses to discharge or restructure debts they cannot repay. Chapter 7 (liquidation) and Chapter 13 (repayment plan) are the most common personal types. Bankruptcy stays on your credit report for 7 to 10 years and severely limits borrowing access during that time.
- Borrower
- The individual or entity receiving a loan and assuming the obligation to repay it according to the loan agreement terms.
- Bridge Loan
- A short-term loan used to cover expenses during a transition period — typically between selling one property and buying another. High rates and fees; intended for a defined short window, not long-term use.
C
- Collateral
- An asset pledged to secure a loan. If you default, the lender can seize the collateral. Mortgages are secured by the home; auto loans by the car. Offering collateral typically lowers your interest rate because it reduces lender risk.
- Co-signer
- A person who agrees to take joint responsibility for a loan. If the primary borrower defaults, the co-signer is fully liable. Co-signing can help a borrower with weak credit qualify or get a better rate — but the co-signer bears real financial risk.
- Credit Bureau
- Organizations that collect and maintain consumer credit information. The three major U.S. bureaus are Equifax, Experian, and TransUnion. Lenders report payment behavior to bureaus; bureaus compile reports used to calculate credit scores.
- Credit Limit
- The maximum amount a lender allows you to borrow on a revolving credit account. Staying well below the limit (under 30% utilization) helps your credit score.
- Credit Utilization
- The percentage of your available revolving credit currently in use. Calculated as total balances divided by total credit limits. Keeping utilization below 30% supports a strong credit score; below 10% is optimal.
D
- Debt Consolidation
- Combining multiple debts into a single new loan, typically at a lower interest rate. Simplifies repayment and can reduce total interest cost when done correctly. See our debt consolidation guide.
- Default
- Failure to repay a loan according to the agreed terms. Triggers collection actions, credit score damage, and potential legal proceedings. On secured loans, default can result in asset seizure (foreclosure, repossession).
- Debt-to-Income Ratio (DTI)
- Total monthly debt payments divided by gross monthly income. The key metric lenders use to assess repayment capacity. See our complete DTI guide.
- Delinquency
- A loan payment that is past due. Typically reported to credit bureaus after 30 days late. Can severely damage your credit score and may trigger late fees.
E
- Equity
- The portion of an asset's value that you own outright — the market value minus any outstanding loan balance. Home equity is the difference between your home's value and your mortgage balance. Equity can be borrowed against through HELOCs and home equity loans.
- Escrow
- An account held by a third party on behalf of both parties in a transaction. In mortgages, an escrow account holds funds for property taxes and homeowner's insurance — the lender collects monthly contributions and pays these bills on your behalf.
F
- Factor Rate
- A pricing method used by merchant cash advance providers instead of APR. A factor rate of 1.3 means you repay $1.30 for every $1 borrowed. Factor rates are not directly comparable to APR — they're typically equivalent to much higher APRs than they appear.
- FICO Score
- The most widely used credit scoring model, produced by Fair Isaac Corporation. Scores range from 300 to 850. Used by approximately 90% of top lenders. See our credit score improvement guide.
- Forbearance
- A temporary arrangement where a lender agrees to reduce or pause loan payments during financial hardship. Interest typically continues to accrue. Common during economic crises and available on many federal student loans.
- Foreclosure
- The legal process by which a lender takes possession of a mortgaged property after the borrower defaults. Can take months to years depending on the state. Severely damages credit and results in loss of the home.
G
- Grace Period
- A period after the due date during which a payment can be made without penalty. Credit cards typically have a 21-day grace period. Mortgages and personal loans often have a 15-day grace period before late fees apply.
- Gross Income
- Your total income before taxes and other deductions. Lenders use gross income (not take-home pay) when calculating DTI.
- Guarantor
- A person or entity that agrees to repay a loan if the primary borrower defaults. Similar to co-signer but with a slightly different legal standing in some jurisdictions. Common in business lending.
H
- Hard Inquiry
- A credit report pull triggered when you formally apply for credit. Temporarily reduces your score by 5 to 10 points. Multiple hard inquiries within 14 to 45 days for the same loan type are typically counted as a single inquiry by credit scoring models.
- HELOC (Home Equity Line of Credit)
- A revolving line of credit secured by your home equity. Draw and repay as needed, up to the credit limit. Interest accrues only on the drawn balance. Rates are usually variable. Defaulting on a HELOC can trigger foreclosure.
I
- Interest Rate
- The percentage of the principal charged annually as the cost of borrowing, excluding fees. Always lower than APR on fee-bearing loans. Compare APRs, not just interest rates, when evaluating loan offers.
- Installment Loan
- A loan repaid in equal scheduled payments (installments) over a fixed term. Personal loans, auto loans, and mortgages are all installment loans. Contrast with revolving credit (credit cards, lines of credit).
L
- Lien
- A legal claim against an asset used as collateral for a loan. A mortgage is a lien on a home. The lien is released when the loan is fully paid. Outstanding liens can prevent the sale of an asset until the debt is settled.
- Loan-to-Value Ratio (LTV)
- The loan amount divided by the property's appraised value, expressed as a percentage. A $200,000 mortgage on a $250,000 home = 80% LTV. Lower LTV generally means better rates and no requirement for private mortgage insurance (PMI).
M
- Maturity Date
- The date on which a loan must be fully repaid. At maturity, the outstanding balance (including any balloon payment) is due in full.
- Mortgage Insurance Premium (MIP)
- Insurance required on FHA loans that protects the lender if the borrower defaults. Unlike conventional PMI, FHA MIP often lasts the life of the loan (for loans with under 10% down).
O
- Origination Fee
- A fee charged by the lender to process a loan, typically 1% to 8% of the loan amount. Deducted from the loan proceeds or rolled into the balance. A key reason APR is higher than the stated interest rate.
- Overdraft
- A negative bank account balance when a transaction exceeds available funds. Banks typically charge overdraft fees ($25 to $35 per occurrence). Some banks offer overdraft lines of credit as a lower-cost alternative.
P
- Personal Guarantee
- A business owner's pledge that they will personally repay a business loan if the business cannot. Puts personal assets (home, savings) at risk for business debt. Required on most SBA and business loans.
- Private Mortgage Insurance (PMI)
- Insurance required on conventional mortgages with less than 20% down payment. Protects the lender, not you. Typically 0.5% to 1.5% of the loan amount annually. Cancellable once you reach 20% equity.
- Prepayment Penalty
- A fee charged for paying off a loan early. Rare on personal loans from major lenders but still appears on some auto loans and mortgages. Always check the loan agreement before making extra payments.
- Principal
- The original loan amount borrowed, before interest. Also refers to the remaining unpaid balance of the original loan amount at any point in time.
R
- Refinancing
- Replacing an existing loan with a new one — typically to get a lower rate, lower payment, or better terms. Common for mortgages and student loans. Usually involves closing costs; calculate break-even point before refinancing. See our refinance guide.
- Revolving Credit
- Credit that can be borrowed, repaid, and borrowed again up to a limit — like a credit card or line of credit. Contrast with installment loans, which have a fixed term and payment schedule.
S
- Secured Loan
- A loan backed by collateral. If you default, the lender can seize the collateral. Secured loans typically have lower rates than unsecured loans because the lender has a recovery path if you don't pay.
- Soft Inquiry
- A credit report check that doesn't affect your credit score. Pre-qualification checks, background checks, and personal credit monitoring are all soft inquiries. Safe to allow; does not signal to other lenders that you're seeking credit.
- Subprime
- Loans (or borrowers) that don't meet standard creditworthiness thresholds. Subprime loans carry higher rates to compensate for higher default risk. The term gained infamy from the 2008 financial crisis's subprime mortgage products.
T
- Loan Term
- The length of time over which a loan is repaid. Longer terms mean lower monthly payments but higher total interest paid. Shorter terms mean higher payments but lower total cost. Always calculate total cost, not just monthly payment.
- Truth in Lending Act (TILA)
- Federal law requiring lenders to disclose the APR, total cost, and terms of credit before you sign. The reason lenders must disclose APR in the U.S. Administered by the Consumer Financial Protection Bureau (CFPB).
U
- Underwriting
- The lender's process of assessing whether to approve a loan application. Evaluates credit score, income, DTI, assets, employment history, and other factors. Automated underwriting is common for standard applications; manual underwriting is used for complex situations.
- Unsecured Loan
- A loan not backed by collateral. Approval relies entirely on the borrower's creditworthiness. Personal loans are typically unsecured. Higher rates than secured loans because lenders have no recovery asset if you default.
V
- Variable Interest Rate
- An interest rate that changes periodically based on a benchmark index (like the prime rate or SOFR). Starts lower than fixed rates but introduces uncertainty into future payments. Common on HELOCs, credit cards, and some personal loans.