Glossary of Financial Terms
A
Adjustable-RateĀ Mortgage
An adjustable-rate mortgage (ARM) is a mortgage that offers the borrower a fixed interest rate for a set amount of time. After that time expires, the interest rate on the remaining balance varies throughout the life of the loan. Depending on the terms of the mortgage, the interest rate resets each month or year. This type of mortgage is also called a variable rate mortgage.
Annual Percentage Rate
The Annual Percentage Rate (APR) is the yearly cost of borrowing money. APRĀ includesĀ the interest and fees charged over a one-year period.Ā Many types ofĀ debt include anĀ APRĀ such asĀ credit cards, auto loans, mortgages and personal loans. The APRĀ helps borrowers chooseĀ credit card offers,Ā mortgages, loans, etc.
B
Balance
When referring to debt, a balanceĀ isĀ the amount of money remaining to be repaid on a loan, credit card or mortgage.Ā WhenĀ the term ābalanceā refersĀ to a checking or savingsĀ bankĀ account,Ā theĀ balanceĀ isĀ the amount of money present inĀ theĀ account.
Balance Transfer
A balance transferĀ refers toĀ moving aĀ balanceĀ from oneĀ account to another account,Ā which is often an account at another financial institution. ItĀ most commonlyĀ describesĀ transferring outstanding debt owed on a credit card to an account held at another credit card company.
Balloon Payment
AĀ balloon paymentĀ isĀ the money owed on aĀ loanĀ when the loan term expires (usually after 5-7 years).Ā WhenĀ the term is over, the borrower must pay a balloon payment for theĀ total amountĀ remainingĀ on the loan, orĀ the borrower can choose toĀ refinanceĀ the loan for new terms and rates. Balloon loans sometimes allow theĀ borrower to transfer theĀ remaining amount automatically into a long-term mortgage.
Bankruptcy
When an individual or a company has debtĀ that cannot be repaid,Ā declaringĀ bankruptcyĀ givesĀ the individual or companyĀ legal protection from the debts. BankruptcyĀ isĀ a legal processĀ that can offer relief from some or all debts, depending on the type of bankruptcy.
Budget
A budget is a written planĀ that tracks monthly expenses and income.Ā ItĀ is usedĀ to help manage finances, keep current with expensesĀ and save money.
C
Card Holder
A cardholder is theĀ person who is issued a credit card, along withĀ any authorized users.Ā The primary cardholder isĀ responsible for credit card payments. Credit cardholders are protected byĀ federal lendingĀ laws that protect consumer rights.
Cash Advance
A cashĀ advanceĀ is aĀ loanĀ issued from a creditor. The most common cash advances are issued byĀ aĀ credit card or through a loanĀ taken inĀ advanceĀ of aĀ paycheck. TheseĀ types of cash advanceĀ loansĀ chargeĀ special interest ratesĀ and feesĀ on the amount of the advance.Ā AĀ credit card cash advanceĀ is typically the costliest credit card transaction compared to purchases or balance transfers.
Cash Advance Fee
AĀ cash advance fee is aĀ chargeĀ madeĀ by the bankĀ or financial institution that the borrower owesĀ after taking a cash advance loan. This feeĀ could be either a one-time,Ā flatĀ feeĀ that is owedĀ at the time ofĀ theĀ transaction orĀ a feeĀ chargedĀ as an annualĀ percentage of the amount ofĀ theĀ cash advance.
Collateral
CollateralāÆisĀ an asset that a lender accepts as security for aāÆloan. If a borrower defaults on theirāÆloanāÆpayments, the lender has the right to seize theāÆcollateralāÆand sell it to recoupĀ anyĀ losses.
Collections
CollectionsĀ occurĀ whenĀ aĀ creditor, or a business,Ā like a utility company,Ā sellsĀ past-dueĀ debtĀ to an agencyĀ to recover the amount owed.Ā The delinquent debt could be past due credit card debts,Ā utility charges,Ā medical bills, cell phone bills,Ā or other paymentsĀ that are over 6 months past due.Ā Collection agencies attempt to recover past-due debts by contacting the borrower via phone and mail.Ā SeeĀ TheĀ Fair Debt Collection Practices ActĀ for laws that protect consumer rights during the collections process.
ConventionalĀ Mortgage or Loan
A conventional mortgage or conventional loan isĀ available throughĀ a private lender or two government-sponsored enterprisesāFannie Mae and Freddie Mac.Ā Conventional loansĀ are consideredĀ riskyĀ because theyāre not guaranteed by the government. These mortgages can haveĀ strictĀ requirements and higherĀ interestĀ ratesĀ and fees.
Credit
CreditĀ refers toĀ moneyĀ that isĀ borrowed thatĀ theĀ borrower will need to repay.
Credit CardĀ Charge-Offs
AāÆcredit cardĀ charge-offāÆoccurs whenĀ a borrower does notĀ pay the full minimum payment on a debt for several months. At that time, theĀ creditor writes itāÆoffāÆas a bad debt.Ā NoteĀ that aĀ credit card charge-offĀ doesnāt absolveĀ a borrowerĀ of responsibility for the debt.Ā Interest isĀ still owedĀ on the balance. Even after a credit card charge-off, the lender could turn overĀ theĀ accountĀ to a collections agency.
Credit History
A personās credit historyĀ developsĀ as they borrow, repay and manage theirĀ loan payments, expenses,Ā and other transactions.Ā Future loans depend on a solid credit history, because lenders check this information.
Credit Report
AāÆcredit reportāÆis a statement that has information about a personās credit history, including loan paying history and the status of creditāÆaccounts. Lenders useĀ creditāÆreportsāÆto help them decide if they will loan moneyĀ andĀ what interest rates they will charge.
Credit Score
AāÆcredit scoreāÆis a number based on a formula using the information in a personāsāÆcredit report.āÆThe result is an accurate forecast of how likely that person is to pay bills or repay loans.Ā Lenders use credit scoresĀ toĀ determine what interest rate they will offer onĀ credit cards, mortgages, car loans,Ā andĀ other loans.
Creditor
AāÆcreditorāÆis a person or institution that extends credit byĀ lendingĀ a borrowerĀ money. The borrower agrees to repay the funds under agreed-upon terms.
D
Debt
DebtĀ is money owed toĀ a lender, such asĀ debt fromĀ credit cards, student loans, orĀ aĀ mortgage.
Debt Consolidation
DebtĀ consolidationĀ means thatĀ a personāsĀ debts, whether credit card bills or loan payments, are rolled into a new loan with one monthly payment.Ā AĀ debt consolidation loan does not erase the debt.Ā BorrowersĀ mightĀ payĀ more by consolidating debt into another type of loan.
Debt Management Plan
A debt management plan is when an organization works with creditors to reduce a borrowerās monthly payment and interest rates.Ā People working through a debt management plan typically takeĀ 3-to-5 years to pay off debt.Ā For those who team with a national nonprofit likeāÆGreenPath, aĀ Debt Management PlanĀ is delivered byĀ financial counselors certified by theĀ National Foundation for Credit CounselingĀ (NFCC)Ā who receive training in compassion and empathy.
Debt Counseling
Borrowers receive debtĀ counselingĀ (also called credit counseling)Ā when a trained credit counselor reviewsĀ their personal finances, debt and credit history to make personalized recommendations to help manage financial challenges. In the case of GreenPath,Ā debtāÆcounselingāÆis provided by certified financial counselors who take into consideration a personās total financial picture, from outstanding credit card payments toāÆoverall financialāÆhealth.
Debt Settlement
Debt settlement is a process of negotiating with creditors to accept a percentage ofĀ the full amount on debt that is charged off or severely delinquent.Ā For-profitāÆdebt settlementāÆcompanies operateāÆto deliver profits to their organization.āÆAs part of the for-profit business model, debt settlement employeesāÆare often paid on a commission basis, based on the fees they collect from consumers.
Default
A defaultĀ on a loanĀ occursĀ when a loanĀ payment is not madeĀ by the borrowerĀ according to theĀ paymentĀ terms of an agreement.
Deferment
A loan deferment is when a lender agrees that a borrower can pause making monthly loan payments for a set amount of time. LoansāÆthat areāÆdeferredāÆare not forgiven. TheĀ borrower still owesĀ the moneyĀ andĀ must repayĀ the debt.Ā Deferments are oftenĀ available with student loansĀ to provideĀ theĀ borrower with a set amount of time beforeĀ making anyĀ payments.
Delinquent
WhenĀ aĀ borrower is late or overdue on making a payment, such as on payments to credit cards, a mortgage, an automobileāÆloan or other debt, it is called delinquent. People whoāÆareāÆdelinquent, or late, with making paymentsĀ may be charged a late fee.
F
Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act is a set of laws that protect consumer rights during the debt collection process. View the full Fair Debt Collection Practices Act here.Ā
Fannie Mae
Fannie Mae,Ā the informal name of the Federal National Mortgage Association,Ā is aĀ U.S.Ā government-sponsored enterprise that buys mortgages from lenders, bundles them into investments and sells them on the secondary mortgage market.Ā Typically,āÆFannie MaeāÆpurchases home mortgage loans from commercial banks or big banks.
FHA Loans
An FHA loan is a mortgage backed by the U.S. Federal Housing Administration (FHA). FHA insured loans provide home buyers with more favorable interest and fees. FHA insured loans are a type of federal assistance provided to lower-income Americans and are different from conventional loans since the house must be owner-occupied for at least a year. Read further details about FHA loans.
Finance Charge
A finance charge is the costĀ ofĀ borrowing money. The cost to a borrower includes interest and other fees.Ā Lenders typically set financeĀ chargesĀ asĀ a percentage of the amount borrowed. Some lenders might set a flat fee finance charge.
Fixed Rate
A fixed rate is an interest rate that stays the same for the life of a loan, or for a portion of the loan term, depending on the loan agreement.
Forbearance
ForbearanceāÆis a process when aĀ lender agrees to a lower payment or no payment for aĀ temporaryĀ period of time.Ā Forbearance is not loan forgiveness.Ā After that time expires, the borrower may face higher payments, accrued interestĀ or an extended loan term.
Foreclosure
Foreclosure is a legal proceeding that happens when a borrower does not make payments on a secured debt. The lender may start legal foreclosure proceedings to seize the property associated with the debt. As an example, default on a mortgage could result in foreclosure and auction of the property.
Freddie Mac
Freddie Mac,Ā the informal name of the Federal Home Loan Mortgage Corporation,Ā is a U.S. government-sponsored enterprise that buysāÆmortgages, combines them with other forms of loans, and sells the debt on theāÆsecondary mortgage market. Typically, Freddie MacāÆpurchases home mortgage loans from smaller banks and lenders.
G
Grace Period
A grace periodĀ isĀ a set period of time in whichĀ borrowersĀ do not have to pay finance charges or interest if they pay balances in full.Ā Revolving credit card lendingĀ provides a borrower with a grace period.
I
Interest
Interest refers to the cost of borrowing funds, paid byĀ to the lender by theĀ borrower. Interest also means the profit that accrues to those who deposit funds in a savings account or investment.
InterestĀ Rate
An interest rate is the fee lenders chargeĀ a borrower, calculated asĀ a percentage ofĀ theĀ loan amount.Ā The percentage chargedĀ when borrowing moneyĀ is known as the interest rate.
L
Loan Forgiveness
Loan forgiveness meansāÆa borrower is no longer obligated to make loanāÆpayments.Ā With student debtĀ loan forgiveness,Ā the borrower must meet certain criteria such as actively serving in the military, performing volunteer work, teach or practice medicineĀ in certain types of communities, or must meetĀ other criteria specified by the forgiveness program
Loss Mitigation
Loss mitigation isĀ the process whenĀ mortgage servicersĀ work withĀ borrowers to avoid foreclosure.
Loan Modification
Loan modification isĀ when a lender makes aĀ permanent change to loan terms. The modifications could include changingĀ theĀ interest rate, type of mortgage,Ā or extending the time to pay the mortgage balance.
Loan Servicer
A loan servicer is the company that mails or emails a borrower their mortgage, student loan or other loan statements. The loan servicer is the organization that processes tasks for managing the loan. The loan servicer company may not be the same company that originally issued the loan.
M
Minimum Payment
The minimum payment is a payment made on aĀ loanĀ or credit card that is specified by the lender asĀ the smallest payment amount due.Ā Borrowers can pay more than the minimum payment.
Mortgage
A mortgage is theĀ loanĀ a borrower takesĀ on from a lender to purchaseĀ real estate.
P
Past Due
Past dueāÆis when a payment has not been made by itsāÆdueāÆdate. Borrowers who areāÆpast dueāÆwill usually face penalties and are subject to late fees.
Private Mortgage Insurance
Private mortgage insurance is a type of mortgage insurance that might be requiredĀ for borrowersĀ to payĀ forĀ with a conventional loan. Private mortgage insurance protects the lender in the event a borrower stops making payments onĀ theĀ loan.
R
Reinstatement
Reinstatement refers toĀ a lump sum payment thatĀ makesĀ anĀ account currentĀ when the borrower paysĀ everythingĀ that is owed. This payment would include anyĀ missed payments and fees.
Repayment Plan
A repayment plan isĀ a written agreementĀ forĀ borrowersĀ who areĀ past dueĀ on loan payments. This option allows the borrower to pay the late amount as a smaller addition to the regular monthly payment, spread out over several months.
RevolvingĀ Credit
Revolving creditāÆis when aĀ creditor increases theĀ credit limit to an agreed level as a borrower pays offĀ a debt, such as a credit card. Revolving creditāÆmay take the form ofāÆcreditāÆcards orāÆlines of credit with other lenders.
S
SecuredĀ Debt
AāÆsecured debtāÆis a loan thatĀ allows the lender to seize the asset or collateral used to acquire the debt to repay the funds advanced to the borrowerĀ in the event of default. Examples of secured debtāÆare mortgages and auto loans. In these cases, the item being financedĀ isĀ theĀ asset orĀ collateral for the financing.
Short Sale
AāÆshort saleāÆis when a homeowner in financial distress sells the property for less than the amount due on the mortgage.
U
UnsecuredĀ Debt/Unsecured Loan
Unsecured debt or an unsecured loan is a loan that is not backed byāÆan asset orĀ collateral. It is riskier than secured debt.āÆThe interest rate for unsecured debt is normally higher than for secured debt.
V
Variable Rate Mortgages
AĀ variable rate mortgageĀ is a mortgage in which the initial interest rate is fixed for a period of time. After that period expires, the interest rate on the outstanding balance varies throughout the life of the loan. Depending on the terms of the mortgage, the interest rate resetsĀ each month or year. This type of mortgage is also referred to as anĀ adjustable-rate mortgage (ARM).
***Sources:
This glossaryĀ ofĀ financialĀ termsĀ is intended to provideĀ an introductoryĀ definition of financial terms. Please useĀ this glossary onlyĀ asĀ a general guide.Ā The definitionsĀ areĀ assembledĀ and summarizedĀ from the following sources.
consumerfinance.gov/consumer-tools/educator-tools/youth-financial-education/glossary/