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Financial Definitions

Loan Terms Explained

Annual Percentage Rate (APR)
The amount it costs to carry a balance on a loan expressed as a yearly percentage. To calculate the amount owed in interest each month divide the APR by 12. For example, if the APR is 16% the monthly rate is 1.3%.
Asset
Anything owned by a person that has a cash value. This includes savings, investments, goods, and of course, property.
Bad Credit
A term used to describe a poor credit rating. Usually credit is damaged by making late payments, not making payments, going over card limits or declaring bankruptcy. "Bad Credit" often results in being denied credit.
Balance
The total amount of money owed on a loan. It includes any unpaid balance from the previous month, new purchases, cash advances, and any charges such as an annual fee, late fee or interest.
Balance Transfer
Moving the debt or amount owed from one credit card to another credit card. This is often executed with special checks or application forms. It is generally offered as an option on some credit card applications. The usual reason is to move the balance of one credit card to another one is getting a lower and better interest rate.
Cash advance loan (or cash loan)
A loan where a borrower gets cash advanced based on his paycheck. These loans generally are offered up to $500. Usually, they must be repaid on or by the next payday.
Collateral
Property that is offered to secure a loan or other credit. It is also sometimes called security and becomes subject to seizure if the borrower defaults on the loan.
Cosigner
Another person who signs for a loan and takes on equal responsibility for it.
Credit
The promise of an individual or group to pay in the future in order to purchase or borrow money in the present.
Creditworthiness
This is a lender's measure of a borrower's past and future ability and willingness to repay debts.
Credit Card
A card used repeatedly over time to borrow money or buy goods and services on credit.
Credit History
The verification of how a person has borrowed and repaid debts over time.
Credit Scoring System
A system used to ascertain whether or not to extend credit by assigning scores to various components of creditworthiness.
Debt Service
The total payments owed on loans (includes repayments plus interest).
Default
When a borrower fails to uphold the terms of a credit agreement with a lender.
Establishment Fee
The fee charged by a lender to set up a loan.
Finance Charge
The dollar amount a borrower pays to get credit.
Fixed Rate
A traditional way to determine the finance charge owed on an extension of credit. A predetermined and specific interest rate is applied to the principal.
Liability
Legal responsibility. A borrower has the liability to repay debt.
Loan Protection
This is like insurance on one's debt. It is available should a borrower's income cease because of sickness, injury, disease, or involuntary unemployment. It can provide peace of mind against unexpected events. In the unfortunate event of a borrower's death, they are able to repay a loan up to $100,000. 
Open-end Credit
A line of credit that may be used repeatedly up to a certain limit, also called a charge account or revolving credit.
Payday Loan
A loan where a borrower gets cash advanced based on his paycheck. These loans generally are up to $500 and must be repaid on the borrower's next payday.
Principal
This is the amount of a loan.
Redraw Facility
The part of your variable rate loan into which you can make additional repayments when you can, and later withdraw funds if you need to.
Reschedule
Revised timetable for loan repayments.
Secured Loan
A secured loan is backed by collateral. Upon default of the loan, the lender can sell the collateral to satisfy the obligation.
Service Charge
A component of some finance charges. Service charge examples are fees banks use for things such as overdraft checking accounts. 
Statement
The monthly bill from a lender that outlines and summarizes the activity on a credit account. It usually includes the current balance, any purchases made, any payments made since the last report, any credits to the account, any finance charges and other transactions for the month.
Statement Date
The date on which a statement is generated, and the month's interest is added to the balance.
Unsecured Loan
A loan based on your promise to pay without savings or other collateral. It is sometimes called a signature loan.
Variable Rate
A variable rate will vary over time as opposed to a fixed rate. A variable rate fluctuates over the life of the loan. The rate is associated with an index that reflects changes in the market rates of interest. 




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