There is a lot of loan terminology to learn when you are just getting started with a new loan and each loan brings new words with new definitions. Educate yourself and feel confident when discussing loans.
Welcome to the loans terminology 101 section of the Cash Academy Blog. Here we'll go over key loan terminology, what it all means, and how it can apply to you.
Loan terms can be confusing and overwhelming with unique terminology, abbreviations, acronyms, and even trending terms within the industry. But understanding loan terminology will help you better understand your loan and how it works.
That's why we created the loan terminology 101 section of the Cash Academy Blog, so we can go over key loan terminology in simple and easy-to-understand ways.
We'll help you better comprehend these terms so you can make informed financial decisions as an individual, as a household, and even as a small business.
Let's get started and expand your loan vocabulary today!
A-F
Adverse Action Notice
An adverse action notice is a written notification sent to a borrower by a lender explaining why a loan application was changed or denied
Amortization
Loan amortization is the process of spreading out payments over time to reduce upfront costs.
Annual Percentage Rate (APR)
Annual Percentage Rate (APR) is the percent a loan borrower pays in interest and fees over the course of a year.
Annuity
An annuity is a financial product that can provide a stream of income for a period of time in exchange for a series of payments or one lump sum payment.
Applicant
A loan applicant is the potential borrower who fills out and submits the loan application.
Authorized User Credit Card
An authorized user on a credit card is someone who’s been added to either a personal or business credit card account — typically a spouse, an adult child, a friend, an employee, or yourself.
Automated Clearing House (ACH)
The Automated Clearing House (ACH) is a program designed for processing online financial transactions.
Borrower
A loan borrower is the loan applicant who got their loan application approved and received loan funds.
Buy Now Pay Later (BNPL)
Buy Now Pay Later (BNPL) is a short-term loan that allows borrowers to make purchases now and make payments on that purchase over time.
Cash Advance
A cash advance is a fast-funding loan option that's paid off with one quick payment on the borrower's next payday.
Closing Disclosure
A closing disclosure is a five-page document that outlines all the final terms and details of a home loan.
Collateral Loan
A collateral loan is a type of secure loan that uses a form of collateral, like a car title, to back up the loan amount.
Compound Interest
Compound interest includes both the interest on the original amount (also known as the principal) as well as the accrued interest that accumulates over time.
Cosigner
A cosigner is a secondary signer on a loan application who is not the borrower, but whose signature acts as a form of collateral.
Credit
Credit can refer to the amount of money a borrower can access or the borrower's financial standing.
Credit Builder Loan
A credit builder loan is a type of loan designed specifically to help improve the user’s credit history and credit score. It is a type of loan where the user deposits the principal amount first and then improves their credit by making regular on-time payments.
Credit Score
A credit score is a number range used to show someone’s creditworthiness. Scores generally range between 0 and 850 with 850 being the best score possible.
Credit Utilization Ratio
A credit utilization ratio is a measurement that compares how much credit you are using over your total credit limit.
Debt Repayment Methods
There are many ways to tackle debts, including debt payoff practices and tips that offer guidance on where to start, debt relief strategies and methods that offer a game plan, and debt management services and products that offer great professional resources and help.
Debt Avalanche Method
The debt avalanche method is a strategy where you list all your debts from the highest interest rate to the lowest.
Debt Consolidation
Debt consolidation is a type of debt refinancing that brings multiple debts into one single loan.
Debt Snowball
The debt snowball method is a debt repayment strategy that involves paying off your debts in order of smallest to largest amounts.
Default
Loan default is when a borrower fails to meet an obligation in the loan contract, like making on-time payments.
Deferred
Deferred is an adjective used to describe loans when loan payments are officially delayed or rescheduled.
Direct Lender
A direct lender is a type of lender that manages the loans they provide directly rather than through a third party.
Down Payment
A down payment is an upfront payment that goes toward a large purchase and helps secure the rest of the funding for the large purchase.
Emergency Loan
An emergency loan is a type of loan that provides access to immediate financial relief in an emergency situation. It’s a loan designed to offer a financial lifeline when you need it most.
Fixed Rate
A fixed rate is a type of interest rate that remains the same during the life of the loan.
G-L
Income
When thinking about income, most people immediately think of the income from their job—your regular paycheck, your W2, your direct deposit every two weeks. But in today’s ever-changing financial landscape, income can come from a variety of sources.
Indirect Lender
An indirect lender is a type of lender that acts as a third party to connect customers with direct lenders.
Installment Loan
An installment loan is a type of loan that breaks payments into smaller chunks.
Interest Rate
An interest rate is the percentage amount a lender charges a borrower for a loan.
Licensed Lender
A licensed lender is a lender that has a license to operate from the federal and state government.
Lien
A lien is a legal claim on a property that acts as collateral to secure a loan.
Loan Approval
A loan approval is when a loan applicant's application is approved.
Loan Commitment
A loan commitment is when a lender agrees to lend a borrower a specific amount of money with specific terms and conditions.
Loan Denial
A loan denial is when a loan applicant's application is denied or not approved.
Loan Officer
A loan officer is a financial representative at a financial institution who helps loan customers with their loan applications or agreements.
Loan Principal
The loan principal is the amount of money a loan customer borrows before any interest or fees are applied.
Loan Underwriting
Loan underwriting is the decision-making process a loan application goes through before getting approved or denied.
Loan
A loan is a financial agreement between a lender and a borrower with a specific amount of money and set terms and conditions for repayment. Each loan type comes with its own set of features, benefits, and considerations. Understanding these options is important for making an informed decision.
M-R
Mortgage
There are many types of loans for homes. Different mortgage loan types come with different loan rates and loan terms, but there are other important characteristics to consider as well.
Nonrecourse Loan
A nonrecourse loan is a type of loan that does not grant a lender legal recourse in case the borrower defaults on the loan. Not having recourse means the lender is not allowed to seize assets on top of any existing collateral to repay the loan.
Origination Fee
An origination fee is an initial fee from a lender to process, underwrite, and manage a loan.
Payday Loan
A payday loan is a fast-funding option that's due on the borrower's next payday.
Personal Loan
A personal loan is a flexible funding option that's paid off with a few installment payments.
Peer-to-Peer Lending
Peer-to-Peer Lending (P2P) is a type of borrowing where you borrow money directly from another person instead of a financial institution.
Pre-Approval
Pre-approval is when a lender reviews a loan applicant's creditworthiness and financial situation and determines the applicant could be approved for a set amount.
Prequalified
Prequalified is an adjective used to describe a potential loan applicant who the lender has determined to be qualified to apply and get approved for a set loan amount.
Prepayment Penalty
A prepayment penalty is a fee a lender might charge when a borrower pays off a loan balance early. Not all lenders charge this fee, but if you want to pay off your total loan balance early, then it’s a good idea to check for this fee first.
Primary Residence
A primary residence is where someone lives for the majority of the year.
Prime
Prime is an adjective used to describe a type of interest rate or loan offered to applicants with a credit score in the highest range.
Promissory Note
A promissory note is a written legal promise to pay a certain sum at a certain time.
Refinancing
Refinancing is when an existing loan contract is adjusted, often with a longer repayment period and lower payment amounts.
Recourse Loan
A recourse loan is a type of loan that grants a lender legal recourse in case the borrower defaults on the loan. Having recourse allows the lender to seize assets on top of any existing collateral to repay the loan.
Revolving Credit
Revolving credit is a type of credit that can be borrowed repeatedly up to a certain limit.
S-Z
Secured Credit Card
A secured credit card functions similarly to an unsecured credit card but requires an upfront refundable cash deposit, which becomes your credit limit or the amount you’re approved to borrow. This deposit is kind of like a down payment that reduces the risk for the lender and helps those with no credit or low credit to establish or repair their credit history.
Secured Loan
A secured loan is a type of loan that is backed or secured by collateral or an asset the lender can claim in case of default.
Short-Term Loan
A short-term loan is a fast-funding option that's due on the borrower's next payday.
Signature Loan
Signature loans are a type of unsecured loan that are backed by the customer's signature. Sometimes these loans can also be known as a "good faith loan" or a "character loan" because they are backed more by the character of the customer than traditional loan collateral.
Subprime
Subprime is an adjective used to describe a type of interest rate or loan offered to applicants with a credit score in a lower range.
Subprime Loan
A subprime loan is a type of loan offered to borrowers with lower credit scores or a higher risk of loan default.
Title
A title is a legal document that outlines who owns a property or asset, like a car title.
Title Loan
A title loan is a type of loan that uses a borrower's car title as collateral to secure the loan.
Underwriter
An underwriter is a person who performs the loan underwriting process and processes a loan application for rejection or approval.
Unsecured Loan
An unsecured loan is a type of loan that isn’t backed or secured by collateral or an asset the lender can claim in case of default.
Variable Rate
A variable interest rate is a type of interest rate that becomes higher or lower depending on a benchmark interest rate or market index.
