taking notes on a book about loans

Loan Terminology 101

Kimber Severance

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.

If you're going to get a loan you should know some basic loan terminology. This will help you be more aware of the loan process so you can take full advantage of the loan options available to you. Find the loan products that fit your personal needs at a nearby Check City Store or by visiting Check City's online loan services.

A-F

Adverse Action Notice 

An adverse action is a notice that lets someone know their application was denied. You could receive this notice in the form of a letter or an email. Adverse action notices are generally given to a customer when their loan application has been denied. 

Automated Clearing House (ACH)

The Automated Clearing House (ACH) is a program designed for processing online financial transactions. It can help with credit transfers, direct debits, direct deposits, and fee charges. This is the program that allows borrowers to select auto payment options and direct deposits. 

Amortization

The term amortization means to gradually pay off debt through making planned payments on the principal and interest over time. This is similar to installment loans where you make loan payments in segments rather than all at once. 

Annuity 

An annuity is a type of funding through your insurance. Annuity funds are often created by the customer making regular payments into an annuity account. This account will often grow tax-free and then be paid back to the account holder in segments at a later date. All of these details depend on the annuity contract. 

Annual Percentage Rate (APR)

Annual Percentage Rate (APR) is the interest rate of a loan over the course of one year. It's how much interest would be applied to your loan over the course of an entire year. APR also includes more than just the interest rate. It includes all of the extra rates and fees you would pay for a loan. 

Applicant

The person who fills out the application for a loan is called the applicant. The applicant can also be referred to as the borrower. 

Asset 

An asset is a type of financial resource. Assets could be owned by an individual, a company, or even a country. Your financial assets then add to your total net worth. While they hold financial value, assets are often used to keep and grow for the future, like an investment. 

Borrower

Another term for the applicant is the borrower. This term is used to refer to an applicant who is applying to borrow funds through a loan service. 

Co-Signer

A co-signer is someone who also signs the loan application alongside the main loan borrower. They aren't the main applicant or borrower but they are helping the main borrower secure the loan by also signing the application. This additional signature helps secure the loan because the cosigner takes on responsibility for the loan as well, helping the applicant look more secure in the eyes of the lender. 

Cash Advance 

A cash advance is a small loan that helps borrowers access the cash they need from their next paycheck sooner. 

Collateral Loan 

A collateral loan uses some kind of collateral to financially secure the loan. Collateral loans often use the title of a vehicle to back up the amount borrowed by the customer. 

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. 

Direct Lender 

There are two kinds of lenders—indirect lenders and direct lenders. Indirect lenders act as a third party to connect customers with direct lenders. Direct lenders are the loan company’s that actually provide the loan. 

Debt Consolidation 

Debt consolidation is an important type of debt refinancing for people with high consumer debts. To consolidate debts means to bring your debts together into one loan. This allows borrowers to pay off one loan instead of many, and possibly replace high-interest rates with one interest rate. 

Default 

When you default on a loan, you fail to meet an obligation on your loan contract. This could mean you didn't make a payment or were late making a payment. 

Deferred 

When something is deferred it is put off or delayed. You can apply for a loan deferment if a loan company offers deferments and you meet their deferring requirements. Then you can defer, delay, or reschedule your loan payments.

Downpayment 

A downpayment is the first payment you make on a large purchase that requires a loan. Often, the higher the initial payment you can make, the less you'll have to pay off later via the loan, and you can sometimes get better payment options and interest rates too. 

Fixed Rate 

A fixed rate is a type of interest rate that remains the same during the life of the loan. Other loan types might change the interest rates at certain points during the loan's life depending on what's outlined in the loan agreement. 

G-L

Interest 

The interest is an extra percentage that accumulates during the life of a loan. This is what helps pay the lender for issuing the loan in the first place. Each lender has different practices for how interest percentages are applied and how interest payments are made.  

Installment Loan 

An installment loan is a loan that has segmented payments. So instead of having to pay back a small loan all at once, you can break that loan amount into a number of payments over a period of time. 

Lien 

A lien is what you grant a lender when you give them partial ownership of one of your assets during the life of a loan. Liens are often used in Title Loans, also frequently referred to as auto loans. A lien gives the lender partial ownership of the title of your car to secure the loan while you pay it off. Using collateral like a lien on the title of your car can help borrowers who have low credit scores and need another method to insure the loan. 

Loan Approval or Loan Commitment 

When your loan application gets approved it might be called a loan approval or a loan commitment. Loan approval might also differ from your loan commitment because there could possibly be a final step involved in the loan approval process that is for you to actually commit to the loan agreement upon accepting your loan approval. When your loan application gets approved, you'll most likely receive a notification from the lender through the contact information you provided them on your loan application. 

Licensed Lender 

A licensed lender is a lender with a license to lend with the federal and state government. This license ensures that they are legally able to be a direct lender where they operate. 

Loan Denial

When your loan application gets denied you'll receive a formal loan denial often in the form of a letter or email. This formal loan denial notification will often tell you the reason your loan was denied. This could be due to something on your credit reports like high debts or a low credit score. It could also happen because the lender just needs some more information from you or something was incorrect on your loan application. 

Loan Underwriting

Loan underwriting refers to the loan terms and application and approval process of a loan. During the loan approval process, a lender needs to look at certain things to see whether you qualify for the loan. A lender will look at an applicant's credit score and any other financial information like your financial capacity and collateral. The loan's underwriting includes all the qualifications a borrower needs to meet before they can get approved for that loan. 

M-R

Mortgage 

A mortgage is a type of loan used for purchasing a home. Real estate has its own loan type because mortgages come with the unique requirements and characteristics that come with properties and property ownership. 

Learn more about mortgages and the process of buying a home in, "How To Buy a House"

Origination Fee

Loan agreements often come with fees. An origination fee is one of the first fees you might pay when getting a loan. This fee pays for the loan company's handling and managing of the loan. The origination fee is meant to cover the costs of processing your new loan. Hence the reason it's called an “origination” fee—because it pays for creating a new loan. 

Payday Loan

A payday loan is a small, short-term loan that can help cover the borrower’s cost until their next payday. Sometimes these loans are called a cash advance or a payday advance as well because the borrower is essentially taking out an early advance on their next paycheck. 

Personal Loan

A personal loan is a small, short-term loan used for personal reasons. This loan type can be similar to a payday loan in that they have smaller loan amounts and shorter loan terms, but many personal loans are slightly larger than a payday loan. 

Pre-Approval 

When a lender offers pre-approval, this means that they essentially offer the ability to apply before applying. They can quickly tell if you would get approved for a loan and label you as a “pre-approved” customer. Then you can decide whether you want the loan or not. Pre-approval is a quick way to know early on what loan products you qualify to take out. 

Preliminary Disclosures

A preliminary disclosure is a brief overview of your financial assets and standing. It lists your general assets and liabilities or the things you have financially working for and against you. It's a financial inventory that helps lenders understand where you stand financially. 

Preliminary Title Report 

A title report is a report that outlines all the details of ownership on a title, like liens. A preliminary title report might be a briefer overview for the sake of time and efficiency when applying for a title loan. It goes over the basic property records. 

Primary Residence 

Your primary residence is the main place where you live. People can only have one primary residence, so if you frequently stay at more than one location, only one of them can be considered your legal primary residence. Lenders need to know your primary residence so that they can send any important mail to the correct address where you will be most likely to get it. 

Principal 

The principal balance is the initial starting amount of the loan. For example, if you take out a loan for $100 then $100 is the principal. But by the end of the loan, with all the accumulating interest, rates, and fees added, the total loan amount you end up paying might grow beyond $100. 

Promissory Note 

A promissory note can also sometimes be called a note payable. This note is a legal promise in writing to pay a certain sum at a certain time. Promissory notes might be used when someone is indebted to someone else and will outline all the terms of that debt. 

Refinancing 

Refinancing is when you take an existing loan contract and adjust it. Often refinancing is used to help stretch out payments over a longer period of time in order to lower your monthly payments. It can also be used when you need a bigger loan and want to refinance for a larger loan sum. 

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Title 

A car title is a legal document that outlines who owns the car. If you are still paying off the original car loan you used to buy the vehicle, then the auto loan lender will also have a lien (partial ownership) on your car title. 

Title Loan 

A title loan is a type of small, short-term loan that uses the value of a vehicle’s title to gauge how much a customer can borrow. A car title loan can let borrowers access the value of their vehicle’s title to use as collateral for their loan. 

Variable Rate 

A variable interest rate can also be called an adjustable rate or a floating rate. This type of interest is not fixed and becomes higher or lower depending on a benchmark interest rate or market index.