Loan Terminology You Should Know

July 30, 2021

They can help get you the car you need to get to work, a home to call your own, or even help you pay your bills on time to avoid hard-hitting late fees. 

Before you take advantage of what different loan services can do for you, you should take a moment to test your knowledge of basic loan terminology. 

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 deposit. 


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

Amortization is when you spread out the cost of a loan or debt over a period of time. Amortization calculators are then used to figure out how much each installment payment should be. 

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. 


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


A co-signer is someone who also signs the loan application. 

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. 

Debt Consolidation 

Debt consolidation is an important type of debt refinancing for people with high consumer debts.

To consolidate means to bring many things together into one. When you consolidate debts, you bring many debts into one loan. This allows you to pay off debts and start fresh with one single loan. 

For example, if you have debts on several different credit cards, you could use debt consolidation to pay them off and stop paying all those different interest rates. 


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. 


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.

Deferments are helpful when something like a late paycheck makes it difficult to repay the loan. 


A downpayment is the first payment you make on a large purchase that requires a loan. 

Often, the higher 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. 


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.  


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 on 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. 

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 report 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. 


A mortgage is a type of loan used for purchasing a home. 

Real estate has its own loan type because mortgages come with unique requirements and characteristics because property and ownership are involved. 

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 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. 


When a lender offers pre-approval, this means that they offer the ability to apply before applying. 

They can quickly tell if you would get approved for a loan and let you know if you are pre-approved. 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. 

There's also a final disclosure that gives more details about your financial inventory. 

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. Some people might frequently stay with family members, but your main place where you live the most is your primary residence. It's where your bedroom and most of your things reside. 

Lenders need to know your primary residence so that they can send any important mail to the correct address where you will be the most likely to get it. 


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 loan amount 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 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. 


The title of a car is what tells you who owns the vehicle. The title to a house or property also outlines the ownership of that property. 

If you are still paying off a car or home loan then the lender will also be on the title.. 

If you take out a title loan then the loan company will also temporarily take out a lien and appear on the title of the car during the life of the 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. 

In Conclusion,

If you're going to get loans you should know what different loan terminology means. This will help you be more aware of the loan process and know you're getting the best loan product around. 

Find the best loan products around at your nearby Check City or by visiting Check City's online loan services!