Loan and Debt Glossary: Lending Terms in Plain English

A

Advance-fee loan scam: A fake loan offer that asks you to pay a fee, buy a gift card or send money before you get the funds. Real lenders take their fees out of the loan or add them to the balance; they don't collect them up front. More: Loan scams
Adverse action notice: The notice a lender must send when it denies your application or offers worse terms than you asked for. It tells you why (or how to ask why) and, if a credit report was used, which bureau supplied it and how to get a free copy. More: How to get a loan
Amortization: Paying off a loan with equal monthly payments that cover that month's interest plus part of the principal. Early payments are mostly interest; later ones are mostly principal. See it month by month with the amortization schedule.
APR (annual percentage rate): The yearly cost of a loan, including the interest rate and certain upfront fees such as an origination fee. Because it folds in fees, APR is the number to compare between offers of the same term. More: APR vs. interest rate

B

Balloon payment: A large lump sum due at the end of a loan whose regular payments don't fully pay it off. If you can't pay or refinance the balloon when it comes due, you can default even after years of on-time payments.

C

Car title loan: A short-term loan secured by your car's title, often for a fraction of the car's value, at rates that can run into the triple digits. If you can't repay or renew it, the lender can repossess the car. More: Bad credit
Charge-off: An accounting step where a lender writes off a seriously past-due debt as a loss. You still owe the money: the lender or a debt buyer can keep collecting, and the charge-off stays on your credit report. More: Missed a payment
CLTV (combined loan-to-value ratio): All loans secured by your home (first mortgage plus any home equity loan or HELOC) divided by the home's value. Lenders cap CLTV, which sets how much equity you can borrow against. More: Home equity loans
Co-borrower: A second applicant who shares the loan, its payments and usually the thing it pays for, such as a car or home. Both of you are fully responsible, and the loan shows on both credit reports. More: Cosigners and co-borrowers
Collateral: Property you pledge to secure a loan, such as a car, home or savings account. If you don't repay, the lender can take it: repossession for a car, foreclosure for a home. More: Secured vs. unsecured loans
Cosigner: Someone who promises to repay your loan if you don't, without getting any ownership of what it buys. A cosigner can help you qualify or get a lower rate, but your late payments hurt their credit too. More: Cosigners and co-borrowers
Credit access business (CAB): A Texas business that arranges payday and title loans made by a third-party lender and charges its own fee on top of the lender's interest. State law sets no ceiling on that fee, which is where most of the cost sits. More: Texas
Credit counseling: Help from a counselor, ideally at a nonprofit agency, who reviews your budget and debts and explains your options. Counseling itself is usually free or low cost; a counselor may suggest a debt management plan. More: Payoff strategies
Credit-builder loan: A small loan, often from a credit union or community bank, where the money is held in a savings account while you make payments and released to you at the end. The on-time payments are reported to the credit bureaus. More: No credit history

D

Debt avalanche: A payoff method: make minimum payments on everything and put every extra dollar on the debt with the highest APR. It saves the most interest. More: Payoff strategies
Debt consolidation: Combining several debts into one new loan or balance, ideally at a lower APR. It only saves money if the new rate and fees are lower and you don't run the old balances back up. More: Debt consolidation loans
Debt management plan (DMP): A repayment plan set up by a credit counseling agency: you make one monthly payment to the agency, which pays your creditors, often at reduced interest rates the creditors agree to. You repay the full balance, usually over several years. More: Settlement vs consolidation
Debt settlement: Negotiating with creditors to accept less than the full balance, usually after you've stopped paying. It damages your credit, settlement companies charge fees, and forgiven amounts can be taxable. More: Settlement vs consolidation
Debt snowball: A payoff method: make minimum payments on everything and put every extra dollar on the smallest balance first. It costs more interest than the avalanche but gives quicker wins. More: Payoff strategies
Debt-to-income ratio (DTI): Your monthly debt payments divided by your gross monthly income. Lenders use it to judge whether you can afford a new payment; work yours out with this DTI calculator guide. More: How to get a loan
Deferment: A lender-approved pause on payments, often with the skipped payments moved to the end of the loan. Interest may keep building during the pause, so ask how it will be charged. More: Hardship and forbearance
Deferred interest: A promotion, common in medical and store financing, where no interest is charged if you pay the full balance by a deadline. Miss the deadline by even a dollar and you're charged all the interest back to the purchase date. More: Medical loans
Draw period: The first phase of a HELOC, when you can borrow, repay and borrow again up to your limit. Payments are often interest-only during the draw period, so they can rise sharply when it ends. More: HELOCs

E

ECOA (Equal Credit Opportunity Act): The federal law that bars lenders from discriminating based on race, color, religion, national origin, sex, marital status, age, or because your income comes from public assistance. It is implemented by Regulation B and also requires adverse action notices.

F

Factor rate: A pricing method used by merchant cash advances and some short-term business loans: you repay the amount times a factor, such as 1.3. A factor rate isn't an APR, and on a short term it can mean a very high APR. More: Small business loans
FCRA (Fair Credit Reporting Act): The federal law that governs credit reports: who can see them, how long negative items stay, and your right to dispute errors. Funditia explains how to dispute a credit report error.
FDCPA (Fair Debt Collection Practices Act): The federal law that limits how third-party debt collectors can contact you and bans harassment, false statements and unfair practices. It generally doesn't cover original lenders collecting their own debts. More: Debt collectors and your rights
Fixed rate: An interest rate that stays the same for the life of the loan, so your payment doesn't change. Most personal loans, auto loans and home equity loans have fixed rates.
Forbearance: A temporary reduction or pause in payments that your lender agrees to during a hardship. Interest usually keeps accruing, and the skipped amount must be repaid later in a lump sum, added to the loan, or spread over future payments. More: Hardship and forbearance
Form 1099-C (cancellation of debt): The IRS form a creditor files when it cancels or settles a debt of $600 or more for less than you owe. The forgiven amount is generally taxable income unless an exclusion applies, such as being insolvent at the time. More: Settlement vs consolidation

H

Hard inquiry: A credit check a lender makes when you formally apply. It shows on your credit report and can lower your score slightly; Funditia explains hard vs. soft inquiries. More: Prequalification explained
HELOC (home equity line of credit): A revolving credit line secured by your home, usually with a variable rate. You borrow as needed during the draw period and repay during the repayment period; if you can't pay, you can lose the home. More: HELOCs
Home equity loan: A lump-sum loan secured by your home, usually with a fixed rate and fixed payments. It often costs less than unsecured credit, but the house is the collateral. More: Home equity loans

I

Interest rate: The percentage a lender charges on the money you owe, not counting upfront fees. Two loans with the same interest rate can have different APRs if their fees differ. More: APR vs. interest rate

J

Judgment: A court's decision that you owe a debt, usually after a creditor or collector sues. A judgment can let the creditor garnish wages, levy a bank account or place a lien, so never ignore a lawsuit. More: Debt collectors and your rights

L

Loan modification: A permanent change to your loan's terms, such as a lower rate or longer term, to make payments affordable after a lasting hardship. Get any modification in writing before you rely on it. More: Hardship and forbearance
Loan term: How long you have to repay, usually in months. A longer term lowers the monthly payment but raises the total interest you pay. More: Comparing loan offers
LTV (loan-to-value ratio): The loan amount divided by the value of the property securing it. On a car, an LTV above 100% means you owe more than it's worth; on a home, lenders use LTV and CLTV to set how much you can borrow. More: Auto loans

M

MAPR (military annual percentage rate): The all-in rate used under the Military Lending Act. It counts interest plus most fees and add-ons such as credit insurance, and it is capped at 36% on most consumer credit to active-duty servicemembers and their dependents.
Military Lending Act (MLA): The federal law that protects active-duty servicemembers and their covered dependents, chiefly by capping the MAPR at 36% on most consumer loans. It also bans certain terms, such as mandatory arbitration.

N

Negative equity: Owing more on a loan than the property is worth, also called being upside down. It is common with cars in the first years of a long loan and makes selling or refinancing harder. More: Auto loan refinancing
NMLS (Nationwide Multistate Licensing System): The system many state regulators use to license lenders, brokers and loan officers. You can look up a company's licenses and NMLS ID for free at NMLS Consumer Access before you share personal information. More: Loan scams

O

Origination fee: A one-time fee for processing a loan, usually a percentage of the amount and often deducted from the money you receive. It's included in the APR, so a loan with a lower rate but a higher fee can cost more. More: Origination fees

P

Payday alternative loan (PAL): A small loan from a federal credit union under NCUA rules: PAL I loans run $200–$1,000 for 1–6 months, PAL II loans up to $2,000 for 1–12 months. The application fee is capped at $20 and the rate at 28% while the general ceiling is 18%. More: Payday loan alternatives
Payday loan: A small, short-term loan, usually due on your next payday, repaid from your bank account or a postdated check. A typical fee of $15 per $100 for two weeks works out to an APR of about 391%. More: Payday loan alternatives
Personal guarantee: A promise to repay a business loan from your own money if the business can't. Most small business lenders require one from owners, so your personal assets and credit are on the line. More: Small business loans
Prepayment penalty: A fee some lenders charge if you pay off a loan early. Ask before you sign; many personal loans have none, and the early payoff calculator shows what paying ahead saves. More: Comparing loan offers
Prequalification: A lender's estimate of the rate and amount you might get, based on information you provide and usually a soft credit check. It isn't an approval: final terms come after you apply and the lender verifies your details. More: Prequalification explained
Principal: The amount you borrow, or the part of the balance that is still unpaid, not counting interest. Each payment covers that month's interest first; the rest reduces the principal.

R

Rate exportation: Federal law lets a bank charge borrowers anywhere the interest rate allowed in its home state, even if your state caps rates lower. Under a 1980 federal law, states can opt out for state-chartered banks' loans, as Colorado and Oregon have done. More: Colorado
Regulation F: The CFPB rule that implements the FDCPA. Among other things, it presumes a collector calls too often if it calls more than 7 times in 7 days about a debt, requires a validation notice, and lets you opt out of email and text contact. More: Debt collectors and your rights
Regulation Z: The rule that implements the Truth in Lending Act. It sets how lenders calculate and disclose the APR, finance charge and payment schedule, and adds rules for credit cards and mortgages. More: APR vs. interest rate
Repayment period: The phase of a HELOC after the draw period ends, when you can no longer borrow and must repay principal and interest. Payments can jump at this point, especially if you paid interest only before. More: HELOCs

S

Secured loan: A loan backed by collateral, such as an auto loan or home equity loan. It's often easier to get and cheaper than unsecured credit, but you can lose the collateral if you default. More: Secured vs. unsecured loans
Soft inquiry: A credit check that doesn't affect your credit score, used for prequalification, your own checks and account reviews. Only you can see soft inquiries on your report. More: Prequalification explained
Statute of limitations: The time limit, set by state law, for a creditor to sue you over a debt. It varies by state and type of debt, and in some states a payment can restart the clock. More: Old debt and time limits

T

TILA (Truth in Lending Act): The federal law that requires lenders to disclose a loan's cost in a standard way, including the APR, finance charge and total of payments, before you sign. It is implemented by Regulation Z. More: APR vs. interest rate
Time-barred debt: A debt past the statute of limitations for a lawsuit. A collector may still ask you to pay but can't sue or threaten to sue; the debt may still appear on your credit report if it's within the reporting period. More: Old debt and time limits

U

Unsecured loan: A loan with no collateral, approved on your credit and income, such as most personal loans. If you default, the lender can't take property directly but can send the debt to collections or sue. More: Personal loans
Usury: Charging interest above the legal maximum. Each state sets its own usury limits, often with higher caps for licensed lenders and exceptions for banks; check your state's rules.

V

Validation notice: The notice a debt collector must send within five days of first contacting you, showing who it's collecting for, the amount and how it was calculated. You have at least 30 days after receiving it to dispute the debt or ask for the original creditor's name. More: Debt collectors and your rights
Variable rate: An interest rate tied to a benchmark, such as the prime rate, so it can rise or fall over the life of the loan. HELOCs and credit cards usually have variable rates, so your payment can change. More: HELOCs

W

Wage garnishment: A court-ordered deduction from your paycheck to pay a debt, usually after a creditor wins a judgment. For ordinary consumer debt, federal law caps it at 25% of disposable earnings or the amount above 30 times the federal minimum wage, whichever is less; many states protect more. More: Debt collectors and your rights