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A
American Express
see Credit Card
Amortization
The gradual repayment of a loan by installments.
Amortization Schedule
A timetable for payment of a loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.
Annual Fee
A fee charged to a loan, usually a credit card or line of credit, on a yearly basis.
Annual Percentage Rate (APR)
The percentage rate either earned (if the lender) or paid (if the borrower) on a loan in a year's time. For
instance, a 12% APR on a $1,000 loan would mean after one year, the borrower would end up having to pay (approximately) $1,120
to pay off the loan.
Annual Percentage Yield (APY)
The actual percentage rate earned (if the lender) or paid (if the borrower) due to compounding interest. The
APR, although listed as a definite number, is actually not 100% accurate. Due to compounding interest, the actual rate is
higher. See compound interest for an example.
Annum (as in "per annum")
Year
Appreciation
An increase in the value of a property due to changes in market conditions or other causes. The opposite of
depreciation.
Asset
Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable
claims against others (including bank accounts, stocks, mutual funds, etc).
Auto Loan
A loan in which one's automobile is used as collateral.
B
Bankrupt
A person, firm, or corporation that, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court-appointed trustee.
Bankruptcy
A proceeding in a federal court in which a debtor who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee.
Types of bankruptcy are:
Chapter 7 - A "straight" or "liquidation" bankruptcy. It allows a person to discharge
his/her debts through a liquidation of his/her assets. Some types of debts cannot be discharged through bankruptcy. These
include alimony, child support, and certain taxes.
Chapter 11 - A reorganization bankruptcy, usually involving
a corporation or partnership. (A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and
pay creditors over time. People in business or individuals can also seek relief in Chapter 11.)
Chapter 12 - A
simplified reorganization plan for family farmers whose debts fall within certain limits.
Chapter 13 - This is
a "reorganization" or "debt adjustment." bankruptcy. This type of bankruptcy allows a person to pay debts, or parts of debts,
from current income over a period of up to five years. (Wage Earner Repayment Plan).
Before-Tax Income
Income before taxes are deducted.
Beneficiary
The person designated to receive the income from a trust, estate, or a deed of trust.
Bill of Sale
A written document that transfers title to personal property.
Bond
An interest-bearing certificate of debt with a maturity date. An obligation of a government or business corporation. A real estate bond is a written obligation usually
secured by a mortgage or a deed of trust.
C
Certificate of Deposit (CD)
A document written by a financial institution that is evidence of a deposit, with the issuer's promise to return the
deposit plus earnings at a specified interest rate within a specified time period.
Charge Card
A charge card is a plastic card that looks and works much like a credit card, but does not allow the user to carry balances from one pay period to the next.
Checking Account
A highly liquid deposit account that allows you to make multiple withdrawals and deposits, usually without fee. Unlike a savings account, which
the federal government sets withdrawal limits, there is no governmental limits as to the number of deposits or withdrawals
that can be made each month. Typically a checking account allows you to write checks or use a debit card (aka check card) in order to purchase goods or services.
Checks
A paper instrument used to purchase goods or services by using the existing funds in a checking account. In order
to be negotiable, the check must contain 7 pieces of information:
1. Date
2. Words of negotiability ("Pay to the Order of")
3. Payee (the person/entity who the
check is made out to)
4. Written amount
5. Payor's bank (the bank the funds are drawn off of)
6.
Payor's signature
7. MICR line (the numbers at the bottom of the check that lists the ABA/Routing number and
account number)
If you notice, a check is still legally negotiable even if the check is not on "check stock" paper, is missing a numerical
amount (in the box on the right side of a typical check) or a check number. But whether or not you can
get someone to accept your check and assume it is legitimate is a whole different case.
Collateral
An asset (such as a car or a home) that guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.
Collection
The efforts used to bring a delinquent loan current.
Collection Agency
A collection agency is a business that pursues payments on debts owed by individuals or businesses. Some collection agencies operate as agents of other companies, and collect debts for a fee or percentage of the total amount owed. Others work on their own account, purchasing debts from a creditor for less than the dollar amount of the debt and aggressively persuading the debtor to make their payments. A creditor may sell debts to a collection agency in order to remove them from their accounts receivable records; the difference between the original
amount loaned and the sale price to the collection agency is written off as a loss. (compliments of www.wikipedia.com)
Compound Interest
Interest paid on the original principal balance and on the accrued and unpaid interest.
For instance: say you have $10,000 to invest at a 5% APR. If interest did not compound, then after one year your $10,000 will have grown to $10,500 ($10,000 X .05). However, when compounding interest is included, you will notice you end up with slightly more. At the end of the first month, you will have earned $41.67 in
interest ([$10,000 X .05] / 12). The next month, you will earn another $41.84 ([$10,041.67 X .05] / 12) to bring your two month total
to $10,083.51. On and on the interest will compound and after 12 months, rather than having just $10,500 you will have $10,511.62.
Conventional Mortgage
A mortgage that is not insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Not to be confused with a governmental mortgage.
Credit
An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date.
Credit Bureau
An institution whose sole purpose is to regulate the credit histories of each person, according to their social security
number. The three major credit bureaus are Equifax, Experian, and Transunion.
Credit Card
A revolving loan which is tied directly to a plastic card. The most common types of credit cards are Visa, Mastercard, American Express, and Discover.
Credit History
A record of an individual's open and fully repaid debts. A credit history helps a lender to determine whether a potential borrower has a history of repaying debts in a timely manner.
Credit Life Insurance
A type of insurance often purchased by a debtor because it will pay off the balance of the debt should the debtor pass away while the policy is in force.
Creditor
A person to whom money is owed.
Credit Report
A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
D
Debenture
An unsecured corporate bond, usually with a maturity of 15 years or longer.
Debit Card
A plastic card the same size/shape of a credit card that accesses the funds in a deposit
account, rather than a line of credit (which a credit card accesses). The debit card also doubles as an ATM card, which
allows the user to pull cash out of their account at a wide number of ATM machines worldwide.
Debt
An amount owed to another. See installment loan, secured loan, and revolving loan.
Debt-to-Income Ratio
A fraction of the amount of one's debt divided by their total income. If one's debt, for instance, is $500 per month and they earn $2,000 per month, then they have a 1/4 debt-to-income ratio, or 25%.
Debtor
A person who has borrowed money from a creditor with promises to pay them back.
Deed
The formal document used to transfer ownership of real property from one person or entity to another. A deed will consist
of the date, the names and descriptions of the parties involved in the property transfer, the consideration, a full description
of the property, and any exceptions to the transfer.
*Note* Whether you are purchasing real or personal property, it is up to you to verify that the seller has a legitimate
title to the property you are buying. If they do, the right to possess the property will be transferred to you with a deed
Deed of Trust
1. Another term for a mortgage: some states, such as California, do not record mortgages but instead just record deeds of trust.
2. A security instrument whereby real property is given as security for a debt. In a deed of trust there are three parties to the instrument: the debtor, the trustee, and the lender (or beneficiary). In such a transaction, the debtor transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the debtor pays the debt as agreed, the deed of trust becomes void. If, however, the borrower defaults in the payment of the debt, the trustee may sell the property.
Default
What occurs when a party is unwilling or unable to pay their debt obligations. This can occur with all debt obligations including bonds, debentures, mortgages, loans, and promissory notes. Default can also occur with sovereign bonds, that is, governments can default on their payments to creditors.
Delinquent Loan
A loan that is 30 to 60 days passed the due date. A loan that is over 60 days passed due is considered a nonaccruing loan.
Department of Veterans Affairs
A government agency that provides services for eligible veterans of the armed forces. Among other programs, it guarantees
mortgage loans made by private lenders to veterans. The VA home loan guaranty program is designed to encourage lenders to
offer long-term, low-downpayment mortgages to eligible veterans by guaranteeing the lender against loss. See also, http://www.va.gov for more information.
Deposit Account
An account that is said to be fairly liquid in the sense that the owner of said account may withdrawal funds fairly often
without fee or without having to close out the account.
Depreciation
A decline in the value of property; the opposite of appreciation.
Down payment
The part of the purchase price of a property that the buyer pays in cash and does not finance.
Discover
See Credit Card
E
Educational IRA
An account created solely for the purpose of saving for the education of the beneficiary of said account.
Equifax
One of the three major credit bureaus responsible for tracking individual's credit history and determining crediworthiness.
For more information, visit their website at Equifax.com
See also Credit Bureau.
Equity
A borrower’s financial interest in a property. Equity is the difference between the fair
market value of the property and the amount still owed on the loan.
Escrow
An item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition.
For example, the deposit by a borrower with the lender of funds to pay taxes and insurance premiums when they become due,
or the deposit of funds or documents with an attorney or escrow agent to be disbursed upon the closing of a sale of real estate.
Escrow account
The account in which a mortgage servicer holds the borrower’s escrow payments prior to paying property expenses.
Estate
The ownership interest of an individual in real property. The sum total of all the real property
and personal property owned by an individual at time of death.
Executor
A person named in a will to administer an estate. The court will appoint an administrator if no executor is named.
Experian
One of the three major credit bureaus responsible for tracking individual's credit history and determining crediworthiness.
For more information, visit their website at Experian.com
See also Credit Bureau.
Fair Credit Reporting Act
A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies
and establishes procedures for correcting mistakes on one's credit record.
Federal Housing Administration (FHA)
A federal agency, established by Congress in 1934, in order to make mortgages more affordable for consumers and investments
more desirable for lenders. FHA-approved lenders may obtain insurance on mortgage loans that meet FHA standards. The FHA agency
is within the Department of Housing and Urban Development (HUD) that provides mortgage insurance for residential mortgages and sets standards for construction and underwriting. The FHA
does not lend money, nor does it plan or construct housing.
Finance Charge
See Interest
Foreclosure
A legal procedure in which the lender gets ownership of the property (usually a house) when the borrower defaults on the mortgage loan.
G
Government Mortgage
A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Not to be confused with a conventional mortgage.
H
Home Equity Loan
A mortgage loan set up as a lump sum that the borrower takes out at the time the loan is processed. Once the loan is
processed, the borrower then pays interest on the entire amount. For instance, if approved for a $50,000 home equity loan,
then the borrower is given a check for $50,000 (or has $50,000 transferred to an account of their choice) and then pays interest
on the balance until it is paid off.
Home Equity Line of Credit
A mortgage loan set up as a line of credit against which a borrower can draw up to a maximum amount, as opposed to a
loan for a fixed dollar amount. For example, using a standard mortgage you might borrow $150,000, which would be paid out
in its entirety at closing. Using a HELOC instead, you receive the lender’s promise to advance you up to $150,000, in
an amount and at a time of your choosing. You can draw on the line by writing a check, using a special credit card, or in
other ways.
Homeowner's Insurance
An insurance policy that combines personal liability insurance and hazard insurance
coverage for a dwelling and its contents.
Home Loan
See mortgage.
Housing and Urban Development (HUD)
HUD. See also, http://www.hud.gov for more information.
I
Income
Income, generally defined, is the money that is received as a result of the normal business activities of an individual
or a business. For example, most individuals' income is the money they receive from their regular paychecks.
Individual Retirement Account (IRA)
An IRA is an account created solely for the purpose of saving for one's retirement. The most common types are Roth and
Traditional. A third one, known as an Educational IRA is used not for retirement purposes, but for saving for educational
expenses. See Roth IRA, Traditional IRA, and Educational IRA. For more in depth information on the differences between each IRA, please see the IRA FAQ.
Inflation
An increase in the amount of money or credit available in relation to the amount of goods or services available, which
causes an increase in the general price level of goods and services. Over time, inflation reduces the purchasing power of
a dollar, making it worth less.
Installment
The regular periodic payment that a borrower agrees to make to a lender.
Installment Loan
Borrowed money that is repaid in equal payments, known as installments. The most common types are automobile,
home, and personal loans. Unlike revolving loans, an installment loan can usually be paid in advance. This means, anytime you make a payment greater than the minimum monthly
payment due, it goes towards the next month's payment. Be sure to check with your financial institution to make sure that
there are no pre-payment penalties for paying more than the minimum payment due.
Insurance
A contract that provides compensation for specific losses in exchange for a periodic payment. An individual contract
is known as an insurance policy, and the periodic payment is known as an insurance premium.
Interest
The fee charged for borrowing money
Interest Only loan
A loan in which the minimum payment due only covers the interest due at the time.
For example: many mortgage companies offer interest only mortgages, home equity loans, or home equity lines of credit.
You can borrow $100,000 at 6.5%, for example, and your minimum payment would be around $540/month.
These are very risky loans. If the value of your house goes up, then you can utilize the equity in it (your $100,000
might be worth $120,000 for instance). However, if the value goes down, you now owe more than what the house is worth
and would not be able to sell or refinance the loan until you make up the difference.
Interest Rate
The rate of interest in effect for the monthly payment due, usually expressed as an annual percentage rate (APR).
J
K
L
Late Charge
The penalty a borrower must pay when a payment is made after the due date. Some financial institutions are nice enough
to give a grace period, such as 15 days, so that as long as the payment is made within 15 days of the due date, a late charge
will not be imposed.
Lease
A written agreement between the borrower (leasee) and the property owner (leasor) that stipulates the conditions
under which the leasee may use the property for a set amount of time. The two most common types of leases would be rental
leases (for housing) and automobile leases.
Lender
The person or financial institution that lends money to a borrower.
Liability
Amount owed (i.e., payable) by an individual or entity, such as for terms received, services rendered, expenses
incurred, assets acquired, construction performed, and amounts received but not yet earned. In short, a debt. The opposite of an asset.
Lien
A legal claim against a property that must be paid off when the property is sold.
Line of Credit
An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain
time to a specified borrower. See home equity line of credit.
Liquid
Something, usually an account, that determines how easy it is to close or convert into cash. The more liquid
an account is, the easier it is to access/close/cash out.
Liquid Asset
A cash asset or an asset that is easily converted into cash. The easier something is able to be converted in cash, the
more “liquid” it is considered.
Liquidity
Refers to an investor's ability to sell an investment as a means of payment or easily convert it to cash without risk
of loss of nominal value.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
Loan Contract
The contract that specifies the requirements and expectations for a loan that is filled out and signed by the borrower and loan provider.
M
Mastercard
See Credit Card
Merged Credit Report
A credit report that contains information from three credit repositories. When the report is created, the information
is compared for duplicate entries. Any duplicates are combined to provide a summary of a your credit.
Money Market Account
An account held at a financial institution that is, in essense, a higher end savings account. It usually requires a minimum deposit as well as a minimum monthly balance in order to avoid a monthly fee. Furthermore,
the funds are usually insured according to the FDIC or NCUA regulations.
The name given to the concept of the multiplication of money made possible by financial institutions holding part of
their deposits in reserves while lending out the remaining funds.
Let's say you go to the bank and you deposit $10,000. The bank is required by law to hold a certain percentage
of that deposit, and they are free to lend out the other percent. The amount they are required to keep is called the
reserve requirement, the amount they can lend out is known as the excess reserve. Let's say that the reserve requirement
is 10%. The bank will hold onto $1,000 and lend out $9,000 of the deposit you made.
So who will the $9,000 go to? Well, let's say someone uses it to buy a car. The car buyer will then borrow
the $9,000 from your bank and give it to the car dealer. The dealer will then, in this example, turn around and deposit
the funds into their bank. Their bank will then keep 10% (for their reserve requirements) and lend out $8,100.
This will go on and on, thus increasing the money supply in the country indirectly.
Just how much money will be created using this process? Well, take the number and divide it by the reserve ratio.
So in this case, it would be $10,000/.10 = $100,000.
Mortgage
A legal document that pledges a property to the lender as security for payment of a debt.
Mortgagee
The lender in a mortgage agreement.
Mortgage Insurance
A contract that insures the lender against loss caused by a mortgagor's default on a government mortgage or conventional mortgage. Mortgage insurance can be issued by a private company or by a government agency such as the Federal Housing Administration
(FHA). Depending on the type of mortgage insurance, the insurance may cover a percentage of or virtually all of the mortgage
loan.
N
Negative-Amortization
The result of a mortgage repayment plan in which the borrower makes payments that amount to less than the
interest due. Unpaid interest is then added to the outstanding loan balance, causing the outstanding loan balance to increase
instead of decrease.
For example: let's say you get a $200,000 loan in which your monthly payments are only $800/month. If
the interest rate was 7.5%, for example, then the $800 payment wouldn't even cover the interest due. After 10 years
of making payments, the total principal balance due would have increased to over $280,000.
Net Worth
The value of all of a person's assets, including cash, minus all liabilities.
Nonaccruing Loan
A loan that is more than 60 days past due and that has stopped accruing interest. Often times a loan that is over 60
days past due is sent to collections (or a collection agency) and if there is collateral involved, is in danger of repossession or foreclosure.
O
P
Partial Payment
A payment that is not sufficient to cover the scheduled monthly payment on a loan.
Per Diem
Latin for "per day." The "per diem" on a loan is the interest due daily, which is thus calculated by the annual percentage
rate (APR) and the remaining loan balance. For example, if $10,000 is left on the loan and the APR is 5%, then the per diem
would be ($10,000 X .05) / 365. The reason you would divide by 365 is because $10,000 X .05 would give you the annual interest
paid; dividing that by 365 would give you (approximately) what the daily interest, or "per diem" is. In this case, the annual
interest paid would be approximately $500, and the per diem is $1.37.
*Note* The per diem is in direct relation to the remaining balance of the loan. As the loan payments are made, the per
diem decreases so that toward the end of the loan the per diem approaches 0. For example, After I make a $500 car payment
on the $10,000 loan, my per diem would then become
Personal Loan
An unsecured loan whose full balance is distributed in a lump sum at the loan's origination. Once the lump sum is disperced, interest
is charged on the full balance of the loan.
Personal Line of Credit
An unsecured revolving loan where interest is only charged on the amount borrowed for the amount of time it is borrowed. Unlike a Personal Loan, the full loan amount that one is approved for is not required to be dispersed all at once.
PITI
See Principal, Interest, Taxes, and Insurance (PITI).
Power of Attorney
A legal document that authorizes another person to act on one’s behalf. A power of attorney can grant complete
authority or can be limited to certain acts and/or certain periods of time.
Pre-payment
Any amount paid to reduce the principal balance of a loan before the due date.
Pre-payment Penalty
A fee that may be charged to a borrower who pays off a loan before it is due.
Always check before you sign up for any loan that there is no pre-payment penalty. If the institution you are applying
for has a pre-payment penalty clause, go somewhere else. The last thing you want as a borrower is to be penalized for
paying your loan off sooner. If you already have a loan that has a pre-payment penalty clause then I would still encourage
you to look into paying the loan off sooner. If you have the funds available to pay off the loan but are reluctant to
pay a few hundred dollars, calculate how much money you'll end up paying in interest if you continue making just the regular
payments. If the pre-payment penalty is less, go ahead and pay off/pay down the loan. In the long run it will
still be worth it.
Prime Rate
The interest rate that banks charge to their preferred customers. Changes in the prime rate
influence changes in other rates. Many loans are tied directly to the prime rate (i.e. Prime + 1%), so when the prime rate
increases, the loan's interest rate increases accordingly.
Principal
The amount borrowed or remaining unpaid. The part of the monthly payment
that reduces the remaining balance of a loan.
Principal Balance
The outstanding balance of principal on a loan. The principal
balance does not include interest or any other charges.
Principal, Interest, Taxes, and Insurance (PITI)
The four components of a monthly mortgage
payment. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest
is the fee charged for borrowing money. Taxes and insurance refer to the amounts that are paid into an escrow account each
month for property taxes and mortgage and hazard insurance.
Promissory Note
A written promise to repay a specified amount over a specified period of time.
Q
R
Repossession
A legal procedure in which the lender gets ownership of the property (usually an automobile) when the borrower defaults on the loan.
Reverse Mortgage
As the name implies, a reverse mortgage is actually one used by customers (62 years of age or older) who
have equity built up in their home and have their home completely paid off. Rather than a borrower pay the lender a
fixed amount each month, the homeowner gets a monthly check (or lump sum payment) from the lender. The funds given to
them are accumulated into an actual loan and an agreement is determined as to when the loan will be paid off (usually once
the home is sold). These are most often used by seniors who are looking to supplement their income during retirement.
Revolving Loan
a loan which can be paid off and borrowed from again without having to reapply. The most common types of revolving
loans are credit cards and lines of credit (personal and home equity). Unlike installment loans, which can be paid in advance, revolving loans cannot be. This means that a minimum payment is required every month.
Roth IRA
An "Individual Retirement Account" that is designed to save funds for retirement. As opposed to the "Traditional IRA,"
which accumulates pre-tax dollars, a Roth IRA accumulates post-tax dollars.
Rural Housing Service
An agency of the US Department of Agriculture that provides financing to farmers and other qualified borrowers buying
property in rural areas who are unable to obtain loans elsewhere. It offers low-interest-rate loans with no down payment to
borrowers with low-to-moderate incomes who live in rural areas or small towns. Formerly known as the Farmers Home Administration.
S
Savings Account
A very liquid deposit account held at a financial institution usually for low balances held for short periods. For higher balances, a Money Market Account is generally suggested, and for long term savings a Certificate of Deposit (CD) is generally suggested.
Second Mortgage
A mortgage that has a lien position subordinate to the first mortgage.
Secured Loan
A loan which is secured by some sort of collateral. In the event that the loan is not paid in accordance with the agreement
made, the lender has the right to repossess/foreclose the property and, thusly, take control of the asset.
Signature Loan
See Unsecured Loan.
Sweat Equity
Contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash. These
were made popular through the "Habitat For Humanity" program where those who could not otherwise afford to own their own home
were allowed to help build their own home through "sweat equity" and with the help of others.
T
Title
A legally recognized right to the possession and ownership of some property.
Traditional IRA
An individual retirement account which accumulates pre-tax dollars.
Transunion
One of the three major credit bureaus responsible for tracking individual's credit history and determining crediworthiness.
See also Credit Bureau.
Truth-in-Lending
A federal law that requires lenders to fully disclose, in writing, the terms and conditions of a loan, including the
annual percentage rate (APR) and other charges.
Trustee
A fiduciary who holds or controls property for the benefit of another.
U
Underwriting
The process of evaluating a loan application to determine the risk involved for the lender. Underwriting involves an
analysis of the borrower's creditworthiness and the quality of the property itself.
Unsecured Loan
A loan in which no collateral is used; Also known as a "signature loan."
V
Vehicle Loan
A secured, installment loan in which the vehicle purchased is used for collateral. The most popular types of vehicle loans are automobiles, Recreational Vehicles (RVs), and Boats.
Visa
See Credit Card
W
Will
A person's written declaration of desires for disposal of his or her property after death.
XYZ
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