Understanding Lending and Credit Terms
If you are unfamiliar with certain lending and credit terms, finding the right loans and credit options can be challenging.
Like in other areas of the financial industry, specialized terminology used by lenders and creditors can make you wary of accepting their offers. To ensure you receive the best possible loans and credit opportunities, you can learn common lending and credit terms. Understanding these terms can help you manage your money effectively.
Lending and Credit Terms to Know Before Borrowing
Before applying for loans or using credit, you should consider the meaning of common jargon associated with them. The following list defines frequently used terms that you should know prior to establishing a loan or credit:
- Accrued interest: This is interest charges that have yet to be paid. Most lenders charge some interest on loans, and the amount of interest that already applies to the loan (i.e., the interest you owe) is considered your accrued interest. However, accrued interest on subsidized Federal Stafford Loans during in-school, grace and deferment periods is paid by the federal government.
- Amortization: In finance, this term refers to both the repayment of loan principal and the process of determining how much an intangible asset is worth over time.
- Annual Percentage Rate (APR): Your APR is the total cost of interest (presented as a percentage) that you will pay annually for a loan which incorporates the interest rate, loan fees and other repayment terms that may affect your interest.
- Appraisal: An appraisal is the act of estimating the value of a possession. Appraisals are typically performed by experts and are requested during many purchases, sales and refinances.
- Bad or good credit loans: In short, bad credit loans are loans reserved for borrowers with lower credit ratingswhereas good credit loans are loans for borrowers with higher credit ratings. Often, bad credit loans are more expensive than good loans and have higher interest rates.
- Balance-sheet loans: These loans are consistently managed by the original lenders rather than other financial institutions or investors.
- Capital: Your financial assets are considered capital.
- Closed-end or open-end credit: Closed-end credit is a loan or type of credit that must be completely repaid by a specific date (e.g., car loans). Open-end credit is a loan or line of credit for which you have been preapproved to reuse up to a certain limit and can be repaid gradually for as long as you need it (e.g., home equity loans or credit cards).
- Co-borrowing: This occurs when an additional borrower(s) whose income, net worth and credit history are evaluated for loan or credit eligibility signs the agreement.
- Collateral: Collateral is the use of a possession as security for the repayment of a loan.
- Conforming loans: A mortgage loan in which its conditions are determined by the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac.
- Consolidation loans: This type of loan is the combination of multiple loans. By combining the loans, borrowers hope to reduce their overall debts.
- Consumer credit: Any debt that accrues after you purchase a good or service is consumer credit.
- Convertible loans: These loans give you greater flexibility and can be partially or fully converted into equity.
- Cosigner: This person can help others obtain loans and are held responsible for loan repayment if the signer defaults on the loan.
- Credit line: Also known as a line of credit, credit line is the amount of credit issued to a borrower.
- Down payment: The initial payment for an item purchased on credit.
- Interest: A charge for the use of lent funds or to delay debt repayment.
- Master Promissory Note (MPN): A legal document stating that you will repay your student loans issued by the U.S. Department of Education.
- Mortgage: A loan in which the lender takes the title to the borrower’s property until the loan is repaid.
- Subsidized loans: Loans for undergraduate students demonstrating financial need that do not accrue interest during in-school, grace and deferment periods.
- Unsubsidized loans: Loans for undergraduate and graduate students regardless of their financial need that accrue interest during all loan periods.
Lending and Credit Terms to Know After Borrowing
While it is important to understand the terms that detail your loan and credit agreements, it is equally important to comprehend terms related to the maintenance of your finances after you have signed the agreements. Some words that you may encounter when managing your loans and credit are defined below:
- Authorized user: An authorized user can legally use someone else’s credit card without being held responsible for debts. Typically, authorized users can help others improve their credit.
- Balance transfer: This is the act of moving debt from one credit card to another with lower interest rates and fewer penalties.
- Billing cycle: The time between the receipt of billing statements is known as the billing cycle.
- Bottom line: This is the final total of a financial document.
- Credit report: Information provided by credit bureaus detailing your credit history and score.
- Default: Failure to repay a loan.
- Deferment: Permission to temporarily cease loan payments to avoid default. Eligibility criteria can vary by loan provider.
- Depreciation: This is the process of assets decreasing in economic value.
- Grace period: The time between the end of a billing cycle and the payment’s due date. Not all credit cards and loans offer grace periods, so be sure you know when your payment is due.
- Loan period: The time it takes to repay a loan. Usually, this time is fixed.
How to be an Informed Borrower
To be an informed borrower, you must understand common lending and credit terms and use them to decide which loans or credit options best suit your needs. For instance, you may realize that a lower APR is attainable for you by adding a cosigner or that your billing cycle begins earlier than you had thought. Not only can this information help you choose appropriate loans and credit offers but it can also enable you to think critically about your current financial situation. Additionally, you may reflect on your past actions and discover why your finances may have suffered and how you may improve you financial choices.