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Vocabulary Terms

Lingo You Should Know Before Signing a Loan

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Have you ever read a financial document, only to realize you are not positive what 50% of the words mean?

Below are terms that could show up in a loan, and are important to know before signing.

Accredited Institution: A postsecondary institution that has been evaluated and meets the general standards set by the peer review accreditation boards.

Amortization: The gradual repayment of a debt by periodic (usually monthly) installments of principal and interest.

Annual Percentage Rate (APR): A percentage rate that represents the total cost of taking out a loan. The APR includes not only the interest rate, but also other costs or fees that may be charged by the lender (if applicable).

Automated Clearing House (ACH): An electronic funds-transfer system.

Borrower: The person who is legally responsible for the loan.

Capitalized Interest: When unpaid interest is added to a loan’s principal balance at the end of a borrower’s grace period, forbearance, or deferment. From that point on, the loan’s interest payment will be calculated using this new principal balance.

Charge-Off: Declaration by a creditor that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent and/or defaults on a debt.

Collateral: An asset(s) that a borrower offers to a lender in a secured loan. The lender can take possession of the collateral if the borrower defaults on the loan.

Collections Agency: If a borrower is delinquent and/or defaults on a debt, the lender can pass it off to a debt collection agency for collection activities.

Consolidation: When multiple loans are combined so that the borrower only makes one payment.

Cosigner: Someone who signs a loan along with the borrower and accepts legal responsibility for paying the debt if the borrower defaults or does not pay.

Credit Bureau: An agency that collects and researches individual credit information and sells it to businesses who have a permissible purpose for receiving the information, such as lenders or employers. The three main credit bureaus in the US are Equifax, Experian, and TransUnion.

Credit Report: A record of a borrower’s debt and payment history.

Credit Score: An estimate of a borrower’s creditworthiness represented as a numerical value. *See FICO Score

Debt-to-Income Ratio: The amount of debt a borrower has compared to their income. This is a standard item a loan officer will look at to determine whether a borrower is eligible for a loan.

Default: Failure to make the agreed-upon periodic payments on a loan after a number of days in delinquency, or as defined by the lender.

Deferment: A temporary postponement of payment on a loan. For some federal loans, interest may not accrue during this period.

Delinquency: A loan becomes delinquent when loan payments are not received by their respective due dates.

Discharge: When a borrower is released from a loan obligation.

Disbursement: The act of paying out or disbursing money.

Enrollment Status: Indicates whether the borrower’s status is full-time, three-quarter time, half-time, less than half-time, withdrawn, graduated, etc as defined by each school.  If a student’s enrollment status drops to less than half-time, the student’s loans may be eligible to enter repayment.

Federal Loan: A loan offered by the US Department of Education.

Fixed Interest Rate: The interest rate of the loan will stay the same during the term of the loan.

Free Application for Federal Student Aid (FAFSA): The paperwork a student needs to fill out each year they attend school that will help determine if the student is qualified for a federal financial aid package, federal grants, work-study, and/or loans.

FICO Score: One popular model to calculate a borrower’s credit score. FICO stands for the Fair Isaac Corporation, the company that came up with the methodology for the FICO score. Scores range from 300 to 850.

Forbearance: A period during which a borrower’s monthly loan payments are temporarily suspended or reduced, but interest continues to accrue.

Grace Period: A period of time after a student graduates or stops attending school as a full-time student before the student is required to make payments on their student loans.

Hard Credit Pull: An inquiry that occurs when a prospective lender checks a potential borrower’s credit report to make a lending decision. Hard inquiries can temporarily, slightly lower a borrower’s credit score and will typically stay on a credit report for two years.

Interest: Money paid regularly at a particular rate for the use of money lent.

Interest Rate: The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Income-Driven Repayment Plan: An option for federal borrowers that sets up a borrower’s monthly student loan payment at an amount that is intended to be affordable based on the borrower’s income and family size. There are four different income-driven repayment plans offered by the federal government:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

LIBOR: The one month London Interbank Offered Rate (LIBOR) rate is the rate of interest at which banks offer to lend money to one another and is commonly used as the reference rate for student loans.

Lender: The organization that gives a borrower a loan. For federal student loans, this is the Department of Education. Private lenders could include banks, credit unions, schools, etc.

Non-Sufficient Funds: Case in which there are not enough funds in a checking/savings account to pay for the cost of something/make a full payment. Some institutions may charge additional fees for payments that fail due to non-sufficient funds.

Overdraft: Case in which there are not enough funds in a designated account and the financial institution transfers the balance to cover the cost of something from another account and assesses a fee for the service.

Pay-off: The total amount owed to a lender to completely pay off a loan as of a certain date.

Personal Loan: Any sum of money that is lent to a consumer for personal expense purposes.

Principal: The amount borrowed less any interest and/or other charges.

Private Loan: A loan offered by a lending institution that is not part of the federal government.

Promissory Note: A contract between the lender and the borrower which states that the borrower will repay the loan as agreed upon in the terms of the contract.

Refinancing: The process of replacing an existing loan with a new loan. Borrowers may refinance their loans in order to get a lower interest rate and/or potentially make one monthly payment as opposed to multiple payments to various servicers.

Secured Loan: Loans that are protected by an asset or other collateral.

Servicer: An organization that acts on behalf of the lender to administer its loan portfolio. Some lenders also service their loans, but the federal government works with private servicing agencies.

Soft Credit Pull: An inquiry that occurs when a company checks a potential client’s credit report as a background check before a lending decision. Soft inquiries don’t affect a potential borrower’s credit.

Subsidized Loan: A federal loan where the borrower does not pay the pay interest that accrues during a borrower’s grace period. Subsidized loans are awarded on the basis of financial need, which is determined by the borrower’s FAFSA information.

Unsecured Loan: Loans that are not protected by an asset or other collateral.

Unsubsidized Loan: A loan where the borrower is responsible for any interest accrued during the loan term, including the grace period.

Variable Interest Rate: A variable rate may start out lower than a fixed rate, but it may fluctuate over the life of the loan as its underlying reference rate changes. *See LIBOR 

This article was written by Carolyn Pairitz Morris, Senior Editor at Earnest.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.