If you’ve ever filled out a loan application, you might have wondered if it was written in a foreign language. Many of the individual phrases look like English, but the document as a whole is about as easy to understand as a Swahili auctioneer. Even words you thought you knew have an entirely new meaning.
You’re not alone. The lending industry borrows terminology from the legal profession and from the world of finance, which can result in dense, confusing jargon.
Glossary of Lending Terms
The glossary of terms below should help you to begin to understand what a lending officer is talking about when she uses phrases like “PMI” or “interim financing.”
Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes in response to various influences, such as the federal funds rate and the rate of inflation. Adjustable rate mortgages are attractive when interest rates are on a decline or when you plan to sell the property is five years or less.
Annual Percentage Rate (APR)
The annual rate that is charged for borrowing (or generated through investment) as a single percentage. The rate includes the interest rate and any fees or costs associated with the loan.
Items with monetary value. Your Aunt Mildred’s string of graduated pearls may be considered an asset, but only if they’re genuine.Costume jewelry is not considered an asset. Assets can be used as collateral when seeking a loan.
A debt which the creditor is unable to collect. If you’ve ever lent money to someone who refused to repay you, you were stuck with bad debt.
A financial statement that illustrates all the assets, liabilities and net worth of a company during a particular period of time.
A short-term loan to provide contingency funds while waiting for the processing of longer-term financing.If a buddy spots you $20 to get you through until payday, that’s a type of bridge loan.
A document of the current status of a commercial venture along with describing the projections for its future. Business plans cover finance, marketing, and operations. All businesses should have one.
The money at the disposal of a business to cover the cost of its day-to-day operations as well as long-term expenditures.
Similar to a bridge loan, cash-flow financing provides funds to cover shortfalls while waiting for more substantial revenues to be received.
Assets used to guarantee a loan in case of default. In other words, if you offer Aunt Mildred’s pearls as collateral for a loan, and you don’t repay the loan, kiss Aunt Mildred’s pearls goodbye because the lender will take them.
A legally binding promise to provide certain goods or perform given services. Many covenants cover elements such as full disclosure and assurance of legality – in other words, a guarantee of honesty and conduct on the up and up.
Assets to be liquidated to cash within a year.
Debt that will be repaid within a year.
Current assets divided by current liabilities. The larger the result, the greater the liquidity a company enjoys. The greater liquidity a company enjoys, the more likely the company is to be able to pay its bills on time.
A specified payment amount due to cover a debt, usually payable monthly, quarterly or annually.
Failure to fulfill the terms of a contract, for instance, failure to pay a debt.
A payment that is not made by the due date.
Thoroughly checking out all aspects of a potential borrower to determine reliability, financial stability, credit history, and the accuracy of the statements made.
Ownership interest secured by financial investment. The more profitable the venture, the greater the return on equity investment.
Fixed Rate Mortgages
Mortgages with an interest rate that remains the same for the entire payment period of the loan.
Generally Accepted Accounting Principles (GAAP)
A standard set of accounting principles accepted by a significant proportion of financial institutions in the United States.
A loan backed by a pledge from a third party to cover the loan if the original debtor defaults on the loan.
International Financial Reporting Standards (IFRS)
The accepted accounting standard for financial institutions outside the United States.
Another term for a bridge loan or a short-term loan.
Third parties that obtain capital from low-interest loans and equity and dispense loans on a large scale. Examples include credit unions, banks and venture capital firms.
The use of various kinds of financial instruments, such as borrowed capital, to improve the return of an investment. Also, the debt used to finance a firm’s assets. For instance, a company that has more debt than equity is highly leveraged.
The legal and financial term for what you owe.
Rights to collect payment on a debt are limited to specific assets. In other words, creditors can’t take everything you own to repay a debt.
Financial holdings that are easily converted to cash. Savings accounts are considered to be a liquid asset.
Funds maintained by financial institutions to cover bad debts and other financial shortfalls. GAAP dictates that loss reserves should be deducted from the assets of a lending institution.
The interest rate a company is required to pay to borrow money on the commercial market.
The balance left when you deduct your total liabilities from your total assets. Net worth can be either positive (good) or negative (bad).
A short term loan that obtains its nickname from the fact that many payday loans have repayment periods pegged to the pay dates of borrowers. Loan amounts are typically small, ranging from $200 to $1500.
A secondary mortgage loan to make up the difference between a prospective homeowner’s down payment and the standard 20 percent down payment. Piggyback loans are often used to avoid Private Mortgage Insurance (PMI).
An investment term that refers to the entire assortment of an individual’s financial holdings, including stocks, savings accounts and bonds. Each type of holding has its own level of risk, ranging from none (federally guaranteed bank deposits) to highly risky (stocks in industries where prices vary widely, such as energy).
Lending or credit practices that impose unfair burdens on borrowers, including hidden fees, excessively high interest rates and stiff prepayment penalties. Many payday lenders follow predatory lending practices.
A fee charged to borrowers who pay off their loans before the repayment period ends. Most payday loans include stiff prepayment penalties.
The benchmark interest rate for loans dictated by the Federal Reserve Bank (the Fed). Usually, prime rate is only available to the most creditworthy customers.
The actual amount borrowed.Interest and taxes are calculated based on a percentage of the principle.
Principle, Interest, Taxes and Insurance (PITI)
Principal, Interest, Taxes and Insurance or PITI stands for all the costs that are figured in a monthly mortgage statement.
Private Mortgage Insurance (PMI)
A requirement for market-rate borrowers seeking mortgages who do not provide at least 20 percent down payment or a piggyback loan. FHA loans do not require PMI because of the government guarantee.
A promise to pay a certain amount during a prescribed period.
Commonly applied to payday loans, rollovers are an extension of an original loan granted when a borrower cannot pay the entire balance due. Instead, borrowers pay a fee that renews the loan but usually does not reduce the principle.
A loan that does not require collateral but is based on a borrower’s demonstrated ability to pay. Payday loans are a type of signature loan.
Credit extended to individuals with poor credit or limited credit. Payday loans are a prime type of subprime credit.
Statement supporting a claim, e.g. a guarantee that certain statements made to obtain funding are true.
An uncollectible debt that a company counts on its books as a loss. One of the functions of loss reserves is to cover the cost of write-offs.
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.