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Personal loans glossary

An A-to-Z list of terms to help you understand your loan contract.

Updated

Thinking about taking out a personal loan? Familiarize yourself with a few key terms so that you’ll be ahead of the curve once you’re ready to sign the dotted line.

Term Definition
Accrued interest Interest that’s accumulated on a loan since it was first issued, but that hasn’t been paid yet.
Adjustable rate Also known as a variable rate, this is an interest rate that’s subject to change.
Amortization A loan that has regular, scheduled repayments that go toward paying both the loan’s interest and principal.
Annual percentage rate (APR) An expression of a loan’s interest rates and fees as a percentage rate for the whole year.
Appreciation An increase in an asset’s value, such as a car or home.
Asset Anything that someone owns that has money value, including cash, a home, owed debt, a trademark or patent.
Automated clearing house (ACH) payment An electronic payment made through the ACH network from one bank account to another. ACH is used for direct deposit from your employer or when a lender transfers funds directly into your account.
Autopay A service that allows you or a loan provider to automatically withdraw money from your account on a regular — usually monthly — basis.
Borrower The person taking out a loan from a bank, credit union or other lender.
Broker A third party that acts as an intermediary between lenders and potential borrowers for a fee.
5 Cs of credit An easy way to remember what lenders look at when determining your creditworthiness. The five Cs are: character, capacity, conditions, capital and collateral.
Capitalized interest Interest that’s added to your loan’s principal instead of being treated separately.
Closing Also known as a settlement, this is the final step in taking out a loan — when the loan agreement is signed and the funds are disbursed.
Cosigner Someone who also signs on to your loan and holds responsibility to repay it if you default.
Compound interest Interest that is periodically added to a loan based on your accumulated interest and principal.
Consumer reporting agency Also known as a credit bureau, this is an agency that gathers information from your creditors to compile your credit report and credit score.
Creditworthiness How a lender values your likeliness to be able to repay a loan. Your credit score is typically used as the best expression of your creditworthiness, though your income, debts, age and employment status also play a large role.
Debt-to-income (DTI) ratio Your gross monthly income divided by your gross monthly debt payments.
Default A failure to repay debts, which can result in the seizure of collateral or even a lawsuit.
Deferred payment An arrangement where a borrower doesn’t have to start making repayments on a loan until a certain agreed-upon time — common with student loans.
Depreciation A decrease in an asset’s value, such as a car or home.
Down payment An initial payment you make up front when purchasing an expensive item. A loan is used to cover the rest of its cost.
Equity The difference between the value of an asset — like a car or home — and the balance of a loan used to pay for that asset.
Escrow account A third-party account that holds money before two parties go through with a transaction — common with debt settlement companies.
FICO score Your credit score assigned by one of the three credit bureaus: Experian, Equifax or TransUnion. When a lender sets credit score requirements, they’re most likely talking about your FICO score.
Grace period The amount of time a borrower has to make a payment before the lender charges a late fee.
Guaranteed loan A loan where a third party agrees to assume at least part of the debt if the borrower defaults.
Interest The amount a lender charges for letting someone borrow its assets, typically expressed as a percentage.
Loan agreement The contract that a borrower signs agreeing to the lender’s terms and conditions.
Minimum and maximum loan amount The largest and smallest amounts of money a lender is willing to let someone borrow.
Negative amortization When the loan payment doesn’t cover the accrued principal for that period, which is added to a loan balance.
Origination fee A fee you pay to cover the cost of processing your loan — usually between 1% and 5% of the amount you borrow taken out of your funds before you receive them.
Prepayment Paying more than your monthly payment on a loan.
Prepayment penalty A fee charged for making extra repayments on your loan or paying it off early.
Prime rate The interest rate that lenders give to their most creditworthy customers, usually based on the Federal Reserve or The Wall Street Journal’s prime rate.
Principal Your loan balance, not including interest.
Promissory note The document you sign before you take out a loan legally binding you to the terms and conditions of repayment.
Purchase option The option to buy a leased car or home, typically for a balloon payment.
Refinance Taking out another loan with more favorable terms to pay off a debt.
Revolving debt Open-ended access to a certain amount of funds that you pay off as you borrow, like a credit card.
Secured loan A loan that is backed by collateral.
Simple interest Interest that’s calculated based on your loan’s balance.
Strong credit Having a long history of repaying debts on time with a high credit score. Typically necessary to get approved for a loan with a competitive rate.
Subprime Credit for borrowers with bad or poor credit, typically with higher interest rates.
Term The amount of time a borrower has to repay a loan.
Title A document that proves ownership of an asset — like a car or home.
Unsecured loan A loan that is not backed by collateral.
Upside-down loan When you owe more money on an asset than it’s actually worth— most common with car loans.
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