Understanding Loans, Credit, and Predatory Lending

Vocabulary terms and definitions covering fundamental loan terminology, the 6 C's of lending, predatory lending signs, and credit reporting.

Loan

Money that a lender gives to a borrower, which the borrower agrees to pay back, usually with interest.

Lender

The person, bank, or company giving the money.

Borrower

The person receiving the money.

Principal

The original amount of money borrowed.

Interest

The extra money the borrower pays for borrowing, also referred to as APR.

Fees

Additional charges that may come with a loan.

Loan Term

The amount of time the borrower has to repay the loan.

Total Loan Cost Formula

$$\text{Total Loan Cost} = \text{Principal} + \text{Interest} + \text{Fees}$$

Secure Loan

A loan backed by collateral, which the bank will seize if the borrower fails to pay it back.

Unsecured Loans

Loans that are not backed by collateral.

Installment Loans

Loans paid back over time through regular payments, usually with equal monthly payments and a set repayment period.

Revolving Credit

Open-ended borrowing that allows borrowers to repeatedly spend and repay money up to a specific credit limit.

Predatory Lending

Lending practices that impose unfair, deceptive, or abusive loan terms on borrowers, often benefiting the lender at the borrower's expense.

Annual Percentage Rate (APR)

A rate reflecting the yearly cost of borrowing.

Payday Loans (Cash Advance Loans)

Short-term loans with high fees and short repayment terms that usually must be repaid by the borrower's next payday.

Cycle of Debt

A situation where a borrower struggles to repay a loan on time and takes out another loan to cover the first, accumulating further fees and debt.

Character

One of the 6 C's of lending, evaluated by a loan officer as stability, such as how long you have held your job.

Capacity

One of the 6 C's of lending, assessing your ability to pay the loan based on how much you earn.

Capital

One of the 6 C's of lending, representing the money you are contributing to the loan.

Collateral

One of the 6 C's of lending, consisting of an asset or something of value pledged to secure a loan.

Conditions

One of the 6 C's of lending, referring to the borrower's plans for using the money.

Credit Score

A number representing financial history that helps lenders determine your credit risk.

Credit

The ability to borrow money, or a promise you make to pay back money you borrowed with interest.

Credit Report

A report detailing who you are, your debt amount, on-time payment records, and negative public record information.

Credit Reporting Agencies

The three agencies that compile credit reports: Equifax, Experian, and Transunion.

Fair isaac Corporation Score (FICO)

A credit score number that helps lenders determine an individual's credit risk.