Banking & Financial Systems Chapter 8: Lending

adjustable-rate mortgage (ARM)

A mortgage loan in which the interest rate may change over the life of the loan

adjusted balance method

A way to calculate finance charges by using the balance from the previous month and subtracting payments made during the current period

annual percentage rate (APR)

The actual annual interest rate paid over the life of a loan

average daily balance method

A way to calculate finance charges by using the card’s beginning daily balance

bankruptcy

A legal procedure that enables individuals or companies to eliminate or repay some or all debt under the guidance of federal bankruptcy courts

cap

The maximum increase that can be applied to a monthly loan payment, or the maximum interest rate increase when the rate is adjusted

capacity

A loan applicant’s ability to pay debts as shown by cash flow

capital

A loan applicant’s money, property, and other valuables

character

A loan applicant’s honesty and integrity as shown by how he or she handles debt

closed-end loan

A loan that must be paid in full on a specific date

closing costs

Several fees that are applied when a mortgage is signed

collateral

A borrower’s property that is pledged to secure a loan

commercial loan

A loan made when a company borrows money

conditions

The overall environment in which a loan will be given

consumer loan

A loan made when an individual borrows money for his or her use

cosigner

An individual who signs a loan along with the borrower, taking on equal liability for repayment

credit bureau

A company that gathers, analyzes, and summarizes credit-related information on consumers

credit score

A measure of risk based on a borrower’s credit history

creditworthiness

An assessment of a borrower’s ability to repay a loan

debt ratio

A comparison of debt to income or assets, the most common of which are the debt-to income ratio, the debt-service-coverage ratio, and the loan-to-value ratio

default

Occurs when a borrower fails to meet the terms of a loan agreement

equity

The difference between real estate’s value and the amount owed for the real estate; equity belongs to the owner

equity loan

A loan that temporarily transfers cash to the borrower and is secured by the owner’s equity; sometimes referred to as a second mortgage

Export-Import Bank of the United States (Ex-Im Bank)

An independent federal agency established in 1934 to assist US businesses by financing the export of US products, supporting US companies engaged in the overseas export of goods and services, offering loans to US companies, providing guarantees that creditworthy foreign buyers will pay, and offering insurance on exported goods.

Farm Service Agency (FSA)

Part of the US Department of Agriculture that provides financial and logistical support to commercial farms, often in the form of loans or guarantees

FICO score

A credit rating used by lenders to predict an applicant’s ability and willingness to repay loans

fixed-rate mortgage

A mortgage loan in which the interest rate stays the same for the entirety of the loan’s term

government-sponsored enterprise (GSE)

An organization that is chartered and supported by the government to promote a public interest

installment loan

A type of closed-ended loan for a large amount of money that is repaid in smaller amounts over a specified period of time

loan

Money temporarily transferred to a borrower in exchange for repayment and interest

loan policy

A guideline for balancing risk

mortgage-backed securities

Bonds that are guaranteed by the US government

mortgage loan

A secured loan made to purchase real estate; typically known as a mortgage

nominal annual rate

A loan’s annual interest rate without the cost of fees or compound interest

open-ended loan

A loan that does not have to be paid in full by a specific date

periodic interest rate

The interest rate the lender applies to a loan’s outstanding balance to calculate the finance charge each billing period

previous balance method

A way to calculate finance charges by using the amount the customer owed at the end of the previous billing period to calculate the interest owed for the current month

principal

An initial amount of money that is loaned or deposited

real estate

A section of land, the air above it, the ground itself, and any buildings on that land

reorganization

The process of creating a repayment plan to repay debts without liquidating property

risk

The chance that an unfavorable event will happen to a person or property

secured loan

. A loan backed by the borrower’s property

signature loan

A loan that is not backed by collateral, only the borrower’s signature

Small Business Administration (SBA)

An independent agency of the federal government that was created in 1953 to help Americans start and grow businesses, often in the form of loans

subprime loan

A loan with fees and interest rates that are higher than the rates given to a person who meets all of the underwriting criteria.

term

The number of years a loan will exist.

underwriting

When lenders analyze risks and set conditions on the loan

unsecured loan.

A loan that is not backed by collateral, only the borrower’s signature; also called a signature loan

World Bank Group (WBG).

A group of international organizations whose mission is to ease poverty around the world by giving loans and grants to developing countries.