Borrowing and Lending

adjustable rate mortgage

(ARM)

A type of loan whose interest rate goes up or down depending on the base rate to which it is tied. Adjustable rate loans can be risky, as rates go up as well as down.

annual percentage rate (APR)

An expression of the total cost of a loan to the borrower.

bankruptcy

A legal declaration by a person or organization that it cannot pay its creditors. The debtor’s assets are sold to pay the debt, and the debtor can have a fresh start (although the debtor may have difficulty getting credit).

collateral

An object of value pledged to a creditor to secure a loan. If the borrower doesn’t pay back the loan, the creditor gets to keep the collateral.

cosigner

Someone who signs a contract to pay another person’s debt if that person defaults. A cosigner with good credit can help someone who has yet to establish good credit or someone with bad credit get a credit card, loan, or mortgage.

credit history

A record of someone’s previous activity with credit. It can include personal information, current extended credit, and recent bankruptcy.

credit report

A report of someone’s credit history that can be looked at by potential creditors. Everyone is entitled to a free copy of his or her credit report annually in order to very that no errors were made that might negatively impact his or her credit score.

default terms

The conditions of a loan, which usually include when it must be repaid and the interest rate.

down payment

An initial cash payment of a percentage of the total amount due on a large purchase such as a home or car. The buyer borrows the rest of the money. The down payment serves to ensure that the lender can recover the balance due on the loan in the event that the borrower defaults.

FICO score

The most widely used type of credit score. A FICO score measures someone’s creditworthiness by summarizing several factors that predict the borrower’s ability to pay.

fixed rate loan

A type of loan that always has the same interest rate, even when the prime interest rate goes up or down.

interest

An amount of money that a borrower must pay on a regular basis in addition to paying off the principal of the loan. In a sense, interest is a fee paid to the lender for the use of its money.

loan

An arrangement in which someone supplies money to a borrower and the borrower agrees to repay that money, usually along with interest, at some future point in time.

minimum monthly payment

The smallest amount of money a borrower can pay monthly toward a credit card, usually 2% of the balance.

mortgage broker

An individual who helps home buyers find the home loan that best fits their needs.

prepayment penalties

Fees for paying off a loan early.

prime rate

A rate of interest that serves as a benchmark for most other loans in a country. In the United States, the prime rate is the interest rate banks charge to the most financially sound customers for short-term loans.

principal

The total amount of money being borrowed. A loan’s principal does not include interest or fees.

refinance

Replace a mortgage with a new mortgage. People often refinance when interest rates come down in order to obtain more favorable terms.

repayment schedule

The number and timing of payments needed to pay off a loan.

sub-prime loan

A loan to a person with a poor credit history. Sub-prime lending is risky to creditors, so borrowers often pay a higher interest rate.