Dictionary - Debt
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Ability to Pay

Ability to pay refers to a borrower’s capacity to make good on his loan obligations.In banking, ability to pay is often called “financial capacity.” When considering a loan, a banker will first and foremost consider the borrower’s ability to pay, which can be viewed as the financial capacity of the borrower to service his existing debts. Read more

Average Daily Balance Method

The average daily balance method is a way of calculating interest by considering the balance owed or invested at the end of each day of the period rather than the balance owed or invested at the end of the week, month or year. The frequency of interest compounding affects how lenders and borrowers use the average daily balance method. Read more

Back to Back Loan

With back to back loans two parties, each in a different country, lend money to each other in an effort to hedge against currency risk.They are also called "parallel loans." Company XYZ is in the United States and Bank ABC is in Germany. Read more

Bad Debt

In business, bad debt is the portion of a loan or portfolio of loans a lender considers to be uncollectable.In personal finance, bad debt generally refers to high-interest consumer debt. Read more

Balloon Loan

A balloon loan is a loan with a large payment made near or at the end of the loan term. Unlike a loan whose total cost (interest and principal) is amortized -- that is, paid incrementally during the life of the loan -- a balloon loan's principal is paid in one sum at the end of the term. Read more

Balloon Payment

A balloon payment is a large payment made at or near the end of a loan term. Unlike a loan whose total cost (interest and principal) is amortized -- that is, paid incrementally during the life of the loan -- a balloon loan's principal is paid in one sum at the end of the term. Read more

Bank Guarantee

A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss.note that a bank guarantee is not the same as a letter of credit (see the differences between those two below). Read more

Broker Loan

A broker loan is a loan that the lender can obligate the borrower (a brokerage house) to repay at any time. Also known as a call loan or demand loan, a broker loan is granted to a brokerage house in need of short-term capital for financing clients' margin portfolios. Read more


Bullet is usually short for bullet payment, which is typically a large payment made near the end of a loan that does not amortize over time. Unlike a loan whose total cost (interest and principal) is amortized – that is, paid incrementally during the life of the loan -- a bullet loan's principal is paid in one sum at the end of the term. Read more

Bullet Loan

A bullet loan is a loan that does not amortize over time and must be repaid with a single large payment (also called a balloon payment) at the end of the term of the loan. Unlike a loan whose total cost (interest and principal) is amortized -- paid incrementally during the life of the loan -- a bullet loan's principal is paid in one sum at the end of the term. Read more

Cancellation of Debt

Cancellation of debt occurs when a lender tells a borrower that he or she no longer must repay a loan. Let's assume that John Doe borrowed $100,000 from Bank XYZ for a luxury car. Read more

Cash Flow Loan

A cash flow loan is a loan, usually to a company, intended to meet daily cash needs during times when cash flow is inconsistent.These loans are short-term in nature; borrowers usually must repay them in 30 to 180 days. Read more

Chapter 11

Chapter 11 bankruptcy refers to the section of U.S.bankruptcy law under which companies and individuals can attempt to restructure their debts in order to repay them. Read more

Chapter 13

Chapter 13 refers to the section of U.S.bankruptcy law under which individuals may attempt to restructure their finances in order to repay their debts. Read more

Chapter 7

Chapter 7 refers to the section of U.S.bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts. Read more

Charge Card

A charge card is a plastic card issued by a financial institution that allows the user to make purchases with funds borrowed from that financial institution. Colloquially speaking, a charge card is the same as a credit card. Read more

Closed End Lease

A closed end lease, also called a "walk away lease", is usually a kind of car lease that allows the lessee to return the car at the end of a lease period. Let's assume John Doe leases a 2021 Ford Mustang. Read more


Collateral is an asset pledged by a borrower to a lender, usually in return for a loan.The lender has the right to seize the collateral if the borrower defaults on the obligation. Read more


Credit is an agreement whereby a financial institution agrees to lend a borrower a maximum amount of money over a given time period.Interest is typically charged on the outstanding balance. Read more

Credit Bureau

A credit bureau is an agency that collects, organizes, and disseminates credit information to creditors and potential creditors.Credit bureaus generally collect information on individuals and small businesses. Read more

Credit Crunch

A credit crunch occurs when loans are very expensive and difficult to obtain. During a credit crunch, lending institutions are limited as to the amount of funds they can use to make loans. Read more

Credit Limit

A credit limit is the maximum amount that a person may charge on a credit card or borrow from a financial institution. After a financial institution has approved an applicant's request for a credit card or another type of revolving credit, the lender will decide on the maximum amount of credit it's willing to extend to that person; this maximum amount is known as the credit limit. Read more

Credit Quality

Credit quality is a measure of an individual's or company's creditworthiness, which is ability to repay debt. A FICO score, which is created and calculated by the Fair Isaac Corporation, is a measure of an individual's credit quality. Read more

Credit Risk

Credit risk is the chance that a bond issuer will not make the coupon payments or principal repayment to its bondholders.In other words, it is the chance the issuer will default. Read more

Credit Score

Credit score refers to the FICO score, which is created and calculated by the Fair Isaac Corporation and is a measure of an individual's creditworthiness.It is a mathematical summary of the information on a person's credit report. Read more

Credit Utilization Rate

The credit utilization rate is a calculation comparing an individual's total debt balances to total available credit. The credit utilization rate is also referred to as the credit utilization ratio. Read more

Credit Utilization Ratio

Credit utilization, commonly referred to as the credit utilization ratio or credit utilization rate, is a calculation comparing an individual's total debt balances to total available credit. The credit utilization ratio is also referred to as the utilization ratio. Read more


A creditor is an individual or institution that lends money or services to another entity under a repayment agreement. There are generally two types of creditors: personal and real. Read more


In the business world, debt is an amount borrowed. For example, let's assume Company XYZ has invented a new product that will revolutionize the widget market. Read more

Debt Discharge

A debt discharge is a legal action that relieves a borrower from his or her obligations to a lender.  Debt discharge typically happens during bankruptcy, which is a legal process under which a borrower protects and or liquidates assets in order to repay debts. Read more

Debt Financing

Debt financing is the use of borrowing to pay for things. For example, the basic idea behind acquisition debt financing is that the acquirer purchases the target with a loan collateralized by the target’s own assets. Read more

Debt Service

Debt service is the act of making interest and principal payments on debt. For example, let's say Company XYZ borrows $10,000,000 and the payments work out to $14,000 per month. Read more


A default is a violation of a promise to pay debt in agreed amounts at agreed times. Let's assume Company XYZ has a line of credit for $10 million from Bank ABC, and $5 million of that line is outstanding. Read more


Delinquent means “something or someone who fails to accomplish that which is required by law, duty, or contractual agreement, such as the failure to make a required payment or perform a particular action.”   In financing and investing, delinquency occurs when a person or business with an obligation to make payments against a debt, such as loan payments, does not make those payments on time or in a regular, appropriate manner.The term "delinquent" usually refers to a situation where a borrower is late or overdue on a payment, such as for income taxes, a mortgage, an automobile loan, or a credit card account. Read more


An encumbrance is a limitation on the ownership of a property. In the real estate world, an encumbrance is similar to a lien. Read more

Fair Credit Reporting Act (FCRA)

The Fair Credit Reporting Act (FCRA) is the principle legislation for consumer credit rights in the U.S.It regulates the collection, distribution, and use of consumer credit information. Read more

Federal Farm Credit System (FFCS)

The Federal Farm Credit System (FFCS) is a group of lenders that provide loans and other credit services to farmers, ranchers, and producers or harvesters of aquatic products.  People or businesses that process or market products from farmers, ranchers, or aquatic producers may also be eligible for FFCS loans, as are certain rural homeowners, utility cooperatives, and farm-related businesses.  Although President Roosevelt created the system in 1933, the FFCS received most of its power in 1971 with the passage of the Farm Credit Act. Read more

Federal Funds

Federal funds are monies held by banks at the Federal Reserve to meet reserve requirements.Funds in excess of reserve requirements can be loaned to other banks in order for those banks to meet reserve requirements. Read more


Also called wage execution, a garnishment is a process under which money owed or paid to a borrower is given to a creditor instead. Let's say John Doe has stopped paying child support to his ex-wife. Read more

Grace Period

A grace period is a period of time, usually about 10 days, during which a past due amount can be paid with little or no penalty. Let's assume your credit card payment is due on December 15. Read more

Guaranteed Loan

With a guaranteed loan, a party other than the borrower has promised to take responsibility if the borrower cannot make the payments.The entity assuming this responsibility is called the guarantor. Read more


In most usages, insolvency is the inability of a company or individual to meet its financial obligations as they come due.In the legal sense of the word, an entity is considered insolvent if its total liabilities exceed its total assets. Read more

Installment Debt

Installment debt refers to any loan that is repaid by the borrower in periodic (usually monthly) installments that include principal and interest. Installment debt, also called an installment loan, is granted to the borrower with a preset number of monthly payments of equal amount. Read more


The term IOU is the phonetic spelling of the phrase "I Owe You." In bookkeeping, it signifies an outstanding debt. Usually, an IOU is a signed informal notice of an unpaid debt, sometimes because of partial payment and an outstanding balance due. Read more

Jingle Mail

Jingle mail occurs when a property owner sends his/her keys to the mortgage lender because he/she is unable to continue to make payments. Jingle mail -- denoting the jangling sound of keys in an envelope -- is the act of relinquishing one's obligations on a property by literally mailing the keys to the lending bank. Read more

Judgment Lien

A judgment lien allows a creditor to take possession of a piece of a debtor's property if the debtor does not pay his or her debts. Let's say John Doe owns a pit bull breeding company that borrows $1 million from Bank XYZ. Read more

Judgmental Credit Analysis

Judgmental credit analysis occurs when a banker approves or denies a credit application based on his or her experience with similar projects rather than the applicant's creditworthiness.   Let's say Company XYZ needs to borrow $1 million to lease a new factory. Read more

Lame Duck

A lame duck is a person who has gone bankrupt or is in default.In politics, a lame duck is a politician whose tenure is about to end. Read more


A lender is a creditor or any entity to which you owe money for services provided. If you borrow money from XYZ Bank, XYZ Bank becomes your lender. Read more

Letter of Credit

A letter of credit is a bank's written promise that it will make a customer's (the holder) payment to a vendor (called the beneficiary) if the customer does not. Letters of credit are most common in international transactions, where buyers and sellers may not know each other well or laws and conventions may make certain transactions difficult. Read more


Leverage is any technique that amplifies investor profits or losses.It's most commonly used to describe the use of borrowed money to magnify profit potential (financial leverage), but it can also describe the use of fixed assets to achieve the same goal (operating leverage).  Financial Leverage Let's look at selected balance sheet and income statement information for Company XYZ. Read more


In finance and investing, a liability is a claim on a company's assets. For example, let's assume that XYZ Company sold $1,000,000 of gift certificates during the holidays. Read more


A lien is a lender's claim against a collateral asset that may be legally sold should the borrower fail to repay a loan. When someone takes out a sizeable loan, such as a home mortgage or an auto loan, the lender often requires an asset that can be held as collateral against the loan. Read more

Lien Sale

A lien sale is the sale of a lien by a relevant authority to a third party in an effort to recoup money owed. Let’s assume John Doe owns a house in the country and the annual property taxes are $4,000. Read more

Line of Credit (LOC)

A line of credit (sometimes called revolving credit) is a pre-arranged amount of money lent by a financial institution.Unlike a traditional loan – which is usually a lump sum payment that is repaid on a fixed schedule – a line of credit is flexible.  The borrower can draw from the line of credit until they reach their credit limit. Read more


Liquidation refers to the selling of assets in return for cash.  The term liquidation is most often used in discussions about Chapter 7 bankruptcy -- a section of U.S.bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts. Read more


A loan is a sum of money that is borrowed by an individual or business from a lender (typically a financial institution or another party with money). Under a typical loan agreement, the lender expects the borrower to repay the loan over an agreed-upon period of time and/or with the expectation that they will pay back the loan regularly (often every month). Read more

Loan Loss Provision

A loan loss provision is an expense that is reserved for defaulted loans or credits.  It is an amount set aside in the event that the loan defaults. Generally, banks conduct their business by taking deposits and making loans using those deposits.  It is a bit more complicated (e.g. Read more

Loan Syndication

Loan syndication is a lending process in which a group of lenders provide funds to a single borrower. When a project is unusually large or complex, it may exceed the capacity of a single lender. Read more

Negative Carry

Negative carry means that the price of borrowing money is higher than the returns earned on borrowed money.It is the opposite of positive carry. Read more

Negative Pledge Clause

A negative pledge clause is lending agreement language designed to prevent borrowers from pledging the same collateral to multiple lenders or otherwise taking actions that might jeopardize the security of existing lenders. For example, let's assume that Company XYZ borrows $10 million from Bank A. Read more

Net Borrower

A net borrower (also called a "net debtor") is a company, person, country, or other entity that borrows more than it saves or lends.Borrowing can take the form of traditional bank lending, but it also might come in the form of Treasury debt, publicly traded bonds, or even seller financing (accounts payable). Read more

Nonperforming Assets

Nonperforming assets are a bank's nonperforming loans plus the real estate owned by the bank due to foreclosures. On a bank's balance sheet, loans made to customers are listed as assets. Read more


In the finance world, a note is debt. Notes are typically medium-term debt, but not always. Read more

Offset Mortgage

An offset mortgage is a mortgage held in the same bank as the borrower's deposit accounts, savings accounts or other accounts.The mortgage payments are calculated based on the borrower's combined balance. Read more

Past Due

Past due means overdue.Typically, a bill is past due if the borrower is 30 days past the payment deadline. Read more

Past-Due Balance Method

The past-due balance method is a system for calculating interest charges based on loan or credit balances not paid prior to a specified due date. The past-due balance method for computing interest on credit card charges and certain types of loans comprises a grace period during which no interest is charged if repaid in full. Read more


Paycheck-to-paycheck means a lifestyle in which a person does not save money and would incur significant financial stress if he or she does not receive his or her next paycheck. For example, let's say John Doe's paycheck is $1,450 every two weeks, or $2,900 a month. Read more

Prime Rate

The prime rate is the interest rate commercial banks charge their most creditworthy customers, which are usually corporations. Anyone who has borrowed money knows that different banks charge different interest rates. Read more


In finance,  principal refers to the face amount of a debt instrument or an amount of money borrowed. For example, if you borrow $25,000 from XYZ Bank to purchase a car, the principal balance is $25,000. Read more

Promissory Note

A promissory note is a written document that binds one party to pay another through credit.The agreement is considered a debt instrument as it typically contains loan-type features such as the repayment terms, principal amount owed, interest rate, maturity date, date of issuance and both parties' signatures. Read more

Quick-Rinse Bankruptcy

A quick-rinse bankruptcy moves through the courts especially quickly. Let's say Company XYZ is struggling to pay its vendors and is quickly running out of cash to pay its employees. Read more

Ratings Service

Ratings Service is provided by companies that evaluate the risks associated with debt securities.  Companies, such as Moody's, Standard & Poor's (S&P), and Fitch, provide ratings for securities based on underwriting criteria. The criteria include a number of factors, such as the underlying security, method of repayment, revenue history, qualifications of the team, market factors, etc. Read more


Reaffirmation occurs when a lender agrees to forgive a borrower's debt and then the borrower agrees to repay the debt anyway. For example, let's assume that John Doe borrowed $100,000 from Bank XYZ for a luxury car. Read more


Refinance refers to the replacement of a debt with new debt bearing different terms. Financing involves borrowing a specific amount of money over a length of time at an agreed-upon interest rate. Read more


Repayment usually refers to the payments on a debt.  Under the terms of a loan, repayment can have different schedules and requirements.For example, a loan may be amortized over a specific period of time, requiring regular repayments. Read more

Revolving Credit

Revolving credit is a line of credit individuals and corporations can borrow from and pay back as needed. Revolving credit is also referred to as a line of credit (LOC) Before granting a revolving line of credit to an applicant, a financial institution considers several factors that determine a borrower's ability to repay. Read more

Secured Creditor

Secured creditor is a lender that provides collateralized debt. Mortgage lenders are the most common example of secured creditors: They lend you money and keep the house as collateral. Read more

Secured Debt

Secured debt is debt that is collateralized. Mortgages are the most common example of secured debt: the bank lends you the money and the bank has the house as collateral. Read more

Senior Debt

Senior debt is debt that is first to be repaid, ahead of all other lenders or creditors, in the event of a borrower’s bankruptcy. For example, if Company XYZ issues bonds, the bondholders are creditors who are senior to Company XYZ's shareholders, for example. Read more


Subordinate means "ranks beneath." In finance, the term usually refers to the claims a creditor has on a company's assets relative to other creditors. When something is subordinate, it ranks below the claims of other investors. Read more

Take-Out Lender

A take-out lender is a lender whose loan replaces another loan. Let's say Company XYZ is a real estate development company. Read more

Tax Refund Anticipation Loan (TRAL)

A tax refund anticipation loan (TRAL) is a short-term loan from a third party.The loan is collateralized by the borrower's pending tax refund. Read more

Teaser Rate

A teaser rate is usually an artificially low initial interest rate on an adjustable-rate mortgage (ARM). The interest rate on the ARM corresponds to a specific benchmark (often the prime rate, but sometimes LIBOR, the one-year constant-maturity Treasury, or other benchmarks) plus an additional spread (which is also called the margin, and its size is often based on the borrower's credit score). Read more


In the finance world, a term is the length of time until a debt matures.A term can also be a condition of a deal, as evidenced by the phrase term sheet, which describes the terms of a deal. Read more

Truth in Lending Act (TILA)

The Truth in Lending Act (TILA) was implemented to protect consumers when they borrow money.TILA requires the disclosure of certain credit terms so that consumers are not deceived. Read more

U.S. League of Savings Institutions

The U.S.League of Savings Institutions was a national organization of savings banks. Read more

Uncollected Funds

Uncollected funds refer to the balance of uncleared checks in a bank account. When an account holder deposits a check into a savings or checking account, the bank must collect the specified amount of cash from the check writer's bank account. Read more

Underwater Mortgage

An underwater mortgage is a mortgage on a property that is worth less than what is owed on it. For example, let's say John Doe buys a house for $500,000. Read more


In the finance world, a lender or piece of debt is unsecured if it does not have collateral. Let's assume you would like to borrow $100,000 to start a business. Read more

Unsecured Debt

Unsecured debt is debt that does not have any collateral attached. If you borrow money from XYZ Bank, XYZ Bank becomes your creditor. Read more

Unsubordinated Debt

Unsubordinated debt refers to loans and debt securities (e.g., bonds, CDs, collateralized securities, etc.) for which the repayment priority outranks other debts owed by the same individual entity (called subordinated debt). Debt in the form of loans or debt securities (e.g. Read more

Utilization Ratio

The utilization ratio compares an individual's total debt balances to total available credit.It helps determine part of a person's credit score. Read more

Wage Assignment

A wage assignment refers to a forced payment of a financial obligation via automatic withholding from an employee's pay. Courts can subject individuals who become delinquent in their obligations to wage assignments. Read more

Wage Earner Plan

A wage earner plan, subsequently known as Chapter 13, is a bankruptcy protection scheme that allows income earners to satisfy outstanding debts -- in whole or in part -- within a specific time frame. In a Chapter 13 bankruptcy -- formerly called a wage earner plan -- a person petitions the court to reduce the total amount owed and provide a reasonable repayment schedule based on his or her income. Read more

Wage Garnishment

A wage garnishment is an obligatory payment of a debt where a portion of an employee's paycheck is automatically withheld to pay the debt. Courts can set wage garnishments on individuals who become delinquent on their debt payments. Read more

Waterfall Payment

A waterfall payment is a repayment system by which senior lenders receive principal and interest payments from a borrower first, and subordinate lenders receive principal and interest payments after. Imagine the cash generated by a company as a waterfall that flows from senior lenders down to subordinate lenders. Read more

Zombie Bank

A zombie bank is a bank with liabilities that exceed its assets (in other words, it has a net worth of zero).They do not die (hence the nickname) because they receive government support or bailouts. Read more

Zombie Debt

Zombie debt is debt that won't die.  Let's say John Doe ran up a $10,000 credit card bill in his 20s. Read more