Dictionary - Loans
# 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

Amortization Schedule

An amortization schedule is a chart that shows the amounts of principal and interest due for each loan payment of an amortizing loan.An amortizing loan is a loan that requires regular payments, where each payment is the same total amount. Read more

Annual Percentage Rate (APR)

Annual Percentage Rate (APR) is the interest rate that reflects all the costs of the loan during a one year time period. The annual percentage rate includes loan fees and the compound interest rate during the year. Read more

Asset Backed Securities (ABS)

Asset backed securities (ABS) are securities backed by the cash flows of a pool of assets.Home equity loans, auto loans, credit card receivables, and student loans commonly back this class of securities. Read more

Auto Loan

An auto loan allows someone to borrow money to purchase a car or truck.Auto loans are usually simple-interest loans that are to be paid back over a period of typically three or five years. Read more

Back-to-Back Commitment

A back-to-back commitment is an agreement to buy a construction loan on a future date or make a second loan on a future date. For example, let’s assume that Company XYZ applies for a construction loan from Bank ABC. 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

Bridge Loan

A bridge loan is a short-term, high-interest loan that provides a quick source of cash for commercial or individual needs.  It is called a bridge loan because it serves as a bridge between one period of funding and another, more permanent source of funding. To illustrate, suppose a company has been approved for a $1 million loan from a bank. 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

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

Call Loan

A call loan is a loan that the lender may force the borrower to repay at any time. Also called a broker loan or demand loan, a call loan is granted to a brokerage house that needs short-term capital for financing clients' margin portfolios. Read more

Call Loan Rate

The call loan rate, also known as the "broker loan rate", is the interest rate charged on the call loans used by brokerage houses to fund clients' margin trading accounts. When banks or other lenders provide brokerage houses with call loans to help cover their clients' margin accounts, they charge an interest rate called the call loan rate.  The call loan rate fluctuates each day and compounds daily until the loan is repaid or called by the bank. Read more

Call Money Rate

The call money rate, sometimes known as the "broker loan rate," is the interest rate on the loans banks make to brokerage firms that are borrowing to fund transactions in their clients' margins accounts.The call money rate is a rate that is generally not available to individuals. Read more

Car Title Loan

A car title loan is a short-term loan where a borrower uses the title of his or her car as collateral for the loan. Loans for car title loans are usually for less than 30 days and change a high rate of interest. 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

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

Collateralization

Collateralization occurs when a company pledges an asset 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

Construction Loan

Sometimes referred to as a “self build loan,” a construction loan is a loan that is used to finance the construction of a new home or some other type of real estate project.The loan is made to the homebuyer, builder, or developer on a short-term basis to cover the total cost of the construction. Read more

Covenant

A covenant is a promise a company makes, usually in return for a loan or bond issue. Covenants are most common in lending agreements and bond indentures. Read more

Credit Default Swap (CDS)

A credit default swap (CDS) protects lenders in the event of default on the part of the borrower by transferring the associated risk in return for periodic income payments. In a credit default swap (CDS), two counterparties exchange the risk of default associated with a loan (e.g. Read more

Credit Derivative

A credit derivative is a financial instrument thats value is determined by the default risk of an underlying asset. Credit derivatives allow a lender or borrower to transfer the default risk of a loan to a third party. Read more

Credit Report

A credit report is a report detailing a person's financial history specifically related to their ability to repay borrowed money. There are three major credit bureaus in the United States: TransUnion, Experian and Equifax. Read more

Death Spiral

A death spiral is a kind of loan investors provide to a company in exchange for debt that can convert into stock, typically at below-market share prices. Let's say Company XYZ is running low on cash and needs $1 million in capital. 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

Delinquent

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

Demand Loan

A demand loan is a loan where the lender may require the borrower (a brokerage house) to repay at any time.These loans may also be called a broker loan or call loan, A demand loan is granted to a brokerage house needing short-term capital for financing the margin portfolios of clients. Read more

Discount Rate

The discount rate, also known as the Fed discount rate, is the interest rate charged to commercial banks and other institutions on loans from a Federal Reserve bank.This process is a key tool of Federal Reserve monetary policy and an integral part of the Federal Reserve’s role in the broader financial system. Read more

Facility

A facility is essentially a bank loan agreement that a company can use on and off for short-term borrowing purposes. For example, let’s assume Company XYZ is a jewelry manufacturer. 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

Fixed Interest Rate

A fixed interest rate is a type of loan or mortgage for which the rate of interest does not fluctuate over the life of the loan. The most common types of mortgages carry either a fixed or variable interest rate. Read more

Forbearance

Forbearance, which literally means "holding back," is a temporary suspension of loan payments agreed to by both lender and borrower as an alternative to defaulting on the loan (or foreclosure in the case of a mortgage).Lenders choose forebearance agreements in order to avoid the loss and costs of a loan default.  There are many reasons why a borrower may need to establish a forbearance agreement. Read more

Forgivable Loan

A forgivable loan is a type of loan in which some (or all) of the amount can be forgiven or deferred if the borrower meets certain conditions.Since the loan balance is waived when the requirements are met, it is often considered a grant with conditions rather than a loan. 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

Hard Inquiry

A hard inquiry is a lender's investigation of an applicant's credit history for the purpose of approving or declining a loan or extension of credit. A hard inquiry helps a bank or credit card company assess the risk that an applicant will default on his or her repayment obligations. Read more

Home Equity Line of Credit (HELOC)

A home equity line of credit (or HELOC) is a flexible loan that lets you turn your home's equity into cash whenever you need it, up to a certain amount.A HELOC uses your home as collateral just like a home equity loan or cash out refinance, but works more like a credit card because it's revolving credit.  HELOCs are attractive to homeowners needing cash for spending or emergencies because they offer easy accessibility with the repayment flexibility of credit cards, but with annual percentage rates (APRs) that are half as high, potentially saving the borrower hundreds or thousands of dollars in interest charges over time. Read more

Imputed Interest

Imputed Interest refers to interest that is considered by the IRS to have been paid for tax purposes, even if no interest payment was made.The IRS uses imputed interest as a tool to collect tax revenues on loans that don't pay interest, or stated interest is very low. Read more

Installment Loan

An installment loan is a type of loan that is repaid in periodic installments (usually monthly payments) that include principal and interest. An installment loan can also be referred to as installment debt. Read more

Interest

Interest is the cost of borrowing money for a certain period of time. Let's assume you need $500,000 to buy a house. Read more

Joint Credit

Joint credit is credit extended by a lender to two or more parties.Loans secured from joint credit are the responsibility of all parties. Read more

Jumbo Loan

A jumbo loan, also called a jumbo mortgage, is a mortgage that exceeds the maximum amount that will be guaranteed by a government-sponsored entity like Fannie Mae. Once a loan is made between from a bank to a home buyer, the loan is typically sold into the secondary market.  The largest buyers of these loans in the secondary market are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), both government-sponsored enterprises created to provide liquidity to banks.  Fannie Mae and Freddie Mac follow guidelines for loan terms set by the Office of Federal Housing Enterprise Oversight OFHEO). Read more

Junior Mortgage

A junior mortgage is a loan secured by the equity in a house.Equity equals the value of the house less the balance owed on the homeowner's first (or in some cases, preceding) mortgages. Read more

Loan

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 Reserves

Loan loss reserves (LLRs) are types of insurance and credit enhancement that help banks and lenders mitigate estimated losses on loans in the event of defaults or nonpayments.Should borrowers default on their loan, banks might use loan loss reserve funds to alleviate these losses.  How Often Are Loan Loss Reserves Calculated?  Loan loss reserves are revised quarterly. Read more

Loan Officer

There comes a time in everyone’s life where they need to finance a major purchase.It may be a car loan, a line of credit for a business, or even the cornerstone of the American dream: a home loan. Read more

Loan Sharking

Loan sharking refers to predatory lending practices by individuals or organizations (aka loan sharks) that charge extraordinarily-high interest rates. Loan sharking involves taking advantage of the borrower's weak credit or collateral condition. 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

Long-Term Liability

A long-term liability is a liability due in more than one year. A liability is a claim on a company’s assets. Read more

Money Factor

Money factor represents the interest you pay when you lease a car.It is included in your monthly lease payment. Read more

Mortgage Equity Withdrawal (MEW)

A mortgage equity withdrawal (MEW) is a loan that uses the value of a mortgaged property as collateral. When a property is worth more than is owed on it, it has positive equity. Read more

Negative Amortization

Negative amortization occurs when the principal balance on a loan (usually a mortgage) increases because the borrower's payments don't cover the total amount of interest that has accrued. For example, let's assume that John wants to borrow $100,000 from Bank XYZ to buy a house. Read more

Negative Amortization Limit

A negative amortization limit is a clause in a loan that restricts the amount of negative amortization that can occur during the contract. Negative amortization occurs when the principal balance on a loan (usually a mortgage) increases because the borrower's payments don't cover the total amount of interest that has accrued. Read more

Negative Amortizing Loan

Negative amortizing loans are loans in which the loan's principal balance increases even though the borrower is making payments on the loan. For example, let's assume that John wants to borrow $100,000 from Bank XYZ to buy a house. Read more

Negatively Amortizing Loan

Negatively amortizing loans are loans in which the loan's principal balance (usually a mortgage) increases even though the borrower is making payments on the loan. For example, let's assume that John Doe wants to borrow $100,000 from Bank XYZ to buy a house. Read more

Nellie Mae

Nellie Mae is a subsidiary of Sallie Mae (SLM), the largest originator, funder and servicer of student loans in the United States.Specifically, it is responsible for originating Federal Stafford Loans, PLUS loans, consolidation loans and private loans for students and parents. Read more

Nonperforming Loan

A nonperforming loan is a loan that is close to defaulting or is in default. Let's assume Bank XYZ lent $1,000,000 to Company ABC, which much repay the loan in monthly installments of $25,000. Read more

Paid-Up

Paid-up means that all payment obligations under a contract are met. Let's say John Doe takes out a car loan to purchase a 1985 Camaro. Read more

Payday Loan

A payday loan is an advance on one’s paycheck.Independent lenders and some large banks offer the service. Read more

Pledged Asset

A pledged asset is collateral 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

Prepayment Risk

Prepayment risk is the risk that a borrower will pay off a loan earlier than expected. For example, let's say that John Doe borrows $300,000 to buy a house in Phoenix. Read more

Principal

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

Reference Rate

A reference rate is an interest rate that determines another interest rate. Let's say you want to borrow $5,000 to start a business. Read more

Restrictive Covenant

A restrictive covenant is a promise a company makes to not exceed certain financial ratios or not conduct certain activities, usually in return for a loan or bond issue.    Let’s assume Company XYZ wants to borrow $10 million from Bank ABC. Read more

Sallie Mae (SLM)

Sallie Mae, also known as The Student Loan Marketing Association (SLM), is the largest originator, funder and servicer of student loans in the United States.It also provides counseling about student loans to students as well as their parents. Read more

Signature Loan

A signature loan is a loan offered by banks or other financial institutions that does not require collateral.Signature loans are also known as personal or unsecured loans since they are not secured by anything beyond trust that the borrower will pay it back. Read more

Student Loan

For the majority of Americans, taking on a student loan is a requirement to pay for college.A 2019 report estimated that 43 million American adults have federal student loans – with a combined total balance of $1.5 billion. Read more

Syndicated Loan

A syndicated loan is a loan made by a group of lenders who share or participate in a specific loan given to a project. A project may require too large a loan for a single lender or require a special type of investor or lender with expertise in a particular asset class. 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

Take-Out Loan

A take-out loan is a loan that 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 Loan

A teaser loan is usually an adjustable-rate mortgage (ARM) with an artificially low initial interest rate. 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 is often based on the borrower's credit score). Read more

Term Loan

A term loan has a set maturity date and usually has a fixed interest rate. Let's say Company XYZ wants to borrow $1 million to build a factory. 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

Unsecured

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 Loan

An unsecured loan is debt that does not have any collateral attached. Let’s assume you would like to borrow $100,000 to start a business. Read more

Usury

Usury is lending money at an interest rate thought to be irrationally high or higher than permitted by law.  Usury is another word for predatory lending, which is the act of imposing unfair and abusive loan terms on borrowers.Predatory lenders charge unreasonably high-interest rates and usually target borrowers with poor credit and few other options to borrow money at reasonable rates.  To prevent usury, some jurisdictions limit the annual percentage rate (APR) that a lender may charge, while others outlaw the practice entirely.  The concept of usury may be an interesting academic topic, but regrettably it has little relevance in consumer lending. Read more

Variable Interest Rate

A variable interest rate is an interest rate that can change from time to time. For example, let's say that you want to borrow $5,000 to start a business. Read more

Vendor Note

A vendor note is a short-term loan to a customer. Let's say you plan to purchase inventory from Company XYZ  for $2 million. 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

Working Capital Loan

A working capital loan is a loan used by companies to cover day-to-day operational expenses. In many cases, companies are unable to generate the revenue needed to meet expenses incurred by day-to-day business operations. Read more