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.
Accounts receivable financing, also called factoring, is a method of selling receivables in order to obtain cash for company operations.Accounts receivable (A/R) are amounts owed by customers for goods and services a company has sold to those customers.
Acquisition debt is money that is borrowed in order to purchase a company or asset.A leveraged buyout (LBO) is a method of acquiring a company with money that is nearly all borrowed.
An acquisition loan is money borrowed specifically to purchase a company or asset. The basic idea behind acquisition loans is that the acquirer purchases the target with a loan collateralized by the target’s own assets.
An allowance for bad debt is essentially a reduction in a bank's accounts receivable.The allowance for bad debt equals the amount of the banks loans that it does not expect to collect.
Same as the effective annual interest rate, the annual equivalent (AER) rate is the rate of interest an investor earns in a year after accounting for the effects of compounding.The formula for AER is: (1 + i/n)n - 1 Where: i = the stated annual interest rate n = the number of compounding periods in one year For example, let’s assume you buy a certificate deposit with a 12% stated annual interest rate.
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.
An assumed interest rate is used to calculate an annuity's periodic income payments. To understand how the assumed interest rate works, one must first remember how an annuity works.
Average balance is either the simple or the weighted average balance of a financial account during some period of time. A simple average balance is calculated by adding up the beginning balance and the ending balance and dividing the sum by 2.
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.
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.
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.
Back-to-back letters of credit occur when a buyer gives a letter of credit to a seller, who then obtains a letter of credit for a supplier. 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.
A backup line is a bank promise that a commercial paper issuer will repay the maturing debt. For example, let’s assume Company XYZ wants to issue $10 million in commercial paper.
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.
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.
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.
A bank card association is a company owned by one or more financial institutions that licenses credit card programs. The two most popular bank card associations are Visa and MasterCard.
Bank credit is an amount of funds that a person or business can borrow from a bank. All kinds of things can be bank credit: mortgages, credit card accounts and even overdraft lines.
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).
Also called the federal discount rate, the bank rate is the interest rate at which a bank can borrow from the Federal Reserve. To understand the bank rate, it is important to understand that banks derive income from making loans.
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.
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.
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.
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.
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.
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.
Call money is a very short-term bank loan that does not contain regular principal and interest payments.It is often used by brokerage firms to finance margin accounts.
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.
CAMELS is a system used to rate banks. In order to ensure their financial strength, banks must undergo periodic examinations by a federal agency (usually the Office of the Comptroller of the Currency).
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.
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.
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.
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.
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.
Chapter X was a portion of the bankruptcy code that dictated bankruptcy processes and procedures for corporations.1978 was the last year corporations were able to file bankruptcy under Chapter X.
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.
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.
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.
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.
A commercial bank is a financial institution that offers checking accounts, demand deposits, business and personal loans, savings vehicles and a variety of other related financial services. Commercial banks are owned by shareholders and are run for a profit, which is largely obtained by lending at rates higher than they pay their depositors.
Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers.Banks, corporations and foreign governments commonly use this type of funding.
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.
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.
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.
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.
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.
In personal finance, the term credit rating commonly refers to a score issued by the Fair Isaac Corporation (a "FICO score").A person's credit rating indicates how creditworthy he or she is.
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.
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.
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.
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.
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.
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.
The current portion of long-term debt (CPLTD) is the portion of a company's long-term debt payments that are due in less than one year. For example, let’s assume that XYZ Company borrows $10,000,000 from Bank ABC.
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.
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.
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.
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.
A debtor is a person or entity legally required to provide a payment, service or other benefit to another person or entity (the obligee).Debtors are often also called "borrowers" or "obligors" in contracts.
Debtor in possession (DIP) refers to the status of a business that retains control of its assets and continues to operate while under the Chapter 11 bankruptcy reorganization process. Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself.
Debtor-in-possession (DIP) financing refers to financing for a business that retains control of its assets and continues to operate while under the Chapter 11 bankruptcy reorganization process. Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself.
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.
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.
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.
Distressed securities are financial instruments of a company that are under price pressure due to bankruptcy (Chapter 7), reorganization (Chapter 11), financial turmoil, or other economic trauma. Distressed securities can take the form of stocks, bonds, debt, or other financial instruments.
Dun & Bradstreet provides information about businesses through a global commercial database. Founded more than 170 years ago, the company (NYSE: DNB) maintains a global database of information about more than 200 million businesses.
A DUNS number (DUNS stands for Data Universal Numbering System) identifies a company. Let's say Brad Smith of Tampa, Florida, owns a business called Brad's Bagels.
An encumbrance is a limitation on the ownership of a property. In the real estate world, an encumbrance is similar to a lien.
Euro LIBOR is the interest rate at which banks borrow euros from other banks in the London interbank market. Euro LIBOR is essentially LIBOR denominated in Euros.
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.
The Fair Credit Billing Act (FCBA) is an amendment to the Truth in Lending Act.The FCBA is meant to protect consumers from unfair or inaccurate billing practices by providing a system for consumers to contest inaccurate credit card bills.
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.
The Fair Debt Collection Practices Act (FDCPA) is a section of the consumer credit protection act that aims to promote fairness in the collection of consumer debts and provide a way for clarifying and challenging debt information to ensure its validity. The Fair Debt Collection Practices Act protects consumers’ rights in the context of debt collection.
The Federal Deposit Insurance Corporation (FDIC) is an agency of the U.S.government that insures deposits in banks and thrift institutions, supervises the risks associated with these insured funds, and limits the repercussions on the economy when a bank or thrift institution fails.
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.
The Federal Financial Institutions Examination Council (FFIEC) is an interagency body of the U.S.government that provides standardized methods for examining financial institutions in accordance with numerous regulating bodies.
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.
A finance charge is the fee charged to a borrower for the use of credit extended by the lender.Broadly defined, finance charges can include interest, late fees, transaction fees, and maintenance fees and be assessed as a simple, flat fee or based on a percentage of the loan, or some combination of both.
Firewall refers to the strict separation between banking and brokerage activities within full-service banks, and between depository and brokerage institutions as stipulated by the Glass-Steagall Act of 1933. Prior to the Great Depression, investors would borrow on margin from commercial banks and use the money to purchase stocks.
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.
A floating interest rate is an interest rate that can change from time to time. Let's say you want to borrow $5,000 to start a business.
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.
A fully indexed interest rate equals an adjustable-rate mortgage's (ARM) interest rate benchmark plus a spread. The interest rate on an ARM corresponds to a specific benchmark (often the prime rate, but sometimes LIBOR, the one-year constant-maturity Treasury, or other benchmarks) plus a spread (also called the margin, and its size is often based on the borrower's credit score).The benchmark plus the spread equals the interest rate on the loan; it is called the fully indexed rate.
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.
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.
In general, a financial guarantee is a promise to take responsibility for another company's financial obligation if that company cannot meet its obligation.The entity assuming this responsibility is the guarantor.
In the investing world, a half-life is the halfway point of mortgage repayment. Let's say John Doe borrows $100,000 to buy a house.
A home mortgage is a loan secured for a house.The borrower is usually obligated to make a predetermined series of payments on the loan.
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.
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.
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.
LIBOR is one of the most widely used benchmarks for short-term interest rates and is unlike the prime rate in the United States, which is somewhat arbitrarily based on certain banks' lending costs plus a profit margin.Borrowers thus generally support the use of LIBOR in interest-rate calculations because it represents a true market rate.
The term interchange fees, also known as swipe fees, refers to the hidden cost paid by merchants to card-issuing banks and credit card companies for processing credit card and debit card transactions. For example, when you use your debit card or credit card at a store or online, there is a hidden fee that is charged by the card-issuing banks to process this transaction.
An interchange rate is a bank fee for executing credit card and debit card transactions. An interchange is an electronic transfer of information.
Interest is the cost of borrowing money for a certain period of time. Let's assume you need $500,000 to buy a house.
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.
The Japan Credit Rating Agency (JCR) is a credit rating agency in Japan. Similar to Moody's or Standard & Poor's in the United States, JCR rates debt securities and conducts market, industry and economic research.
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.
JIBAR is a market indicator and a benchmark for various interest rates in South Africa. JIBAR calculates the average one-month, three-month, six-month, and 12-month rates.
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.
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.
In the event of a borrower’s bankruptcy, junior debt is debt that is repaid after the obligations to senior lenders or creditors have been fulfilled.Usually, it also has no collateral.
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.
A bank or other institution uses the key rate to determine the interest rate on debt.In the United States, there are two key rates: the discount rate and the Fed Funds rate.
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.
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.
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.
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.
A leverage ratio is meant to evaluate a company’s debt levels.The most common leverage ratios are the debt ratio and the debt-to-equity ratio.
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.
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.
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.
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.
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.
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).
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.
Loan loss reserves are accounting entries banks make to cover estimated losses on loans due to defaults and nonpayment. Let's assume Bank XYZ has made $10,000,000 of loans to various companies and individuals.
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.
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.
The London Interbank Offered Rate (LIBOR) is the base lending rate banks charge each other in the London wholesale money market. LIBOR is an average of inter-bank deposit rates offered by members of the British Bankers Association (BBA).
Long-term debt is debt due in one year or more.It is a key item that appears on a company's balance sheet.
Margin debt is debt obtained from buying on margin. Buying on margin refers to borrowing from a brokerage firm (through a margin account) to make an investment.
A mortgage cash flow obligation (MCFO) is a debt security that uses payments on a series of mortgages to fund principal and interest payments to MCFO holders. An MCFO pays interest and principal payments at a specified rate similar to a bond.
A negative gap occurs when a bank's interest-bearing liabilities exceed its interest-earning assets. Let's assume Bank XYZ has $40 million of interest-rate sensitive assets (mostly loans) and $70 million of interest-rate sensitive liabilities (CDs, savings accounts, etc.).
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.
Negative watch is a status that credit-ratings agencies assign to companies that might receive a lower credit rating in the future. Moody's, Standard & Poor's, and Fitch's are the three primary credit ratings agencies in the United States.
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.
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).
In banking, net settlement is simply the sum of the day's credits and debits. Let's assume XYZ Bank has the following activity today: Outflows:Cash withdrawals $400,000Debit card transactions $500,000Credit card transactions $300,000 Total $1,200,000 Inflows: Check deposits $275,000 CD purchases $100,000 Cash deposits $125,000 Total $500,000 Net settlement = $500,000 - $1,200,000 = -$700,000 Banks send their net settlement data to each other and to Federal Reserve bank banks in order to collect or pay amounts due from or to one another.
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.
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.
In the finance world, a note is debt. Notes are typically medium-term debt, but not always.
The notice to creditors is a way to inform creditors of their opportunity to make claims against a bankrupt company, an estate or other entity. Let's say Company XYZ files for bankruptcy.
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.
Past due means overdue.Typically, a bill is past due if the borrower is 30 days past the payment deadline.
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.
A payday loan is an advance on one’s paycheck.Independent lenders and some large banks offer the service.
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.
Prepackaged bankruptcy refers to a plan for reorganization under Chapter 11 that a company drafts in cooperation with its lenders. If a company determines that Chapter 11 bankruptcy is inevitable, it may first contact and meet with its lenders in order to formulate a mutually beneficial reorganization plan prior to any official proceedings.
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.
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.
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.
A qualification ratio is actually two ratios that banks use to determine whether a borrower is eligible for a mortgage.The two ratios generally are: Total Borrower Debt/Monthly Income Borrower's Total Monthly Debt Payments/Monthly Income For example, let's assume that Borrower X has $4,000 of monthly income and $30,000 of student loans and credit card debt, on which he pays $600.
A qualified mortgage insurance premium is a payment to insure a homeowner’s mortgage payments. Let’s say John and Jane Doe buy a house.
Qualifying ratios are ratios banks use to determine whether a borrower is eligible for a mortgage. The two qualifying ratios banks generally use are: Total Borrower Debt / Monthly Income and Borrower's Total Monthly Debt Payments / Monthly Income For example, let's assume that Borrower X has $4,000 of monthly income and $30,000 of student loans and credit card debt, on which he pays $600.Borrower X wants an 8%, 30-year, $250,000 mortgage.
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.
In personal finance, the term rating commonly refers to a credit rating score issued by the Fair Isaac Corporation (a "FICO score").A person's credit rating indicates how creditworthy he or she is.
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.
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.
Receivership is a form of bankruptcy in which a court-appointed trustee reorganizes the bankrupt entity. In a receivership, a receiver takes custody of the company's property and operations.
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.
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.
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.
A repurchase agreement is the sale of a security combined with an agreement to repurchase the same security at a higher price at a future date. It is also referred to as a "repo." For example, trader A may sell a specific security to trader B for a set price and agree to buy back the security for a specified amount at a later date.
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.
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.
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.
Also called a home equity loan, a second mortgage is secured by the equity in a house.Equity equals the value of the house less the balance owed on the homeowner's mortgage.
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.
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.
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.
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.
Solvency is a company’s ability to pay its debts as they become due. Solvency measures a company's ability to meet its financial obligations.
Sovereign debt refers to the amount of money a country owes to the holders of its government bond.In the United States, sovereign debt is issued by the Department of Treasury and the bonds are referred to as Treasuries -- Treasury notes, Treasury bonds, Treasury bills, etc., depending on the length of their issuance.
Structured finance is a complex financial instrument offered to borrowers with unique and sophisticated needs.Generally, a simple loan will not suffice for the borrower so these more complex and risky finance instruments are implemented.
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.
Subordinated debt is any outstanding loan that, should the borrowing company fail, it will be repaid only after all other debt and loans have been settled.It is the opposite of unsubordinated debt.
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.
A take-out lender is a lender whose loan replaces another loan. Let's say Company XYZ is a real estate development company.
A take-out loan is a loan that replaces another loan. Let's say Company XYZ is a real estate development company.
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.
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).
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).
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.
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.
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.
The U.S.League of Savings Institutions was a national organization of savings banks.
A UCC-1 statement is a written list and description of assets that serve as collateral for a loan. Let's say Company XYZ is a restaurant chain.
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.
An uncommitted facility is a borrowing agreement that allows the lender to determine how much it will lend to the borrower at a given time. Let's say Company XYZ needs extra cash once in a while because it has huge payroll expenses every two weeks and less predictable payments from customers.
In the real estate world, underwater means that a property is worth less than what is owed on it. For example, let's say John Doe buys a house for $500,000.
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.
An encumbrance is a limitation on the ownership of a property.When an asset is unencumbered, there are no limitations on its ownership.
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.
An unsecured creditor is a lender or any entity to which a company or individual owes money for services provided.That creditor, however, does not have any collateral from the borrower.
Unsecured debt is debt that does not have any collateral attached. If you borrow money from XYZ Bank, XYZ Bank becomes your creditor.
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.
In the finance world, an unsecured note is corporate debt that does not have any collateral attached.Unsecured notes are not the same as debentures, which are also unsecured corporate debt (but debentures usually have insurance policies that pay out when the borrower defaults).
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.
The utilization ratio compares an individual's total debt balances to total available credit.It helps determine part of a person's credit score.
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.
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.
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.
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.
Warehouse financing occurs when a lender lends to a borrower who uses inventory as collateral. Let's assume Company XYZ wants to borrow $2 million to expand its operations.
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.
A wet loan is a mortgage in which the borrower gets the funding before all the paperwork is done. Let's assume John Doe wants to buy the house for sale at 123 Main Street.
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.
The Z-score is a financial statistic that measures the probability of bankruptcy. The Z-score is used to predict the likelihood that a company will go bankrupt.A company's Z-score is calculated based on basic indicators found on its financial statements (e.g.
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.