Debt & Bankruptcy
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 fir...
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 go...
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. The basic idea...
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...
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. Let's assume...
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 i...
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 ...
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. It's a contract ...
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 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 ...
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 U...
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 wil...
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. The commercial pa...
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. For exampl...
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...
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 th...
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. They license...
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. Added together, ...
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 ...
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 ba...
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 perio...
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...
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) i...
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 ...
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...
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. Let's assume that Broker XYZ ...
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 acco...
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 Currenc...
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. In the middle of t...
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 the...
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. Individuals, partnerships, or...
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. Individuals, the self-employed, and those ope...
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. Individuals, partnerships, or corporations can file...
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. C...
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 ...
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 M...
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. Let's assume you ...
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. Let...
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. Commerci...
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 t...
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. In the a...
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 ...
A credit card is issued by a financial institution that lets you borrow money to make a purchase. According to a recent Experian report, the average American holds 4 credit cards. Not only are credit...
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. Lenders a...
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 ...
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 measur...
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. In corp...
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: TransUnio...
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. While the definiti...
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 informat...
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 cr...
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. Personal credito...
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,...
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. The company is certain there will be de...
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 b...
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 ta...
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. Making this $14,000 ...
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 c...
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 Chap...
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.   ...
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 outst...
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 ...
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 ...
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. Di...
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 informatio...
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. Brad Johnson in Portland, Ore...
An encumbrance is a limitation on the ownership of a property. In the real estate world, an encumbrance is similar to a lien. The bond world also includes encumbrances. For instance, let's consider ...
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. The Euro LIBOR is also somewhat sim...
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 company is...
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 ...
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 FCRA s...
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 an...
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, ...
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...
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...
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 reser...
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 fee...
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 ...
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 i...
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. Company XYZ offers you a floating interest rate loan at prime...
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 ...
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 rat...
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. You forg...
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...
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. The interest rate is 4% with  a 30-year mortgage. His monthly pay...
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. Home mortgages generally range from 10 to 30 years. The two m...
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 tot...
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, ...
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 installme...
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 pl...
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...
An interchange rate is a bank fee for executing credit card and debit card transactions. An interchange is an electronic transfer of information. In the business world, this usually involves financi...
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 "price" of borrowing that money is interest, and it is expressed as a percent...
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...
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...
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 env...
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. It is published daily. The...
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 $...
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 s...
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. For exampl...
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. Junior mort...
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. To understand key rates...
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. For example, let's say John Doe has lost money on every trade h...
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. Lenders are creditors, but not all creditors are l...
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...
*/ 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 a...
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. A debt ratio is simply a company's total debt divide...
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. The gift certificates ent...
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 lo...
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...
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 repa...
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 co...
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 expe...
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 takin...
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 i...
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 ...
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. For...
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 o...
Long-term debt is debt due in one year or more. It is a key item that appears on a company's balance sheet. Let's assume Company XYZ borrowed $12 million from the bank and now must repay $100,000 of...
Margin debt is debt obtained from buying on margin. Buying margin refers to borrowing from a brokerage firm (through a margin account) to make an investment. Let's assume you want to buy 1,000 shar...
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 mi...
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 securi...
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 ...
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 Joh...
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 al...
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 transa...
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. The biggest...
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. Compa...
In the finance world, a note is debt. Notes are typically medium-term debt, but not always. For example, Treasury notes (T-notes) are intermediate-term bonds issued by the U.S. Treasury. They mature...
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. As part of...
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 ba...
Past due means overdue. Typically, a bill is past due if the borrower is 30 days past the payment deadline. For example, let's assume your credit card payment is due on December 15. You forget to ma...
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 o...
A payday loan is an advance on one’s paycheck. Independent lenders and some large banks offer the service. John Doe’s checking account has $12 in it but he has to pay the guy who fixed his refri...
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. In some ca...
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, i...
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 differe...
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 $2...
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 Tot...
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. They obtain a mortgage to buy the home, but because they d...
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 Borr...
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. It has tried sev...
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 secur...
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 ...
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 c...
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. Company XYZ offers you a variable interest rate loan at prime plu...
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. Pa...
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 ...
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, t...
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 Compa...
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 l...
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 studen...
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. Second mortgages are not...
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. Here's anot...
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. Here's another example: let...
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 cred...
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 ...
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. Short-term solvency is often measured by the current ...
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 refer...
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 ris...
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 tota...
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 t...
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...
A take-out lender is a lender whose loan replaces another loan. Let's say Company XYZ is a real estate development company. It owns a piece of land at a busy intersection and decides to build a huge...
A take-out loan is a loan that replaces another loan. Let's say Company XYZ is a real estate development company. It owns a piece of land at a busy intersection and decides to build a huge apartment...
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. For example, let's assume that John does his taxes on ...
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...
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 s...
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. Let's s...
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. It meets with its bank, ABC Bank, to negotiate the loa...
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 Truth in Len...
The U.S. League of Savings Institutions was a national organization of savings banks. Founded in 1892, the U.S. League of Savings Institutions promoted banking standards, professionalism and issues ...
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. It borrows $5 million from Bank ABC, which require...
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 o...
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 bec...
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. He makes a down payment on the house and ...
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. He makes a down payment on the house and bor...
An encumbrance is a limitation on the ownership of a property. When an asset is unencumbered, there are no limitations on its ownership. To understand what unencumbered means, it's important to unde...
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. Even if you have an excellent credit ...
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. If you borr...
Unsecured debt is debt that does not have any collateral attached. If you borrow money from XYZ Bank, XYZ Bank becomes your creditor. Utility companies, health clubs, phone companies and credit card...
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. Even if you have an excellent credit rating, a bank may be...
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 debe...
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 (c...
The utilization ratio compares an individual's total debt balances to total available credit. It helps determine part of a person's credit score. The utilization ratio is also called the credit util...
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. Company XYZ offeres you a variable interest...
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 ...
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....
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 ...
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. It has used up all of its...
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 af...
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-da...
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 b...
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....
Zombie debt is debt that won't die.   Let's say John Doe ran up a $10,000 credit card bill in his 20s. He works out an agreement with the credit card company, pays $2,000, and is told that the res...