Glossary
Loan terms, in plain English
The words lenders use, defined without the jargon — and with the part that actually affects your rate, payment, or approval.
A
Amortization The schedule that splits each payment between interest and principal. Early payments are mostly interest; the balance flips near the end of the term. APR Annual percentage rate — the interest rate plus mandatory fees, expressed as one yearly cost. The only honest way to compare two loan offers.
B
C
Charge-off When a creditor gives up trying to collect a debt through normal billing and writes it off as a loss — typically after 180 days of non-payment. Co-borrower A second person who shares ownership of what a loan financed and is equally responsible for repaying it from the start. Credit freeze A free lock you place on your credit file that blocks new lenders from accessing it — the strongest defense against identity-theft fraud. Credit limit The maximum you can borrow on a revolving account like a credit card — a key input to your credit utilization ratio. Credit report The detailed record of your borrowing history that your credit score is calculated from — maintained by the three national bureaus. Credit score A 300–850 number summarizing your credit risk. It is the single biggest lever on the rate a lender offers you. Credit utilization ratio The share of your available revolving credit you are currently using — the second-biggest factor in your credit score, after payment history. Credit-builder loan A small loan whose proceeds are held in a locked account while you make payments — designed purely to build a payment history.
D
E
F
FICO score The most widely used credit-scoring model among lenders, built by Fair Isaac Corporation — often used interchangeably with "credit score," though VantageScore is a common alternative. Fixed rate An interest rate that never changes for the life of the loan — your payment is the same every month.
H
L
Lien A legal claim against property that secures a debt — the lienholder can force a sale to collect if the debt goes unpaid. Line of credit A revolving credit limit you can draw from, repay, and draw again — you pay interest only on what you actually use. Loan-to-value ratio The loan amount divided by the property's value, expressed as a percentage — a core number in mortgage and home-equity underwriting.
P
PMI Private mortgage insurance — a monthly premium that protects the lender, not you, when your down payment is under 20%. Prepayment penalty A fee some lenders charge for paying a loan off early. Rare on consumer loans, common in commercial lending — always check the note. Promissory note The legal document where you promise to repay a loan under specific terms — amount, rate, schedule, and what happens on default.
S
Secured A loan backed by an asset the lender can seize if you default — a house, a car, or a deposit. Secured credit card A credit card backed by a cash deposit you make upfront — the deposit becomes your credit limit, and it is the standard tool for rebuilding credit. Short sale Selling a home for less than what is owed on the mortgage, with the lender's approval — an alternative to foreclosure. Soft credit check A credit check that does not affect your score — used for pre-qualification, background checks, and checking your own report. Subprime loan A loan made to a borrower with a low credit score, priced with a higher rate to offset the added default risk.