Financial Terms Glossary
ACH (Automated Clearing House) – ACH is an electronic system that connects banks in the United States. The system enables the banks to instantly send each other money during the business week (typically Monday-Friday).
ACH Authorization – Once you give someone ACH Authorization, they can deposit or withdraw money directly to or from your bank account. They can only deposit or withdraw dollar amounts that you have approved, and they can only do so on dates that you have agreed to. Giving ACH Authorization can help you avoid missing payment deadlines.
APR (Annual Percentage Rate) – The annual percentage rate, or APR, is the yearly cost of a loan given as a percentage of the amount borrowed. The yearly cost includes both interest and other loan fees.
Arbitration – Arbitration is a way to resolve contract disagreements without using the court system. When two people or companies disagree, a third person will decide who has the better argument. The third person can legally require the loser to pay the winner or to take some other action, resolving the disagreement.
Auto Lease – An auto lease is an agreement where a person pays to use a vehicle for a set amount of time (usually 2-5 years). It is cheaper to lease a vehicle than it is to buy, but the vehicle returns to the owner at the end of the lease period. Some auto leases allow the borrower to buy the vehicle at the end of the lease term.
Auto Loan – An auto loan is a loan taken to purchase a vehicle. The borrower pays off the loan at regular time intervals over the loan term. Auto loans are typically secured by the vehicle purchased, meaning that the lender can take ownership of the vehicle if the borrower fails to make their payments.
Bad Credit – Bad credit refers to low credit scores. Scores around 669 and lower are considered bad, and borrowers with credit scores in that range are considered subprime (see subprime loans definition below).
Balance – A balance is the amount of money in a bank account or an amount of money owed to a lender.
Bank Verification – Bank verification is used by lenders to prove that the borrower is who they claim to be and to verify the activity in the borrower’s account. Lenders typically rely on other companies, like Quovo or Yodlee, to perform bank verifications.
Bankruptcy – Bankruptcy is a last-resort option for someone that cannot pay what they owe. In bankruptcy, the person’s property may be sold to repay as much debt as possible before most remaining debts are dropped. Bankruptcy can cause major damage to a person’s credit score.
Budget – A budget is a tool for tracking how much money a person has available for the week, the month, or the year. The available money is calculated by subtracting the money going out (rent, utilities, groceries, and other expenses) from the money coming in (paychecks, interest, and other income). The remaining amount can be saved or used to pay off debt. Available money = Money in – Money out
Checking Account – A checking account is a bank account that allows customers to deposit and withdraw money. Customers can make withdrawals using ATM cards, paper checks, and debit cards.
Collateral – Collateral is property (like a home or a car) that the borrower will have to give to the lender if the borrower is unable to pay back the loan according to the terms of the loan agreement.
Collection Agency – A collection agency is a company that buys overdue loans and tries to collect the money owed from the borrowers. Collection agencies can be aggressive and may even sue borrowers for what they owe.
Collection Costs – Collection costs are the costs to a debt collector of collecting money owed by a borrower.
Conditional Approval – When a lender gives conditional approval for a loan, they are expressing interest in lending the specified amount of money based on what they know about the applicant so far. However, before the lender gives final approval, they will review more information, such as that obtained through bank verification (see above).
Covenant – A covenant is part of a loan agreement describing actions the borrower must take or actions the borrower must not take.
Credit – When banks and credit unions give customers credit, they are allowing the customers to buy things now and pay for them later. For example, when you buy something with a credit card, you have not actually paid for it until you pay your credit card bill. Credit is commonly used to purchase everyday goods and services like groceries and car repairs. Installment credit, which is credit given for a specific purchase, can be used for bigger items like furniture and appliances.
Credit Bureau – Credit bureaus gather individuals’ financial information, which they use to create credit reports (see below). Lenders pay the credit bureaus for credit reports, which help them evaluate how likely a person is to pay back a loan. The three main credit bureaus are TransUnion, Experian, and Equifax. Each is required by law to provide you with your credit report upon request for free once a year. Visit annualcreditreport.com for information on requesting copies of your reports.
Credit Counseling – Credit counseling is a service where counselors provide financial education and other support to help borrowers manage problems with debt.
Credit Entry – In banking, a credit entry is any transaction that adds money to your bank account.
Credit History – A person’s credit history is a record of what they have borrowed and how they have repaid their debts.
Credit Report – A credit report is a summary of a person’s credit history that includes information from credit bureaus, banks, stores, and collection agencies. It also includes public court records, information on borrowings, bill payment records, and applications for credit. Each year, the 3 major credit bureaus (TransUnion, Experian, and Equifax) are required to provide you with a free copy of your credit report upon request. Visit annualcreditreport.com for information on requesting copies of your reports.
Credit Score – Credit scores (also called credit ratings) are used by lenders to decide whether a person is likely to pay back a loan. Your credit score is based on your bill payment history, how much money you owe, the age of your credit history, the types of credit you have, and the number of times others have requested your credit report.
Creditor – A creditor is someone that lends money with the expectation of being paid back in the future. The future payment usually includes an interest charge plus the amount of money borrowed.
Creditworthiness – Creditworthiness is a description of a borrower’s likelihood of paying back a loan based on their credit history and credit health. Lenders use credit scores and reports to evaluate a potential borrower’s creditworthiness.
Debit Card – When you use a debit card to make a payment, it directly reduces the amount of money in your bank account by the purchase price. Debit cards are different than credit cards, which you can use to buy things now while promising to pay later.
Debit Entry – In banking, a debit entry is any transaction that removes money from your bank account.
Debt – Debt is any money you owe. When you borrow money, you take on debt that you are required to pay back based on the terms of the loan agreement.
Debtor – A debtor is someone that owes someone else money. You become a debtor when you borrow money or buy something now with a promise to pay later.
Default – Default means failing to keep the promises agreed to in a contract. If you take a loan and do not make the payments described in the loan agreement, you have defaulted on the loan.
Depository Institution – Depository institutions are organizations, including banks and credit unions, that are legally allowed to accept money from people to hold as cash deposits.
Direct Deposit – Setting up direct deposit enables someone (usually your employer) to electronically deposit money into your bank account without using a paper check.
Direct Loan – A direct loan is a loan made directly from a lender to a borrower. Direct loans differ from brokered loans, where a 3rd party connects the lender and borrower.
Dishonored Payment Fee – A dishonored payment fee can be charged by a company when you try to pay them with a check or electronic payment and the bank rejects the payment. Rejections usually happen when the amount you tried to pay is more than the amount in your account (see NSF definition below).
Finance Charge – When you take a loan, the finance charge is the amount of money you agree to pay in addition to the amount borrowed.
Installment Loans – When you take an installment loan, you agree to make a series of payments until you have paid back the amount of money borrowed plus any interest and fees.
Interest – Interest is the cost of borrowing money. It is usually presented as the percentage of borrowed money that the loan costs each year.
Late Charge – A late charge is a fee you will have to pay if you fail to make a payment on-time, based on the terms of the loan agreement.
Loan – A loan is an amount of money given from a lender to a borrower with the promise that the borrower will pay the lender back. Typically, the amount the borrower pays back includes a fee for borrowing the money called interest, as well as other fees for processing the loan.
Loan Agreement – A loan agreement is a formal document signed by a lender and a borrower agreeing to the terms of a loan. The terms describe how much money the borrower will receive, what borrowing fees they will pay, and how much they will pay back on specified dates.
Loan Forgiveness – Under certain circumstances, specific types of student loans may be cancelled, or forgiven, before they have been fully paid off this is referred to as loan forgiveness. To be eligible, a borrower typically must employed in certain public-service occupations, along with other qualifications.
Loan Period – The loan period is the amount of time the borrower has to repay the borrowed money plus any interest and fees they committed to in the loan agreement.
Loan Rollover – A loan rollover happens when a borrower cannot repay a loan within the loan term and instead pays a fee to extend the length of time they have to pay.
Military Lending Act – The Military Lending Act (MLA) restricts lenders from giving loans with interest rates higher than 36% to active-duty service members. It was enacted in 2006 and implemented by the US Department of Defense.
Money Order – A money order is a payment method that removes the risk of dishonored payment fees (see above) and NSF fees (see below). It is a paper document similar to a check. However, unlike a check, you pay for a money order up-front instead of when it is cashed. You can buy money orders at the post office, as well as some grocery and convenience stores.
NSF Fees – NSF (non-sufficient funds) fees are charged when you try to withdraw more money, by writing a check or making an electronic withdrawal (see ACH and debit card), than was available in the account. In some cases, when this happens, the company you tried to pay will also charge you a dishonored payment fee.
Origination Fee – An origination fee is an amount paid by the borrower to the lender at the time the loan is made to cover the cost of processing the loan.
Overdraft Fee – An overdraft fee is like an NSF fee (see above), but unlike with NSF fees, the bank will cover the difference between the amount you tried to pay and the amount of money that was your account.
Overdraft Protection – Bank customers can pay the bank for overdraft protection, which protects them from being charged overdraft fees (see above) if they attempt to withdraw more money than they have in their checking account. If an overdraft occurs, the bank will either give the account owner credit to cover the payment or will enable them to cover the payment using a credit card linked to the account.
Peer-to-Peer Lending – Peer-to-peer lending is a type of lending where one person borrows money directly from another, rather than borrowing from a bank or other financial institution. Peer-to-peer lending is also known as P2P lending, person-to-person lending, and social lending.
Pending Direct Deposit – When your bank account shows ‘direct deposit pending’ it means that the bank is aware of an incoming payment and is in the process of verifying it.
Personal Debt – Personal debt is any money owed by an individual or household. Debts owed by a business or government are not considered personal debt.
Personal Loans – When money borrowed from a lender (typically a bank, credit union or online lender) that is usually paid back in fixed monthly payments. Personal loans are specified to an individual, not a business, and lenders make their decision on who to lend to and how much interest to charge based on factors including credit score, income, and debt-to-income ratio.
Prepayment – Prepayment is when a borrower pays back a loan early (before it is due).
Presentment – Presentment is the presentation of information to a court.
Principal – Principal is the amount of money borrowed as a loan. By the end of the loan period, the borrower will have paid back principal plus any interest and fees owed to the lender.
Promissory Note – A promissory note is an agreement to pay someone a specific amount of money on a certain date.
Recurring Income – Recurring income is the portion of this period’s money coming in that you expect to receive regularly in future periods.
Refinancing – Refinancing is the process of paying off an old loan with money borrowed through a new loan. The new loan typically has better terms, such as lower monthly payments or a longer loan period.
Remotely Created Payment – Remotely created payments are checks that the owner of a checking account has given someone else permission to write on their behalf. For instance, you can give a lender permission to write checks that reduce the amount of money in your checking account in order to pay off your loan.
Repossession – Repossession occurs when a lender takes ownership of the loan collateral (see above) in response to the borrower’s failure to make payments described in the loan agreement.
Rescission – Rescission is the act of cancelling a contract and returning the people that signed it to the positions they were in before they made the agreement.
Soft Credit Check – A soft credit check or a soft inquiry is performed by financial institutions to determine the creditworthiness of their customers. It is referred to as ‘soft’ because these credit checks do not affect the borrower’s credit score, in contrast to hard credit checks.
Subprime Lending – Subprime lending is the practice of making loans to borrowers with low credit scores (below 670). As borrowers with low scores are considered less likely to pay back the money they borrow, these loans generally have a higher interest rate.
Underwriting – Underwriting is the process used by lenders to decide how much money, and at what interest rate, to lend to someone.
Unsecured Loan – An unsecured loan is a loan backed solely by the borrower’s ability to repay the debt according to the loan agreement. Unsecured loans do not involve the use of collateral (see above).