32 Confusing Loan Terms Explained

Loans can be confusing. When you apply for a loan, all sorts of terms will be thrown around at you. Deciphering these terms can be confusing unless you happen to be a  finance major. Here are some of the more common terms that you might come across and what they mean.

  1. ABA Routing Number – These are the numbers on the bottom of your check that identify the bank. The ABA numbers and the account number will both be found on the bottom of your check.  lender may need these numbers to send you money or to accept payments.
  2. APR – You might think that this is just the interest on a loan but it is not. An APR includes all closing costs and fees in addition to the interest.
    When comparing different loans, you will want to compare the APR of each, it gives you a way to compare them fairly because it takes all the hidden fees into account.
  3. Asset – Something that you own that has value and can be used as collateral for a loan. This is property that the lender can take if you default on a loan.
  4. Assignment – This is when a loan is transferred to another lender. Your obligations stay the same, you would just have to pay a different lender. Loans are often sold to other lenders. Commonly a lender will issue a loan and then immediately sell it to another lender along with a package of other peoples loans.
  5. Back End Compensation – This is money that is paid to a lending institution by the funder of the loan. An example of this could be money paid to a car dealership by a bank that issues a loan. This is another way auto dealers make money off of the sale of a vehicle
  6. Balloon Payment – A large payment that is due at the end of a loan. Used to lower the payments made during the course of a loan but with a cost. This used to be used commonly by auto dealerships to provide low monthly payments. Usually not a good idea.
  7. Co-borrower – A person who will take financial responsibility and title interest in a loan. They are responsible for the loan and have rights to the property.
  8. Co-signer – A person who will take responsibility for a loan but has no interest in the title.In other words if you default on a loan, this person is on the hook but they have no claim to the property. People establishing credit often require a co-signer.
  9. Collateral – An asset that is used to secure a loan. It is property that can be seized in the event of loan default. In other words, if you don’t make your payments, they can take this property.
  10. Credit Score – Your credit score is typically a number between 300 to 850. It represents your ability to repay a loan.The higher your score, the more likely you are to get a loan and the lower your interest rate will be.
    With poor credit, many borrowers have few options other than payday loans which is why it is important to maintain a good credit score. Luckily, there are lost of ways to improve your credit.
  11. Default – Failure to meet the terms of the loan. Typically failing to make the agreed upon loan payments.
  12. Delinquent – A lender becomes delinquent when they fail to make a payment on time. If you are late on your loan payment, you are delinquent.
  13. Emergency Loan – Any loan that is issued quickly with little underwriting. The most common examples of emergency loans is the cash advance or payday loan. You can get a quote on an emergency loan here.
  14. Equity – The difference between what the property is worth and what you owe on the loan. If you owe more than your property is worth, you have negative equity. If you owe less than it is worth, you have positive equity.
  15. Gross Income – The total amount of money that you make before any deductions from state and federal taxes.
  16. Installment Loan – A loan that has fixed payments over a fixed amount of time. You make a regular monthly payment over a set amount of months. An example is a 60 month car loan. The loan would be divided into 60 equal monthly payments. Get an installment loan quote here.
  17. Late Fee – A fee that a lender can charge you if you do not make your payments on time. This will be specified in the loan terms. Some lenders may provide a grace period where no fee will be charged for a certain amount of days after the payment is due, but not all do this.
  18. Lien – A claim to ownership of a piece of property until a debt has been paid. With  car loan, the lender will have a lien on the title until the loan is paid back.
  19. Line of Credit – A fixed amount of capital that can be borrowed and paid back. This is an amount of money that you can borrow again and again.
  20. Net Income – The amount of money that you make after all state and federal taxes are taken out. In other words, your take home pay.
  21. Origination Fee – A fee a lender may charge to cover the costs of providing the loan. Do not confuse this with an application fee. With application fees, you pay that amount no matter what, just for applying. An origination fee is charged when the loan is funded.
  22. Payday Loan – A loan issued by a lender that is paid back on the borrowers next payday.  These are often high fee loans due to be paid back in two weeks or less. Little credit is required to get one.
  23. Principal – The amount that you are borrowing, not including interest. When you make payments, a portion of the payment will go to paying down the principal and the rest will go to interest and any fees or additional costs.
  24. Refinancing – Paying off a loan by taking out a new one. You would usually refinance a loan to secure a lower interest rate or with the case of a home to possibly pull money out to pay off other bills.
  25. Secured Loan – A type of loan where collateral is put down. An example is a car loan where the bank can take the car back if you do not make the payments.
  26. Servicer – A company who handles the administration of the loan for a lender. They accept the payments and handle all of the other loan details for the lender. Kind of like your go between.
  27. Term – The length of the loan. This is a fixed time period in which the loan will be paid back. A car loan might have a term of 60 months while a payday loan might have a term of 10 days.
  28. Truth In Lending Act – Requires lenders to disclose the terms of the loan in a standard format. This makes it easier to compare different loans to determine the best deal with the lowest cost to you.
  29. Underwriting – The process in loan approval where the risk of lending is analyzed based on credit, employment status, assets and many other factors. The lender looks at everything you are bringing to the table and decides if you are a good risk.
  30. Unsecured Loan – A type of loan where there is no collateral being put down. An example of this is a payday loan or credit card advance. If you default, the lender can not go after what you bought with the money.
  31. Usury Laws – Laws that require lenders to not exceed the maximum interest that can be charged for lending.
  32. Variable Rate – An interest rate that can change over the course of the loan. Rates will change based on market conditions. These should be used with caution as your payments can drastically change over time.





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James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.