Glossary of Lending Terms

Plain-language definitions of the words you'll encounter when shopping for a loan. If something's missing, it probably shouldn't be in your loan agreement either.

Amortization

The process of paying off a loan in regular installments, where each payment covers both interest and a portion of the principal. Early payments are mostly interest; later ones are mostly principal.

APR (Annual Percentage Rate)

The yearly cost of a loan including interest and most fees, expressed as a percentage. APR is usually higher than the stated interest rate and is the best number to use when comparing loans.

Asset

Anything of value you own — cash, a car, a home, investments. Lenders look at assets to gauge your financial stability and ability to repay.

Bankruptcy

A legal process for people or businesses that can't pay their debts. It can discharge some debts but damages your credit for years and makes borrowing harder.

Borrower

The person or business receiving the loan and responsible for paying it back.

CDFI

Community Development Financial Institution — a lender certified by the U.S. Treasury to serve low-income and underserved communities with fair-rate loans and financial services.

Character lending

An underwriting approach that weighs a borrower's reputation, references, rent history, and personal circumstances alongside credit scores. Common at CDFIs.

Collateral

Property you pledge to secure a loan. If you don't repay, the lender can take the collateral — a house in a mortgage, a car in an auto loan.

Cosigner

A second person who signs the loan and agrees to pay if the primary borrower doesn't. A cosigner with good credit can help someone with thin credit qualify.

Credit score

A three-digit number (usually 300–850) that summarizes how reliably you've paid past debts. Higher scores generally unlock lower rates.

Credit union

A nonprofit, member-owned financial cooperative. Many CDFIs are credit unions, and they typically offer lower rates than banks for members.

Debt-to-income ratio (DTI)

Your monthly debt payments divided by your monthly gross income. Lenders use DTI to judge whether you can afford a new loan; below 36% is generally considered healthy.

Default

Failing to repay a loan according to its terms. Default triggers penalties, damages credit, and can lead to collections or loss of collateral.

Delinquent

Behind on payments but not yet in default. A loan is typically delinquent the day after a missed payment.

Down payment

Money you pay upfront toward a large purchase like a home or car, reducing the amount you need to borrow.

Eligibility

Whether you meet a lender's basic requirements to apply — such as residency, income, age, or credit minimums.

Equity

The portion of an asset you truly own, free of debt. Home equity, for example, is your home's value minus the mortgage balance.

FICO

The most widely used brand of credit score, created by the Fair Isaac Corporation. Ranges from 300 to 850.

Forbearance

A temporary pause or reduction of loan payments granted by the lender, usually for hardship. Interest often still accrues during forbearance.

Grace period

A short window after a payment's due date during which no late fee is charged. Not every loan has one.

Hardship

A financial setback like job loss, illness, or disaster that makes it hard to pay bills. Lenders — especially CDFIs — may offer hardship programs.

Installment loan

A loan repaid in fixed, scheduled payments over a set period. Mortgages, auto loans, and most personal loans are installment loans.

Interest rate

The percentage the lender charges you to borrow money, applied to the outstanding balance. It does not include fees — see APR for total cost.

Late fee

A charge added when you miss a payment's due date, usually a flat amount or a small percentage of the payment.

Lien

A legal claim a lender holds on your property until the debt is paid. A mortgage places a lien on your home.

Loan term

The length of time you have to repay a loan. Shorter terms mean higher monthly payments but less total interest.

Microloan

A small loan, often under $50,000 and sometimes as small as a few hundred dollars, typically used for small business startup or personal emergencies. A common CDFI product.

Mortgage

A loan used to buy real estate, secured by the property itself. If you don't pay, the lender can foreclose and sell the home.

Origination fee

An upfront fee the lender charges to process and issue a loan, typically 1%–6% of the loan amount.

Personal loan

An installment loan for personal use — debt consolidation, medical bills, emergencies — usually unsecured and repaid over 1–7 years.

Predatory lending

Loans designed to trap borrowers in debt through deceptive terms, excessive fees, or unreasonably high rates. Payday and title loans are classic examples. CDFIs exist as an alternative.

Prequalification

A lender's early, informal estimate of how much you might be able to borrow, based on basic financial info. It's not a guarantee or a full approval.

Principal

The original amount of money borrowed, not including interest. Each payment reduces the principal a little.

Refinance

Taking out a new loan to replace an existing one, usually to get a lower rate, a longer term, or to change loan type.

Secured loan

A loan backed by collateral. Secured loans typically carry lower rates because the lender has something to repossess if you default.

Term

The length of time over which a loan is repaid (see 'Loan term'). Also used loosely to refer to any condition of the loan agreement.

Underwriting

The lender's process of evaluating a loan application — reviewing credit, income, debt, and collateral — to decide whether to approve it and at what rate.

Unsecured loan

A loan with no collateral, approved based on creditworthiness alone. Most personal loans and credit cards are unsecured.

Variable rate

An interest rate that can change over time, usually tied to an index. Variable-rate loans start lower than fixed but can rise — making future payments uncertain.