Financial Terms & Definitions
The process of paying off a balance over a predetermined amount of time in regular, equal payments. By knowing what payments to expect every period, it gives the borrower a clear pathway out of debt.
Read more about amortization.
A person who receives a loan from a lender and, in turn, must repay the loan according to an arrangement worked out between the two parties.
Read more about borrowers.
Cycle of Debt
The cycle of debt is the negative cycle of spending more money than what is brought in, then borrowing money or taking on credit card debt to pay for increasing costs. If something is not done to stop the cycle, it eventually leads to default.
Read more about cycle of debt.
An individual’s debt-to-income ratio is all of their monthly debt payments divided by their monthly gross income. The computed outcome is a way for lenders to measure the ability of an individual to manage the payments they will have to be making every month in order to repay the money that was borrowed.
Read more about debt-to-income ratio.
When a borrower defaults on a loan, it means they have stopped making payments towards the amount, resulting in sometimes serious implications such as additional fees, legal intervention, and more.
Read more about defaulting on a loan.
A provision on a loan which allows payment to be received within a period of time after the actual due date. No late fees will be charged during this typically short period, and it does not result in cancellation or default of the loan.
Read more about grace periods.
A specific dollar amount that an individual receives from a lender and agrees to pay back. The borrower is then set up on a schedule of payments with each installment being the same amount, spread out over a length of time. This amount consists of two parts: the principal and the interest.
Read more about installment loans.
When an individual takes out a loan, they must also make additional payment to the lender in exchange for use of the money. This additional payment is added onto the principal amount and is determined by the annual percentage rate (or APR) dictated by the lender. Interest is paid over the period of time it takes to pay the loan back in its entirety.
Read more about interest.
The total amount of interest that is paid over the term of the loan. This can be determined by taking the total paid and subtracting the principal amount.
Read more about interest paid.
A fee that the lender charges to an individual borrowing money. Generally, it is the amount of interest due per period expressed as a percentage of the principal on the loan.
Read more about interest rates.
Military Lending Act (MLA)
A regulation enacted in 2007 and updated in 2015 by the Department of Defense that provides certain protections and restrictions in lending practices for service members, their spouses, and their dependents.
Read more about the Military Lending Act.
The total amount of money paid from month-to-month, consisting of the principal, the interest rate, and the full term of the loan put together.
Read more about monthly payments.
People interested in taking out a loan may seek out a lender who will then check things like their income and credit history to verify their ability to repay the loan. Included in this pre-approval is the individual’s creditworthiness as well as the amount of money they are able to take out.
Read more about pre-approval.
Principal is a base loan amount a borrower accepts before any interest rates or fees are applied to a loan.
Read more about principal.
The total amount of time it will take for the borrower to pay off a loan received from a lender.
Read more about terms.
A term that means the full amount paid for the loan. It is computed by the monthly payment times the number of payments.
Read more about total paid.
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