Glossary of Common Terms

Amortization
The gradual reduction of a debt by periodic payments large enough to meet current interest payments and to repay the principal at maturity. The loan is repaid through regular, monthly payments of principal and interest paid for a pre-determined amount of time.

Application
Initial statement of personal and financial information that is required to process a loan.

APR
The "Annual Percentage Rate" is a yearly rate of interest paid. This also includes fees and costs paid to aquire a loan. Lenders are required by law to disclose the APR, and the rate is used to compare various loans available, making even simple interest and compound interest loans comparable.

APY
"Annual Percentage Yield" is a percentage rate reflecting the total amount of dividends paid on an account based on the dividend rate (APR) and the frequency of compounding for a 365-day period.

Assets
Items that have some monetary value for their owner. Assets can include buildings (your home, for example), a business's equipment, cash and long-and short-term investments.

Bond
A debt security issued by corporations or governments. It is a promise to pay the face value of the bond at maturity, along with interest payments at regular intervals.

Capital
The money initially invested.

Capital Gain
The profit made when an investment held as capital property is sold for more than it was bought. The opposite is a "capital loss".

Capital Loss
See Capital Gain.

Closing
The meeting during which the title to property actually changes hands, documents are executed and the sale of the property and/or the loan is completed.

Debit Card
Looks like a credit card, but is used to debit money directly from your checking account. In other words, it's a plastic check. An advantage of a debit card is that you can use it to do business with merchants that don't normally take checks, e.g. certain restaurants, mail-order companies, etc.

Direct Deposit
An option that allows you to have payroll checks, Social Security checks or other scheduled checks deposited directly into your checking or savings account. Direct Deposit saves you a trip to the bank, and provides the safety and security of the funds being deposited immediately to your account.

Discount Broker
A broker who charges lower commissions or trading fees but provides only the execution of trades without giving any advice.

Diversification
Spreading investment risk by buying different types of investments issued by different companies in different industries and/or different countries.

Dividend
The amount paid out to holders of a company's shares which represents a portion of the profit that company has earned.

Down Payment
The difference between the loan amount and the purchase price, usually paid immediately upon purchase in the form of cash or trade-in value.

Equity
The value of an owner's unencumbered interest in property. Equity is the difference between the property and the unpaid principle balance of the loan and any liens. Equity increases as the loan is paid down or as the property appreciates in value.

Finance Charge
The total dollar amount your loan will cost you. It includes all interest payments during the term of the loan, any interim interest paid at closing, your origination fee and any other charges paid to the lender or to a third party or an incident or a condition of the extension of credit. Certain charges like the appraisal, credit report and the title search charges are not included in the finance charge calculation.

Fixed Rate
An interest rate that remains locked in at the original rate for the duration of the loan or deposit (the opposite of a variable rate).

Gross Income
For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Interest
The charge made for the use of someone else's money. If you borrow money, you pay interest to the lender. If your investment earns interest, that is what you receive for allowing someone else to use your money.

Interest Rate
The periodic charge, expressed as a percentage, for use of credit.

Lien
An encumbrance against property for money due, either voluntary or involuntary.

Liabilities
Debts, or money owed to someone else. Because this money is not readily available to pay for other financial obligations, banks ask about your liabilities when they are reviewing a loan application.

Loan to Value Ratio (LTV)
The ratio of the amount of your loan to the value of an asset.

Lock or Lock In
A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and subsequently, close the loan and receive the funds you have borrowed.

Mortgage
A legal document that uses property as collateral to secure payment of a debt.

Principal
Amount of debt, not including interest.

Qualifying Ratios
The ratio of your fixed monthly expenses to your gross monthly income, used to determine how much you can afford to borrow.

Return
Income and/or capital gain earned or realized on an investment.

Tax-deductible
An investment that can be deducted over the course of a year from your taxable gross income. Money you invest in a 401K retirement account and interest you pay on a mortgage are two items that are usually tax-deductible.

Tax-deferred
An investment that allows you to defer your owed taxes and pay them at a later date, often at a point when you are in a lower tax bracket (retirement age, for instance). An example is the interest you earn on an IRA. Please consult a tax advisor to determine if interest is tax deductible.

Term
The length of time you will make payments on your loan. Typical auto loans have terms of 24, 36, 48 or 60 months.

Title
Written evidence that proves the right of ownership of a specific property.

Trade-in Value
The amount that the dealership will credit you for the vehicle you provide as partial or full payment for another vehicle.

Underwriting
Process of verifying data and approving a loan.

Upfront Costs
Upfront costs are any fees and charges collected at the time of the loan, as opposed to over the life of the loan.

Upside-down
A situation which occurs when the value of your vehicle is lower than the outstanding balance of the loan secured by the vehicle.

Variable Rate
An interest rate that may change during the term of the loan or deposit (the opposite of a fixed rate).