Types of Credit

Loan

An agreement where you are credited with a fixed amount (usually of money) for a fixed period of time, usually with interest

Good Faith Estimate

An estimate of the fees due at closing for a mortgage loan that must be provided by a lender to a borrower within three days of the lender taking a borrower's loan application.

Micro Credits

An extremely small loan given to impoverished people to help them become self employed.

Credit

Any arrangement where you get "stuff" (money, goods, services), and agree to pay for it in the future

Revolving credit

Open line of credit that can be used for any purchases as long as you're under the limit; payments vary monthly based on size of the debt

Penalty Annual Purchase Rate (APR)

Penalty annual percentage rates (APRs) are higher interest rates that can be triggered by the slightest infraction such as just one payment that is received a day late.

Co-signer

Someone who legally agrees to take responsibility for a person's debt if they cannot repay it

Collateral

Something valuable that the lender can take as payment if you can't pay back your loan (like a house or car)

Cash Allowance

The allowance is a rebate or discount that is applied to the vehicle price or provided as "cash back," which the customer can receive as a rebate check in the mail.

Manufacturer's Suggested Retail Price (MSRP)

The amount of money for which the company that produces a product recommends that it be sold in stores. MSRP does not necessarily correspond to the price retailers actually use or to the price customers are willing to pay.

Term

The amount of time you have to repay your principal

Principal

The amount you borrow

Annual Percentage Rate (APR)

The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan.

Dealership Financing

The buyer and dealer enter into a contract where the buyer purchases a vehicle and agrees to pay, over a period of time, the amount financed plus a finance charge.

Default

The failure to promptly pay interest or principal when due. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt.

Joint Account

A bank or brokerage account that is shared between two or more individuals. Joint accounts are most likely to be used between relatives, couples or business partners who have a level of familiarity and trust for each other, as this type of account typically allows anyone named on the account to access funds within it.

Credit Card

A card issued by a financial company giving the holder an option to borrow funds. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual's credit rating.

Cash Back

A cardholder benefit offered by some credit card companies that pays the cardholder a small percentage of their net expenditures (purchases less refunds). Cash back benefits often provide the cardholder with the opportunity to choose from taking the cash, or using the "points" for purchases, travel (as with miles awards for air travel) or gift cards.

Home-Equity Loan

A consumer loan secured by a second mortgage, allowing home owners to borrow against their equity in the home.

Lease

A contract by which one party (like a car dealer) conveys property (like a car), to another (like a customer) for a specified time, usually in return for a periodic payment.

Well-Qualified Buyer

A customer who can take advantage of special financing or lease terms because the seller deems them "well-qualified".

Home Equity Line of Credit (HELOC)

A line of credit extended to a homeowner that uses the borrower's home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates.

Consolidation Loan

A loan that combines two or more education loans into a single loan, allowing the borrower to make a single monthly payment. Consolidation is available for both federal and private loans

Credit Union

A member-owned financial co-operative. These institutions are similar to banks, except they are created and operated by their members and profits are shared amongst the owners.

Peer-to-Peer Lending

A method of debt financing that enables individuals to borrow and lend money - without the use of an official financial institution as an intermediary.

Fixed-Rate Mortgage

A mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated.

Debit Card

A payment card that deducts money directly from a consumer's checking account to pay for a purchase. Unlike credit cards, they do not allow the user to go into debt, except perhaps for small negative balances that might be incurred if the account holder has signed up for overdraft coverage.

Authorized User

A person who has permission to use and/or carry another person's credit card, but isn't legally responsible for paying the bill.

Cash Advance

A service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash, either through an ATM or directly from a bank or other financial agency. Cash advances typically carry a high interest rate - even higher than credit card itself - and the interest begins to accrue immediately.

Direct PLUS Loans

A student loan offered to parents of students currently enrolled in post-secondary undergraduate education (or to graduate students). With a Direct PLUS loan, the parent borrows money on the student's behalf.

Subsidized Direct Loans

A student loan that the federal government pays interest on as long as the student is in school half-time.

Unsubsidized Direct Loans

A student loan where the student is responsible for the interest during the time they are in school. They can pay that interest while studying or have it rolled into the loan.

Schumer Box

A table that appears in credit card agreements showing basic information about the card's rates and fees.

Secured Credit Card

A type of credit card that is backed by a savings account used as collateral on the credit available with the card. Money is deposited and held in the account backing the card.

Adjustable-Rate Mortgage (ARM)

A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month.

Down Payment

A type of payment made in cash during the onset of the purchase of an expensive good/service. The payment typically represents only a percentage of the full purchase price; in some cases it is not refundable if the deal falls through.

Unsecured debt

Debt NOT tied to a specific asset or that cannot be repossessed if payments are not made

Secured debt

Debt tied to a specific tangible asset that can be used as collateral and reposed if payments are no tmade

Residual Value

How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, its residual value is how much it is worth after three years.

Mortgage

Instruments used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear.

Variable-rate loan

Interest rate can change, based on prime rate or index rate, over the course of the loan

Fixed-rate loan

Interest rate is determined before loan is granted and remains constant as long as ontime payments are being made

Installment loan

Loan used to finance a specific purchase for a specific amount of time; regular payments pay the interest and portion of the principal

Grace Period

The number of days between a consumer's credit card statement date and payment due date when interest does not accrue. The grace period is a window of time during which a consumer owes money to a credit card company for new purchases made during the last billing cycle but isn't being charged interest.

Amortization

The paying off of debt with a fixed repayment schedule in regular installments over a period of time

Interest Rate

The percentage charged for the privilege of borrowing money

Default Rate

The rate of borrowers who fail to remain current on their loans. It is a critical piece of information used by lenders to determine their risk exposure and economists to evaluate the health of the overall economy.

Minimum Payment

The smallest amount of a credit card bill that a credit card holder must pay each billing cycle.

Balance Transfer

The transfer of all outstanding balances from one credit card to a new credit card. Credit card balance transfers are typically used by consumers who want to move their debt to a credit card with a lower interest rate, fewer penalties or other benefits, such as reward points or travel miles.

Home Equity

The value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage payments. This value is built up over time as the property owner pays off the mortgage and the market value of the property appreciates.