Financing Terminology & Topics: A brief refresher on financing jargon

A brief refresher on financing jargon:

In many ways, financing is no different from many other business specialties in that specific words are used to describe various types of loans and their elements. These terminologies may be confusing to applicants and borrowers. Understanding them can help consumers make more informed credit decisions. 

To be sure you’re able to help your Customers understand, here are some commonly used words and their definitions.

Annual Percentage Rate (APR)
The cost of taking out credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of the payments made. This rate includes the interest rate, and any additional fees associated with the loan.

Applicant
A person applies to a creditor for an extension, renewal or continuation of credit.

Borrower 
A person who has applied for and received an extension of credit and become contractually liable for repayment of the principal amount, plus any applicable interest or fees, within a set period of time.

Co-borrower
A person who agrees to share the responsibility for paying back the loan with the primary borrower. Credit information and income from both applicants will be considered to determine loan qualification. 

Credit Limit or Loan Limit
The maximum amount of credit that a lender has agreed to extend to a borrower.

Credit Score or FICO Score
The national credit reporting agencies - Experian, Equifax, and TransUnion - use the FICO scoring system to rate potential borrowers on a scale from 300 to 850 which lenders use to determine how likely a borrower is to pay back their loan on time. Scores are based on financial history and current credit. 

Creditworthiness
An assessment of a potential borrower’s ability to repay a loan.

Deferred Interest Plans
Designed to offer borrowers an opportunity to avoid paying interest if the purchase balance is paid in full within a specified promotional period. While interest does accrue during the promotional period, the interest is waived if the purchase balance is paid in full before the promotional period ends. If the entire purchase balance is not paid before the promotional period ends, the borrower will be charged for accrued interest.

Fixed Interest Rate Plan
The interest rate and monthly payment amount generally remain the same for the entire term of the loan.

Hard Credit Check
When a company requests to review a credit report as part of the loan application process, the request is recorded as a hard inquiry. This inquiry will appear on later credit report requests and can have an effect on the consumer’s credit score. 

Interest Rate
The cost the consumer pays to the lender for borrowing money to finance the loan, on top of the principal loan amount, typically expressed as a percentage. 

Loan Amortization
An amortized loan requires fixed, periodic payments that are applied to both the principal and interest until the loan is paid in full.  

Loan Term
The amount of time (generally stated in months) it will take the borrower to pay off the loan, assuming regular payments are made in accordance with the loan agreement. 

Mixed Interest Rate Loan
These loans offer one interest rate for a specified initial term and another rate for the balance of the loan term. 

Principal
The total amount borrowed, not including interest. 

Secured Loan
A loan that requires collateral to ensure repayment. If the borrower does not repay the loan, the lender can seize the collateral. Examples include mortgages, home equity loans, and auto loans.

Soft Credit Check
Unlike hard credit checks, these inquiries have no impact on the consumer’s credit score. Examples of a soft credit check include checking your own credit and seeking pre-approval with a creditor. 

Unsecured Loan
Unlike a secured loan, collateral is not required. Examples of unsecured loans include personal loans, student loans, and credit cards.