Explained: Financial Jargon

Have you ever been scared away from pulling the trigger on applying for a loan, making an investment, or even opening a checking account simply because you could not understand the financial jargon that was thrown at you? You are not alone.

In the financial world, there are so many different obscure terms uttered that it can be confusing for even the most financially savvy individual, but the truth is, the meanings behind the terms are pretty easy to comprehend. All it takes is a little explanation.

19 Financial Terms Explained

Are you lost in the sea of financial jargon? If so, this article will help you find your way back to shore by providing you with the explanations you need.

Amortization

The gradual repayment of a loan over time through regular payments that cover both principal and interest. In an amortized loan, early payments primarily go toward interest, while later payments mostly cover the principal balance.

APR

Otherwise known as the annual percentage rate, the APR refers to the total cost of your loan. This important distinction between the interest rate of your loan and the APR is one that many borrowers can get tripped up on.

When applying for a loan, you will be quoted an interest rate for that loan as well as an APR. The APR will always have a higher percentage rate. You must pay close attention to the APR, as it is the actual percentage rate you will be paying on the loan.

The APR is a combination of the interest rate on your loan as well as the fees the lender charges you as part of lending you the money. Several types of fees can go into the APR. Some of those fees include:

• Points. "Point" is a funny term for costs to originate the loan. Points pay the lender back for the upfront costs they had to incur to offer you the loan. Points can also include discount points, which is money you pay upfront to decrease your interest rate over the life of the loan. Despite the odd description, points are expressed as percentages.
• Admin fees. An administration fee is often an annual fee that is a percentage of the initial principle of the loan. It is a finance charge paid to the lender for lending you the loan.
• Loan-processing fees. Loan processing fees include costs such as documentation preparation expenses, meeting expenses, and application processing expenses.
• Underwriting fees. An underwriting fee is essentially a payment to the lender for taking on the risk of offering you a loan.
• Pre-paid interest. Pre-paid interest is merely the interest that you owe from the date that you closed on your loan at the end of the month during which you closed.

Borrower

The borrower is the individual taking out the loan and is responsible for making all repayments when due. If you are applying for a loan, you are the borrower in the lending situation.

Collateral

When applying for a loan, a lender may require that you provide some sort of collateral should you suddenly become unable to pay back the debt. Collateral is usually some type of physical asset, such as a home or land, that the lender can seize if you fail to make payments.

Cosigner

A person who signs a loan agreement alongside the primary borrower and becomes equally responsible for repaying the debt. Cosigners typically help borrowers with limited credit history or lower credit scores qualify for loans by adding their stronger credit profile to the application.

Credit Score

Your credit score is a big factor in determining your creditworthiness. A credit score ranges from 300 to 850, with a higher number indicating a higher level of creditworthiness. Lenders of loans will first check your credit score when you apply for a loan to aid in the loan application process and help them determine an appropriate interest rate for the loan.

Several systems generate a credit score for an individual. However, the FICO score is the score most commonly accepted and used by lenders.

Debt-to-Income Ratio (DTI)

A percentage that compares your monthly debt payments to your monthly gross income. Lenders use DTI to evaluate your ability to manage monthly payments and repay debts. A lower DTI ratio suggests you have a good balance between debt and income.

Default

Defaulting on a loan means that you have consecutively missed payments on your loan in the manner agreed upon in the terms of the loan. When you default on a loan, this is a contractual breach, meaning the lender has the right to take legal action against you.

Deferment Period

In some cases, once a loan has been closed and repayment has begun, principal and interest payments can be postponed for a specified period. This is called a deferment period. Often, the borrower must provide certain documentation determined by the lender to be eligible for deferment.

Delinquent

When reading your loan documentation, you may come across references to delinquency. This fancy and maybe scary word simply means that you, the borrower, have failed to make an installment payment when due.

Forbearance

Similar to deferment, forbearance allows you to temporarily stop making payments or reduce your monthly payment amount for a specific period. Interest typically continues to accrue during forbearance periods.

Interest Rate

The interest rate is the amount the lender charges the borrower on top of the principal, which is the loan amount, to borrow from the lender. The interest rate is reflected as a percentage of the principal, and it is because of this interest rate that the amount repaid by the borrower over the life of the loan will be more than the amount of money initially borrowed.

Lender

The lender is an individual or group that lends money to an individual or business with the expectation that those funds are repaid in a responsible and timely manner. The lender will assess the individual applying for the loan, check their creditworthiness, and will determine the interest rates and terms offered to the potential borrower.

Origination Fee

A fee charged by lenders to process a new loan application. It covers the costs of credit checks, loan processing, and underwriting. The fee is typically a percentage of the total loan amount and is often included in the APR.

Pre-Approval

A preliminary evaluation by a lender that indicates how much you might be able to borrow and under what terms. Pre-approval usually involves a soft credit check and doesn't guarantee final loan approval.

Principal

The original amount borrowed in a loan, not including interest or other fees. Your monthly payments typically include both principal and interest portions.

Promissory Note

The promissory note is the legally binding contract between the lender and the borrower that states that the borrower will pay the lender back for the loan by a particular date that was agreed upon in the terms of the loan.

Refinancing

The process of replacing an existing loan with a new loan, typically with better terms such as a lower interest rate or monthly payment. Refinancing can help save money over the life of the loan or make payments more manageable.

Term

The term of your loan is the duration you will be repaying the debt. For instance, your loan could have a longer-term, such as 30 years, or a shorter term, such as 15 years. A person with a higher credit score is more likely to secure longer-term loans, which typically results in a lower monthly payment.

Understanding these financial terms will help you navigate the lending process with confidence and make informed decisions about your financial future.

Simple Fast Loans makes applying for a loan as simple and quick as possible. The financial jargon used during the loan application process can be confusing, so hopefully, these few explanations will help clear things up and make you feel a bit more confident as you embark on the process!