Glossary of Credit Terms

When obtaining a loan or a credit card, there are some important terms you’ll need to understand in order to compare loans to each other. Here are some of the most important ones:

Annual Percentage Rate (APR)

The calculation as required by the Truth in Lending Act to express as a percentage the total of the financing charge paid by the borrower to the loan amount.

Average Daily Balance

Some lenders use the average daily balance to calculate interest. This calculation takes the sum of the daily balance for each day in the month and divides by the total amount of days.

Collateral

The property or personal effects pledged as security for a loan.

Collateralized versus Uncollateralized debt (aka secured versus unsecured debt)

Collateralized/secure debt is secured by property or personal effects (such as a mortgage, which is secured by the home), while uncollateralized debt has no collateral securing it (such as a student loan).

Compounding

When interest is charged on interest, rapidly increasing the amount owed.

Default

Failure to abide by the requirements of the note and the security instrument, most commonly a failure to make payments when they are due.

Delinquency

Failure to make payments when they are due.

Late charge

The penalty incurred for failing to make payments when due.

Minimum monthly payment

The amount that must be paid to keep the loan current. For credit cards, this amount doesn’t always cover the interest due.

Principal

The actual amount of loan as established by a note.

Subsidized

A subsidized loan is a loan where the account holder doesn’t need to pay interest for a specified period of time. The U.S. Government subsidizes some student loans.

Unsubsidized

Unsubsidized student loans accrue interest while the borrower is still in school.

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