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401(k)
Workers can contribute a portion of their salary into their employer’s sponsored retirement plan. Taxes are not paid until the money is withdrawn. Employers may match a percentage of employee contributions up to a certain percentage.
403(b)
A 403(b) plan is a type of retirement account, typically for government employees or workers of a non-profit organization.
A
Accrued Interest
Loan interest that builds on itself and has been incurred on the loan, but has not been paid out yet.
Adjustable-rate mortgage (ARM)
A loan for which the interest rate (coupon rate) is periodically adjusted to reflect changes in a previously selected index rate. The rate of an ARM can vary, unlike a fixed rate loan which remains the same. ARMs may have caps and floors that limit the annual and/or the lifetime change in the coupon rate.
Alternative Mortgage
Not a standard fixed-rate mortgage home loan. Reverse and jumbo mortgages, plus Adjustable Rate Mortgages (ARM’s) are types of Alternative Mortgages.
Amortization
The reduction of a debt or loan amount that occurs with regular, ongoing payments.
Annual Return
The one year return on an investment, either profit or loss.
APR (Annual Percentage Rate)
“Annual Percentage Rate (APR)” is the interest rate that is charged annually to borrowers. The “APR” is the percentage that reflects the actual yearly income earned on funds invested, or cost of a loan.
Appraisal Fee
A professional appraiser will charge a fee to provide their assessment of how much your property is worth. The fee is approximately a few hundred dollars or so for for an average home.
B
Balance Sheet
A financial statement that reports a company’s assets, liabilities, and shareholder equity is a balance sheet. A balance sheet provides a snapshot of a company’s finances (what it owns and owes) as of the date of publication.
Balloon Payments
A balloon payment loan will have one lump-sum payment at the end of that loan.
Bankruptcy
Bankruptcy involves a legal process for people or other entities who cannot repay their debts to creditors to seek relief from some or all of their debts.
Blue-book-value
Blue-book-value refers to an object’s worth, especially vehicles. The name stems from Kelley Blue Book, which is considered the authority on car values. For vehicles, various factors are considered, such as the year, make, model, and the vehicle’s condition.
Borrower
A bank or similar financial institution lends money or other asset to a borrower, which it may lend to an individual or an organization.
Budget Counseling
Financial counselors review clients’ current spending patterns, discuss financial goals, optimize spending strategies, and create spending plans and action plans that allows clients to take charge of their financial situation on both on a month to-month basis and in the long term.
Buying Power
Buying power is also referred to as purchasing power. It factors in the effect of inflation on the amount of goods and services that can be purchased by a specific unit of currency.
C
Cash-value
Cash-value typically refers to life insurance that has a cash-value that can be withdrawn or borrowed against.
CFPB (Consumer Finance Protection Bureau)
The Consumer Financial Protection Bureau (CFPB) is a U.S. government agency. The purpose of the CFPB is to provide connsumer protection regarding finances, pursuing businesses that defraud consumers with unfair and illegal practices.
Chapter 7 Bankruptcy
Also known as a liquidation bankruptcy or straight bankruptcy. It is the quickest form of filing and wipes out most debts within months of filing. With this type of consumer bankruptcy, the debtor is not required to pay back debts owed from before the filing. This bankruptcy filing record will remain on your credit report for a decade.
Chapter 11 Bankruptcy
Chapter 11 Bankruptcy is typically used for businesses that wish to reorganize their debts and stay in business, so it is known as a “reorganization bankruptcy.”
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is essentially a repayment plan type of bankruptcy, where the debtor pays back a portion of their debt to creditors over a three to five year plan.
Charge-off
A charge-off is when a debtor has not paid on a debt for a very long time, so that the account becomes delinquent. This is usually for a period of at least 180 days. At that point, the lender may charge-off the debt, since it wasn’t paid on for so long. It is written off as a loss and the account may be turned over to collections. The debtor is still legally obligated to pay the debt.
Closing-costs
Expenses that a buyer pays at the time a real estate transaction is completed. This includes application fees, underwriting fees, loan-origination fees, and possibly more.
Collection Agency
A debtor who fails to pay on their debt may have their debt go to collections, approximately six months after missing payments. A collection agency will then pursue the debtor for the debt, typically for a fee or percentage of the total amount owed.
Compound Interest
Whenever interest is earned on previously built up interest as well as the principal. It is the interest earned on interest.
Consumer Debt
Consumer debt consists of personal debts that are owed as a result of purchasing goods that are used for individual or household consumption. Credit card debt, student loans, auto loans, mortgages, and payday loans are all examples of consumer debt. These stand in contrast to other debts that are used for investments in running a business or debt incurred through government operations.
Co-Signer
A co-signer is someone who guarantees a debt for someone who’s applying for a loan or a credit card by signing along with them. If the borrower can’t pay, the creditor will go after the co-signer to pay.
Credit Bureaus
A credit bureau, also known as a credit reporting agency or credit reporting company, is an organization that collects and researches individual credit information and sells it to creditors for a fee, so they can make decisions about granting loans and credit card offers. The three main credit bureaus in the U.S. are Equifax, TransUnion and Experian.
Credit Consolidation
Credit consolidation is also referred to as “debt consolidation.” This consolidation is designed to transfer consumer debt, including credit card balances, to one lender, with the goal of reducing the debtor’s interest rate to a lower rate.
Credit Counseling
Credit counseling typically involves a certified credit professional counseling individuals and couples on credit and debt, through budgeting, education and additional tools. Goals include increased credit and debt knowledge, pros and cons of various approaches, greater financial stability, and reducing and ultimately eliminating debt.
Credit History
A credit history is a borrower’s debts and repayment of debts, including how much is owed and how timely the debtor has paid. A credit report contains the borrower’s credit history from multiple sources, including banks, credit card companies, collection agencies, and governments.
Credit Repair
Credit repair typically refers to identifying and disputing credit reporting errors. In a broader sense, it also includes a strategic approach of improving one’s credit profile for the purpose of optimizing credit scores.
Credit Score
A credit score is usually a number between 300–850, depending upon the specific credit score model being used. That score depicts a consumer’s creditworthiness. The higher the score, the better a potential borrower looks to lenders. A credit score is based on credit history, including how well that debtor has paid in the past and how much debt the debtor currently owes.
D
Debt
Debt is however much money a borrower owes.
Debt Consolidation
Debt consolidation is also often referred to as “credit consolidation” which is a form of debt refinancing that involves taking out one loan to pay off multiple others.
Debt Counseling
Debt counseling is also often referred to as “credit counseling” and is typically offered through credit counseling agencies.
Debt Management Plan
A debt management plan (DMP) is a method that has been used by many people to become debt free. It is a formal agreement between a debtor, a credit counseling firm and creditors. The debtor agrees to make a single, regular payment to the counseling firm, which distributes it among creditors on an agreed-upon schedule. Credit card companies offer some concessions to debtors who enter debt management plans by typically lowering interest rates, lowering monthly payments and re-aging accounts as current after a few months of payments on a DMP.
Debt Settlement
Debt settlement is settling a debt for less than what is actually owed. It is the agreement reached between a creditor and a borrower in which a reduced payment from the borrower is regarded as full payment. An accepted debt settlement deal is an agreement to reduce the total amount of debt owed.
Debt-to-Income Ratio
The percentage of your monthly pre-tax income that is used to pay off debts such as auto loans, student loans and credit card balances. There are two specific ratios that lenders utilize: 1) Front-end ratio, in which lenders look at the percentage of monthly pre-tax income that is spent on mortgage payments, and 2) Back end-ratio, which includes other debt obligations besides just the house payment.
Default Risk
Default risk calculates the possibility of a borrower not repaying their loan obligation. If a borrower has a a poor credit score and limited cash resources, they are a much higher default risk than if they had a good credit score and moderate cash resources.
Delinquency
A missed or late payment on a debt, including loans and credit cards accounts is delinquency. The consumer’s account are typically referred to as 30, 60, 90 or 120 days delinquent due to the majority of lenders having monthly payment cycles. A delinquency hurts a consumer’s credit score and it can remain on a person’s credit report for 7 years.
Disbursement
Paying out money is referred to as disbursement. A non-profit credit counseling organization, for example, will disburse a client’s money out to creditors on a Debt Management Program each month.
Discharge
The term “discharge” refers to part of the bankruptcy process. It is also referred to as an “absolute discharge.” When a debtor has declared bankruptcy has legally met all the requirements to resolve their debts, they are released or “discharged” from their obligations. They have successfully completed the bankruptcy process.
E
Equal Credit Opportunity Act (ECOA)
ECOA is a federal law that protects credit applicants from discimination from creditors based on race, color, sex, religion, age, marital status or if they receive public assistance.
Equity
An investment or security that represents ownership in a corporation. Equity is often referred to as stock. Compare to a bond, which represents a loan to a borrower.
F
FAFSA
A college student wishing to receive any type of federally-funded financial assistance must complete the Free Application for Federal Student Aid., which will determine if they receive any aid.
Fair Isaac Corporation (FICO)
FICO is the main credit scoring company that businesses use in the United States. The San Jose, California data analytics company’s FICO score is a measure of consumer credit risk, and has become a fixture of consumer lending in the U.S. Contrary to popular belief, there are actually multiple FICO credit scoring models that lenders can choose from, not simply one.
Foreclosure
When a borrower can no longer make payments on a mortgaged property, the property will eventually go into foreclosure and the lender will then assume legal ownership of that property.
G
Garnishment
A creditor can take a percentage of your paycheck or money from your bank account to collect money you owe. This is called a garnishment. Typically, a court order is required to produce a judgment of a garnishment.
Good Standing
On a credit report, an account in good standing is one that is being paid as agreed, or one that is paid off.
Gross Income
Gross income is what someone earns before any taxes or other deductions are taken out of the funds. It’s referred to as gross pay when it relates to someone’s paycheck. Gross income refers to income from all sources, not just employment. It can also include services received and property, not just income received in cash.
Gross Interest
The annual rate of interest to be paid on a security, an investment, or deposit account before taxes or other charges are deducted is gross interest. It is usually the headline interest rate attached to a fixed-income security such as a CD or a bond, a loan, or a deposit account.
H
Hard Credit Check
Whenever you apply for some kind of credit, such as a credit card or a loan, the lender will pull a copy of your credit. This is referred to as a “hard pull” or “hard credit check” because it will take a few points off of your credit score. FICO credit scoring says it can vary, but it’s approximately five points.
Home Equity Conversion Mortgage (HECM)
A type of reverse mortgage, a home equity conversion mortgage (or HECM) is insured by the Federal Housing Administration (FHA). These are home equity conversion mortgages that can allow senior citizens to convert the equity in their home into cash.
Home Equity Loan
A home equity loan allows homeowners to access their home’s equity. This is the amount that your home could be sold for, minus the amount that is still owed. For example, a home that is worth $300,000 that has a loan balance of $200,000 would have a home equity amount of $100,000. Typically, homeowners often use a home-equity loan for various home improvements, finance their child’s college education, buy a new car or even take a dream vacation. Usually the interest that is paid is tax-deductible. However, because the loan is secured by the home’s equity, if the borrower defaults, the bank may foreclose on the home, thus taking ownership of it.
Homeowner’s Insurance
Protects the homeowner from damage to the home, property, and belongings. Homeowner’s insurance is normally required if the homeowner has a mortgage loan on the home. The insurance, however, does not cover any damage because of flooding. Flood damage is a separate insurance policy.
I
Identity Theft
When someone uses your personal information without your consent, including your name, Social Security number, or a credit card, typically to buy things in your name.
Interest
A borrower typically pays a fee to a lender in the form of interest for using that money. An individual may earn interest on their money deposited at a bank or credit union for depositing money in certain types of accounts.
Involuntary Bankruptcy
Involuntary bankruptcy is a legal procedure that creditors request that a business or a person go into bankruptcy. Involuntary bankruptcy can be requested by creditors if they believe they will not be paid unless bankruptcy proceedings occur.
J
Joint Credit
Joint credit is any type of credit that is issued to two or more people and typically based on their assets, combined incomes and credit histories. The involved persons share responsibility for the debt, including the credit limit and the obligation of paying it back to the lender. Joint credit can particularly be helpful when one person has bad credit, no credit, or little credit, who wouldn’t normally qualify for that credit on their own individual merit.
L
Liability
A liability is typically a sum of money that an individual or a company owes. Over time, liabilities are settled through the transfer of economic benefits including goods, services or money. Liabilities are recorded on the right side of a balance sheet and include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.
Lien
A lien is legal claim against a person’s property, such as a house or a vehicle, as security for a debt. For example, a contractor might place a lien on someone’s home who failed to pay for work the contractor did on the home. The debtor’s property cannot be sold without first paying off the lien. There are also tax liens. A unpaid tax lien can remain on someone’s credit report forever. However, if a tax lien is paid, it can remain for 15 years from the date it was paid off.
Line of Credit
A borrower may get a flexible loan from a lender, that is a line of credit. It is a specific amount of money that the borrower can access as needed. As soon as money is borrowed, interest is charged on it. The borrower can repay what was borrowed either over time in regular monthly payments, or immediately.
Liquid Assets
Liquid assets are cash or things that can quickly be turned into cash, such as a certificate of deposit. Money in bank accounts count as cash.
Liquidity
The ease that an asset or security can be converted into cash without affecting its market price, is liquidity. Cash is, of course, the most liquid asset of all.
Loan Deferment
A lender might allow you to get your loan deferred if you experience a financial hardship.When loan payments are deferred, that means payments do not need to be made during that time, but the interest on the loan may continue to grow, resulting in a higher amount of debt that is owed. It also means that the loan debt will last longer because it has been extended due to being deferred.
Loan-to-Value (LTV) Ratio
This refers to a credit analysis ratio that measures collateral coverage. An LTV ratio is calculated by the total sum of the borrower’s obligations to the bank divided by the total calculated value for the collateral. For example, if the total collateral value is estimated to be $100,000 and the total amount of the borrower’s obligations to the bank is $80,000, then the LTV ratio is 0.80 or 80 percent.
Longevity Risk
The risk of outliving your retirement funds due to living longer than originally expected.
M
Mortgage
A mortgage is a loan that the borrower uses to purchase or maintain a home or other form of real estate. The borrower agrees to pay back the loan over time, typically in a series of regular monthly payments. The property serves as collateral to secure the loan. Thirty-year mortgages have consistently been the favorite among borrowers.
Mortgage Delinquency
A delinquent mortgage involves a home loan for which the borrower has failed to make payments as originally agreed in the loan documents. A mortgage is considered to be delinquent or late when a scheduled payment is not made on or before the due date.
N
Net Income
Net income is someone’s income after cost deductions such as taxes. A paycheck with a gross pay of $500, for example, might end up netting perhaps only $350 after taxes and various other payroll deductions have been taken out.
Nonprofit Organization (NPO)
A nonprofit organization is a business that has been given tax-exempt status by the Internal Revenue Service (IRS) because it furthers a social cause and provides a public benefit. No one owns a nonprofit agency. The management team is overseen by a board of directors. Donations made to a nonprofit organization are typically tax-deductible to individuals and businesses that make them, and the nonprofit itself pays no tax on the received donations or on any other money earned through fundraising activities. Nonprofit organizations are sometimes called NPOs or 501(c)(3) organizations based on the section of the tax code that permits them to operate.
O
Origination
An origination is a multiple step process for getting a home or mortgage loan that the individual must do. Additionally, the term also applies to various other types of amortized personal loans.
Origination Fee
This is a fee that a lender charges the borrower for up front whenever processing an application for a mortgage loan. This fee is charged for processing the loan. A loan origination fee is usually between 0.5% to 1% of a mortgage loan. It is quoted as a percentage of the total loan.
P
PITI
An acronym that stands for the factors that comprise a mortgage payment, which are: principal, interest, taxes and insurance.
Prepayment Penalty
If a lender charges a borrower a fee for paying off their loan before the end of its scheduled term, that is a pre-payment penalty. Most lenders do not use prepayment penalties, but it is wise for all potential borrowers to carefully review the terms of their loan offers before agreeing to a loan to see if this fee is included.
Prime Rate
The lowest interest rate that a bank will charge its best or “prime” customers, is the prime rate. Banks will each state their own prime-lending rate that is available to consumers. Typically, the credit card interest rate that is given to consumers is usually based on the prime rate, plus a certain percentage.
Principal
The amount of money that is borrowed on loan is the principal. It is only the amount that was borrowed; it does not include any fees or interest.
Property-tax
A tax paid on real estate to the local government. The tax is usually based on the value of the property (including the land) you own.
R
Reaffirmations
Whenever a debtor who is going through the bankruptcy process does not try to discharge a debt in bankruptcy and wishes to continue their access to certain credit, they can reaffirm their debt and agree to new terms with their lenders.
Refinancing
Refinancing typically refers to revising an existing loan agreement, such as a mortgage. Also known as a “refi”, the consumer or business requesting the refi is basically seeking more favorable terms, such as a lower interest rate. If the refinancing is granted, a new borrowing contract will replace the original contract.
Repossession
If a borrower defaults (has missed several payments) on a loan, then the creditor may “repossess” or take possession of that vehicle or any collateral as agreed to in the loan contract.
Residual Interest
Residual interest is interest that’s charged in the days between the time that your credit card bill is sent to you and the time when the card company later receives your payment. However, for those who pay their credit card balance on-time and in full each month, no interest is charged because it was paid in full during that grace period.
Reverse Mortgage
A reverse mortgage is a type of mortgage loan that is usually secured by a residential property, which allows the borrower to access the unencumbered value of the property.
Revolving Credit
Revolving credit permits an account holder to repeatedly borrow money up to a set limit while repaying a portion of the current balance in regular payments. Each payment (minus the interest and fees) replenishes the amount available to the account holder. Credit cards are the most common type of revolving credit.
Risk Score
Occasionally, a credit score may be referred to as a risk score, as the creditor/lender is taking a risk that the borrower will pay as agreed.
S
Statute of Limitations
Debt collectors and creditors have a statute of limitations limited time period to file a lawsuit in an attempt to recover a debt owed to them. Although it may be longer, most statutes of limitations are between three to six years. This can vary according to state laws.
Secured Loans
Sometimes a consumer won’t have an established credit history or has poor credit, in which case they could be denied credit, or granted a secured loan. If a loan is secured, property (such as a car or home) is used as collateral. In the event that the borrower does not pay back the loan, the lender will take the collateral to get their money back. Other negative consequences of non-payment can include: The lender turning over the debt to a debt collection company, the negative information can be added to the debtors credit report, and the creditor may sue the debtor.
Soft Credit Check
Obtaining a copy of your credit report is referred to as a “soft pull” or “soft credit check.” vs. applying for credit. Also, whenever a potential employer checks your credit, and pre-approved credit offers are considered a “soft credit check.” Soft credit checks do not have a negative impact on your credit score.
Student Loan
Loans college students obtain for education purposes. This borrowed money may be from a private lender or the federal government. Students typically use the funds to pay for various college costs, including tuition.
Student Loan Counseling
Student loan counseling is a service for debtors who already have student loan debt (not counseling students at the front end of getting the loans). This debt repayment counseling can help debtors find the current status of their student loans, and develop a repayment strategy that best fits the bigger picture of their financial situation.
Student Loan Servicer
A company that tracks loans and collects payments on a borrower’s student loans and handles related tasks regarding the loans.
Subprime Borrower
A subprime borrower refers to someone who has poor credit and typically fails to meet the qualifications for standard or “prime” credit and loan offers. Subprime borrowers are considered a much higher risk for the lender, as they are statistically more likely to not repay their debt repayment obligation.
T
Terms
The agreement fine print that a borrower accepted from the lender, relating to their debt.
Total Annual Operating Expenses
The total annual cost expenditure of what it costs to operate an investment. Expenses are typically shown as a percentage of an investment’s assets, a dollar amount or in basis points. These costs are paid through a reduction in the investment’s rate of return. See expense ratio and operating expenses.
U
Unearned Income
Any income that is not obtained by working. Also referred to as passive income, some examples include monetary gifts and interest from savings accounts and investments.
Unsecured Debt
An unsecured debt has no assets to secure (or back up) that debt. Types of unsecured debt would include medical debt, personal loans, and credit card debt.
Usury
Loaning money at an incredibly high interest rate is considered usury. Although many states have usury laws that cap the maximum interest rates that can be charged, a Supreme Court ruling in 1978 allowed credit card companies and other lenders to ignore usury laws if the lender is headquartered in a state that does not have them. Not surprisingly, as a result, most major card issuers headquarters are now located in states with no usury laws. That basically neutralized state usury laws, so therefore most credit cards’ interest rates are not capped and can legally charge usurious rates.
Utilization Ratio
The ratio between the credit limits on your accounts and the actual outstanding balances that a consumer is using. It shows lenders how much of the available credit is being used overall. The lower the percentage, the better for the debtor. For example, owing $1,000 total credit card debt on a $10,000 total credit card credit limits would be only a 10 percent utilization. Owing $8,000 of the $10,000 total credit limit would be a 80 percent utilization and will be looked at very negatively by lenders. A low utilization ratio of 10% is very positive for a consumer’s credit score, while a high utilization ratio of 80 percent would be very negative, lowering a credit score and could result in being rejected for any additional credit.
V
Variable Rate Loan
If a loan’s interest rate is not fixed, but variable, then that interest rate can vary over the life of the loan term, based on any changing market interest rates. Usually the interest rate is connected to the Prime rate and the variable loan rate adjusts as the Prime rate does.
W
Wage
Financial compensation employees receive for their work. Wages are typically calculated by multiplying the employee’s hourly rate of pay times the number of hours worked.
Withholding
Withholding is funds withheld from an employee’s wages which is not included in their paycheck but instead withheld from their pay and remitted directly to local, state and federal tax authorities. Withholding reduces the amount of tax employees must pay when they file their annual tax returns. Some people choose to increase their withholding to ensure they do not owe taxes. Other people choose to significantly increase their withholding to ensure they receive a large tax refund. The amount withheld can be determined by marital status, income, the number of dependents, and any additional specified amount withheld.