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Acceleration Clause
The clause within a loan agreement that allows a lender
to demand full payment of the outstanding loan amount.
This clause only normally takes affect after the
borrower has missed several monthly payments.
Amortization
The repayment of a loan amount at regular intervals.
Loan payments are usually made on a monthly basis and
continue until the principal plus the accrued interest
is repaid.
Amortization Term
The length of time needed for a borrower to repay their
loan amount, plus the accrued interest, when regular,
fixed monthly payments are made to the account.
Amortization terms range from 1 year through to 30+
years.
Annual Adjustment Cap
The maximum degree to which the interest rate on an
outstanding loan can change through the course of one
year. Most annual adjustment caps are set at 2% which
means the interest rate of a specific loan can’t
increase or decrease more than 2% in a single year.
Annual Percentage Rate
Also known as APR, this is the amount of interest
charged on the outstanding balance of a loan over the
course of a year. Loan providers offer a range of APRs –
the one offered to a borrower often depends on the sum
wanting to be borrowed and the risk class that the
borrower falls into.
Application Fee
The fee charged by some loan providers to cover the cost
of administration and conducting a credit check. Large
loan providers tend to waive the application fee if the
application proves to be successful.
Bad Credit Loan
Small loans that are offered to individuals with a poor
credit history. Because of the high risk of default
these loans come with very high annual percentage rates.
If the loan is successfully paid back on time however
these loans can help to repair a bad credit history.
Base Rate
The base interest rate as set out by the Federal
Reserve. All loan providers calculate their interest
rates according to the national base rate i.e. when the
base rate increases so does the interest charged on the
majority of loans.
Collateral
Property or possessions used as security for a loan. If
the borrower defaults on the loan payments the
collateral can be seized as an alternative form of
payment. Large loans often require some form of property
as collateral.
Commitment
The promise provided by a lender to lock-in a discounted
interest rate on a loan product for a specified period
of time. Although a commitment is generally associated
with a mortgage loan it can be offered to individuals
taking out a personal loan as well.
Commitment Fee
The fee charged by a lender to ensure a commitment (see
above).
Co-borrower
An individual who signs a loan agreement along with the
primary borrower e.g. a spouse or business partner. Both
individuals are equally liable for the debt and both see
the benefit of the sum being borrowed.
Co-signer
An individual who acts as a guarantor on a loan
application and becomes liable for the debt should the
primary borrower default on the repayments. A co-signer
rarely makes use of the money themselves and simply
agrees to repay the loan in the event of a default.
Construction Loan
A loan paid out in instalments directly to a building
contractor e.g. in the building of a new property. Once
the building work has finished the loan become repayable
by the property owner/borrower according to the terms
set out in the loan agreement.
Debt Consolidation
When a loan is taken out in order to repay several
outstanding debts e.g. credit cards. Personal loans
generally have lower interest rates than credit cards
and so consolidating several debts into one single one
is a common way of cutting interest payments and
repaying debts more quickly.
Default
When a borrower fails to make the required monthly
repayments to an outstanding loan they are said to have
defaulted. Occasionally a lender with grant a grace
period before taking further action. (See Grace Period)
Deferment
The ability to take a loan repayment break for a limited
period of time because of hardship. Not all lenders
offer this benefit and interest is still charged on the
outstanding amount, however deferment does offer a way
for a borrower to continue with loan repayments in the
future and avoid default.
Grace Period
The period of time granted by a lender to make a payment
before a loan account is determined to be in arrears.
Most lenders offer a grace period of between 10 and 31
days which means monthly payments can occasionally be
made late without charges being applied.
Home Equity Loan
A specific type of loan whereby money is borrowed using
the equity in a property as collateral. If a borrower
defaults on a home equity loan there is the chance that
they will lose the property in question.
Jumbo Loan
A loan that exceeds a value of $325,000. Jumbo loans are
also commonly known as non-conforming loans as they fail
to conform to the guidelines set out by the Federal
National Mortgage Association and also the Federal Home
Loan Mortgage Corporation. Jumbo loans are very rarely
taken out for anything other than the purchase of
property.
Loan Modification
Any modification that is made to the original terms of a
loan agreement e.g. a change in the interest rate or a
change in the amortization term. According to the Truth
in Lending Act all modifications have to be disclosed to
the borrower within a specified period of time.
Mortgage
A specific type of loan used exclusively to purchase
property. Most mortgage loans have lower interest rates
than personal loans however they run for longer periods
of time, sometimes in excess of 30 years.
Note
A contract between a lender and a borrower that ensures
the borrower will repay the amount borrowed plus any
interest charges within a specified period of time.
Otherwise known as a loan agreement.
Payday Loan
A short term loan that is designed to help borrowers
with day-to-day living costs until their next pay check
comes in. Most payday loans specify repayment within 31
days however the lenders charge very high interest rates
for the borrowing privilege. Few lenders conduct credit
checks for this form of loan and so they are ideal for
individuals with poor credit histories.
Principal
The amount of money borrowed in the form of a loan,
excluding charges, fees and interest.
Qualification
The necessity to meet the qualifying criteria for a loan
before any money will be granted. Qualifying criteria
differ from one lender to the next however all will take
into account the potential borrower’s credit history,
their outstanding finances and their annual income
before a decision is made.
Refinancing
Taking out a new loan in order to pay off an outstanding
loan. This is done primarily to secure a lower interest
rate or a longer amortization term.
Repayment Plan
A long term plan offered by some loan lenders to
borrowers who find themselves in financial difficulty.
Repayment plans benefit both the borrower and the lender
as they decrease the probability of the borrower
defaulting on the loan.
Secured Loan
A loan that uses either a property or another form of
valuable possession as collateral. Whatever is used as
collateral is at risk if the borrower defaults on the
loan secured on it. a mortgage is the classic example of
a secured loan.
Settlement
The amount required to be paid by a borrower in the
event that they want to pay their loan off early. This
amount will include the outstanding balance on the loan
and possibly an early repayment charge as well.
Truth in Lending Act
The Federal Law that ensures lenders must disclose all
terms and conditions associated with a loan within 3
days of the application being received. The terms and
conditions must include a breakdown of all charges, fees
and interest rates at the very least.
Unsecured Loan
Any loan that is taken out by a borrower without the
need for collateral. Unsecured loans tend to be limited
with regards to the maximum amount available to be
borrowed, plus they have higher interest rates because
of the increased risk of non-repayment and therefore
defaultt.
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