Wednesday, March 26, 2008

Frequently Used Debt Terms (A-D)

Here is an organized list of debt terms you would find that are most commonly used in the industry.


1 year adjustable (ARM): A loan with a fixed rate for the first 1 year after which the rate changes once each year for the remaining life of the loan. Because the interest rate can change after the first 1 year, the monthly payment may also change.
The same is applicable in case of 10, 2, 3, 5 and 7 year of adjustable (ARM).

A-Credit: The ideal credit rating for a consumer. Having a good credit score lowers the prices which the lenders usually offer you. Usually a FICO score above 720 fetches you the best deal.

Acceleration Clause: This clause allows the lender to speed up the rate of your loan. In such cases the lender can also demand immediate payment of the entire balance of the loan you owe. This happens if you fail to satisfy the legal obligations in the contract.

Accrued Interest: When you fail to pay your interests within a given period, the interest increases and adds to the debt amount you owe.
Adjustment Interval: This is the span of time in between the alteration in the interest rate or monthly payment on an ARM loan.

Affordability: This is a general evaluation of the amount of money you can afford while purchasing a home. The affordability factor gives the consumer a probable price which can be allotted against their affordability factor. It also mentions about the mortgage required to pay that amount.

Agreement of Sale: A contract signed by buyer and seller mentioning the terms and conditions during the sale of a property.

Alternative Documentation: This is a document related to a loan file which is dependent on information such as pay-stubs, W-2 forms, and bank stubs. This is done without depending on verifications sent to third parties for confirmation of statements made on the application.

Amortization: This deals with the periodic repayment of a loan considering payments of both principal amount and interest rates calculated to payoff the loan at the end of a fixed period of time. The loan balance lessens by the amount of the scheduled payment, or with the deposit of any extra payment. The scheduled payment minus the interest amount equals amortization.

Amount Financed: This figure is used to calculate your APR. It represents your loan amount minus any prepaid finance charges and assumes you will keep the loan to maturity and make only the required monthly payments.

Annual Fee: A credit card issuer may charge you a fee each year for your account.

Annual Percentage Rate (APR): There are two interest rates applied to your loan: the Actual Interest Rate and the Annual Percentage Rate. The Actual Rate is the annual interest rate you pay on your loan (sometimes referred to as the “note rate”), and is the rate used to calculate your monthly payments. The amount of interest you pay, as determined by your Actual Rate, is only one of the costs associated with your loan; there may be others. The Annual Percentage Rate (APR) includes both your interest and any additional costs or prepaid finance charges you might pay such as prepaid interest, private mortgage insurance, closing fees, points, etc. Your APR represents the total cost of credit on a yearly basis after all charges are taken into consideration. It will usually be slightly higher than your Actual Rate because it includes these additional items and assumes you will keep the loan to maturity.

Application: An initial statement of personal and financial information required to apply for a loan.

Application Fee: Fee charged by a lender to cover the initial costs of processing a loan application. The fee may include the cost of obtaining a property appraisal, a credit report, and a lock-in fee or other closing costs incurred during the process or the fee may be in addition to these charges.

Appraisal: A written analysis of the estimated value of a property, as prepared by a qualified appraiser. A fee is typically charged for a real estate appraisal because a home appraisal is time-consuming. An appraisal of an auto is usually not necessary because auto dealers, sellers and buyers all have quick access to the market value of autos.

Appraisal Fee: The charge for estimating the value of property.

Asset: Anything that has monetary or exchange value that is owned by an individual, business or institution. Assets include real estate property, personal property, vehicles and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on). A lender is very interested in the amount and value of any assets you may have because assets can be used as collateral against a loan. Along with other factors such a borrower’s credit rating, assets are also used to help determine the amount of the loan.

Assignment: The transfer of ownership, rights, or interests in property by one person, the assignor, to another, the assignee.

Assignment Recording Fee: In many instances, after closing the lender transfers your loan to a specialized loan “service” who handles the collection of your monthly payments. The Assignment Fee covers the cost of recording this transfer at the local recording office.

Assumption: The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt.


Backup Offer: There is always a provision of an alternate bid or second offer on a property if the first offer does not work out. However, this second offer has to be accepted.

Balance: The amount of the loan which is unpaid. It is equal to the loan amount minus the sum of all prior payments to the principal.

Base Loan Amount: The original loan amount on which loan payments are based. If additional charges accrue, those costs are added to the original loan amount.

Bank Draft: This is a mode of payment where your loan is automatically deducted from your checking or savings account. In such cases you don’t have to mail in your payment each month.

Bankruptcy: When a person is unable to meet his financial obligations he is declared bankrupt by a decree of the court. The Federal Bankruptcy Law states that this person’s property is then used to satisfy the creditors. He can relieve the debts by transferring his assets to a trustee to clear his debts. Different chapters or types of bankruptcy exist amongst which Chapter 7 and Chapter 13 are the most popular ones.If a person files bankruptcy, a record of the filing appears on the borrower’s credit report for up to 10 years.
Bequest: A personal property which has been gifted to an individual and this arrangement is mentioned in the will.

Billing Error: According to the FCBA or Fair Credit Billing Act any mistakes in your monthly statement is known as a billing error.
Bona Fide: Undertaken in good faith.

Borrower: A person who takes money in the form of a loan and is committed to pay it back. This repayment in most cases has an additional interest amount added to the original amount of money borrowed.

An individual who assists in arranging for funds and also negotiates contracts for a client. However this individual does not borrow money for his individual purpose.

Budget: A personal financial record which has the figures of all the income and expenditure done within a specific time limit of all money spent and earned in a specific time frame.

Business Days: According to the Truth in Lending Act or Electronic Fund Transfer Act there are specific days allotted for business dealings. These days are known as business days.

Buyer’s Market: The market prices which are favorable for the consumers is known as a buyer?s market. When due to the price factor sell is less and the buyers are much higher, sellers may be forced to make a considerable price deduction.


Cash-out Refinance: This is a transaction in which the borrower receives additional cash he can use for any purpose. Cash-out refinance happens when a borrower receives a greater amount of money in a fresh loan when compared to the money he uses to pay his debts.

Closing: The meeting between the buyer, seller and lender. When the property and funds legally change hands there is a interaction or meeting between the buyer, seller, and the lender. This is known as closing or settlement.

Collateral: This is a piece of property or asset offered to support a loan. This property can be seized or taken away legally if you fail or can be seized if you default.

Collection Agency: When a borrower is unable to pay off his debts within the allotted time period, the original creditor appoints a company to collect the debts on his behalf. This company is known as the Collection Agency. The Collection Agency gets a certain percentage from the original creditor as their fees.

Commitment: A written document or agreement between a lender and a borrower on a loan amount or any monetary transactions. This document is backed by certain terms and policies for a stipulated period of time.

Cosigner: The cosigner is the third person other than the borrower and lender, who is a witness to the loan. He signs on doted lines and is equally responsible for your loan.

Credit: A particular sum of money granted by a creditor with the provisions for the borrower to pay in the future. It also means an amount of money an individual owes to a person or business.

Credit Bureau: An agency that maintains the records of your credit record and issues it to you when required.

Credit Card: Also known as plastic money, this is a card used to borrow money or buy goods for personal use.

Credit History: The overall financial record of the monetary transactions you dealt with. It shows the amount of money you borrowed, the amount you repaid and the sum which you still need to pay back.

Credit Limit: The maximum amount of money you may charge to a particular account. For example, if your credit limit on a credit card is $10,000, you total transaction cannot exceed $10,000.

Credit Ratio: The percentage calculated based on a debtor?s monthly payable installment amount divided by his net earnings, is known as the credit ratio.

Credit Report: The credit report is a financial document which consists of a person?s credit history and also reflects his updated financial position. A credit report determines an individual?s credit worthiness. An individual can acquire his credit reports from credit bureaus.

Credit Reporting Company: These are companies that compile reports on an individual?s credit history from multiple credit repositories and merge them into a wholesome credit report.

Credit Repository: Companies that gather financial information on an individual?s credit history and gives the updated feedback to credit reporting companies.

Credit Scoring System: This is a highly statistical process used to grade individuals who have applied for credit, based on the various characteristics applicable to creditworthiness.

Credit Warranty: This is a written guarantee or commitment about the creditworthiness of the borrower given by the seller of the loan. The seller guarantees that the main intention of the borrower is to repay the loan under any condition and that he has got a good reputation in handling credit.

Creditor: A person or a financial house who lends money or you owe money.

Credit-related Insurance: This can be insurance related to health, life, or accident designed to repay the outstanding balance of debt.

Creditworthiness: Relates to past credit records and future ability to repay debts based on your current financial position.

Consumer: A person who purchases material goods for his personal use.

Consumer Credit Counseling Service (CCCS): Organizations which help consumers find a way to repay debts through careful budgeting and management of funds. These are usually nonprofit organizations, funded by creditors. By requesting that creditors accept a longer payoff period, the counseling services can often design a successful repayment plan.

Credit Repair Companies: The credit clinics can be in the form of any individual or company which helps debt sick people to recover from their financial crisis and take care to clean up their bad debts.

Credit Grantor: Person or any business house supplying consumer goods in credit system.

Credit type : This is a reference to the type of credit you are undergoing. This type of credit is highly related to your credit history. If you are regular and a punctual in your payments, you are supposed to have a good credit type.


Debt Consolidation: This is a process where your multiple debts are consolidated into one loan amount. Debt consolidation saves you from the harassment of the creditors and also gives you the leverage of repaying your debts in affordable monthly installment. In a debt consolidation program a major percent of your debt amount is eliminated. All the late fees and hidden taxes are also eliminated. Usually one can pay off their debts within a reasonable period of time with the help of such programs. However the time period to clear a particular debt depends on the type and amount of debt a person is undergoing.

Debit Card (EFT Card): A plastic card which consumers may use to make purchases, cash withdrawals, or other types of electronic fund transfers. But with a debit card a person may not take any credit through purchase or cash withdrawal.

Debt-to-Income Ratio: It is the proportion of debt you owe in relation to your income. It is calculated on the basis of debt divided by income.

Deed: A legal document which is a documentation and proof of a particular property, when it is transferred from one owner to another. The deed basically contains a description of the concerned property, the signatures of both the parties and witnesses and is handed over to the buyer at closing.

Deed of Trust: A legal document that conveys title to real property to a third party. The third party holds title until the owner of the property has repaid the debt in full.
Default: If the debtor fails to meet the commitments in legal obligations which are mentioned in the contract, it is known as default.

Deferred Interest: Deferred Interest or Negative Amortization takes place when your monthly repayment towards a loan is not enough to meet the interests due on the loan, and eventually gets added to the original balance of the loan. This is dangerous because the borrower at the ends is obligated to pay a greater amount than he actually borrowed.

Delinquency: When you fail to abide by the loan agreement and miss out on making payments within the time period, delinquency takes place.

Disclosures: Information conveyed to a consumer in context to his financial transactions is known as a disclosure.

Discount Points:
It is a percentage of the mortgage loan which is paid to the lender by the borrower in order to lower the interest rate on the loan. Generally one point equals one percent.

Document Preparation Fee: Such fees are given to companies who are appointed to prepare the loan closing documents.

Due-on-Sale Clause: The provision or leverage enjoyed by a lender in a mortgage or deed of trust, where he can claim immediate balance of the loan upon sale of the property.

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