Common Financial Terms

Understanding key financial terminology is the first step towards building a solid financial foundation. Here you’ll find definitions for important concepts to help you navigate the world of personal finance.

CREDIT SCORE

A statistical number that evaluates a borrower’s creditworthiness based on credit history. Lenders use this score as an effort to predict the probability that a borrower will repay his or her debts.

SECURED CREDIT

A loan that is backed with collateral.

INTEREST

The charge for the privilege of borrowing money, typically expressed as a percentage.

CREDIT BUREAU

A company that collects information relating to the credit ratings of individuals and makes it available to credit card companies, financial institutions, etc. The three major credit bureaus are Equifax, TransUnion, and Experian.

UNSECURED CREDIT

A loan which, when repaid, cannot be recouped through the seizure of an asset.

ANNUAL PERCENTAGE RATE (APR)

APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes interest or other charges associated with the transaction, but does not take compounding into account.

CREDIT REPORT

A detailed report of a consumer’s credit history, prepared by a credit bureau. Lenders use the reports, among other things, to determine a loan applicant’s creditworthiness.

INSTALLMENT LOAN

A loan with specified monthly payments, terms and interest, where the consumer borrows a fixed sum of money and makes substantially equal payments of a set dollar amount until the loan is paid off, a period of months to years.

DOWN PAYMENT

An up-front payment paid out of pocket, often as a part of a loan.

REVOLVING LOAN

A type of credit that can be used repeatedly up to a certain limit, so long as the amount is open and payments are made. The amount of credit available to the borrower, the balance due, and payment can go up and down depending on the purchases and payments made.

INSTALLMENT CONTRACT

A legally enforceable agreement between two parties for the purchase or sale of goods and services.

MINIMUM MONTHLY PAYMENT

The least amount a consumer needs to pay monthly to avoid late fees and have a good repayment history on his/her credit report. Calculated as a small percentage of the consumer’s total credit balance.

EARLY PAYOFF

Making a payment larger than the minimum payment, which allows a loan to be paid off in a shorter term. Usually resulting in savings due to prevention of interest and/or fees.

Common Terms