Financial Terms

401K – a savings plan that allows employees to contribute a fixed amount of income to a retirement account and to defer taxes until withdrawal.

Account Balance – Credits minus debits at the end of a reporting period.

Accounts Payable – Money owed to suppliers.

Accounts Receivable – Money owed by customers.

Actual Cash Value – The replacement cost minus depreciation of a specific item of personal property. It’s essentially the value for which the item could be sold, which is often less than what it would cost to replace it.

Adjustable-Rate Mortgage (ARM) – A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps.

Amortization – The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest.

Annual percentage rate (APR) – It is an expression of the effective rate of interest that will have to be paid on a loan. It is taken as a percentage and calculated as a yearly rate. It is usually different and higher than the advertised rate because it includes one time fees and other costs which help to determine the total cost of borrowing.

Annuity – A sum of money payable yearly or at regular intervals.

Appraisal – An estimated value of a property, based on a analytical comparison of similar saleable property.

Appreciation – The rise in the value of property because of fluctuations in market conditions and other causes like inflation, costs and standard of living

Asset – Any property or possession so owned by an individual that has monetary value is an asset. They include real estate, personal property and debts owed to the individual by others. Liquid assets are those which can be quickly converted into cash like bank accounts, stocks and shares, bonds, mutual funds etc.

Asset Allocation – The process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risk/reward tradeoff based on an individual’s or institution’s specific situation and goals.

Balloon Loan – A long-term loan in which the payments aren’t set up to repay the loan in full by the end of the term. This loan has one large payment due when the loan matures. The type of loan often has a low interest payment. The major disadvantage with this loan is the borrower needs to be disciplined in preparation for the large single payment.

Bank rate – The bank rate is the interest rate that a central bank (e.g., the Federal Reserve) charges to lend money to its member banks. Changes to the bank rate affect the national money supply by encouraging or discouraging borrowing.

Bankruptcy – A proceeding in a federal court in which an insolvent debtor’s assets are liquidated and the debtor is relieved of further liability. Chapter 7 of the Bankruptcy Reform Act deals with liquidation, while Chapter 11 deals with reorganization.

Bond – A loan that’s sold in shares as a security. Corporations and government entities sell bond shares to raise money for special projects, expansion, or simply to cover budgeted expenses. One who purchases a bond is called the bondholder. The terms of the bond specify when and how the bond issuer will repay the principal to the bondholder.

Capital gain – A capital gain is the increase in an asset’s value, such that it becomes worth more than the purchase price. The gain is known as an unrealized capital gain until the asset is sold. Once the asset is sold and the profit is made, the gain is called a realized capital gain.

Capital loss – A capital loss results when the value of an asset decreases below the original purchase price. If a share of stock is purchased for $10, and the value subsequently declines to $8, the stockholder incurs an unrealized capital loss. If the stockholder decides to sell the share for $8, the capital loss would then be realized.

Cash advance – A cash advance is a draw taken against a credit account in cash. Most credit card accounts allow for cash advances in addition to purchases, but the rates for cash advances are higher and the terms are more restrictive than those governing purchase transactions.

Collateral – It is the asset that acts as the guarantee in the repayment of the loan. The borrower may risk losing this asset if he is unable to repay his loan according to the terms of the loan contract or the mortgage or the trust deed.

Consumer credit counseling service – A counseling service that offers advice about how to work out a realistic budget and a debt repayment plan. The goal is to ensure that debts are paid back and the consumer knows how to avoid debt in the future. These services often work closely with creditors and can greatly reduce the interest rates on credit cards. Many people visit one of these agencies when they are preparing to buy a home in order to fix their credit score.

Consumer Credit Protection Act – The Consumer Credit Protection Act is federal legislation that limits wage garnishments and mandates disclosure of certain terms with respect to credit offerings. The Act was passed in 1968 and is best known for containing the Truth in Lending Act (TILA), which requires creditors to provide consumers with understandable, comparable terms n this mortgage the interest rate will not change during the entire term of the loan.

Co-signer – A co-signer, or cosigner, is one who agrees to take responsibility for a debt if the borrower defaults. A loan applicant who does not qualify for a loan may be able to obtain financing anyway if he can convince a family member to be a cosigner. The presence of a qualified cosigner makes the loan significantly more attractive to the lender.

Credit bureau – A credit bureau collects and maintains debt payment histories of individual and corporate borrowers. Lenders use this information to evaluate a prospective borrower’s creditworthiness.

Credit check – A credit check is the review of a loan applicant’s debt payment history. Lenders perform this review to predict how the applicant will handle the proposed debt obligations.

Credit history – It is the documented and detailed statement of an individual’s fully repaid debts. It helps the lender to ascertain the risk and creditworthiness of a potential borrower and whether he will be able to repay future debts in time.

Credit report – A documented statement of an individual’s credit history and borrower’s current credit standing. It is prepared by a credit bureau and used by lenders in determining the creditworthiness of the loan applicant.

Credit score – A number that reflects the credit history as outlined in that person’s credit report. A lender will calculate this number using a computer system as part of the process of assigning interest rates and terms to the loans they make. The higher the number, the better the terms that a lender will offer. A good credit score is around 720. It is possible to raise your credit score over time and by appealing certain items that appear on your report. It is smart for consumers to monitor and track their credit reports to ensure that the information is correct and to make sure that the items that they have disputed do not remain on their reports.

Debt – Money, goods, or services owed by an individual, firm, or government to another individual, firm, or government.

Debt consolidation – Taking all of your multiple loans and bringing them together to form one single loan. This usually creates a lower monthly payment but extends the length of the loan. Sometimes referred to as a consolidation loan, and commonly used by student loan agencies.

Debt-to-income ratio – Debt-to-income ratio, or DTI, is the quotient of a borrower’s minimum debt payments divided by that borrower’s gross income for the same time period. DTI is used by lenders as one factor in the evaluation of risk associated with a debt request. From the lender’s perspective, a higher ratio indicates greater risk.

Depreciation – Decrease in value due to wear and tear, decay, decline in price, etc.

Earned income – The total sum of the money you earn. This includes any wages, salaries, tips, net earnings (if you’re self-employed) and any other income received for personal services. Investment income, such as dividends and interest, are not included as earned income.

EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization

Electronic funds transfer – Electronic funds transfer, or EFT, is the movement of money from one account to another that’s initiated electronically, such as through an ATM.

Emergency fund – An emergency fund is a supply of money that’s being saved for unexpected circumstances. Personal finance experts recommend that households keep enough cash on hand to cover three to six months of living expenses. Most people choose to keep the money in a highly liquid account, such as a savings account.

Equifax – One of the three credit bureaus, also Experian and TransUnion.

Equity – An individual’s financial interest in his own property. It is the difference between the fair market value and the balance of the loan or mortgage amount still outstanding.

Equity – the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc.

Escrow – An account held by the lender into which a homeowner pays money for taxes and insurance.

Fair market value – It is the price that property would sell for in the open market. It is the price agreed upon by a willing buyer and a willing seller.

FICO score – FICO score is a numeric value calculated by Fair Isaac Credit Organization that represents creditworthiness. When lenders talk about credit score, they’re usually referring to the FICO. FICO is calculated by a secret algorithm that considers an individual’s payment history, debt level, and other related factors.

Finance charge – Finance charge is the fee assessed each billing period for the use of a credit card or credit account. The finance charge includes interest, account fees, late fees, and other transaction costs.

Fixed expenses – Expenses that remain the same from month to month and often are the most difficult type to reduce.

Fixed-rate – Fixed-rate describes a loan where the interest rate remains the same for the duration of the facility. Fixed-rate loans are considered more conservative (for borrowers) than adjustable-rate loans, where the rate changes according to economic conditions.

Forbearance – The ability to make interest-only payments on your student loan during a time of financial hardship. If you’re having serious financial difficulty and you don’t qualify for a loan deferment, you can request forbearance.

Foreclosure – It is a reposession of property by a legal process due to default on terms of mortgage by the borrower. This property is sold at a public auction, the proceeds of which are used to settle mortgage debt.

Freddie Mac – A government agency that makes housing affordable to millions of families. This agency purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for new homebuyers.

Full market value – With reference to property taxes, this usually refers to the tax rate applied to 100 percent of the property’s value. Also full cash value.

Garnishment – An amount withheld from your pay before you see you see the money and remitted to another party, such as a creditor.

GDP – Gross Domestic Product. The total market value of all the goods and services produced within the borders of a nation during a specified period.

Gross Income – Total income before taking taxes, allowances or deductions into account.

Home appraisal – A written analysis of the estimated value of your property. A professional appraiser who has training and insight into the marketplace prepares the appraisal report. This report helps determine your home’s fair market value based on recent sales in your neighborhood.

Home equity – The part of a home’s value that the mortgage borrower owns outright; the difference between the fair market value of the home and the principal balances of all mortgage loans.

Home equity line of credit – A variation of a home loan, paid as revolving debt that is backed by the portion of the home’s value that the borrower owns outright. Interest paid on a home equity line of credit can be used as a deductible. This credit allows the homeowner to write checks against the equity on an ongoing basis to pay for multiple expenses rather than one big sum.

Homeowner’s insurance – A policy that includes hazard coverage, loss or damage to property, as well as coverage for personal liability and theft.

Homestead – The place where one puts their home and is protected by law against forced sale to meet debt.

Household income – The total income of all members of a household. An important calculation when applying for a joint credit situation.

Inflation – The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Insurance -A contract (policy) in which an individual or entity receives financial protection, or reimbursement, against losses from an insurance company, which pools client’s risks to make payments more affordable, in exchange for a premium.

Interest – Additional money paid by the borrower for the use of the money, calculated as a percentage of the money borrowed and paid over a specified time.

Interest Rate – A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal.

Interest rate – An amount charged per year on a personal or home loan based on a percentage which varies depending on the type of loan.

Lease purchase mortgage – An option for a potential homebuyer which will allow you to lease a property with the option to buy. The mortgage is often constructed so that the monthly payment will cover the owner’s rent and a little extra which is put into an account and can be used for a down payment at the end of the lease.

Lessee – The person who signs for the lease.

Lessor – The person who is granting a lease.

Liability – A financial obligation, debt, claim, or potential loss.

Lien – It is the settlement of a legal claim like a mortgage debt made when a property is sold. If there is more than one debt, each debt considered a lien, is paid off in order.

Loan to value ratio (LTV) – It is the ratio of the home loan taken to the appraised value or the sale price, whichever is lower. Lower the LTV, better are the terms offered to the borrower.

Market value – The price that a property is worth based on an agreeable situation between ready buyers and content sellers who have disclosed all the facts about the property.

Mortgage – A lawful document promising a lender a certain property as security or guarantee towards payment of a debt.

Mortgage rate – Mortgage rate is the percentage used to calculate interest expense on a real estate loan.

Mutual Fund – An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money mangers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

National Do Not Call Registry – By calling 1-888-382-1222, you can register your phone numbers so that telemarketers cannot call you for a period of five years.

Negative amortization – This happens when the interest due on the loan is more than the monthly payments. The balance unpaid interest is added to the balance of the loan. In negative amortization the loan of the borrower increases and thus he ends up owing more than the original loan.

Negative equity – Negative equity occurs when the value of an asset securing a loan dips below the loan balance. For example, an individual could take out a mortgage loan to finance 100 percent of a home purchase. If the home’s value subsequently drops, due to recession, for example, the homeowner would have negative equity. Selling the home would require the homeowner to pay out of pocket to cover the difference between the sales price and the loan balance.

Net income – The amount left of your income after taxes, allowances, and deductions have been paid.

Net worth – The total sum of all of your assets minus all debts. Assets include your home, car, investments, etc. Debts include mortgages, credit cards, and loans.

Overdraft – Overdraft occurs when drafts or withdrawals exceed an account’s available balance of funds. The term is used interchangeably with “insufficient funds.” Overdraft can also mean an immediate credit extension, such as when there are insufficient funds in an account and the bank must extend credit to cover pending drafts.

P/E ratio – Price Earnings Ratio. The current price of a share of common stock divided by earnings per share over a 12-month period, often used in stock evaluation.

Pension fund – A pension fund is a program initiated by an employer to manage monies set aside for employee retirement. Monies deposited into the fund are invested for growth, so that the asset pool can support pension payments made to employees once they retire. Contributions come from employers and employees, and the management of the funds is usually outsourced to a third party.

Periodic expenses – Expenses that generally occur only once or twice a year.

Personal loan – Money borrowed from a lender where property is not used as collateral. The rates are higher, like credit cards, and are generally smaller denominations over a two year period.

PMI – PMI, or private mortgage insurance, is coverage that protects the lender from costs associated with foreclosing on a mortgage loan. Lenders require PMI coverage when the mortgage loan finances more than 80 percent of the property’s value. PMI premiums are paid by the borrower.

Pre-approval letter – The official letter stating how much money a borrower is qualified for based on interest rates and credit history.

Property tax – A tax assessed by the state or local government on real estate and personal property whose amount varies depending on the property’s value and the various services provided to the property. Property taxes are most often paid into an escrow account and the lender is responsible for paying the taxes when it is due.

Property value – How much a piece of real estate is worth based on the price a buyer and seller would negotiate.

Real estate – Real estate is land. Most of the time, the ownership of land includes ownership of the buildings and resources located on that land.

Recession – A period of general economic decline; specifically, a decline in GDP for two or more consecutive quarters.

Renter’s insurance – An insurance policy that pays for the loss and damage of personal property but not the real estate.

Revenue – The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the “top line” or “gross income ” figure from which costs are subtracted to determine net income.

Reverse mortgage – A type of loan that allows seniors homeowner to use the funds from their built-up equity. There are no payments due until the borrower moves, dies, or the property is sold. The final payment will not exceed the proceeds from the sale of the home.

Roth IRA – A Roth IRA is a type of tax-advantaged retirement savings account available in the U.S. Contributions to a Roth IRA are made with after-tax money, but earnings and qualified withdrawals are tax-free. Qualified withdrawals can’t be made until the account has been open for five years and the accountholder reaches aged 59 1/2. Roth IRAs are subject to annual contribution limits and income limitations.

Rule of 72 – Rule of 72 is a means of estimating how many years it will take to double an investment that’s earning a certain interest rate. To make the calculation, divide the compound interest rate by 72. A 10 percent interest rate, for example, will double an investment in 7.2 years.

Savings account – Savings account is a bank or credit union deposit that earns interest and can be withdrawn on demand.

Second mortgage – A mortgage made subsequent to the previous one or subordinate to the first one. The lenders of the second mortgage gets paid after the first mortgage is paid.

Secure Debt – A debt in which the borrower pledges some form of collateral (e.g. a car or property). In the event that the debt is not repaid the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt.

Stock – A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.

Subprime – Subprime describes borrowers or loans that are less-than-ideal. A subprime borrower, for example, usually has a low credit score. A subprime loan is a debt obligation that doesn’t meet conservative underwriting standards, either because of the borrower’s qualifications, or the structure of the debt itself.

Tax deductions – Amounts of money that the IRS allows you to subtract from your income before computing your income tax. These are similar to tax credits.

Title – A lawful document showing proof of a person’s right to ownership of a property.

Unsecure Debt – this is where you simply give your word to a creditor that you will repay the debt. Some examples are credit cards, utility bills and medical bills.

VA loan – A mortgage that is guaranteed by the Department of Veteran’s Affairs and made available to a borrower with a low down payment.

Variable expenses – Expenses that vary from week to week or month to month.

Variable rate mortgage – A mortgage in which the interest rate is changed periodically based on a financial index. Also referred to as an adjustable-rate mortgage.