Glossary of Loan Terms
Basic Loan Term Defined
Here are definitions of basic loan terms to understand your loan agreement and
promissory note.
Asset
Anything of economic value owned by an individual or a corporation. An asset can be converted to cash, inventory, equipment, securities, real estate or other property, and can be used for the payment of debt.
Balloon Payment
A large payment scheduled at the end of the loan term to cover the remaining balance of the principal and interest of a loan. The borrower makes a relatively small monthly installment payments during the term and at the end, he or she pays the entire balance of the remaining principal and interest in one single payment. Generally it’s used when the loan has a short term or when the borrower cannot afford to make a high monthly payments.
Bridge Loan
A short-term or temporary loan that is used until a borrower secures permanent financing. For example, when a home-buyer’s current home is not sold, this loan bridges a gap between the sale price of a new home and a home buyer’s new mortgage. The home buyer uses the bridge loan as a down payment for the new home.
Collateral
Assets that the borrower pledges to secure the repayment of a loan.
Cosigner
Someone who accepts liability of repayment of credit or a loan if the primary borrower defaults.
Credit Insurance
A policy that pays off a loan in the event the borrower dies or becomes disabled.
Delinquent
Not paid at the scheduled payment time.
Default
Failing to meet the financial obligations as outlined in the promissory note.
Guarantee Fee (Insurance Fee)
A fee charged by the guarantor to guarantee the loan against default.
Line of Credit
A financial agreement between the lender and the borrower establishing the maximum loan amount that the borrower is allowed to draw.
Prepayment Penalty
A fee paid to the lender when the borrower pays off a loan prior to the scheduled due date.
Principal
The original loan amount borrowed on which interest is calculated.
Promissory Note
A contract where the borrower promises in writing to pay a sum of money to the lender.
Security
Property that the lender can claim in the event the borrower defaults on the loan terms.