Borrowing Money - The Jargon

LoanJargon, A-C

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Additional principal payment
Extra money included in the monthly payment to help reduce the principal. This can be a highly effective way to shorten the length of the loan and the overall costs.

Advance (Loan advance)
The amount of money that the borrower loans.

Alienation clause
Sometimes included in a contract, this clause requires the borrower to pay the full outstanding balance of the loan in the event that the property or asset is sold or transferred.

Amortization
Amortization refers to the repaying of the principal portion of the loan (as opposed to the interest portion of the loan).

APR
Annual Percentage Rate. The total cost of your loan calculated on an annual basis. Use this as the comparative figure you use to compare different loans.

Arrears fee
A penalty charge against the borrower for late or non-payment of any loan installments.

Assessed valuation
An official valuation of a property, normally carried out by a government approved independent body.

Balloon loan
A mortgage or other loan whereby the repayment schedule has one large final repayment (the balloon payment) at the end. The preceding payments are generally much smaller, and attract a low interest rate.

Basis point
A basis point is one one-hundredth of one percentage point. For example, the difference between 5.01% interest and 5.34% interest is 33 basis points.

Bridging Loan
A bridging loan is a temporary loan set up to cover the borrower in a situation where a long term loan is to follow. A classic example is where a home owner wishes to buy a new home before they’ve managed to sell the home they currently own.

Call option
A clause in a loan agreement that allows a lender to ask for the balance at any time.

Cancellation period
In some situations there will be a ‘cooling off’ period, whereby borrowers can cancel a loan agreement within a specific period of time, without penalty.

Cap
A limit on the amount the interest rate or monthly payment can increase for a variable rate loan.

Collateral
Any asset that is pledged by the borrower to the lender against the loan amount. In the event that the borrower cannot make sufficient payments against the loan, the lender has the right to seize and sell the asset(s).

Completion
This is effectively the time when the loan agreement commences, and the money has been transferred from the lender to the borrower. In essence, it is the completion of the agreement between the two parties.

Compound interest
With regard to loans, Compound Interest refers to the interest paid on the principal amount of the loan as well as on the accrued and unpaid interest of the loan.

Consolidation of debt
The replacement of any number of loans, or debt, with one loan covering the total amount. Consolidation loans are normally taken out to reduce the overall cost of interest and penalty charges incurred by the individual loans.

Credit history
A historic record of financial activity by an individual concerning loans, repayments etc.