Glossary of Financial Terms Cont...

401(k) plan - A retirement savings plan sponsored by a company for the benefit of its employees. The employees contribute a fixed amount to the plan out of their paychecks, before federal income taxes are withheld. The amount contributed to the plan accumulates tax-free until the employee reaches age 59 1/2. Some companies match a portion of their employees' contributions.

Adjustment Period - The time between changes to the interest rate as dictated by fluctuations of the index for an adjustable rate loan.

Annual fee - A yearly fee, typically associated with a credit card or revolving credit plan.

Annual Percentage Rate (APR) - The cost of credit, expressed as a yearly rate. APR is generally not the same as the contract interest rate.

Appraisal - The estimated value of a property.

Adjustable Rate Mortgage (ARM) - A mortgage loan with an interest rate that changes at regular intervals, based on an established index.

ATM - Automatic teller machine

ATM withdrawal - Cash dispensed from an ATM and deducted from the checking or savings account balance.

Balance - The amount of money outstanding in an account.

Bankruptcy - A legal proceeding in U.S. Federal Court, entered into by borrowers who are unable to pay their debts. In Chapter 13 bankruptcy, the borrower files a payment plan with the court and promises to make partial payments to creditors. In Chapter 7 bankruptcy, a trustee may sell the borrower's assets and use the proceeds to repay the creditors. Both types of bankruptcy stay on the borrower's credit history for up to 10 years.

Budget - A financial plan to manage the spending and saving of money.

Caps - An established limit to the amount interest rates can increase in an adjustable rate mortgage loan.

* Periodic or adjustment cap: The maximum the interest rate can increase or decrease from one adjustment period to the next of an adjustable rate mortgage loan.
* Overall or lifetime cap: The maximum interest rate that can be charged over the life of an adjustable rate mortgage loan.

Cash advance - Cash charged against a credit card. Since the advance is really a loan, interest is charged from the date of the advance.

Certificate of Deposit (CD) - Money deposited in a bank or savings and loan for a stated time period and normally paying a fixed rate of interest.

Charge card - A card that charges no interest, but that requires you to pay your bill in full each month.

Charge off - A loan or credit card debt written off as uncollectible from the borrower. The debt, however, remains valid and subject to collection.

Checking account - Money kept in a bank or savings and loan for safekeeping. Money can be easily withdrawn by writing checks or using an ATM or debit card.

Closed-end loan - A loan in which money is borrowed in one lump sum for a specified period of time.

Closing cost - Fees paid at the closing of a real estate secured loan. These may include an appraisal fee, title search and insurance, survey, taxes, deed, recording fee, credit report charge and other costs assessed at settlement.

Collateral or security - An asset pledged to ensure payment of debt.

Compound interest - Interest computed on the balance of a loan, in which the balance includes all unpaid interest.

Co-signer - A person who signs a loan agreement along with the borrower and assumes equal responsibility for repayment.

Credit - A promise to pay at a later date for goods or services purchased today.

Credit application - A written request for credit, generally in a form specified by the lender. Sometimes, an application fee is charged to cover the cost of loan processing.

Credit bureau - A company that compiles credit histories on prospective borrowers and provides credit reports to lenders. Lenders use these reports when making decisions on extending credit. The three major credit reporting agencies are Equifax, Experian and TransUnion.

Credit card - A plastic card issued by a bank authorizing payment for purchases. Interest is charged on the outstanding balance.

Credit counseling - Professional counseling provided by organizations that help consumers find ways to repay their debt - through careful budgeting and management of money.

Credit limit - The maximum amount of money that may be charged on a credit card account.

Credit line (or personal line of credit) - The maximum loan amount a consumer can borrow against in an account. As a credit line is partially or fully repaid, the consumer can borrow against the account again.

Credit report - A record of someone's credit history, including debt repayments, late payments and any bankruptcies that is compiled by a credit reporting agency.

Creditor - A person or business from whom you borrow, or to whom you owe, money.

Currency exchange - A business that provides a number of services for a fee, such as license plate renewal, check cashing and fund wiring.

Debit card - A plastic card issued by a bank and used for making purchases. The purchase amount is deducted directly from your checking account.

Debt - Money owed to another party.

Debt consolidation - A strategy sometimes used by consumers to better manage their debt problems. Rather than paying off several separate bills each month, a consumer consolidates his or her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time.

Default - Failure to repay a loan or otherwise meet the terms of a loan agreement.

Delinquency - Failure to make payments on time.

Discretionary income - Individual or family earnings not allocated for necessities such as food and shelter.

Down payment - A sum of money put down to buy a house, car, or other large item. This is a portion of the purchase price which is generally required by the seller to be paid in cash upfront.

Equal Credit Opportunity Act - A federal law prohibiting lenders from discriminating against applicants for credit.

Equity - The market value of a person's home or real estate, less the value of all existing liens.

Fair Credit Reporting Act - A federal law giving consumers the right to learn what information credit reporting agencies have on file about them and to dispute any inaccurate data in the file.

Fair Debt Collections Practices Act - A federal law to protect consumers from any harassing or abusive conduct, the use of false or misleading representations or unfair practices in the collection of debts.

Federal Deposit Insurance Corporation (FDIC) - A federal agency that insures consumer deposits in a bank or savings and loan for up to $100,000 per account. Deposits include checking and savings accounts and certificates of deposit.

Finance charge - The cost of credit expressed as a dollar amount.

Fixed interest rate - An interest rate that does not change over the term of the loan.

Fixed Rate loan - The interest rate on a fixed rate loan is set when the loan is opened. The interest rate remains the same through the entire term of the loan and does not change when market indexes or other interest rates fluctuate.

Foreclosure - A legal process in which property that is collateral or security for a loan may be sold to help repay the loan when the loan is in default.

Grace period - A period of the time in which a borrower can pay off the full balance of their credit account without incurring additional finance charges.

Home equity loan - A loan secured by a person's home.

Index - Most lenders tie ARM interest rate adjustments to changes in an index. Lenders base adjustable rate mortgage loan interest rates on a variety of indexes.

Installment loan - A loan in which the amount of payment and the number of payments are predetermined.

Interest - The dollar amount a lender charges a customer for borrowing money.

Interest rate - The rate that lenders charge their borrowers for the privilege of borrowing money.

Judgment - An official decision made by a court related to a lawsuit.

LIBOR - London InterBank Offered Rate (LIBOR). The financial index to which many adjustable rate mortgage loans are tied when they have short-term adjustment periods.

Late payment fee - A fee charged for a loan payment not received by the due date.

Lease - A contract that allows a consumer to use an asset, such as a car, in exchange for payment. At the end of the lease term, the asset must be returned.

Lender - A person or business from whom one borrows or to whom one owes money. Also referred to as a creditor.

Liable - Having (legal) responsibility.

Lien - A claim placed by a creditor on a piece of real estate, or property, to ensure the payment of a debt.

Loan - An amount borrowed to be repaid at a later date, with interest.

Loan agreement - A contract that spells out in detail the terms and conditions of a loan.

Loan to Value ratio (LTV) - The ratio of money borrowed on a property to the property's fair market value.

Margin - Percentage points added to the index and used to determine the interest rate of an adjustable rate mortgage loan. The margin may differ from one lender to another, but it is usually constant throughout the life of the loan.

Maturity date - The date on which final, or last, payment on a loan is due.

Minimum payment - The smallest amount a borrower must pay each month on a loan or credit card account.

Mortgage loan - A loan used for the purchase of a home. The home serves as security, or collateral, for the loan.

Origination fee - Charge to borrower to cover costs of issuing loan, including credit and title checks, property appraisals, etc.

Personal line of credit - See credit line.

Prepayment penalty - An additional fee a lender may charge if a borrower pays off all or part of the loan balance before a period chosen by the lender or before the loan is due.

Public record - Information obtained from local, state or federal courts indicating a person's history of meeting financial obligations, including alimony and child support.

Refinance - Paying off an existing loan with the proceeds from a new loan.

Repossess - Forced or voluntary surrender of merchandise as a result of a consumer's failure to repay a loan as promised.

Right of rescission - A borrower's right to cancel a contract within three business days.

Savings account - Money kept in a bank or savings and loan association for safekeeping. Savings accounts earn interest on all money kept in the account.

Savings bond - A government bond that earns interest, issued in face value denominations from $50 to $10,000. Interest on the bond accumulates tax free.

Secured loan - A loan in which a borrower pledges an asset such as a home or car that may be sold if the borrower is unable to repay the loan.

Security - See collateral.

Simple interest - Interest computed on the principal balance outstanding as long as any portion remains unpaid.

Title - A legal document that provides evidence of property ownership.

Truth in Lending Act - A federal law that requires lenders to disclose to the borrower the true cost of a loan, including the actual interest rate and all terms and conditions of the loan, in a manner that is easily understood.

Unsecured loan - A loan granted based only on the borrower's promise to repay.

Variable interest rate - An interest rate that changes based on an index, such as the prime rate.

Yield - The percentage rate of return paid on a stock in the form of dividends or the effective rate of interest paid on a savings or money market account or bond.