Common Loan Definitions and Related Terms: Lending 101
The Merriam Webster dictionary defines a loan as a temporary lending of money to an individual or organization with an interest rate attached. Of course, while the dictionary makes it sound simple, loans are a little complicated.
An Abridged Dictionary of Loan Terms and Definitions
When you begin looking for a loan, you hear a lot of unfamiliar terms. You need loan definitions. Your lender probably won’t sit down and explain them all to you. We will. This glossary explains loan terminology in the most straightforward manner as possible. It breaks the terms down into categories that reference the context in which you’d read the term.
Loanry does not lend money. We function to help you find a lender. We set up a loan mall so you can easily shop personal loans among many lenders, almost as easily as you could visit a shopping mall to pick up a new pair of jeans. Because of this, we just do not have contact with you; your lender does. So, we want you to understand the loan procedure basics and the loan terms. We find it better to educate you and give you the tools. The Loanry team want you to ultimately save money. If you do decide to borrow than please use our library of personal finance education tools to borrow smart.
We are not trying to frighten you with this huge list of terms, but financial institutions use their own lingo. You will get a much better loan deal if you understand what the lender refers to with each term and know what it will cost you. We’ll break this up into types of loan definitions, for example, explaining fees in one section and references to loan terms in another.
The great news is that once you learn the lingo, it remains the same regardless of the loan type or the type of lending institution you find. Whether you need a student loan or a home loan or a car loan or some other type of loan, these terms apply to every situation.
General Loan Terms 101
Let’s start with the loan definitions you will come across regardless of the type of installment loan you consider. You’ll will read these terms in all types of loan documentation.
This refers to the equal loan payments planned out during a specified period to pay off the debt on time.
An installment loan also gets referred to as an amortized loan due to its planned series of equal installment payments that repay the loan amount, plus interest without the need for a balloon payment.
The annual anniversary of the loan. The initial anniversary date occurs on the twelfth payment’s due date. Thereafter, it occurs on the same annual date noted on the MOP Promissory Note.
Annual Percentage Rate (APR):
The percentage rate referring to the amount of interest charged on the loan.
A final payment to fulfill the promissory note on an installment loan in order to discharge the debt. The balloon payment is typically much larger than the monthly installment payments.
The lender listed on the promissory note that is secured by a deed of trust.
The person eligible for the loan and who carries the primarily responsible for its repayment.
A term that refers to one of the five criteria that lenders use to determine whether to extend a loan to you. Lenders base your character on your credit score and credit history.
A term that refers to one of the five criteria that lenders use to determine whether to extend a loan to you. Lenders determine your capacity or ability to re-pay a loan, based upon your monthly income and your outstanding financial obligations.
A term that refers to one of the five criteria that lenders use to determine whether to extend a loan to you. Collateral refers to the property of merit you provide as a guarantee of re-payment when you apply for a secured loan.
A term that refers to one of the five criteria that lenders use to determine whether to extend a loan to you. Capital refers to your savings or other assets a bank can claim if you default on the loan.
A term that refers to one of the five criteria that lenders use to determine whether to extend a loan to you. The conditions of your loan describe how you intend to use the loan.
This refers to a extra payment that reduces the loan’s principal balance before the final balloon payment.
Essentially, failure to repay the loan as specified in the Deed of Trust or Promissory Note.
The term demand note refers to a loan the lender can recall at any time that has no fixed term or repayment schedule.
The phrase friendly loan refers to a financial agreement between friends, family or business associates. These rarely have legal documentation since they are typically verbal agreements. This makes it tough to legally challenge them.
The term loan commitment, also called loan approval, refers to the letter issued by the lender that commits to funding for the specified borrower and property. It contains conditions that must be met prior to funding the loan. It expires 60 days from its date of issue.
Loan denial letter:
A letter from the lender that denies a loan to the specified individual. Depending on the type of loan, the letter may state the denial reason. These reason may include credit history or score, inadequate monthly income or lack of verifiable liquid assets.
The process of operational procedures management and the collection of payments related to a loan.
The process and procedures of risk analysis including loan factors such as credit score and history, assets, employment, etc. used by a lender to determine whether to extend a loan to an individual.
Loan withdrawal letter:
A letter from the lender acknowledging a borrower’s desire to withdraw their loan application/approval from the lender. It may or may not state the reason for withdrawal.
Home Loan/Mortgage Specific Terms
Some loan definitions only apply to property purchases. These terms apply to home loans, mortgages, investment property, business properties, etc. If you visit Accury, our real estate related partner site, you’ll come across many of these terms.
The monetary value of a single-family home as determined by an approved appraiser.
A person who assumes loan responsibility, but does not take a title interest or live at the property.
Close of Escrow:
The legal meeting at which the property officially and legally transfers between the lender, buyer and seller.
A second individual who assumes responsibility on a loan. This person also has a title interest in the property, meaning the co-own it, and they intend to occupy it as a primary residence.
Date of Recordation:
The date on which a deed of trust is officially entered on the books of the county recorder in the county in which the property is located.
Deed of Trust:
Sometimes used instead of a mortgage, this financial security instrument conveys the property’s title in trust to a third party to insure the payment of the promissory note. When the borrower pays off the loan, the deed transfers to the homeowner.
The initial payment offered for purchase of a piece of real estate. The loan amount covers the difference between the real estate’s purchase price and the loan amount. While some loan types, such as VA loans, allow for a borrower to forgo a down payment, the typical amount is at least 10 percent of the home’s purchase price.
Equity refers to the property’s fair market value less the current debt on the property. You can leverage the equity on your property to receive a loan, also called an equity line of credit.
In escrow, a third party handles the funds disbursement and paperwork as an agent and intermediary for the buyer and seller.
When the home needs repairs or treatment for termites, the firm handling the escrow withholds funds until the repairs or treatment is complete.
Evidence of Insurance:
This insurance document confirms the property is insured by a homeowners’ policy. This is not a copy of the insurance policy, but a letter or statement of commitment to insure a specific property beginning on a given date at specified premium.
This is more commonly referred to as the homeowner’s insurance policy.
Repairs and/or additions made to better the status of the permanent structure of the primary residence.
Home Loan Coordinator:
The person designated by the Chancellor of each campus and Laboratory Director as the Home Loan Coordinator. This individual serves as the primary contact at the campus level for loan applicants.
An organization of homeowners residing within a particular development whose major purpose is to maintain and provide community facilities and services for the common enjoyment of the residents.
Homeowner’s Insurance Policy:
An insurance policy available to owners of private dwellings that covers the dwelling and contents in the case of fire, wind damage, theft, and, personal liability. The typical policy does not include flood or earthquake coverage.
HUD-1 Closing Statement:
A document required by the Department of Housing and Urban Development (HUD) that discloses all financial information related to funds received and disbursed at a loan’s closing.
This term refers to reports generated by the inspector the borrower hires to assess the home’s condition before closing on the home. These usually include a home inspection report and a termite report. The home inspection may include specific detailed reports on the condition of the foundation and roof, as well as, a geological report and a septic tank inspection, when a septic system is present.
Interest has two meanings. The first is a reference to the annual percentage of the loan you will also re-pay in consideration for the loan. The second meaning is also a business term meaning a share, title or right in a property or business.
Joint ownership by two or more persons giving each tenant equal interest and equal rights in the property, including the right of survivorship.
Lender’s escrow instructions:
Instructions produced by the Office of Loan Programs for an escrow or title company detailing the documentation and procedures required before a loan is funded.
Loan-to-Value (LTV) Ratio:
The ratio of the principal balance of a mortgage loan to the value of the securing property, as determined by the purchase price or Appraised Value, whichever is less.
The lender that holds the Deed of Trust or mortgage.
The borrower who named on a Deed of Trust or mortgage.
The process of paying off an existing loan and establishing a new loan.
The restoration of the primary residence. Generally, this includes repairs, improvements and additions to the permanent structure of the primary residence.
Monetary Transfer Terms
Some loan definitions you need to know refer to the manner in which loan monies transfer from the lender to the borrower.
Automated Clearinghouse (ACH):
A money transfer network that electronically transmits funds from one participating financial institution to another.
Electronic Funds Transfer (EFT):
Electronic Funds Transfer (EFT) refers to the actual transfer of funds through an ACH. In loan terms, it refers to the transfer of the loan amount electronically from the lender to the borrower. Other EFTs include direct deposit and debit card transactions.
Types of Loan Definitions
You’ll find many types of loans available. Financial institutions specialize. Some offer credit cards, some offer mortgages, some offer unsecured loans and some offer many types of loans. Here are the unusual terms you might come across when exploring loan types.
A loan type used in real estate with a loan term of less than 12 months. Considered a temporary loan, the bridge loan provides the borrower the net proceeds from an impending home sale so the borrower can purchase a new home. The borrower re-pays the loan with the proceeds of the home sale.
Deferred payment loan:
A loan that defers all monthly interest and principal payments to the promissory note’s maturity date. The loan principal balance, plus the accrued interest comes due when the deferment ends. These are common with student loans.
Graduated Payment Mortgage:
You will commonly see this written as GP-MOP. It refers to loan type related to the Mortgage Origination Program (MOP) that provides an initial lower interest rate than the standard rate. There minimum rate is 2.75 percent. The interest rate will annually increase by 0.25 percent to 0.50 percent until it equals the standard rate.
Interest-only payment loan:
This type of loan does not amortize. During the loan term, the borrower pays only the interest each month. They re-pay the principal as a lump sum when the length or the loan term ends.
This type of loan typically charges higher interest rates but requires no collateral. Credit cards and student loans are the most common types of unsecured loans. This is the most common type of consumer loan.
Getting a loan entails much more than the interest rate and the amount of the loan. You’ll incur a number of fees. Here are the definitions for the fees your lender will charge.
A nominal charge, typically of $50 or less, that accompanies the loan application. You pay this fee at each lender, for each loan application submitted. If your loan application gets denied, you will get charged another fee if you re-apply. Some lenders waive the re-application fee if you have good credit.
You’ll incur the administration fee to process the loan application. This charge ranges between $35 to $50. Some lenders bundle this into the application fee.
The origination fee typically amounts to about ten percent of the loan. It can be charged in addition to application and administration fees or in addition to them. It is paid from the loan monies, for example, if you apply for a $1,000 loan, you’ll receive $900.
You only incur a late fee if you pay your monthly payment late or miss your payment. These range from $30 to $37. You get charged for each late payment. You may receive an one-time forgiveness of this fee, if your lender offers it.
Prepayment penalty fee:
Your lender counts on making back the cost of loaning you money by charging interest. If you try to pay it off more quickly, by making double payments or large lump sum payments, in addition to your monthly installments, you’ll pay a fee. It is a hefty fee, generally amounting to about 80 percent of six months of interest.
Conclusion – Loan Definitions and Related Terms
The plethora of terms and loan definitions can seem overwhelming but we hope this short glossary helps you better understand them. Loanry wants you to find a lender for your financing needs. We try to make it easy for you to find lenders and their loan offers. While we cannot promise you will find a lender here that can get you a loan, we can make it as simple as possible for you to look for the right lender who can help you. We even offer money tools to help you compare different types of lenders.
Our service lists numerous types of personal loan options from a plethora of lenders. These consumer loans include credit cards, installment loans, payday loans, mortgage loans, student loans, car loans and more with both short-term and long-term options. Our loan mall has lenders who offer high and low interest rates. You’ll find options for those with great credit, bad credit and no credit. Print this article or keep it open in a separate browser window while you loan shop. That lets you refer back to it easily. Make your loan search simpler. Start at Loanry and find the lender you need. We do not loan money, but we do make it easier to help find a lender for you.
About the Author – Ethan Taub
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Carlie Lawson writes about business and finance, specializing in entertainment, cryptocurrency and FOREX coverage. She wrote weekly entertainment business and finance articles for JollyJo.tv, Keysian and Movitly for a combined seven years. A former newspaper journalist, she now owns Powell Lawson Creatives, a PR firm, and Powell Lawson Consulting, a business continuity and hazards planning consultancy. She earned BAs in Journalism and Film & Video Studies from the University of Oklahoma. She also earned her Master of Regional & City Planning at OU. Her passion lies in helping people make money while reducing risk.