A Guide to Understanding
Financial Terms
Provided in Partnership with GreenPath Financial Wellness
Introduction
When reading about credit cards, mortgages, or other financial products, you may
encounter financial terminology and acronyms that you aren’t familiar with. Please
Note that these descriptions are a guide only and are not legal definitions.
A
Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) is a mortgage that offers the borrower a fixed
interest rate for a set amount of time. After that time expires, the interest rate on
the remaining balance varies throughout the life of the loan. Depending on the
terms of the mortgage, the interest rate resets each month or year. This type of
mortgage is also called a variable rate mortgage.
Annual Percentage Rate
The Annual Percentage Rate (APR) is the yearly cost of borrowing money. APR
includes the interest and fees charged over a one-year period. Many types of debt
include an APR such as credit cards, auto loans, mortgages and personal loans.
The APR helps borrowers choose credit card offers, mortgages, loans, etc.
B
Balance
When referring to debt, a balance is the amount of money remaining to be repaid
on a loan, credit card or mortgage. When the term “balance” refers to a checking
or savings bank account, the balance is the amount of money present in the
account.
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Balance Transfer
A balance transfer refers to moving a balance from one account to another
account, which is often an account at another financial institution. It most
commonly describes transferring outstanding debt owed on a credit card to an
account held at another credit card company.
Balloon Payment
A balloon payment is the money owed on a loan when the loan term expires
(usually after 5-7 years). When the term is over, the borrower must pay a balloon
payment for the total amount remaining on the loan, or the borrower can choose
to refinance the loan for new terms and rates. Balloon loans sometimes allow
the borrower to transfer the remaining amount automatically into a long-term
mortgage.
Bankruptcy
When an individual or a company has debt that cannot be repaid, declaring
bankruptcy gives the individual or company legal protection from the debts.
Bankruptcy is a legal process that can offer relief from some or all debts,
depending on the type of bankruptcy.
Budget
A budget is a written plan that tracks monthly expenses and income. It is used to
help manage finances, keep current with expenses and save money.
C
Card Holder
A card holder is the person who is issued a credit card, along with any authorized
users. The primary card holder is responsible for credit card payments. Credit card
holders are protected by federal lending laws that protect consumer rights.
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Cash Advance
A cash advance is a loan issued from a creditor. The most common cash advances
are issued by a credit card or through a loan taken in advance of a paycheck. These
types of cash advance loans charge special interest rates and fees on the amount
of the advance. A credit card cash advance is typically the costliest credit card
transaction compared to purchases or balance transfers.
Cash Advance Fee
A cash advance fee is a charge made by the bank or financial institution that the
borrower owes after taking a cash advance loan. This fee could be either a one-
time, flat fee that is owed at the time of the transaction or a fee charged as an
annual percentage of the amount of the cash advance.
Collateral
Collateral is an asset that a lender accepts as security for a loan. If a borrower
defaults on their loan payments, the lender has the right to seize the collateral and
sell it to recoup any losses.
Collections
Collections occur when a creditor, or a business, like a utility company, sells
past-due debt to an agency to recover the amount owed. The delinquent debt
could be past due credit card debts, utility charges, medical bills, cell phone bills
or other payments that are over 6 months past due. Collection agencies attempt
to recover past due debts by contacting the borrower via phone and mail. See The
Fair Debt Collection Practices Act for laws that protect consumer rights during the
collections process.
Conventional Mortgage or Loan
A conventional mortgage or conventional loan is available through a private
lender or two government-sponsored enterprises—Fannie Mae and Freddie Mac.
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Conventional loans are considered risky because they’re not guaranteed by the
government. These mortgages can have strict requirements and higher interest
rates and fees.
Credit
Credit refers to money that is borrowed that the borrower will need to repay.
Credit Card Charge-Offs
A credit card charge-off occurs when a borrower does not pay the full minimum
payment on a debt for several months. At that time, the creditor writes it off
as a bad debt. Note that a credit card charge-off doesn’t absolve a borrower of
responsibility for the debt. Interest is still owed on the balance. Even after a credit
card charge-off, the lender could turn over the account to a collections agency.
Credit History
A person’s credit history develops as they borrow, repay and manage their loan
payments, expenses and other transactions. Future loans depend on a solid credit
history, because lenders check this information.
Credit Report
A credit report is a statement that has information about a person’s credit history,
including loan paying history and the status of credit accounts. Lenders use credit
reports to help them decide if they will loan money and what interest rates they
will charge.
Credit Score
A credit score is a number based on a formula using the information in a person’s
credit report. The result is an accurate forecast of how likely that person is to pay
bills or repay loans. Lenders use credit scores to determine what interest rate they
will offer on credit cards, mortgages, car loans and other loans.
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Creditor
A creditor is a person or institution that extends credit by lending a borrower
money. The borrower agrees to repay the funds under agreed upon terms.
D
Debt
Debt is money owed to a lender, such as debt from credit cards, student loans, or
a mortgage.
Debt Consolidation
Debt consolidation means that a person’s debts, whether credit card bills
or loan payments, are rolled into a new loan with one monthly payment. A
debt consolidation loan does not erase debt. Borrowers might pay more by
consolidating debt into another type of loan.
Debt Management Plan
A debt management plan is when an organization works with creditors to reduce
a borrower’s monthly payment and interest rates. People working through a debt
management plan typically take 3-to-5 years to pay off debt. For those who team
with a national nonprofit like GreenPath, a Debt Management Plan is delivered by
financial counselors certified by the National Foundation for Credit Counseling
(NFCC) who receive training in compassion and empathy.
Debt Counseling
Borrowers receive debt counseling (also called credit counseling) when a trained
credit counselor reviews their personal finances, debt and credit history to make
personalized recommendations to help manage financial challenges. In the case of
GreenPath, debt counseling is provided by certified financial counselors who take
into consideration a person’s total financial picture, from outstanding credit card
payments to overall financial health.
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Debt Settlement
Debt settlement is a process of negotiating with creditors to accept a percentage
of the full amount on debt that is charged off or severely delinquent. For-profit
debt settlement companies operate to deliver profits to their organization. As part
of the for-profit business model, debt settlement employees are often paid on a
commission basis, based on the fees they collect from consumers.
Default
A default on a loan occurs when a loan payment is not made by the borrower
according to the payment terms of an agreement.
Deferment
A loan deferment is when a lender agrees that a borrower can pause making
monthly loan payments for a set amount of time. Loans that are deferred are not
forgiven. The borrower still owes the money and must repay the debt. Deferments
are often available with student loans to provide the borrower with a set amount
of time before making any payments.
Delinquent
When a borrower is late or overdue on making a payment, such as on payments to
credit cards, a mortgage, an automobile loan or other debt, it is called delinquent.
People who are delinquent, or late, with making payments may be charged a late
fee.
F
Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act is a set of laws that protect consumer rights
during the debt collection process.
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Fannie Mae
Fannie Mae, the informal name of the Federal National Mortgage Association,
is a U.S. government-sponsored enterprise that buys mortgages from lenders,
bundles them into investments and sells them on the secondary mortgage market.
Typically, Fannie Mae purchases home mortgage loans from commercial banks or
big banks.
Finance Charge
A finance charge is the cost of borrowing money. The cost to a borrower includes
interest and other fees. Lenders typically set finance charges as a percentage of
the amount borrowed. Some lenders might set a flat fee finance charge.
Fixed Rate
A fixed rate is an interest rate that stays the same for the life of a loan, or for a
portion of the loan term, depending on the loan agreement.
Forbearance
Forbearance is a process when a lender agrees to a lower payment or no payment
for a temporary period of time. Forbearance is not loan forgiveness. After that
time expires, the borrower may face higher payments, accrued interest or an
extended loan term.
Foreclosure
Foreclosure is a legal proceeding that happens when a borrower does not make
payments on a secured debt. The lender may start legal foreclosure proceedings to
seize the property associated with the debt. As an example, default on a mortgage
could result in foreclosure and auction of the property.
Freddie Mac
Freddie Mac, the informal name of the Federal Home Loan Mortgage Corporation,
is a U.S. government-sponsored enterprise that buys mortgages, combines them
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
with other forms of loans, and sells the debt on the secondary mortgage market.
Typically, Freddie Mac purchases home mortgage loans from smaller banks and
lenders.
G
Grace Period
A grace period is a set period of time in which borrowers do not have to pay
finance charges or interest if they pay balances in full. Revolving credit card
lending provides a borrower with a grace period.
I
Interest
Interest refers to the cost of borrowing funds, paid by to the lender by the
borrower. Interest also means the profit that accrues to those who deposit funds
in a savings account or investment.
Interest Rate
An interest rate is the fee lenders charge a borrower, calculated as a percentage of
the loan amount. The percentage charged when borrowing money is known as the
interest rate.
L
Loan Forgiveness
Loan forgiveness means a borrower is no longer obligated to make loan payments.
With student debt loan forgiveness, the borrower must meet certain criteria such
as actively serving in the military, performing volunteer work, teach or practice
medicine in certain types of communities, or must meet other criteria specified by
the forgiveness program.
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Loss Mitigation
Loss mitigation is the process when mortgage servicers work with borrowers to
avoid foreclosure.
Loan Modification
Loan modification is when a lender makes a permanent change to loan terms.
The modifications could include changing the interest rate, type of mortgage or
extending the time to pay the mortgage balance.
M
Minimum Payment
The minimum payment is a payment made on a loan or credit card that is specified
by the lender as the smallest payment amount due. Borrowers can pay more than
the minimum payment.
Mortgage
A mortgage is the loan a borrower takes on from a lender to purchase real estate.
P
Past Due
Past due is when a payment has not been made by its due date. Borrowers who
are past due will usually face penalties and are subject to late fees.
Private Mortgage Insurance
Private mortgage insurance is a type of mortgage insurance that might be required
for borrowers to pay for with a conventional loan. Private mortgage insurance
protects the lender in the event a borrower stops making payments on the loan.
R
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
Reinstatement
Reinstatement refers to a lump sum payment that makes an account current
when the borrower pays everything that is owed. This payment would include any
missed payments and fees.
Repayment Plan
A repayment plan is a written agreement for borrowers who are past due on loan
payments. This option allows the borrower to pay the late amount as a smaller
addition to the regular monthly payment, spread out over several months.
Revolving Credit
Revolving credit is when a creditor increases the credit limit to an agreed level as a
borrower pays off a debt, such as a credit card. Revolving credit may take the form
of credit cards or lines of credit with other lenders.
S
Secured Debt
A secured debt is a loan that allows the lender to seize the asset or collateral used
to acquire the debt to repay the funds advanced to the borrower in the event of
default. Examples of secured debt are mortgages and auto loans. In these cases,
the item being financed is the asset or collateral for the financing.
Short Sale
A short sale is when a homeowner in financial distress sells property for less than
the amount due on the mortgage.
U
Unsecured Debt/Unsecured Loan
Unsecured debt or an unsecured loan is a loan that is not backed by an asset or
GREENPATH FINANCIAL WELLNESS Guide to Understanding Financial Terms
collateral. It is riskier than secured debt. The interest rate for unsecured debt is
normally higher than for secured debt.
V
Variable Rate Mortgages
A variable rate mortgage is a mortgage in which the initial interest rate is fixed for
a period of time. After that period expires, the interest rate on the outstanding
balance varies throughout the life of the loan. Depending on the terms of the
mortgage, the interest rate resets each month or year. This type of mortgage is
also referred to as an adjustable-rate mortgage (ARM).
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Additional Resources for Financial Wellness
GreenPath free financial counseling line:
877-337-3399
Online education tools:
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