Personal Finance Glossary
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A glossary of common financial terms to help understand the financial industry.
Glossary
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a type of home loan that regularly adjusts its annual interest rate based on an index interest rate. With an ARM, your monthly payment may begin lower than a fixed-rate mortgage, but your interest rate and monthly payment can both increase substantially after the introductory period.
Amortization
Amortization refers to the gradual process of paying off a loan over time with regular payments.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the annual cost of borrowing money, including the interest rate and any other fees you must pay to get the loan. For that reason, your APR is usually higher than your interest rate.
Annual Percentage Yield (APY)
The annual percentage yield (APY) is the total amount paid in interest on a loan or account for the year. It is based on the interest rate and the compounding frequency.
Asset
An asset is any item with economic value, such as stock or real estate.
Auto loan
An auto loan is a type of loan used to purchase an automobile. You will then need to repay the total amount plus interest by making regular monthly payments.
Auto loan calculator
An auto loan calculator calculates the total cost of an auto loan and the estimated monthly payment based on the total cost of the vehicle, interest rate and other lending fees.
Auto loan approval
Auto loan preapproval is the process of getting approved for an auto loan before you purchase the car. The lender will approve you for up to a certain amount which you can use to purchase the vehicle of your choice.
Automated Clearing House (ACH)
The Automated Clearing House (ACH) is a system for authorizing and approving financial transactions worldwide. Participating financial institutions use the ACH to transfer money from one account to another.
Balance transfer
A balance transfer is the process of moving debt from one account to another. The original loan is paid off in full, and the remaining balance is transferred to a new loan with a lower interest rate to help you save money over the life of the loan.
Bank reconciliation
Bank reconciliation is a detailed list of all the transactions, including deposits, transfers, and withdrawals, posted to an account over a specific period of time in relation to the amount of funds on hand to rectify any discrepancies. Financial institutions use it to prevent fraud and accounting mistakes.
Bankruptcy
Bankruptcy is when a business or individual claims they can no longer repay their debts. The person or business can then make arrangements to liquidate their assets or create a repayment plan. Bankruptcy is a legal process that a judge must approve.
Car refinancing
Car refinancing is the process of replacing your current auto loan with a new one. The new loan has new terms and a new interest rate. You can use this option to lower your monthly payment or reduce your interest rate to save money.
Cashier's check
A cashier's check is a check guaranteed by a financial institution made out to a company or individual. The funds will be debited from the bank's internal account when the recipient deposits the check. They are often used in brokerage and real estate transactions.
Certificate of Deposit (CD)
A certificate of deposit, or certificate account, is a type of investment that accrues interest at a set rate. The money is kept in a secure account and will appreciate in value until the maturity date. The funds and any interest accrued are then made available to the investor.
Certified check
A certified check is a personal check certified by a person's financial institution. It shows that the check is official, which means it can be accepted as payment.
Checking account
A checking account is a deposit account designed for everyday spending. It is free and easy to make withdrawals as long as you don't incur a negative balance.
Closing costs
Closing costs are fees incurred at the end of a real estate transaction. They generally range from 3% to 6% of the home's sale price. They may be covered by either the seller or buyer, but are ultimately the buyer's responsibility.
Co-signer
A co-signer is a person who agrees to take on the financial responsibility of paying your debts if you can no longer make regular payments.
Collateral
Collateral is an asset or sum of money used to secure a loan. If you fail to repay the loan, the collateral can be used as repayment.
Collateralized Debt Obligation (CDO)
A collateralized debt obligation (CDO) is a structured financial security backed by a package of underlying loans, such as mortgage or car loans made to individuals. These loans can be used as collateral if the CDO goes into default.
Commercial loan
A commercial loan is a loan used for business purposes. The business owners are responsible for repaying the loan in regular installments plus interest using the income they make from their company.
Compound interest
Compound interest is the interest accrued when the interest rate is applied to the remaining loan balance and all the interest accrued from previous periods.
Compounding frequency
Compounding frequency is the number of times per year the interest accrued is credited to the account. The interest is added to the principal amount, which creates compounded interest. Interest can be compounded yearly, semi-annual, quarterly, monthly, daily or hourly.
Construction loan
A construction loan is used to construct a building or home. You must repay the principal amount plus interest over a short period until the home is built. Loan funds can only be used for construction expenses.
Coverdell Education Savings Account (ESA)
A Coverdell education savings account (Coverdell ESA) is a trust that can only be used to pay for qualifying educational expenses on behalf of the designated beneficiary. The account provides tax advantages to encourage parents and guardians to save for their child's education.
Credit card
A credit card is a card issued by a financial institution that allows you to pay for goods and services on credit. You must repay the money spent plus interest until it is paid in full.
Credit history
Your credit history is a collection of all your debts and related payments, including how much you owe, how many loans you have in your name and how often you pay your bills on time.
Credit limit
Your credit limit is the maximum amount you can charge to a credit card. You can pay down your balance to free up credit and pay your bills on time to increase your credit limit.
Credit report
A credit report is a statement with information about your credit history and current credit situation, including the remaining balance on your debts, the number of accounts in your name, overall credit utilization and a record of all payments made over a specific period of time.
Credit score
A credit score is a numerical score that typically ranges from 300 to 850 and predicts how likely you are to repay a loan on time. Companies use a mathematical formula—called a scoring model—to create your credit score from the information in your credit report. There are different scoring models, so you have more than one credit score.
Credit union
A credit union is a not-for-profit financial institution that offers many of the same services and products as a bank but usually with lower fees. They are designed to serve the communities in which they are located, such as a county, city or state.
Currency exchange
Currency exchange is the process of exchanging one type of currency for another at a financial institution or currency exchange company.
Debit card
A debit card is a card issued by a financial institution linked to a checking account. The card can be used in place of cash, and any expenses charged to the card are automatically deducted from your account.
Debt-to-Income Ratio (DTI)
Your debt-to-income (DTI) ratio is all your monthly debt payments divided by your gross monthly income. The DTI is expressed as a percentage based on how much of your monthly income goes toward repaying your debts.
Default
Default is when you fail to repay the money you have borrowed. You will default on the loan once you miss a certain number of regular payments.
Delinquency
Delinquency happens when you fall behind on your monthly payments, which means the loan is in default.
Direct deposit
Direct deposit is when your income is automatically deposited into your checking account. It is usually more convenient and less wasteful than depositing a physical check.
Early withdrawal penalty
An early withdrawal penalty is a fee you incur when you withdraw funds from an account before the maturity date. This often applies to retirement accounts, certificates of deposit and other time-based investments.
Electronic Funds Transfer (EFT)
An electronic funds transfer (EFT) is when money is transferred electronically from one account to another, either within the same financial institution or across multiple institutions.
Escrow
Escrow is when a third party, such as a financial institution or title company, agrees to temporarily hold money or property until the buyer and seller come to an agreement. In most situations, the buyer must meet certain conditions before the transaction can be approved.
FDIC Insurance
FDIC Insurance from the Federal Deposit Insurance Corporation guarantees the money in your bank account up to $250,000 per account. If the financial institution holding your money files for bankruptcy, the government steps in to ensure you receive the funds you have earned.
FICO score
Your FICO Score is the three-digit number representing your credit score. The mathematical equation used to create the score was created by Fair Isaac Corporation (FICO).
Finance charge
A finance charge is a fee for borrowing money or using a credit card.
Financial advisor
A financial advisor is someone who provides financial advice to individuals regarding saving, investing and other important money-related issues.
Fixed-rate mortgage
A fixed-rate mortgage is a type of home loan with a set interest rate that will not change over the life of the loan, so your monthly principal and interest payment will be the same every month.
Foreclosure
Foreclosure is when you fail to repay the money you borrowed to buy your home. If you stop making mortgage payments, the home can be used as collateral and may be repossessed by your financial institution.
Foreign transaction fee
A foreign transaction fee is a fee for using your credit or debit card outside of the U.S. You may have to pay this fee when traveling overseas or buying goods from other countries online.
Grace period
The grace period is the period of time you have to pay your debts before the lender issues a penalty or additional fee. You won't be charged extra if you make a payment during the grace period.
Gross income
Your gross income is your total income before taxes and other deductions are taken out.
Health Savings Account (HSA)
A health savings account (HSA) is a type of investment account with tax advantages, but the funds can only be used to cover healthcare expenses.
High-yield savings account
A high-yield savings account is a type of low-risk investment. It comes with a higher interest rate than a regular savings account, but you'll need to maintain a certain minimum balance to receive these benefits.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) allows you to borrow against your home equity. Equity is based on the amount your property is currently worth minus the remaining balance on your home's mortgage.
Home equity loan
A home equity loan is issued in a lump sum that lets you borrow against your home equity. Equity is based on the amount your property is currently worth minus the remaining balance on your home's mortgage.
Identity theft
Identity theft is when someone assumes your identity using your contact and financial information. Assuming your identity allows the person to make unauthorized purchases on your account or apply for a loan in your name.
Individual Development Account (IDA)
An individual development account (IDA) is a type of savings account geared towards helping you reach a particular goal, such as buying your first home, paying for education or starting a business.
Individual Retirement Account (IRA)
An individual retirement account (IRA) is a type of retirement account with tax advantages to help you save for retirement. Your income goes into a trust at a financial institution that will accrue interest tax-free until you reach retirement age.
Installment loan
An installment loan is a type of loan that must be repaid within a specific period of time. The principal sum is divided into a set number of regular principal and interest payments.
Interest
Interest is the cost of borrowing money. It is usually expressed as an interest rate, which is then applied to the principal balance owed.
Interest rate
An interest rate is a percentage rate representing the amount of interest you must repay. The interest rate is applied to the principal balance at regular intervals until the loan is paid off in full.
Investment
An investment is any method or item used to generate future income, such as real estate, stocks, bonds and savings accounts that accrue in value with time.
Joint account
A joint account is a type of bank account shared between two or more people. The account is often used by married couples who want to share their finances. Both parties have full access to the funds in the account.
Lien
A lien is a legal claim to an asset used as collateral as part of the conditions of the loan. A bank may put a lien on your property or assets if you fail to repay your debts.
Line of credit
A line of credit is a type of account with a set spending limit that allows you to purchase items on credit. You will then need to repay the money you spent plus interest by making regular payments.
Loan origination fee
A loan origination fee is a fee you pay when you first take out a loan. The fee covers the administration fees incurred on behalf of the financial institution providing the loan.
Loan payment
A loan payment is the amount of money you must pay every month until your debt is paid off in full.
Loan term
The loan term is the length of the loan or the amount of time you have to repay the debt.
Loan-to-Value (LTV) ratio
The loan-to-value (LTV) ratio compares the remaining balance on your mortgage to the current appraised value of the property once you have made a down payment. The higher your down payment, the lower your LTV ratio. Mortgage lenders may use the LTV to decide whether to lend to you and determine if they will require private mortgage insurance.
Margin call
A margin call is when brokers request additional funds when an investment account is running out of money, usually due to a bad trade.
Minimum payment
A minimum payment is the minimum amount you must pay every month until your loan is paid off in full. You are welcome to pay more than the minimum payment to save money on interest.
Mobile banking
Mobile banking is the process of managing your finances on your smartphone or tablet using a secure mobile banking app. You can check your balance, transfer funds or make an appointment at your local financial institution.
Mobile deposit
A mobile deposit is when you deposit a check using your smartphone or tablet. You will need to take a photo of the front and back of the check using the built-in camera and enter the check amount into the mobile banking app. The funds will be available in three to five business days.
Money market account
A money market account is a type of deposit account that accrues interest without limiting your access to the funds in the account. The account combines the features of a checking and savings account.
Mortgage
A mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home. You must repay the loan's principal balance plus interest and other fees by making regular monthly payments. Your home will be used as collateral until the loan is paid off, giving the lender the right to take your property if you fail to repay the money borrowed.
Mortgage points
Mortgage points are upfront payments that you can pay on your mortgage to reduce your interest rate and monthly payments in the future.
NCUA Insurance
National Credit Union Administration (NCUA) Insurance is used to insure credit union deposits up to $250,000 per account. If the credit union declares bankruptcy, the government steps in to ensure account holders can access their funds.
Net income
Net income is how much you earn in income minus taxes, loan repayments and other recurring expenses.
Non-Sufficient Funds (NSF) fee
A non-sufficient funds (NSF) fee is a fee incurred when you don't have enough money in your account based on the minimum balance requirement.
Notary public
A notary public is an official chosen by the state or local government to deal with financial matters relating to the public, such as overseeing transactions, trusts, estates, deeds and other financial agreements.
Online banking
Online banking is the process of managing your finances online using your bank's website or mobile banking app. You can access many of the same features you would by visiting your financial institution in person.
Overdraft fee
An overdraft fee is a fee charged to your checking account when you incur a negative balance by spending more money than you have.
Overdraft protection
Overdraft protection is a service provided by financial institutions that will protect you from incurring an overdraft fee when you run out of money in your account. Your account may have an overdraft by up to a certain amount, but you must replenish the funds as quickly as possible to avoid paying a fee.
Payday loan
A payday loan is a short-term loan with a high interest rate intended to cover your expenses until you receive your next paycheck.
Personal loan
A personal loan is a loan from a financial institution used for personal reasons, such as buying a house or car or consolidating personal debt. You repay the loan plus interest by making regular monthly payments.
Power of attorney
A power of attorney gives someone the legal authority to make decisions regarding another person's finances or personal property.
Prequalification
Prequalification is the process of preapproval for a loan, such as a mortgage or auto loan. Before committing to the loan, you can use prequalification to compare interest rates and your estimated monthly interest rate.
Prime rate
A prime rate is the interest rate that financial institutions charge their excellent credit customers. The rate is usually lower than the bank's regular interest rate.
Principal
The principal is the total remaining balance on your loan. When you apply for a loan, the principal is the amount you plan to borrow before interest and other fees.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is a type of mortgage insurance that protects the lender from incurring financial losses should you default on your mortgage. You might be required to pay for PMI if your down payment is less than 20 percent of the property value and you have a conventional loan. You may be able to cancel PMI once you’ve accumulated a certain amount of equity in your home.
Refinancing
Refinancing is the process of replacing your current loan or debt with a new loan. Your old loan will be paid off in full and the remaining balance is transferred to a new loan with new terms and a new interest rate.
Regular savings account
A regular savings account is a bank account that accrues interest at a low rate while keeping your funds easily accessible. You may have to pay a fee or maintain a minimum balance to earn interest.
Returned check fee
A returned check fee is a fee you pay when one of your checks is denied or returned because you don't have enough money in your account to cover the balance.
Revolving credit
Revolving credit is a line of credit that becomes available as you pay down the balance owed.
Routing number
A routing number is a nine-digit code used to identify your financial institution. Companies and retailers need access to this number when conducting your financial transactions to withdraw or deposit money from your account.
Savings account
A savings account is the most basic type of bank account. The money you deposit into the account earns interest at a modest rate.
Secured loan
A secured loan is a loan backed by collateral, such as your personal assets, which can be repossessed if you default on the loan.
Simple interest
Simple interest is the interest rate you pay to borrow money. It is calculated using only the principal and doesn't include compound interest.
Statement savings account
A statement savings account is a statement of all deposits and withdrawals posted to your savings account over a set period of time.
Subprime loan
A subprime loan is a loan designed for individuals with little to no credit. The loan comes with a higher interest rate than a traditional loan to compensate the financial institution for the added risk.
Tiered interest rate
A tiered interest rate is when the interest rate varies based on the loan amount. The interest rate is higher on loans with larger balances.
Time deposit
A time deposit is an investment account that matures at a set date. The funds in the account can't be withdrawn until the account reaches maturity.
Title insurance
Title insurance is a type of insurance designed to protect homeowners and mortgage lenders from bad titles due to undisclosed issues with the property, back taxes, liens and other legal issues.
Underwriting
Underwriting is an automated or manual process by which a lender reviews a borrower's credit risk profile against federal or in-house qualifications. Some lenders may charge a fee for this process.
Unsecured loan
An unsecured loan is a loan that's not secured by collateral. These loans usually have a higher interest rate than secured loans due to the added risk incurred by the lender.
Variable interest rate
A variable interest rate is when the interest rate changes at regular intervals based on an underlying index rate, which will rise and fall based on borrowing costs.
Wire transfer
A wire transfer is the electronic transfer of funds from an account at one financial institution to another, including those in other countries.
Withdrawal limit
A withdrawal limit is the maximum amount of money you can withdraw from a savings account without incurring a fee.