Financial Glossary

Accrued Interest

Interest earned but not yet paid

Annual Percentage Rate (APR)

The cost of credit expressed as a yearly rate. The annual percentage rate is often not the same as the interest rate. It is a percentage that results from an equation considering the amount financed, the finance charges, and the term of the loan.

Credit Rating

For individuals, credit risk is based on your financial resources and credit history. Your total debt level, timeliness in paying credit cards, and many other factors are taken into consideration. Credit bureaus use credit scoring to quantify to potential creditors how likely you are to pay back a loan.

Credit Score

A number that indicates an individual's creditworthiness. Credit bureaus determine the score with a statistical program. You are given points for such things as your credit card debt, number of cards, total debt level, and whether you rent or own your own home. Delinquencies, collection accounts, and charged-off accounts area also factored into this score. Even the number of inquiries from potential creditors can affect your score because a number of inquiries may signal credit problems. Creditors use the score to decide whether to give you a mortgage, issue a credit card, or offer a small business loan. A good score can result in a lower interest rate; a poor score can mean you will be charged a higher interest rate or denied a loan.

Debt-to-Income Ratio (DTI)

Debt-to-income ratio (DTI) is the percentage of monthly gross income that goes toward paying debts.

Disclosure Statement

A written explanation of the rates, fees, and terms of a specific loan based on the borrowers qualifications.

FICO

The most common credit-scoring model used by lenders, it is also known as a Fair Isaac score. A FICO score can range from 200-900. According to this model, the higher your score, the less likely you are to default on a loan.

Finance Charges

Interest charged on loans made to you. For example, the interest rate on a credit card or the interest rate on a student loan is a finance charge.

Interest

Charge paid for borrowing money, calculated as a percentage of the remaining balance of the amount.

Interest Rate

The annual rate of interest on the loan, expressed as a percentage of 100. The rate used to calculate the monthly payment and finance charge of a loan.

Note

Legal document obligating a borrower to repay a loan at a stated interest rate during a specified period of time.

LIBOR

An interest rate at which banks can borrow funds from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year. The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points.

Prime Rate

The interest rate that banks use in pricing loans to their most creditworthy customers.

Supplemental Fee

The fee lenders charge a borrower to protect themselves against the risk of bad debt.