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Glossary of terms

401(k) Loan

An amount of money borrowed against the accumulated cash value of a 401(k) retirement plan upon approval of the employer. The borrower must pay back the loan within five years through payroll deductions. The loan carries a low interest rate, and the interest payments go back into the retirement account. Borrowers often use 401(k) loans to pay off credit card debt.

401(k)

A retirement savings plan sponsored by an employer that allows the employee to set aside money for retirement. Funds toward the plan are deducted from the employee's before-tax pay, with matching contributions from the employer. The accrued funds are not taxed until the money is withdrawn.

Adjustable Rate

The variable percentage a borrower pays for the use of money that may increase or decrease throughout the life of the loan. Here are some common forms of consumer loans and credit extensions that carry an adjustable interest rate:

Amortization

The repayment of a debt with prioritized installments. An amortization schedule is often used to illustrate the interest and principal payments on a home equity loan for debt consolidation. Below is an example of a amortization schedule:

Debt = $1,200; Interest rate = 15.00%; Term = 6 months

Asset Liquidation

The process of selling a debtor's assets or property to pay off creditors. This process is associated with Chapter 7 bankruptcy. At filing, the debtor provides a list of assets to a bankruptcy trustee who determines which items to sell and compensate creditors. The long-term effect of Chapter 7 liquidation is a negative mark on the filer's credit record that exists for a minimum of 10 years.

Assets

A person's owned possessions that carry value. Assets are often characterized by liquidity, the ability to covert to cash in a short time without loss. Here are some specific types of personal assets:

Bad Credit

A term identifying a person with below average credit resulting from default or late payments on previous debts. Bad credit can influence many aspects of a person's life, and an increasing number of businesses are screening customers based on their credit history.

Balance Transfer

The process of moving a high-interest credit card balance onto another card with a lower interest rate. Consumers often use a balance transfer to consolidate multiple high-interest debts onto one card, but the low interest rate usually lasts for a brief three month period.

Balloon Payment

A loan payment made at the end of the term to pay off the remaining balance. The payment amount is larger than other payments. During the life of the loan, the borrower makes small prioritized payments, usually monthly, until the end of the term when the balloon payment is made to eliminate the remaining sum.

Bank

A financial institution offering loans and credit to customers while holding money deposits and other valued items. Banks offer a variety of products to help consumers manage debt, such as personal loans and debt consolidation.

Bankruptcy Trustee

A person legally appointed by a federal court to serve the interests of creditors involved in a Chapter 7 or Chapter 13 bankruptcy case. The bankruptcy court executes its mandate through the trustee, who's responsible for ensuring the creditors receive the maximum amount of restitution.

Bankruptcy

An action pursued by debtors in federal court to relieve debts and gain protection from creditors seeking legal action. Personal or consumer bankruptcy occurs in one of two forms: Chapter 7 and Chapter 13 .

Beneficiary

A term describing the person entitled to receive assets and proceeds from a life insurance policy, retirement plan, will or trust. The amount beneficiaries receive from a whole life insurance policy can be negatively affected by debt consolidation when the policyholder taps into the funds to pay off debt.

Borrower

The person who obtains a loan or is granted a line of credit from a lender or creditor while accepting the liability of repaying the debt in full. The goal of the borrower, whether seeking a loan to buy a car or relieve debt, is to receive the best possible repayment term and lowest interest rate.

Car Title Loan (secured line of credit)

An advancement of money that uses the borrower's automobile as collateral. These loans often carry unfavorable repayment terms and expensive interest rates. Car title loans can be a form of secured debt consolidation.

Cash-Out Refinance

The restructuring of a mortgage loan for a larger amount than the remaining sum. The difference is cashed out by the borrower. A popular method of paying off multiple debts, a cash-out refinance converts unsecured credit card debt into a secured loan using the debtor's real estate property as collateral.

Certificate of Deposit (CD)

A certificate issued by a bank on a time deposit of a certain amount of money. A CD accrues interest over a specified term and fixed maturity date, similar to a savings account but with higher interest and penalties for early withdraw.

Chapter 7

The chapter of the bankruptcy code that liquidates assets of a debtor to pay off creditors and discharge debts. Below lists some of the key points involved in a Chapter 7 bankruptcy case:

·         Remains on credit record for 10 years

·         Proceeds from liquidation given to creditors

·         Allowed to file once every seven years

·         Strict rules to qualify, must pass the "means test"

Chapter 13

The chapter of the bankruptcy code involving the adjustment of debts to allow the debtor to repay creditors over a three- to five-year period. Debtors who don't qualify for Chapter 7 are transferred to Chapter 13 bankruptcy.

·         Remains on credit record for  ten years

·         Filer enters a debt repayment plan

·         Must direct all disposable income toward creditors

·         Filer's income determines the amount paid on debt

Closed-End Credit

An advancement of money at a fixed amount in which the borrower agrees to repay the entire principal and interest over a predetermined period. Payments are made in fixed installments, and the credit may be secured or unsecured.

Collateral

A valuable asset or property pledged by a borrower as security against repayment of a debt. If the borrower fails to repay the debt, the lender receives ownership of the asset. Secured loans use collateral as insurance against repayment.

Commercial Bank

A financial institution that offers consumer and business services such as loans, credit cards and various deposit accounts. Commercial banks offer their services to all people, unlike other financial institutions, such as credit unions which require membership prior to eligibility.

Consolidation Loan

An advancement of money to pay off a combined debt amount, replacing multiple debts with one loan. Lenders offer specialized consolidation loans to help borrowers pay off debts. This type of loan varies based on credit score and collateral.

Consumer Credit Counseling Service

An agency (some non-profit) that offers debt management services to help people repay debts while working on behalf of creditors. All agencies (including non-profits) are paid by the creditor. The service aims at getting the debtor to repay all debts in full. The service also provides educational tools to assist people with debt.

Consumer Credit

A loan or line of credit granted to a consumer to purchase goods and services. Consumer credit can occur in several different forms including open-end credit, installment loans, closed-end credit and single-payment loans.

Credit Card

A plastic card carrying a revolving balance that allows cardholders to use the money for goods and services. A credit card carries a credit limit, the maximum amount of money extended to the cardholder. The interest rate on a credit card is based on the cardholder's credit record and the prime rate.

Credit Counseling

A debt-relief service provided by an agency who works to lower the interest rate and fees on credit cards. These credit counseling agencies are compensated by creditors to get consumers to repay their debts in full, and the program does not offer any reduction in the principal debt amount, only in fees and interest.

Credit History

A detailed record of a person's ability to repay debts, along with data on borrowing tendencies. A person's credit history illustrates his or her past performance on financial obligations, such as credit cards, loans and utility bills. Here is some information that might appear on someone's credit history for a specific account:

Credit Report

A record of financial obligations about a person, including payment histories, outstanding debts and available credit. Every consumer is entitled to a free copy of his or her credit report. The three major credit bureaus - Equifax, Experian and TransUnion - offer personal credit reports.

Credit Score

A number that reflects a person's credit history used by lenders to assess risk and creditworthiness. One's credit score is affected by spending and repayment habits.

 

Credit Union

A nonprofit financial institution offering similar services as a commercial bank and operated as a cooperative, owned and controlled by the people who use its services. Credit unions are known for offering low interest rates on loans and high rates on savings accounts.

Creditworthiness

The risk level of a borrower, as viewed by a lender. Borrowers likely to make timely payments on debt are considered to be creditworthy

Debt Negotiation

The process that takes place between a creditor and debtor, or an agency representing the debtor, to settle on a repayment amount less than the initial balance.

Debt Settlement

A method by which debtors help resolve debts by working with the creditor to settle the debt. Creditors agree to waive part of the debt and accept the remaining sum as full repayment.

Debt Settlement Company

A firm that specializes in negotiating unsecured debt on behalf of its customers by working with their creditors. These companies may be called debt consolidation firms, debt settlement firms or debt management firms.

Debt

Money a borrower owes to a lender. A person can incur debt from many different sources, such as credit cards, department store cards and loans. Debt is typically classified into two categories: secured and unsecured. A debt is secured when the debtor's asset may be controlled by the creditor if the debtor fails to make payments. An unsecured debt does not use collateral and carries a higher interest rate than secured debt because the creditor takes on more risk. Some examples of secured and unsecured debts:

Debtor

A person who owes money. Debtor's include those who borrow money for home mortgages and car loans, as well as those who've accumulated credit card debt.

Default

The failure to fulfill financial obligations on a loan, credit card or any debt security. A mark on a person's credit report as an indication of bad credit.

Delinquent

An overdue payment, or failure to repay a financial liability. The delinquency appears as a negative item on a credit report.

Discharge of Debts

The cancellation of a consumer's financial liabilities that occurs through bankruptcy.

Additional Info:

Disposable Income

The portion of personal income that can be spent at the person's discretion. In general, the greater one's income, the greater their availability of disposable income. Disposable income is not necessarily spent frivolously.

Equity

The dollar difference between the fair market value of an asset and debts claimed against it.

Finance Company

A business that specializes in lending financial commodities to individuals, often with bad credit or no credit, and does not take deposits like a commercial bank.

Financial Institution

A company or enterprise that performs financial tasks, such as holding deposits, issuing loans or investing in securities, for consumers, businesses or the federal government.

First Mortgage

The initial loan on a property that has precedence over all other debts on the property.

Fixed Rate

A predetermined percentage of interest applied to the principal on an extension of credit.

For-profit Company

A debt-relief agency that does not receive subsidies or compensation from credit card companies to help customers relieve debt problems.

Foreclosure

The procedure that occurs when a mortgage lender gains ownership of a property after the homeowner failed to make proper payments.

High Risk Debt Consolidation Loan

An advancement of money for someone with damaged credit to finance multiple debts. A loan issued to a borrower considered a high risk usually will carry unfavorable terms and conditions, such as a high interest rate, extended repayment term and predefined rate adjustments.

Home Equity Line of Credit

A revolving credit line offered by lenders allowing homeowners a second mortgage that uses the homeowner's equity as collateral.

Home Equity Loan

An installment loan secured by the accumulated equity of the borrower's home. A form of closed-end credit featuring a fixed interest rate, monthly payment and term.

Installment Loan

An extension of money arranged to allow borrowers to repay the principal and interest in equal payments over a fixed term.

Interest Rate

A percentage charged by a lender for borrowing money.

Additional Info:

Interest

The cost of borrowing money, usually expressed as a percentage rate.

Introductory Rate

A low interest rate carried by a credit card for an initial period, usually three months.

Junk Fees

The excessive and unnecessary costs charged by credit card companies or personal loan lenders.

Lender

A company that provides loans to customers.

Liability

A financial obligation.

Life Insurance Loan

An amount of money borrowed against the accumulated cash value of a whole life insurance policy.

Liquidation

The selling of assets to use the proceeds to pay off debts.

Lump Sum

A large one-time payment or distribution of money.

Means Test

An income-based test required for Chapter 7 bankruptcy filers.

Mortgage Refinance

An adjustment of the remaining amount on a loan to secure a low interest rate, extend the payment term or increase the amount borrowed.

Mortgage

A secured loan that uses real estate as collateral against repayment. The lender can seize possession of the property if the borrower defaults on the payments.

Net Income

A person's income minus expenses.

Non-Profit Company

A debt-relief agency funded through credit card companies that helps customers repay debts in full.

Open-End Credit

A revolving line of credit that borrowers may use repeatedly.

Original Balance

The principal amount of a loan excluding interest and other charges.

Pawn Shop Loan

A small, short-term extension of money by a pawnbroker for a variety of merchandise, such as tools, electronics and jewelry.

Payday Loan

Also known as deferred presentment, are currently available in 20 states plus the District of Columbia . They are short-term loans, generally 7 to 14 days, against a post-dated check. In Arizona , this loan against the paycheck you haven't yet earned carries a 15% fee. On the average payday loan of $300 for eight days, this 15% fee equates to an APR of 459

Policyholder

A person who pays a premium in exchange for coverage by an insurance policy.

Pre-Approval

The process used by creditors and lenders to qualify borrowers for an extension of credit or a loan without a credit check or any other screening method.

Predatory Lending

When lenders mislead borrowers to obtain expensive and abusive loans that carry high interest rates and excessive fees.

Prime Rate

The standard interest rate on loans set by banks in relation to the Fed Funds rate, the rate at which banks lend money to each other.

Principal

The initial amount of a debt excluding interest and other fees

Repossession

The seizure of property after a borrower fails to make payments. Loans that are secured with collateral, such as car loans and home mortgages, include a risk of repossession.

Revolving Credit

An available amount of money borrowers can pay off and use again that does not carry a fixed repayment schedule but only minimum payments.

Secured Credit Cards

A line of credit that equals an amount deposited by the cardholder as collateral

Settlement

An agreement between a creditor and debtor on a reduced amount of debt to be repaid.

Subprime Borrower

A person with a low credit score resulting from late or default payments on previous debts. Lenders label these borrowers as risky business options and charge them higher interest rates. Borrowers are often considered subprime when their credit score is less than 620.

Subprime Mortgage

A mortgage loan issued to a homeowner with a damaged credit history and low credit score. The mortgage lender levies high interest rates that often adjust above the borrower's ability to make payments, resulting in default and foreclosure.

Subprime

A category used to identify financial operations involving borrowers with damaged credit histories and low credit scores.

Tax-Deductible

An expense that a taxpayer may subtract from income tax payments. Charitable contributions are an example of a tax-deductible expense.

Third Party Firm

A company that acts as a middle man between a creditor and a debtor in a repayment plan.

Title Loan

An extension of money against the ownership right of property, such as a car or boat title.

Transfer

The procedure of moving a balance to another account. Many credit lenders will allow you transfer your credit card balance from one card to another.

Unsecured Credit

A revolving line of credit not backed by collateral. Most credit cards are are a form of unsecured credit.

Unsecured Loan

A lump-sum distribution of money that involves no collateral. Unsecured loans are usually personal loans, such as loans given by a bank or other lending institution.

Variable Interest Rate

A fluctuating percentage rate a borrowers pays for the extension of money.

Whole Life Insurance

A protective contract that issues funds to the beneficiary upon the death of the policyholder and accumulates cash value, allowing the policyholder to borrow against the amount to finance debt consolidation.

Yield

The percentage rate of return on an investment. The amount or quantity produced or returned.

Zero Balance

The appearance on a consumer's credit card bill when all debts have been paid off. Consumers begin their credit cards with zero balances.

Zero-Interest Credit Card

A revolving credit line that accrues no interest for a specified introductory period, usually three months.