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Glossary

The world of finance has its own language. This glossary is a short list of common terms used in the world of finance. At the end of the glossary are links to other glossaries with additional terms and definitions.

A

Amortization: The gradual and systematic reduction of debt by equal periodic payments. Such payments generally must be sufficient to recompense current interest due during the repayment period and to repay the entire principal by the time the loan reaches maturity. An amortization schedule is a table that shows the amounts of principal and interest due at regular intervals and the corresponding unpaid principal balance at the time each installment payment is made.

Annual Percentage Rate (APR): The rate required by Truth in Lending laws. It is designed to show customers the total cost of credit, including the stated interest rate plus certain finance and service charges. See also Truth in Lending Act.

Appraisal Fee: The charge for estimating the value of property offered as security.

B

Bankruptcy: State of insolvency of an individual or an organization--in other words, an inability to pay debts. There are two kinds of legal bankruptcy under the U.S. law: involuntary, when one or more creditors petition to have a debtor judged insolvent by a court; and voluntary, when the debtor brings the petition. In both cases, the objective is an orderly and equitable settlement of obligation. See also Chapter 7, Chapter 13.

C

Cash Flow: Cash available to an organization from its business operations and investments. A positive cash flow indicates net operating income is sufficient to cover expenses, while a negative cash flow means expenses are growing faster than revenues. Lenders, when making loans to a business, often look first at cash flow from operations before collateral pledged by the borrower, as the primary source of loan repayment.

Certificate of Deposit (CD): A form of time deposit at a bank or savings institution; a time deposit cannot be withdrawn before a specified maturity date without being subject to an interest penalty for early withdrawal. Small-denomination CDs are often purchased by individuals. Large CDs of $100,000 or more are often in negotiable form, meaning they can be sold or transferred among holders before maturity.

Certified Check: A check for which a bank guarantees payment. When the check is certified, it legally becomes an obligation of the banks, and the funds to cover it are immediately from the depositor's account.

Chapter 7: A provision of bankruptcy laws wherein a company is required to liquidate its assets to pay of its creditors. See Bankruptcy.

Chapter 13: Adjustments of debts of an individual with regular income under the Federal Bankruptcy Code. Chapter 13 enables a debtor who is an individual to develop and perform a plan for the prepayment of creditors over an extended period. The plan might provide for full or partial repayment. Chapter 13 allows the debtor to retain his or her property, unless he or she agrees otherwise in the plan. See Bankruptcy.

Check: A demand deposit instrument (a draft) signed by the maker and payable to a person named or to a bearer upon presentation to the bank on which it is drawn.

Collateral: An asset such as an automobile or a piece of property that a person uses to take out a loan, promising to give the asset to the lender if loan payments cannot be met. Collateral also refers to the collection of receivables, such as mortgages, which are used to back the interest and/or principal security.

Consumer Credit: Loan extended to individuals. Consumer credit includes secured and unsecured installment and revolving credit.

Credit Card: A plastic card authorizing the account holder to charge purchases against a preapproved credit line. Credit cards are issued by banks, thrift institutions, retailers, gasoline companies, and other credit grantors. Many card issuers change an annual fee to cover account servicing costs. See also Debit Card.

Credit Rating: A formal evaluation of an individual's or company's credit history and capability of repaying obligations. Any number of firms investigate, analyze, and maintain records on the credit responsibility of individuals and businesses. The credit rating is based on the number of outstanding debts and whether debts have been repaid in a timely manner in the past.

Credit Scoring System: A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness.

D

Debit Card: A plastic card giving consumers access to their funds electronically. Debit cards act like checks when paying for goods and services or withdrawing cash at automated teller machines. See also Automated Teller Machine; Credit Card.

Demand Deposit: An account balance which, without prior notice to the bank, can be drawn on by check, cash withdrawal from an automatic teller machine, or by transfer to other accounts using the telephone or home computers. Demand deposits are the largest component of the U.S. money supply. And the principal medium through which the Federal Reserve implements monetary policy.

Direct Deposit: An automatic deposit of wages or benefits (such as payroll payments) into a consumer's bank account. Direct Deposit payments are processed through the Federal Reserve's Automated Clearing House.

E

Electronic Fund Transfer Systems (EFTS): A variety of systems and technologies for transferring funds (money) electronically rather than by check. Includes Fedwire, Bankwire, automated clearinghouses (ACHs), and other automated systems.

Electronic Transfer Account (ETA): An ETA is a low-cost account which is made available by participating Federally insured financial institutions to individuals who receive Federal benefit, wage, salary, or retirement payments. The account allows recipients to receive Federal payments electronically in accordance with the Electronic Funds Transfer (EFT) provision of the Debt Collection Improvement Act of 1996 (DCIA). The DCIA requires that Federal payments, except for tax refunds and except where waived by the Secretary of the Treasury, be made electronically after January 1, 1999.

F

Finance: Charge/Cost of credit, including interest paid by a customer for a consumer loan. Under the Truth in Lending Act, the finance charge must be disclosed to the customer in advance. See also Consumer Credit Protection Act of 1988.

Fixed Rate: A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal. See also Interest, Principal.

Fraud: Intentional misrepresentation, concealment, or omission of the truth for the purpose of deception or manipulation to the detriment of a person or an organization. Fraud is a legal concept and the application of the term in a specific instance should be determined by a legal expert.

G

Garnishment: A notice to an employer or other asset holder requiring that monies, wages, or property due a debtor be withheld and given a creditor to be applied to a specific debt in arrears.

Graduated Payment: Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization. See also Amortization.

H


I

Individual Development Account (IDA): Special savings accounts for low-income families often restricted to first home purchase, higher education, or small business capitalization. A portion of the deposited funds are matched by one or more of the following institutions: federal and state government, banks and credit unions, community-based organizations, foundations, and churches. Families saving in an IDA program receive the help of a non-profit organization that usually requires financial literacy training.

Installment Credit: A loan, extended by financial institution or retail firms, to be repaid along with interest charge in fixed periodic payments or, if variable rate of interest is charged, to be repaid in amounts that vary with the interest charged.

Interest: A fee charged by a lender for the use of money over time.

Internet Banking: Financial services accessed via the Internet's World Wide Web. Banks use the Internet to deliver information about financial services, replace transactions done in branch offices, which eliminates the need to build new branches, and to service customers more efficiently. Internet banking sites offer the prospect of more convenient ways to manage personal finances, and such services as paying bills online, finding mortgage or auto loans, applying credit cards, and locating the nearest ATM or branch office.

J


K


L

Lease Financing: A specialized area of finance dealing with renting property owned by a lender, financing the leases of a company engaged in rentals, financing the purchase of an item to be leased out by a borrower.

Loan: Transaction wherein an owner of property, called Lender, allows another party, the Borrower, to use the property. The borrower customarily promises to return the property, after a specified period with payment for its use, called Interest. The documentation of the promise is called a promissory note when the property is cash.

M

Mortgage: Debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien a property as security for the repayment of a loan. The borrower has use of the property, and the lien is removed when the obligation is fully paid. A mortgage normally involves real estate. See also Debt.

Mortgage Loan: A temporary and conditional pledge of property to a creditor as security for the repayment of debt.

Mutual Fund: A registered investment trust company. A mutual fund is an "open-end" investment company, whose primary activity is investing, usually in a diversified portfolio of securities. The stockholder in a mutual fund buys shares from, or sells them back to, the mutual fund in a direct sale, not through a stock exchange.

N

Negative Amortization: Repayment schedule calling for periodic payments that are insufficient to fully amortize the loan. Earned but unpaid interest is added to the principal, increasing the debt. Eventually, payments must be rescheduled to fully pay off the debt. See also Amortization.

O

Online Banking: Access by personal computer or terminal to bank information, accounts and certain transactions via the financial institution’s web site on the Internet. Also known as Internet banking.

Overdraft Checking Account: A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.

P

Payday Loan: A transaction in which a short-term cash advance is made to a consumer in exchange for a customer's post-dated check in the amount of the advance plus a fee, or in exchange for a consumer's authorization to debit a transaction account in the amount of the advance plus a fee at a designated future date.

Personal Identification Number PIN: A sequence of digits assigned to consumers that are used to identify them when debit cards are used at an ATM, POS terminals or a home device. See also ATM, Credit Card, Debit Card.

Predatory Lending: Unscrupulous lending that involves at least one of the following elements: - making high-cost loans based on the assets of the borrower rather than on the borrower's ability to repay the obligation - inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced ("loan flipping") - engaging in fraud or deception to conceal the true cost of the loan obligation (e.g. terms and fees) from an unsuspecting or unsophisticated borrower.

Prime Rate: The interest rate charged by leading banks to their best, most secure customers. The rate is determined by the market forces affecting a banks' cost of funds and the rates that borrower will accept.

Principal: Major party to a transaction, acting as either a buyer or a seller. A principal buys and sells for his or her own account and risk. It is also refers to the amount initially lent for a loan or mortgage.

Q


R

Redlining: A practice in which certain areas of a community are eliminated from eligibility for mortgages or other loans, either intentionally or unintentionally, allegedly because the area is considered a poor investment risk.

S

Section 8: A program of the Department of Housing and Urban Development that provides rental assistance to low- and very low-income families. HUD pays the difference between the market rent of a unit and the amount that the tenant is able to pay.

Securities: Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt-obligations (bonds).

Subprime Lending: Lending provided to those who do not qualify for "prime" rates, those rates reserved for borrowers with virtually blemish-free credit histories. Subprime lending that involves unscrupulous practices is considered predatory.

T

Transaction Account: A checking account or similar account from which transfers can be made to third parties. Demand deposit accounts, negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, and credit union share draft accounts are examples of transaction accounts at banks and other depository institutions.

Treasury Securities: Interest-bearing obligations of the US government issued by the Treasury as a means of borrowing; money to meet government expenditures not covered by tax revenues. Marketable Treasury securities fall into three categories- bills, notes, and bonds. Marketable Treasury obligations are currently issued in book-entry form only; that is, the purchaser receives a statement, rather than an engraved certificate.

Truth in Lending Disclosures: Information sent to customers at periodic intervals regarding finance charges, service charges, minimum payment schedule, customer obligations, and Fair Credit Billing Act requirements for items in dispute.

U

Unsecured Credit: Credit extended on the borrower's promise to repay the debt, and for which collateral is not required.

Unsecured Debt: A debt instrument not backed by the issuer's pledging of assets. Unsecured bonds are called debentures.

V

Variable Rate: A variable rate agreement, as distinguished from a fixed rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.

W

Will: A document, also called testament, that, when signed and witnessed, gives legal effect to the wishes of a person, called a testator, with respect to disposal of property upon death.

X


Y


Z


©2004 The Northern and Central Ohio Partnership for Financial Education ~ Technical Questions? ~ Content Questions?