Basic Loan Definitions

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Basic Loan Definitions

Loan:  A sum of money that is borrowed to be paid back with interest over time.

Borrower:  Individual or Entity that borrows a sum of money from a lender such as a financial institution.

Co-Borrower:  Receives a direct benefit or interest from the loan.  Sometimes also referred to as a joint borrower or joint applicant and is equally responsible for repayment of the loan.

Co-Signer:   Receives no direct benefit or interest from the loan.  Borrows with a borrower and is equally responsible for repayment of the loan.

Principal or Loan Amount:  The amount borrowed from the lender before any fees or interest are added or applied. 

Interest:  The amount charged by the lender, usually a percentage, that is paid for the use of the sum borrowed. 

Fixed Interest Rate:  An interest rate that does not change during the term of the loan.

Adjustable or Variable Interest Rate:  An interest rate that adjusts during the term of the loan.  Usually disclosed as a percentage added to an index rate, such as the Wall Street Journal Prime Rate. 

Secured Loan:  A loan in which something of value as security, like a home or car, is pledged to the lender.

Unsecured Loan:  A loan in which something of value as security is not given.  Credit cards are an example. 

Installment Loan:  A loan paid over a fixed term or length of time with scheduled payments (installments) of the same amount. 

Revolving Loan:  A loan that provides continuous access to funds up to a certain established credit limit (Principal or Loan Amount).  Borrow when needed and only amounts needed.  Payments are usually interest on the amount actually borrowed.  As the loan is repaid, the Principal or Loan Amount is made available again for future needs.  Credit cards and Home Equity Lines of Credit are examples.

Home Equity Loan vs. Home Equity Line:  Types of loans that are secured by the equity in the borrower’s home, usually with a mortgage or deed.  A Home Equity “loan” is usually an installment loan with the full loan amount funded at once, interest is assessed and charged on the total loan amount and repaid in principal and interest installments over a specific period of time.   A Home Equity “line” allows the borrower to obtain funds when needed up to a set Principal or Loan Amount (similar to a credit card), interest is assessed on the amount borrowed and payments are generally due monthly for the interest that has accrued.

Advance vs Cash Advance:  Obtaining an amount (loan) from a revolving loan or line of credit, such as a home equity line of credit loan or credit card, that is available up to an established credit limit by using devices such as checks or cards associated with the account, usually at no cost.  Cash Advances on credit cards may come with upfront fees as well as higher interest rates on the balances of these transactions.