Loan terms glossary
Loan paperwork runs on a small vocabulary that nobody ever teaches you. These are the 30 terms that show up most often on consumer loan agreements and offer letters, each defined in plain language and in the order you would find them in a dictionary. Where a term has a fuller write-up elsewhere on this site, the definition links to it. To put any of these numbers to work, use the free loan calculator.
Amortization · APR · Balloon payment · Collateral · Cosigner · Credit score · DTI · Default · Deficiency balance · Delinquency · Down payment · Fixed rate · Grace period · Installment loan · Interest rate · Lien · LTV · Origination fee · Prepayment penalty · Principal · Refinance · Repossession · Revolving credit · Secured loan · Simple interest · Term · Total interest · Underwriting · Unsecured loan · Variable rate
A
Amortization
Amortization is the process of clearing a loan through equal scheduled payments, each one covering that period's interest first and putting the remainder toward the balance. Because interest is charged on a balance that keeps shrinking, early payments are mostly interest and later payments are mostly principal, even though the payment amount never changes. The guide to how loan payments work is the full explanation, and the calculator prints the month-by-month schedule.
Annual percentage rate (APR)
APR expresses the yearly cost of a loan with certain lender fees folded in alongside the interest rate, so it is a fuller measure than the rate alone. When a loan carries no lender fees the APR and the interest rate are the same number; when it carries an origination fee, the APR is higher. See APR vs interest rate for a worked example where a 10% note rate with a 5% fee prices out at a 12.74% APR.
B
Balloon payment
A balloon payment is a single large amount due at the end of a loan whose regular payments were too small to clear the balance. Loans structured this way keep the monthly payment low by design and leave a lump owing at maturity, which the borrower must then pay, refinance, or settle by selling the asset. A fully amortizing loan, which is what this site's calculator models, has no balloon.
C
Collateral
Collateral is property pledged to a lender as backing for a loan, giving the lender something to claim if the loan is not repaid. A car secures an auto loan, and that backing is why secured borrowing generally prices lower than unsecured borrowing. Collateral does not reduce what you owe; it reduces what the lender stands to lose.
Cosigner
A cosigner is a second person who signs the loan agreement and becomes fully responsible for repaying it if the primary borrower does not. Lenders may accept a cosigner when the borrower's own credit history or income is thin, since it gives them a second party to collect from. The obligation is real and ongoing: missed payments typically appear on the cosigner's credit record as well.
Credit score
A credit score is a number summarizing your borrowing history, which lenders use as one input when deciding whether to approve a loan and at what rate. Higher scores generally lead to lower offered rates because they signal lower expected risk. Several scoring models exist, so the number a lender sees may differ from the one you see.
D
Debt-to-income ratio (DTI)
DTI compares your total monthly debt payments to your gross monthly income, stated as a percentage. Lenders use it to judge whether you can absorb another payment on top of what you already owe. A new loan raises your DTI by its monthly payment, which is one reason the term you pick affects approval and not just cost.
Default
Default is the point at which a lender formally treats a loan as broken, usually after payments have gone unmade for a period defined in the agreement. What follows depends on whether the loan is secured or unsecured: secured lenders can move against the collateral, while unsecured lenders pursue collection and may sue. Default is generally reported to credit bureaus and affects borrowing for years.
Deficiency balance
A deficiency balance is the amount still owed after collateral has been seized and sold for less than the outstanding loan. If a car securing a $20,000 loan is repossessed while roughly $12,825.82 remains owing after two years of payments and it sells for less than that, the shortfall is the deficiency, and the borrower can still be pursued for it. Losing the asset does not automatically end the debt.
Delinquency
A loan is delinquent as soon as a scheduled payment is late, which is a lighter status than default. Lenders usually report delinquency to credit bureaus once it passes a set number of days, commonly thirty. Curing the missed payment ends the delinquency, though the record of it may remain.
Down payment
A down payment is money paid up front toward a purchase, reducing the amount you need to borrow. Because it lowers the principal, it lowers both the monthly payment and the total interest, and it also lowers the loan-to-value ratio, which lenders read as reduced risk. When using a calculator, enter the amount financed after the down payment, not the sticker price.
F
Fixed interest rate
A fixed rate stays the same for the entire life of the loan, so the scheduled payment is known from day one and never moves. This is what makes an amortization schedule possible to print in advance. Most consumer auto and personal loans in the United States are fixed rate.
G
Grace period
A grace period is a short window after a payment's due date during which the payment can arrive without triggering a late fee. It is a courtesy defined by the loan agreement, not a legal right, and its length varies by lender. Interest generally continues to accrue during the window, so a grace period delays a penalty rather than pausing the loan.
I
Installment loan
An installment loan is borrowed as one lump sum and repaid through a fixed number of scheduled payments until the balance reaches zero. Auto loans and personal loans are the common consumer examples, and both are what this calculator is built for. The opposite structure is revolving credit, where the balance can go back up.
Interest rate
The interest rate is the yearly price of borrowing the principal, expressed as a percentage and typically divided by twelve to charge monthly. It is the number that actually drives the payment calculation. It excludes fees, which is the whole reason APR exists as a separate figure.
L
Lien
A lien is the lender's legal claim recorded against a specific piece of property until the loan tied to it is repaid. On a financed vehicle the lender is recorded as lienholder on the title, which is why the title cannot be transferred cleanly until the loan is cleared. Paying the loan off releases the lien.
Loan-to-value ratio (LTV)
LTV is the loan amount divided by the value of the asset securing it, stated as a percentage. A larger down payment produces a lower LTV, which lenders treat as safer because a sale would more likely cover the balance. On a depreciating asset like a car, LTV can rise above 100% partway through a long loan, a situation usually described as being underwater.
O
Origination fee
An origination fee is a charge for making the loan, quoted either as a flat amount or as a percentage of the loan. It is often deducted from the money before it reaches you, so a stated loan amount and the cash you actually receive can differ. Because it is a genuine cost of borrowing, it is normally counted inside the APR rather than the note rate.
P
Prepayment penalty
A prepayment penalty is a fee some agreements impose for paying a loan off ahead of schedule, which exists because early payoff cuts short the interest the lender expected. Most consumer auto loans do not carry one, and a minority of personal loans do. It is worth checking the agreement before making large extra payments, since a penalty can offset part of the interest saved.
Principal
Principal is the amount borrowed and still owed, separate from any interest charged on it. Every payment splits into an interest portion and a principal portion, and only the principal portion reduces the debt. Extra money sent toward principal shortens the loan directly, which is the mechanism behind the loan payoff calculator.
R
Refinance
Refinancing replaces an existing loan with a new one, usually to obtain a lower rate, a different term, or a smaller payment. The new loan pays off the old balance and starts its own schedule, so a refinance that also lengthens the term can lower the payment while raising total interest. Paying a loan off faster works through a case where exactly that happens.
Repossession
Repossession is a secured lender taking back the collateral after the borrower fails to keep up payments. For a vehicle loan the process is governed by state law and the loan agreement, and the car is typically sold to recover what is owed. If the sale does not cover the balance, the remainder becomes a deficiency balance.
Revolving credit
Revolving credit is a borrowing limit you can draw against, repay, and draw against again, with credit cards and lines of credit as the usual examples. The balance and the minimum payment change month to month, so there is no fixed payoff schedule to print. Amortization calculators like this one are built for fixed installment loans and do not model revolving balances.
S
Secured loan
A secured loan is backed by collateral the lender can claim if the loan is not repaid. That protection lowers the lender's risk and generally earns the borrower a lower rate. The auto loan vs personal loan comparison prices the same $20,000 both ways to show what the difference is worth.
Simple interest
Simple interest is calculated on the outstanding principal only, not on previously accrued interest. Most consumer installment loans work this way: each period's interest is the current balance multiplied by the periodic rate. It is why paying early in the month, or paying extra, reduces the interest charged next period.
T
Term
The term is the length of the loan, expressed as a number of months or years and equal to the number of scheduled payments. A longer term lowers the monthly payment and raises the total interest, since the balance is outstanding for more periods. It is usually the single input a borrower has the most control over.
Total interest
Total interest is the sum of the interest portion of every payment across the whole loan, and it is the cleanest measure of what borrowing cost you. It responds to all three inputs: amount, rate, and term. Comparing total interest rather than monthly payment is what keeps a longer, cheaper-looking loan from fooling you.
U
Underwriting
Underwriting is the lender's assessment of whether to make a loan and on what terms, weighing credit history, income, existing debts, and the collateral if any. It is the step between applying and receiving a firm offer. Because the outcome sets your rate, two people asking for the same loan on the same day can be quoted very differently.
Unsecured loan
An unsecured loan has no collateral behind it, so the lender is relying on your credit history and your promise to repay. With nothing to seize, lenders price the added risk into a higher rate. Most personal loans are unsecured, which is covered on the personal loan calculator page.
V
Variable interest rate
A variable rate can move over the life of the loan, usually tracking an index the lender specifies. When the rate moves the payment or the payoff date moves with it, so the schedule printed at signing is an estimate rather than a promise. Fixed-rate calculators, including this one, model a rate that does not change.
Run your own numbers: the free loan calculator turns most of these terms into figures you can see, showing the monthly payment, total interest, payoff date, and a complete amortization schedule. Everything runs in your browser; nothing is uploaded.
Further reading: CFPB: what is amortization; CFPB: personal installment loans.
More loan guides
- How loan payments work: amortization, interest & payoff
- APR vs interest rate: what the difference costs you
- How to pay off a loan faster
- Auto loan vs personal loan: which should you use for a car?
- Loan calculator FAQ
This glossary is general information, not financial advice. Definitions describe common United States consumer lending usage; your loan agreement controls. Confirm all figures with your lender.
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