📚 Financial Terms Glossary
Understand loan terminology with clear, simple explanations. No jargon, just clarity.
🚫 Common Loan Myths Debunked
❌ Myth: "Lower monthly payment always means a better deal"
Truth: Lower payments often mean longer terms and more total interest paid. A $300,000 loan at 6% costs $231,676 more in interest over 30 years vs. 15 years.
❌ Myth: "Extra payments don't make much difference"
Truth: An extra $100/month on a $250,000 mortgage can save over $62,000 in interest and cut 6+ years off the loan.
❌ Myth: "APR and interest rate are the same thing"
Truth: APR includes fees and gives you the true cost of borrowing. A 6% rate might have a 6.25% APR due to fees.
❌ Myth: "You should always pay off loans early"
Truth: If your loan rate is lower than investment returns (like a 3% mortgage vs. 7% market returns), investing may be smarter.
📖 Essential Loan Terms
Amortization
The process of paying off a loan through regular payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal.
APR (Annual Percentage Rate)
The true yearly cost of a loan including interest rate plus fees. Always higher than the interest rate. Use this to compare loans fairly.
Balloon Payment
A large final payment due at the end of a loan term. Common in business loans but risky for consumers as it requires refinancing or a large lump sum.
Collateral
Property you pledge as security for a loan. If you can't pay, the lender can take it. Your car secures an auto loan; your home secures a mortgage.
Compound Interest
Interest calculated on both the original principal and previously earned interest. Works for you in savings, against you in debt.
Credit Score
A number (300-850) representing your creditworthiness. Higher scores get better interest rates. 740+ is excellent, 670+ is good.
Debt-to-Income Ratio (DTI)
Your total monthly debt payments divided by gross monthly income. Lenders prefer DTI below 36%, with housing costs under 28%.
Down Payment
Money paid upfront when buying something with a loan. Larger down payments mean smaller loans and often better rates.
Equity
The portion of an asset you actually own. In a home, it's current value minus remaining mortgage balance.
Escrow
Money held by a third party for specific purposes, like property taxes and insurance in mortgage payments.
Fixed Rate
An interest rate that stays the same for the entire loan term. Predictable payments but potentially higher initial rates.
Grace Period
Time after a payment due date before late fees apply. Typically 10-15 days for most loans.
Interest Rate
The yearly cost of borrowing money, expressed as a percentage. Does not include fees (unlike APR).
Loan-to-Value Ratio (LTV)
Loan amount divided by property value. Lower LTV means less risk for lenders and better rates for you.
Origination Fee
Fee charged by lenders for processing a loan, typically 0.5% to 1% of loan amount. Sometimes negotiable.
PITI
Principal, Interest, Taxes, and Insurance - the four components of most mortgage payments.
Points
Fees paid to reduce interest rate. One point = 1% of loan amount and typically reduces rate by 0.25%. Good if you'll keep the loan long-term.
Prepayment Penalty
Fee for paying off a loan early. Common in business loans, rare in consumer mortgages. Always ask about this.
Principal
The original loan amount, or the remaining balance you still owe. Each payment reduces this amount.
Refinancing
Replacing your current loan with a new one, typically to get better rates or terms. Consider closing costs vs. savings.
💡 Pro Tips for Smart Borrowing
- ✓ Shop around: Rate differences of 0.5% can save thousands over a loan's life.
- ✓ Improve credit first: A 720 credit score vs. 620 can save $50,000+ on a $300k mortgage.
- ✓ Consider total cost: A 15-year loan costs less overall despite higher payments.
- ✓ Read the fine print: Look for prepayment penalties, rate adjustment terms, and all fees.
- ✓ Calculate true cost: Use our calculator to see how different terms affect your total payment.