Dictionary - Credit & Debt
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Ability to Pay

Ability to pay refers to a borrower’s capacity to make good on his loan obligations.In banking, ability to pay is often called “financial capacity.” When considering a loan, a banker will first and foremost consider the borrower’s ability to pay, which can be viewed as the financial capacity of the borrower to service his existing debts. Read more

Accounts Receivable Financing

Accounts receivable financing, also called factoring, is a method of selling receivables in order to obtain cash for company operations.Accounts receivable (A/R) are amounts owed by customers for goods and services a company has sold to those customers. Read more

Acquisition Debt

Acquisition debt is money that is borrowed in order to purchase a company or asset.A leveraged buyout (LBO) is a method of acquiring a company with money that is nearly all borrowed. Read more

Acquisition Loan

An acquisition loan is money borrowed specifically to purchase a company or asset. The basic idea behind acquisition loans is that the acquirer purchases the target with a loan collateralized by the target’s own assets. Read more

Allowance for Bad Debt

An allowance for bad debt is essentially a reduction in a bank's accounts receivable.The allowance for bad debt equals the amount of the banks loans that it does not expect to collect. Read more

Annual Equivalent Rate (AER)

Same as the effective annual interest rate, the annual equivalent (AER) rate is the rate of interest an investor earns in a year after accounting for the effects of compounding.The formula for AER is: (1 + i/n)n - 1 Where: i = the stated annual interest rate n = the number of compounding periods in one year For example, let’s assume you buy a certificate deposit with a 12% stated annual interest rate. Read more

Annual Percentage Rate (APR)

Annual Percentage Rate (APR) is the interest rate that reflects all the costs of the loan during a one year time period. The annual percentage rate includes loan fees and the compound interest rate during the year. Read more

Assumed Interest Rate

An assumed interest rate is used to calculate an annuity's periodic income payments. To understand how the assumed interest rate works, one must first remember how an annuity works. Read more

Average Balance

Average balance is either the simple or the weighted average balance of a financial account during some period of time. A simple average balance is calculated by adding up the beginning balance and the ending balance and dividing the sum by 2. Read more

Average Daily Balance Method

The average daily balance method is a way of calculating interest by considering the balance owed or invested at the end of each day of the period rather than the balance owed or invested at the end of the week, month or year. The frequency of interest compounding affects how lenders and borrowers use the average daily balance method. Read more

Back to Back Loan

With back to back loans two parties, each in a different country, lend money to each other in an effort to hedge against currency risk.They are also called "parallel loans." Company XYZ is in the United States and Bank ABC is in Germany. Read more

Back-to-Back Commitment

A back-to-back commitment is an agreement to buy a construction loan on a future date or make a second loan on a future date. For example, let’s assume that Company XYZ applies for a construction loan from Bank ABC. Read more

Back-to-Back Letters of Credit

Back-to-back letters of credit occur when a buyer gives a letter of credit to a seller, who then obtains a letter of credit for a supplier. A letter of credit is a bank's written promise that it will make a customer's (the holder) payment to a vendor (called the beneficiary) if the customer does not. Read more

Backup Line

A backup line is a bank promise that a commercial paper issuer will repay the maturing debt. For example, let’s assume Company XYZ wants to issue $10 million in commercial paper. Read more

Bad Debt

In business, bad debt is the portion of a loan or portfolio of loans a lender considers to be uncollectable.In personal finance, bad debt generally refers to high-interest consumer debt. Read more

Balloon Loan

A balloon loan is a loan with a large payment made near or at the end of the loan term. Unlike a loan whose total cost (interest and principal) is amortized -- that is, paid incrementally during the life of the loan -- a balloon loan's principal is paid in one sum at the end of the term. Read more

Balloon Payment

A balloon payment is a large payment made at or near the end of a loan term. Unlike a loan whose total cost (interest and principal) is amortized -- that is, paid incrementally during the life of the loan -- a balloon loan's principal is paid in one sum at the end of the term. Read more

Bank Card Association

A bank card association is a company owned by one or more financial institutions that licenses credit card programs. The two most popular bank card associations are Visa and MasterCard. Read more

Bank Credit

Bank credit is an amount of funds that a person or business can borrow from a bank. All kinds of things can be bank credit: mortgages, credit card accounts and even overdraft lines. Read more

Bank Guarantee

A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss.note that a bank guarantee is not the same as a letter of credit (see the differences between those two below). Read more

Bank Rate

Also called the federal discount rate, the bank rate is the interest rate at which a bank can borrow from the Federal Reserve.   To understand the bank rate, it is important to understand that banks derive income from making loans. Read more

Bridge Loan

A bridge loan is a short-term, high-interest loan that provides a quick source of cash for commercial or individual needs.  It is called a bridge loan because it serves as a bridge between one period of funding and another, more permanent source of funding. To illustrate, suppose a company has been approved for a $1 million loan from a bank. Read more

Broker Loan

A broker loan is a loan that the lender can obligate the borrower (a brokerage house) to repay at any time. Also known as a call loan or demand loan, a broker loan is granted to a brokerage house in need of short-term capital for financing clients' margin portfolios. Read more

Broker Loan Rate

The broker loan rate is the interest rate on bank loans made to brokerage firms that are borrowing to fund transactions in their clients' margins accounts.Sometimes the broker loan rate is also called the "call money rate.” It is a rate that is usually not available to individuals. Read more

Bullet

Bullet is usually short for bullet payment, which is typically a large payment made near the end of a loan that does not amortize over time. Unlike a loan whose total cost (interest and principal) is amortized – that is, paid incrementally during the life of the loan -- a bullet loan's principal is paid in one sum at the end of the term. Read more

Bullet Loan

A bullet loan is a loan that does not amortize over time and must be repaid with a single large payment (also called a balloon payment) at the end of the term of the loan. Unlike a loan whose total cost (interest and principal) is amortized -- paid incrementally during the life of the loan -- a bullet loan's principal is paid in one sum at the end of the term. Read more

Call Loan

A call loan is a loan that the lender may force the borrower to repay at any time. Also called a broker loan or demand loan, a call loan is granted to a brokerage house that needs short-term capital for financing clients' margin portfolios. Read more

Call Loan Rate

The call loan rate is the interest rate charged on the call loans used by brokerage houses to fund clients' margin trading accounts. When banks or other lenders provide brokerage houses with call loans to help cover their clients' margin accounts, they charge an interest rate called the call loan rate. Read more

Call Money

Call money is a very short-term bank loan that does not contain regular principal and interest payments.It is often used by brokerage firms to finance margin accounts. Read more

Call Money Rate

The call money rate, sometimes known as the "broker loan rate," is the interest rate on the loans banks make to brokerage firms that are borrowing to fund transactions in their clients' margins accounts.The call money rate is a rate that is generally not available to individuals. Read more

CAMELS

CAMELS is a system used to rate banks. In order to ensure their financial strength, banks must undergo periodic examinations by a federal agency (usually the Office of the Comptroller of the Currency). Read more

Cancellation of Debt

Cancellation of debt occurs when a lender tells a borrower that he or she no longer must repay a loan. Let's assume that John Doe borrowed $100,000 from Bank XYZ for a luxury car. Read more

Cash Flow Loan

A cash flow loan is a loan, usually to a company, intended to meet daily cash needs during times when cash flow is inconsistent.These loans are short-term in nature; borrowers usually must repay them in 30 to 180 days. Read more

Chapter 11

Chapter 11 bankruptcy refers to the section of U.S.bankruptcy law under which companies and individuals can attempt to restructure their debts in order to repay them. Read more

Chapter 13

Chapter 13 refers to the section of U.S.bankruptcy law under which individuals may attempt to restructure their finances in order to repay their debts. Read more

Chapter 7

Chapter 7 refers to the section of U.S.bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts. Read more

Chapter X

Chapter X was a portion of the bankruptcy code that dictated bankruptcy processes and procedures for corporations.1978 was the last year corporations were able to file bankruptcy under Chapter X. Read more

Charge Card

A charge card is a plastic card issued by a financial institution that allows the user to make purchases with funds borrowed from that financial institution. Colloquially speaking, a charge card is the same as a credit card. Read more

Closed End Lease

A closed end lease, also called a "walk away lease", is usually a kind of car lease that allows the lessee to return the car at the end of a lease period. Let's assume John Doe leases a 2021 Ford Mustang. Read more

Collateral

Collateral is an asset pledged by a borrower to a lender, usually in return for a loan.The lender has the right to seize the collateral if the borrower defaults on the obligation. Read more

Collateralization

Collateralization occurs when a company pledges an asset to a lender (usually in return for a loan).The lender has the right to seize the collateral if the borrower defaults on the obligation. Read more

Commercial Bank

A commercial bank is a financial institution that offers checking accounts, demand deposits, business and personal loans, savings vehicles and a variety of other related financial services. Commercial banks are owned by shareholders and are run for a profit, which is largely obtained by lending at rates higher than they pay their depositors. Read more

Commercial Paper

Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers.Banks, corporations and foreign governments commonly use this type of funding. Read more

Credit

Credit is an agreement whereby a financial institution agrees to lend a borrower a maximum amount of money over a given time period.Interest is typically charged on the outstanding balance. Read more

Credit Bureau

A credit bureau is an agency that collects, organizes, and disseminates credit information to creditors and potential creditors.Credit bureaus generally collect information on individuals and small businesses. Read more

Credit Card

A credit card is issued by a financial institution that lets you borrow money to make a purchase.According to a recent Experian report, the average American holds 4 credit cards. Read more

Credit Crunch

A credit crunch occurs when loans are very expensive and difficult to obtain. During a credit crunch, lending institutions are limited as to the amount of funds they can use to make loans. Read more

Credit Limit

A credit limit is the maximum amount that a person may charge on a credit card or borrow from a financial institution. After a financial institution has approved an applicant's request for a credit card or another type of revolving credit, the lender will decide on the maximum amount of credit it's willing to extend to that person; this maximum amount is known as the credit limit. Read more

Credit Quality

Credit quality is a measure of an individual's or company's creditworthiness, which is ability to repay debt. A FICO score, which is created and calculated by the Fair Isaac Corporation, is a measure of an individual's credit quality. Read more

Credit Rating

In personal finance, the term credit rating commonly refers to a score issued by the Fair Isaac Corporation (a "FICO score").A person's credit rating indicates how creditworthy he or she is. Read more

Credit Report

A credit report is a report detailing a person's financial history specifically related to their ability to repay borrowed money. There are three major credit bureaus in the United States: TransUnion, Experian and Equifax. Read more

Credit Risk

Credit risk is the chance that a bond issuer will not make the coupon payments or principal repayment to its bondholders.In other words, it is the chance the issuer will default. Read more

Credit Score

Credit score refers to the FICO score, which is created and calculated by the Fair Isaac Corporation and is a measure of an individual's creditworthiness.It is a mathematical summary of the information on a person's credit report. Read more

Credit Utilization Rate

The credit utilization rate is a calculation comparing an individual's total debt balances to total available credit. The credit utilization rate is also referred to as the credit utilization ratio. Read more

Credit Utilization Ratio

Credit utilization, commonly referred to as the credit utilization ratio or credit utilization rate, is a calculation comparing an individual's total debt balances to total available credit. The credit utilization ratio is also referred to as the utilization ratio. Read more

Creditor

A creditor is an individual or institution that lends money or services to another entity under a repayment agreement. There are generally two types of creditors: personal and real. Read more

Current Portion of Long-Term Debt (CPLTD)

The current portion of long-term debt (CPLTD) is the portion of a company's long-term debt payments that are due in less than one year.   For example, let’s assume that XYZ Company borrows $10,000,000 from Bank ABC. Read more

Debt

In the business world, debt is an amount borrowed. For example, let's assume Company XYZ has invented a new product that will revolutionize the widget market. Read more

Debt Discharge

A debt discharge is a legal action that relieves a borrower from his or her obligations to a lender.   Debt discharge typically happens during bankruptcy, which is a legal process under which a borrower protects and or liquidates assets in order to repay debts. Read more

Debt Financing

Debt financing is the use of borrowing to pay for things. For example, the basic idea behind acquisition debt financing is that the acquirer purchases the target with a loan collateralized by the target’s own assets. Read more

Debt Service

Debt service is the act of making interest and principal payments on debt. For example, let's say Company XYZ borrows $10,000,000 and the payments work out to $14,000 per month. Read more

Debtor

A debtor is a person or entity legally required to provide a payment, service or other benefit to another person or entity (the obligee).Debtors are often also called "borrowers" or "obligors" in contracts. Read more

Debtor in Possession (DIP)

Debtor in possession (DIP) refers to the status of a business that retains control of its assets and continues to operate while under the Chapter 11 bankruptcy reorganization process.  Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself. Read more

Debtor-in-Possession (DIP) Financing

Debtor-in-possession (DIP) financing refers to financing for a business that retains control of its assets and continues to operate while under the Chapter 11 bankruptcy reorganization process.  Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself. Read more

Default

A default is a violation of a promise to pay debt in agreed amounts at agreed times. Let's assume Company XYZ has a line of credit for $10 million from Bank ABC, and $5 million of that line is outstanding. Read more

Delinquent

Delinquent means “something or someone who fails to accomplish that which is required by law, duty, or contractual agreement, such as the failure to make a required payment or perform a particular action.”   In financing and investing, delinquency occurs when a person or business with an obligation to make payments against a debt, such as loan payments, does not make those payments on time or in a regular, appropriate manner.The term "delinquent" usually refers to a situation where a borrower is late or overdue on a payment, such as for income taxes, a mortgage, an automobile loan, or a credit card account. Read more

Demand Loan

A demand loan is a loan where the lender may require the borrower (a brokerage house) to repay at any time.These loans may also be called a broker loan or call loan, A demand loan is granted to a brokerage house needing short-term capital for financing the margin portfolios of clients. Read more

Distressed Securities

Distressed securities are financial instruments of a company that are under price pressure due to bankruptcy (Chapter 7), reorganization (Chapter 11), financial turmoil, or other economic trauma. Distressed securities can take the form of stocks, bonds, debt, or other financial instruments. Read more

Dun and Bradstreet (D&B)

Dun & Bradstreet provides information about businesses through a global commercial database.  Founded more than 170 years ago, the company (NYSE: DNB) maintains a global database of information about more than 200 million businesses. Read more

DUNS Number

A DUNS number (DUNS stands for Data Universal Numbering System) identifies a company.   Let's say Brad Smith of Tampa, Florida, owns a business called Brad's Bagels. Read more

Encumbrance

An encumbrance is a limitation on the ownership of a property. In the real estate world, an encumbrance is similar to a lien. Read more

Euro LIBOR

Euro LIBOR is the interest rate at which banks borrow euros from other banks in the London interbank market. Euro LIBOR is essentially LIBOR denominated in Euros. Read more

Facility

A facility is essentially a bank loan agreement that a company can use on and off for short-term borrowing purposes. For example, let’s assume Company XYZ is a jewelry manufacturer. Read more

Fair Credit Billing Act (FCBA)

The Fair Credit Billing Act (FCBA) is an amendment to the Truth in Lending Act.The FCBA is meant to protect consumers from unfair or inaccurate billing practices by providing a system for consumers to contest inaccurate credit card bills. Read more

Fair Credit Reporting Act (FCRA)

The Fair Credit Reporting Act (FCRA) is the principle legislation for consumer credit rights in the U.S.It regulates the collection, distribution, and use of consumer credit information. Read more

Fair Debt Collection Practices Act (FDCPA)

The Fair Debt Collection Practices Act (FDCPA) is a section of the consumer credit protection act that aims to promote fairness in the collection of consumer debts and provide a way for clarifying and challenging debt information to ensure its validity. The Fair Debt Collection Practices Act protects consumers’ rights in the context of debt collection. Read more

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an agency of the U.S.government that insures deposits in banks and thrift institutions, supervises the risks associated with these insured funds, and limits the repercussions on the economy when a bank or thrift institution fails. Read more

Federal Farm Credit System (FFCS)

The Federal Farm Credit System (FFCS) is a group of lenders that provide loans and other credit services to farmers, ranchers, and producers or harvesters of aquatic products.  People or businesses that process or market products from farmers, ranchers, or aquatic producers may also be eligible for FFCS loans, as are certain rural homeowners, utility cooperatives, and farm-related businesses.  Although President Roosevelt created the system in 1933, the FFCS received most of its power in 1971 with the passage of the Farm Credit Act. Read more

Federal Financial Institutions Examination Council (FFIEC)

The Federal Financial Institutions Examination Council (FFIEC) is an interagency body of the U.S.government that provides standardized methods for examining financial institutions in accordance with numerous regulating bodies. Read more

Federal Funds

Federal funds are monies held by banks at the Federal Reserve to meet reserve requirements.Funds in excess of reserve requirements can be loaned to other banks in order for those banks to meet reserve requirements. Read more

Finance Charge

A finance charge is the fee charged to a borrower for the use of credit extended by the lender.Broadly defined, finance charges can include interest, late fees, transaction fees, and maintenance fees and be assessed as a simple, flat fee or based on a percentage of the loan, or some combination of both. Read more

Firewall

Firewall refers to the strict separation between banking and brokerage activities within full-service banks, and between depository and brokerage institutions as stipulated by the Glass-Steagall Act of 1933. Prior to the Great Depression, investors would borrow on margin from commercial banks and use the money to purchase stocks. Read more

Fixed Interest Rate

A fixed interest rate is a type of loan or mortgage for which the rate of interest does not fluctuate over the life of the loan. The most common types of mortgages carry either a fixed or variable interest rate. Read more

Floating Interest Rate

A floating interest rate is an interest rate that can change from time to time. Let's say you want to borrow $5,000 to start a business. Read more

Forbearance

Forbearance, which literally means "holding back," is a temporary suspension of loan payments agreed to by both lender and borrower as an alternative to defaulting on the loan (or foreclosure in the case of a mortgage).Lenders choose forebearance agreements in order to avoid the loss and costs of a loan default.  There are many reasons why a borrower may need to establish a forbearance agreement. Read more

Foreign Debt

Foreign debt, otherwise known as external debt, is the part of total debt held by creditors of foreign countries, i.e.non-residents of the debtor's country. Read more

Fully Indexed Interest Rate

A fully indexed interest rate equals an adjustable-rate mortgage's (ARM) interest rate benchmark plus a spread.  The interest rate on an ARM corresponds to a specific benchmark (often the prime rate, but sometimes LIBOR, the one-year constant-maturity Treasury, or other benchmarks) plus a spread (also called the margin, and its size is often based on the borrower's credit score).The benchmark plus the spread equals the interest rate on the loan; it is called the fully indexed rate. Read more

Grace Period

A grace period is a period of time, usually about 10 days, during which a past due amount can be paid with little or no penalty. Let's assume your credit card payment is due on December 15. Read more

Guaranteed Loan

With a guaranteed loan, a party other than the borrower has promised to take responsibility if the borrower cannot make the payments.The entity assuming this responsibility is called the guarantor. Read more

Guarantor

In general, a financial guarantee is a promise to take responsibility for another company's financial obligation if that company cannot meet its obligation.The entity assuming this responsibility is the guarantor. Read more

Half-Life

In the investing world, a half-life is the halfway point of mortgage repayment. Let's say John Doe borrows $100,000 to buy a house. Read more

Home Mortgage

A home mortgage is a loan secured for a house.The borrower is usually obligated to make a predetermined series of payments on the loan. Read more

Insolvency

In most usages, insolvency is the inability of a company or individual to meet its financial obligations as they come due.In the legal sense of the word, an entity is considered insolvent if its total liabilities exceed its total assets. Read more

Installment Debt

Installment debt refers to any loan that is repaid by the borrower in periodic (usually monthly) installments that include principal and interest. Installment debt, also called an installment loan, is granted to the borrower with a preset number of monthly payments of equal amount. Read more

Installment Loan

An installment loan is a type of loan that is repaid in periodic installments (usually monthly payments) that include principal and interest. An installment loan can also be referred to as installment debt. Read more

Interbank Rate

LIBOR is one of the most widely used benchmarks for short-term interest rates and is unlike the prime rate in the United States, which is somewhat arbitrarily based on certain banks' lending costs plus a profit margin.Borrowers thus generally support the use of LIBOR in interest-rate calculations because it represents a true market rate. Read more

Interchange Fees

The term interchange fees, also known as swipe fees, refers to the hidden cost paid by merchants to card-issuing banks and credit card companies for processing credit card and debit card transactions. For example, when you use your debit card or credit card at a store or online, there is a hidden fee that is charged by the card-issuing banks to process this transaction. Read more

Interchange Rate

An interchange rate is a bank fee for executing credit card and debit card transactions. An interchange is an electronic transfer of information. Read more

Interest

Interest is the cost of borrowing money for a certain period of time. Let's assume you need $500,000 to buy a house. Read more

IOU

The term IOU is the phonetic spelling of the phrase "I Owe You." In bookkeeping, it signifies an outstanding debt. Usually, an IOU is a signed informal notice of an unpaid debt, sometimes because of partial payment and an outstanding balance due. Read more

Japan Credit Rating Agency (JCR)

The Japan Credit Rating Agency (JCR) is a credit rating agency in Japan. Similar to Moody's or Standard & Poor's in the United States, JCR rates debt securities and conducts market, industry and economic research. Read more

Jingle Mail

Jingle mail occurs when a property owner sends his/her keys to the mortgage lender because he/she is unable to continue to make payments. Jingle mail -- denoting the jangling sound of keys in an envelope -- is the act of relinquishing one's obligations on a property by literally mailing the keys to the lending bank. Read more

Johannesburg Interbank Agreed Rate (JIBAR)

JIBAR is a market indicator and a benchmark for various interest rates in South Africa. JIBAR calculates the average one-month, three-month, six-month, and 12-month rates. Read more

Judgment Lien

A judgment lien allows a creditor to take possession of a piece of a debtor's property if the debtor does not pay his or her debts. Let's say John Doe owns a pit bull breeding company that borrows $1 million from Bank XYZ. Read more

Judgmental Credit Analysis

Judgmental credit analysis occurs when a banker approves or denies a credit application based on his or her experience with similar projects rather than the applicant's creditworthiness.   Let's say Company XYZ needs to borrow $1 million to lease a new factory. Read more

Junior Debt

In the event of a borrower’s bankruptcy, junior debt is debt that is repaid after the obligations to senior lenders or creditors have been fulfilled.Usually, it also has no collateral. Read more

Junior Mortgage

A junior mortgage is a loan secured by the equity in a house.Equity equals the value of the house less the balance owed on the homeowner's first (or in some cases, preceding) mortgages. Read more

Key Rate

A bank or other institution uses the key rate to determine the interest rate on debt.In the United States, there are two key rates: the discount rate and the Fed Funds rate. Read more

Lame Duck

A lame duck is a person who has gone bankrupt or is in default.In politics, a lame duck is a politician whose tenure is about to end. Read more

Lender

A lender is a creditor or any entity to which you owe money for services provided. If you borrow money from XYZ Bank, XYZ Bank becomes your lender. Read more

Letter of Credit

A letter of credit is a bank's written promise that it will make a customer's (the holder) payment to a vendor (called the beneficiary) if the customer does not. Letters of credit are most common in international transactions, where buyers and sellers may not know each other well or laws and conventions may make certain transactions difficult. Read more

Leverage

Leverage is any technique that amplifies investor profits or losses.It's most commonly used to describe the use of borrowed money to magnify profit potential (financial leverage), but it can also describe the use of fixed assets to achieve the same goal (operating leverage).  Financial Leverage Let's look at selected balance sheet and income statement information for Company XYZ. Read more

Leverage Ratio

A leverage ratio is meant to evaluate a company’s debt levels.The most common leverage ratios are the debt ratio and the debt-to-equity ratio. Read more

Liability

In finance and investing, a liability is a claim on a company's assets. For example, let's assume that XYZ Company sold $1,000,000 of gift certificates during the holidays. Read more

Lien

A lien is a lender's claim against a collateral asset that may be legally sold should the borrower fail to repay a loan. When someone takes out a sizeable loan, such as a home mortgage or an auto loan, the lender often requires an asset that can be held as collateral against the loan. Read more

Lien Sale

A lien sale is the sale of a lien by a relevant authority to a third party in an effort to recoup money owed. Let’s assume John Doe owns a house in the country and the annual property taxes are $4,000. Read more

Line of Credit (LOC)

A line of credit (sometimes called revolving credit) is a pre-arranged amount of money lent by a financial institution.Unlike a traditional loan – which is usually a lump sum payment that is repaid on a fixed schedule – a line of credit is flexible.  The borrower can draw from the line of credit until they reach their credit limit. Read more

Liquidation

Liquidation refers to the selling of assets in return for cash.  The term liquidation is most often used in discussions about Chapter 7 bankruptcy -- a section of U.S.bankruptcy law under which companies and individuals liquidate their assets in order to repay their debts. Read more

Loan

A loan is a sum of money that is borrowed by an individual or business from a lender (typically a financial institution or another party with money). Under a typical loan agreement, the lender expects the borrower to repay the loan over an agreed-upon period of time and/or with the expectation that they will pay back the loan regularly (often every month). Read more

Loan Loss Provision

A loan loss provision is an expense that is reserved for defaulted loans or credits.  It is an amount set aside in the event that the loan defaults. Generally, banks conduct their business by taking deposits and making loans using those deposits.  It is a bit more complicated (e.g. Read more

Loan Loss Reserves

Loan loss reserves are accounting entries banks make to cover estimated losses on loans due to defaults and nonpayment. Let's assume Bank XYZ has made $10,000,000 of loans to various companies and individuals. Read more

Loan Sharking

Loan sharking refers to predatory lending practices by individuals or organizations (aka loan sharks) that charge extraordinarily-high interest rates. Loan sharking involves taking advantage of the borrower's weak credit or collateral condition. Read more

Loan Syndication

Loan syndication is a lending process in which a group of lenders provide funds to a single borrower. When a project is unusually large or complex, it may exceed the capacity of a single lender. Read more

London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is the base lending rate banks charge each other in the London wholesale money market. LIBOR is an average of inter-bank deposit rates offered by members of the British Bankers Association (BBA). Read more

Long-Term Debt

Long-term debt is debt due in one year or more.It is a key item that appears on a company's balance sheet. Read more

Margin Debt

Margin debt is debt obtained from buying on margin. Buying on margin refers to borrowing from a brokerage firm (through a margin account) to make an investment. Read more

Mortgage Cash Flow Obligation (MCFO)

A mortgage cash flow obligation (MCFO) is a debt security that uses payments on a series of mortgages to fund principal and interest payments to MCFO holders. An MCFO pays interest and principal payments at a specified rate similar to a bond. Read more

Negative Gap

A negative gap occurs when a bank's interest-bearing liabilities exceed its interest-earning assets. Let's assume Bank XYZ has $40 million of interest-rate sensitive assets (mostly loans) and $70 million of interest-rate sensitive liabilities (CDs, savings accounts, etc.). Read more

Negative Pledge Clause

A negative pledge clause is lending agreement language designed to prevent borrowers from pledging the same collateral to multiple lenders or otherwise taking actions that might jeopardize the security of existing lenders. For example, let's assume that Company XYZ borrows $10 million from Bank A. Read more

Negative Watch

Negative watch is a status that credit-ratings agencies assign to companies that might receive a lower credit rating in the future. Moody's, Standard & Poor's, and Fitch's are the three primary credit ratings agencies in the United States. Read more

Negatively Amortizing Loan

Negatively amortizing loans are loans in which the loan's principal balance (usually a mortgage) increases even though the borrower is making payments on the loan. For example, let's assume that John Doe wants to borrow $100,000 from Bank XYZ to buy a house. Read more

Net Borrower

A net borrower (also called a "net debtor") is a company, person, country, or other entity that borrows more than it saves or lends.Borrowing can take the form of traditional bank lending, but it also might come in the form of Treasury debt, publicly traded bonds, or even seller financing (accounts payable). Read more

Net Settlement

In banking, net settlement is simply the sum of the day's credits and debits. Let's assume XYZ Bank has the following activity today: Outflows:Cash withdrawals        $400,000Debit card transactions    $500,000Credit card transactions    $300,000 Total                $1,200,000 Inflows: Check deposits    $275,000 CD purchases        $100,000 Cash deposits        $125,000 Total            $500,000 Net settlement = $500,000 - $1,200,000 = -$700,000   Banks send their net settlement data to each other and to Federal Reserve bank banks in order to collect or pay amounts due from or to one another. Read more

Nonperforming Assets

Nonperforming assets are a bank's nonperforming loans plus the real estate owned by the bank due to foreclosures. On a bank's balance sheet, loans made to customers are listed as assets. Read more

Nonperforming Loan

A nonperforming loan is a loan that is close to defaulting or is in default. Let's assume Bank XYZ lent $1,000,000 to Company ABC, which much repay the loan in monthly installments of $25,000. Read more

Note

In the finance world, a note is debt. Notes are typically medium-term debt, but not always. Read more

Notice to Creditors

The notice to creditors is a way to inform creditors of their opportunity to make claims against a bankrupt company, an estate or other entity. Let's say Company XYZ files for bankruptcy. Read more

Offset Mortgage

An offset mortgage is a mortgage held in the same bank as the borrower's deposit accounts, savings accounts or other accounts.The mortgage payments are calculated based on the borrower's combined balance. Read more

Past Due

Past due means overdue.Typically, a bill is past due if the borrower is 30 days past the payment deadline. Read more

Past-Due Balance Method

The past-due balance method is a system for calculating interest charges based on loan or credit balances not paid prior to a specified due date. The past-due balance method for computing interest on credit card charges and certain types of loans comprises a grace period during which no interest is charged if repaid in full. Read more

Payday Loan

A payday loan is an advance on one’s paycheck.Independent lenders and some large banks offer the service. Read more

Pledged Asset

A pledged asset is collateral pledged by a borrower to a lender (usually in return for a loan).The lender has the right to seize the collateral if the borrower defaults on the obligation. Read more

Prepackaged Bankruptcy

Prepackaged bankruptcy refers to a plan for reorganization under Chapter 11 that a company drafts in cooperation with its lenders. If a company determines that Chapter 11 bankruptcy is inevitable, it may first contact and meet with its lenders in order to formulate a mutually beneficial reorganization plan prior to any official proceedings. Read more

Prime Rate

The prime rate is the interest rate commercial banks charge their most creditworthy customers, which are usually corporations. Anyone who has borrowed money knows that different banks charge different interest rates. Read more

Principal

In finance,  principal refers to the face amount of a debt instrument or an amount of money borrowed. For example, if you borrow $25,000 from XYZ Bank to purchase a car, the principal balance is $25,000. Read more

Promissory Note

A promissory note is a written document that binds one party to pay another through credit.The agreement is considered a debt instrument as it typically contains loan-type features such as the repayment terms, principal amount owed, interest rate, maturity date, date of issuance and both parties' signatures. Read more

Qualification Ratio

A qualification ratio is actually two ratios that banks use to determine whether a borrower is eligible for a mortgage.The two ratios generally are: Total Borrower Debt/Monthly Income Borrower's Total Monthly Debt Payments/Monthly Income For example, let's assume that Borrower X has $4,000 of monthly income and $30,000 of student loans and credit card debt, on which he pays $600. Read more

Qualified Mortgage Insurance Premium

A qualified mortgage insurance premium is a payment to insure a homeowner’s mortgage payments. Let’s say John and Jane Doe buy a house. Read more

Qualifying Ratios

Qualifying ratios are ratios banks use to determine whether a borrower is eligible for a mortgage.  The two qualifying ratios banks generally use are: Total Borrower Debt / Monthly Income and Borrower's Total Monthly Debt Payments / Monthly Income For example, let's assume that Borrower X has $4,000 of monthly income and $30,000 of student loans and credit card debt, on which he pays $600.Borrower X wants an 8%, 30-year, $250,000 mortgage. Read more

Quick-Rinse Bankruptcy

A quick-rinse bankruptcy moves through the courts especially quickly. Let's say Company XYZ is struggling to pay its vendors and is quickly running out of cash to pay its employees. Read more

Rating

In personal finance, the term rating commonly refers to a credit rating score issued by the Fair Isaac Corporation (a "FICO score").A person's credit rating indicates how creditworthy he or she is. Read more

Ratings Service

Ratings Service is provided by companies that evaluate the risks associated with debt securities.  Companies, such as Moody's, Standard & Poor's (S&P), and Fitch, provide ratings for securities based on underwriting criteria. The criteria include a number of factors, such as the underlying security, method of repayment, revenue history, qualifications of the team, market factors, etc. Read more

Reaffirmation

Reaffirmation occurs when a lender agrees to forgive a borrower's debt and then the borrower agrees to repay the debt anyway. For example, let's assume that John Doe borrowed $100,000 from Bank XYZ for a luxury car. Read more

Receivership

Receivership is a form of bankruptcy in which a court-appointed trustee reorganizes the bankrupt entity.   In a receivership, a receiver takes custody of the company's property and operations. Read more

Reference Rate

A reference rate is an interest rate that determines another interest rate. Let's say you want to borrow $5,000 to start a business. Read more

Refinancing

Refinance refers to the replacement of a debt with new debt bearing different terms. Financing involves borrowing a specific amount of money over a length of time at an agreed-upon interest rate. Read more

Repayment

Repayment usually refers to the payments on a debt.  Under the terms of a loan, repayment can have different schedules and requirements.For example, a loan may be amortized over a specific period of time, requiring regular repayments. Read more

Repurchase Agreement (Repo)

A repurchase agreement is the sale of a security combined with an agreement to repurchase the same security at a higher price at a future date. It is also referred to as a "repo."  For example, trader A may sell a specific security to trader B for a set price and agree to buy back the security for a specified amount at a later date. Read more

Restrictive Covenant

A restrictive covenant is a promise a company makes to not exceed certain financial ratios or not conduct certain activities, usually in return for a loan or bond issue.     Let’s assume Company XYZ wants to borrow $10 million from Bank ABC. Read more

Revolving Credit

Revolving credit is a line of credit individuals and corporations can borrow from and pay back as needed. Revolving credit is also referred to as a line of credit (LOC) Before granting a revolving line of credit to an applicant, a financial institution considers several factors that determine a borrower's ability to repay. Read more

Sallie Mae (SLM)

Sallie Mae, also known as The Student Loan Marketing Association (SLM), is the largest originator, funder and servicer of student loans in the United States.It also provides counseling about student loans to students as well as their parents. Read more

Second Mortgage

Also called a home equity loan, a second mortgage is secured by the equity in a house.Equity equals the value of the house less the balance owed on the homeowner's mortgage. Read more

Secured Creditor

Secured creditor is a lender that provides collateralized debt. Mortgage lenders are the most common example of secured creditors: They lend you money and keep the house as collateral. Read more

Secured Debt

Secured debt is debt that is collateralized. Mortgages are the most common example of secured debt: the bank lends you the money and the bank has the house as collateral. Read more

Senior Debt

Senior debt is debt that is first to be repaid, ahead of all other lenders or creditors, in the event of a borrower’s bankruptcy. For example, if Company XYZ issues bonds, the bondholders are creditors who are senior to Company XYZ's shareholders, for example. Read more

Signature Loan

A signature loan is a loan offered by banks or other financial institutions that does not require collateral.Signature loans are also known as personal or unsecured loans since they are not secured by anything beyond trust that the borrower will pay it back. Read more

Solvency

Solvency is a company’s ability to pay its debts as they become due. Solvency measures a company's ability to meet its financial obligations. Read more

Sovereign Debt

Sovereign debt refers to the amount of money a country owes to the holders of its government bond.In the United States, sovereign debt is issued by the Department of Treasury and the bonds are referred to as Treasuries -- Treasury notes, Treasury bonds, Treasury bills, etc., depending on the length of their issuance. Read more

Structured Finance

Structured finance is a complex financial instrument offered to borrowers with unique and sophisticated needs.Generally, a simple loan will not suffice for the borrower so these more complex and risky finance instruments are implemented. Read more

Student Loan

For the majority of Americans, taking on a student loan is a requirement to pay for college.A 2019 report estimated that 43 million American adults have federal student loans – with a combined total balance of $1.5 billion. Read more

Subordinate

Subordinate means "ranks beneath." In finance, the term usually refers to the claims a creditor has on a company's assets relative to other creditors. When something is subordinate, it ranks below the claims of other investors. Read more

Subordinated Debt

Subordinated debt is any outstanding loan that, should the borrowing company fail, it will be repaid only after all other debt and loans have been settled.It is the opposite of unsubordinated debt. Read more

Syndicated Loan

A syndicated loan is a loan made by a group of lenders who share or participate in a specific loan given to a project. A project may require too large a loan for a single lender or require a special type of investor or lender with expertise in a particular asset class. Read more

Take-Out Lender

A take-out lender is a lender whose loan replaces another loan. Let's say Company XYZ is a real estate development company. Read more

Take-Out Loan

A take-out loan is a loan that replaces another loan. Let's say Company XYZ is a real estate development company. Read more

Tax Refund Anticipation Loan (TRAL)

A tax refund anticipation loan (TRAL) is a short-term loan from a third party.The loan is collateralized by the borrower's pending tax refund. Read more

Teaser Loan

A teaser loan is usually an adjustable-rate mortgage (ARM) with an artificially low initial interest rate. The interest rate on the ARM corresponds to a specific benchmark (often the prime rate, but sometimes LIBOR, the one-year constant-maturity Treasury, or other benchmarks) plus an additional spread (which is also called the margin and is often based on the borrower's credit score). Read more

Teaser Rate

A teaser rate is usually an artificially low initial interest rate on an adjustable-rate mortgage (ARM). The interest rate on the ARM corresponds to a specific benchmark (often the prime rate, but sometimes LIBOR, the one-year constant-maturity Treasury, or other benchmarks) plus an additional spread (which is also called the margin, and its size is often based on the borrower's credit score). Read more

Term

In the finance world, a term is the length of time until a debt matures.A term can also be a condition of a deal, as evidenced by the phrase term sheet, which describes the terms of a deal. Read more

Term Loan

A term loan has a set maturity date and usually has a fixed interest rate. Let's say Company XYZ wants to borrow $1 million to build a factory. Read more

Truth in Lending Act (TILA)

The Truth in Lending Act (TILA) was implemented to protect consumers when they borrow money.TILA requires the disclosure of certain credit terms so that consumers are not deceived. Read more

U.S. League of Savings Institutions

The U.S.League of Savings Institutions was a national organization of savings banks. Read more

UCC-1 Statement

A UCC-1 statement is a written list and description of assets that serve as collateral for a loan.   Let's say Company XYZ is a restaurant chain. Read more

Uncollected Funds

Uncollected funds refer to the balance of uncleared checks in a bank account. When an account holder deposits a check into a savings or checking account, the bank must collect the specified amount of cash from the check writer's bank account. Read more

Uncommitted Facility

An uncommitted facility is a borrowing agreement that allows the lender to determine how much it will lend to the borrower at a given time. Let's say Company XYZ needs extra cash once in a while because it has huge payroll expenses every two weeks and less predictable payments from customers. Read more

Underwater

In the real estate world, underwater means that a property is worth less than what is owed on it. For example, let's say John Doe buys a house for $500,000. Read more

Underwater Mortgage

An underwater mortgage is a mortgage on a property that is worth less than what is owed on it. For example, let's say John Doe buys a house for $500,000. Read more

Unencumbered

An encumbrance is a limitation on the ownership of a property.When an asset is unencumbered, there are no limitations on its ownership. Read more

Unsecured

In the finance world, a lender or piece of debt is unsecured if it does not have collateral. Let's assume you would like to borrow $100,000 to start a business. Read more

Unsecured Creditor

An unsecured creditor is a lender or any entity to which a company or individual owes money for services provided.That creditor, however, does not have any collateral from the borrower. Read more

Unsecured Debt

Unsecured debt is debt that does not have any collateral attached. If you borrow money from XYZ Bank, XYZ Bank becomes your creditor. Read more

Unsecured Loan

An unsecured loan is debt that does not have any collateral attached. Let’s assume you would like to borrow $100,000 to start a business. Read more

Unsecured Note

In the finance world, an unsecured note is corporate debt that does not have any collateral attached.Unsecured notes are not the same as debentures, which are also unsecured corporate debt (but debentures usually have insurance policies that pay out when the borrower defaults). Read more

Unsubordinated Debt

Unsubordinated debt refers to loans and debt securities (e.g., bonds, CDs, collateralized securities, etc.) for which the repayment priority outranks other debts owed by the same individual entity (called subordinated debt). Debt in the form of loans or debt securities (e.g. Read more

Utilization Ratio

The utilization ratio compares an individual's total debt balances to total available credit.It helps determine part of a person's credit score. Read more

Variable Interest Rate

A variable interest rate is an interest rate that can change from time to time. For example, let's say that you want to borrow $5,000 to start a business. Read more

Wage Assignment

A wage assignment refers to a forced payment of a financial obligation via automatic withholding from an employee's pay. Courts can subject individuals who become delinquent in their obligations to wage assignments. Read more

Wage Earner Plan

A wage earner plan, subsequently known as Chapter 13, is a bankruptcy protection scheme that allows income earners to satisfy outstanding debts -- in whole or in part -- within a specific time frame. In a Chapter 13 bankruptcy -- formerly called a wage earner plan -- a person petitions the court to reduce the total amount owed and provide a reasonable repayment schedule based on his or her income. Read more

Wage Garnishment

A wage garnishment is an obligatory payment of a debt where a portion of an employee's paycheck is automatically withheld to pay the debt. Courts can set wage garnishments on individuals who become delinquent on their debt payments. Read more

Walk-Away Lease

Also called a closed-end lease, a walk-away lease is usually a kind of car lease that allows the lessee to return the car at the end of a lease period. Let's assume John Doe leases a 2013 Ford Mustang. Read more

Warehouse Financing

Warehouse financing occurs when a lender lends to a borrower who uses inventory as collateral. Let's assume Company XYZ wants to borrow $2 million to expand its operations. Read more

Waterfall Payment

A waterfall payment is a repayment system by which senior lenders receive principal and interest payments from a borrower first, and subordinate lenders receive principal and interest payments after. Imagine the cash generated by a company as a waterfall that flows from senior lenders down to subordinate lenders. Read more

Wet Loan

A wet loan is a mortgage in which the borrower gets the funding before all the paperwork is done. Let's assume John Doe wants to buy the house for sale at 123 Main Street. Read more

Working Capital Loan

A working capital loan is a loan used by companies to cover day-to-day operational expenses. In many cases, companies are unable to generate the revenue needed to meet expenses incurred by day-to-day business operations. Read more

Z-Score

The Z-score is a financial statistic that measures the probability of bankruptcy.  The Z-score is used to predict the likelihood that a company will go bankrupt.A company's Z-score is calculated based on basic indicators found on its financial statements (e.g. Read more

Zombie Bank

A zombie bank is a bank with liabilities that exceed its assets (in other words, it has a net worth of zero).They do not die (hence the nickname) because they receive government support or bailouts. Read more

Zombie Debt

Zombie debt is debt that won't die.  Let's say John Doe ran up a $10,000 credit card bill in his 20s. Read more