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Glossary of Loan Terms

Authored By: D.C. Bar Pro Bono Center

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Glossary of Loan Terms

 

Amount Financed

The amount financed includes the principal amount you are borrowing plus finance fees and other extras which the lender is charging but which you are not paying up front. The amount financed is also the total amount on which the lender is charging interest. You should always compare the amount financed with the amount you are receiving. The amount you are receiving is the amount you thought you were borrowing. If the amount financed is higher than the amount you receive, then this means you are being charged fees or other extras that you may not have been aware of. It also means that the lender is charging interest on these fees, adding even more cost to your loan.

You should always find out exactly what you are being charged for and have somebody help you determine the "real" interest rate for the loan.

Arbitration

Arbitration is when a disagreement is decided by a private person called an arbitrator. An arbitrator listens to the arguments of each side, and decides how to resolve the dispute - similar to a judge. Sometimes lenders try to require you to use an arbitrator to resolve a disagreement with them. Arbitration is not always bad, but if it is required it can prevent you from having your day in court if you have been mistreated by your lender.

Balloon Payment

A balloon payment occurs when the last payment on the mortgage is a very large payment. Lenders use this balloon ("inflated") final payment to make the other monthly payments much smaller. They sell you on the low monthly payment. But they don't tell you that when the balloon payment comes due, you will need to either take out a new loan to pay the balloon, or else lose your house. Some balloon payments are for as much as the entire loan! That means that your "low monthly payment" ends up costing you more money than a higher payment would.

Credit Life Insurance

Credit life insurance is insurance that will pay off your loan in the event that you pass away before its term is over. You are not required to buy this insurance to qualify for your loan. Sometimes sub-prime lenders will include this insurance without explaining it to the borrower. Credit life insurance is usually more expensive than other types of life insurance. In some cases, the lender charges the entire amount of potential premiums up front and then charges interest on the amount to the borrower. If you feel that you need life insurance to cover the amount of a loan, you may be better off shopping for a separate policy.

Equity

Your equity is the value of your ownership in your property. You can figure your equity by finding the current value of your home and subtracting the amount you owe on your house mortgage or mortgages.

Finance Fees or Points

These are fees you have to pay when you borrow money. In a bank loan, fees are usually no more than 2 percent to 3 percent of the loan. A percentage point is sometimes called merely a "point," so you may hear a 3 percent finance fee described as "3 points." With a high cost loan, fees can exceed 5 points.

With a bank, fees are usually paid up front. In many high cost loans, however, these fees are added to your loan. You end up paying interest on this amount as well. If a lender advertises a low interest rate, but increases the finance fees, the loan costs just as much as if it just had the higher interest rate.

Foreclosure

Foreclosure is the legal word for what happens when you do not make your payments on your mortgage and the lender takes your house to pay your loan off. If you are foreclosed upon, the lender has the power to sell your house to the highest bidder. The money from the sale will pay the lender first and you will have lost your home.

Interest Rate

Lenders charge you for using their money. When they charge you over time, it is called an interest rate. The interest rate is a percentage of the amount you owe on the loan. It is usually stated as a yearly rate. If you are being charged 10 percent interest, for example, on $100, then you must pay $10 per year to the lender. At the beginning of the loan, your monthly payments go almost entirely to paying interest charges.

Predatory Loan

A Predatory Loan is a loan in which the lender charges an amount which is more than reasonable to compensate the lender for time and risk, and where the lender uses misleading tactics to sell the loan to the borrower.

Principal

The principal of a loan is the amount of money borrowed. A principal payment is a payment of money that pays back part of the principal.

Total Payments

The total payments on your loan include everything you will pay to your lender over the course of the loan. Looking at this number helps you to see how much you are actually paying for your loan. If your loan has a balloon payment, the total payments will include the balloon, but it will not include the finance fees and additional interest you will have to pay when you refinance the balloon.

For a conventional loan of $140,000, typical total payments would be approximately $350,000. For predatory loans they can be anywhere up to $600,000. (Plus, additional charges when you refinance your balloon amount.)

Last Review and Update: Dec 06, 2016