Glossary of Terms

In the financial world, some words and terms can be confusing.  Here is a glossary of some of these terms.

• Accrued Interest — Interest that has been earned but not received or recorded.
• Amortization — The process of fully paying off indebtedness by installments of principal and earned interest over a definite time.
• Annual Percentage Rate (APR) — The cost of credit on a yearly basis expressed as a percentage.
• Appraisal fee — The charge for estimating the value of property offered as security.
• Appreciation — An increase in the value or price.
• Asset — Anything an individual or a business owns that has commercial or exchange value. An asset is something you own that has lasting or even growing value. Assets have lasting or growing value.
• Automated Clearinghouse (ACH) — Electronic clearing and settlement system for exchanging electronic transactions among participating depository institutions; such electronic transactions are substitutes for paper checks and are typically used to make recurring payments such as payroll or loan payments. The Federal Reserve Banks operate an automated clearinghouse, as do some private sector firms.
• Automated Teller Machine (ATM) — Computer-controlled terminal located on the premises of financial institutions or elsewhere, through which customers may make deposits, withdrawals or other transactions as they would through a bank teller. Other terms sometimes used to describe such terminals are customer-bank communications terminal (CBCT) and remote service unit (RSU). Groups of banks sometimes share ATM networks located throughout a region of the country that may include portions of several states.
• Automated Teller Machine (ATM) card — A debit card that automatically withdraws money from your account.
• Balance — The amount owed on a loan or credit card or the amount in a savings or investment account.
• Balance sheet — A financial statement showing a "snapshot" of the assets, liabilities and net worth of an individual or organization on a given date.
• Balloon payment — A large extra payment that may be charged at the end of a loan or lease.
• Bankruptcy — A legal proceeding declaring that an individual is unable to pay debts. Chapters 7 and 13 of the federal bankruptcy code govern personal bankruptcy.
• Barter — The direct exchange of goods and services among people. No money is used in the exchange.
• Budget — An itemized summary of probable income and expenses for a given period.
• Capital — A person's savings and other assets, which can be used as collateral for loans.
• Cash flow — Money coming to an individual less money being paid out during a given period.
• Certificate of Deposit (CD) — A form of time deposit at a bank or savings institution; a time deposit cannot be withdrawn before a specified maturity date without being subject to an interest penalty for early withdrawal. Small-denomination CDs are often purchased by individuals. Large CDs of $100,000 or more are often in negotiable form, meaning they can be sold or transferred among holders before maturity.
• Certified check — A check for which a bank guarantees payment. When the check is certified, it legally becomes an obligation of the banks, and the funds to cover it are immediately from the depositor's account.
• Chapter 13 — Adjustments of debts of an individual with regular income under the Federal Bankruptcy Code. Chapter 13 enables a debtor who is an individual to develop and perform a plan for the prepayment of creditors over an extended period. The plan might provide for full or partial repayment. Chapter 13 allows the debtor to retain his or her property, unless he or she agrees otherwise in the plan. See Bankruptcy.
• Chapter 7 — A provision of bankruptcy laws wherein a company is required to liquidate its assets to pay of its creditors. See Bankruptcy.
• Character — A borrower's trustworthiness.
• Check — A written order to a bank to pay the amount specified from funds on deposit.
• Check clearing — The movement of a check from the depository institution at which it was deposited back to the institution on which it was written; the movement of funds in the opposite direction and the corresponding credit and debit to the involved accounts. The Federal Reserve operates a nationwide check-clearing system.
• Collateral — Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security)
• Commercial bank — Bank that offers a broad range of deposit accounts, including checking, savings and time deposits and extends loans to individuals and businesses. Commercial banks can be contrasted with investment banking firms, such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal securities.
• Compound interest — Interest that is calculated on the original principal plus all interest accrued to that point in time. Since interest is paid on interest as well as the amount borrowed, the effective interest rate is greater than the nominal interest rate. The compound interest rate method is often used by banks and savings institutions in determining interest they pay on savings deposits "loaned" to the institutions by the depositors.
• Consumer — People whose wants are satisfied by using goods and services.
• Consumer credit — Loan extended to individuals. Consumer credit includes secured and unsecured installment and revolving credit.
• Cosigner — A term referring to a person, other than the principal borrower, who signs for a loan. The cosigner(s) assumes equal liability for the loan.
• Credit — The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
• Credit bureau — A business organization that puts together information for your credit file, keeps it up to date, and makes it available for a fee to lenders, insurance companies, and potential employers.
• Credit card — Any card, plate or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.
• Credit history — A record of how a person has borrowed and repaid debt.
• Credit rating — An estimate of the amount of credit that can be extended to an individual or business without undue risk. (See also credit scoring system)
• Credit report — A loan and bill payment history, kept by a credit bureau and used by financial institutions and other potential creditors to determine the likelihood that a future debt will be repaid.
• Credit scoring system — A statistical system used to determine whether to grant credit by assigning numerical scores to various characteristics related to creditworthiness.
• Credit union — Financial cooperative organization of individuals who have a common bond, such as place of employment or residence or membership in a labor union. Credit unions accept deposits from members, pay interest (in the form of dividends) on the deposits out of earnings and use their funds to provide consumer installment loans to members.
• Creditor — A person, financial institutions or other business that lends money.
• Creditworthiness — A creditor's measure of a consumer's past and future ability and willingness to repay debts.
• Currency — Any form of money in actual use as a medium of exchange.
• Debit — Charges to an account.
• Debit card — A card that resembles a credit card but which debits a transaction account (checking account) with the transfers occurring contemporaneously with the customer's purchases. A debit card may be machine readable, allowing for the activation of an automated teller machine or other automated payments equipment.
• Debt — Money owed; also known as liability.
• Secured – Secured debt is backed by things you own, i.e. mortgage or car loan.
• Priority Secured – Priority unsecured debt is backed by the government, i.e. student loans, state and federal income taxes and property taxes, and child support owed.
• Unsecured - Unsecured debt has only your contract backing it. This includes credit cards, personal loans and lines of credit, medical bills, and bounced checks.
• Debt to Income Ratio – Debt-to-income ratio is the percentage of your take-home pay that is tied up in debt payments. This ratio looks at consumer debts, including credit cards, car loans, student loans, personal loans.
• Debt service — Periodic payment of the principal and interest on a loan.
• Deficit — The amount each year by which government spending is greater than government income.
• Delinquency — The failure to make timely payments under a loan or other credit agreement.
• Demand — The amount of a commodity that people are ready and able to buy at a given time for a given price.
• Demand deposit — A deposit that may be withdrawn at any time without prior written notice to the depository institution. A checking account is the most common form of demand deposit.
• Denomination — A class of units having specified values, such as a system of currency.
• Deposit — Any money in a savings or a checking account or in a certificate of deposit (CD).
• Depository institution — A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks and credit unions. Although historically they have specialized in certain types of credit, nonbank depository institutions have broadened their powers in recent years. For example, NOW accounts, credit union share drafts and other services similar to checking accounts may be offered by thrift institutions.
• Depreciation — See currency depreciation.
• Direct deposit — A method of payment which electronically credits your checking or savings account.
• Dividend — A share of profits paid to a stockholder.
• Electronic banking — Conducted by Automated Teller Machines (ATMs), telephones (not via the Internet) or debit cards.
• Electronic Funds Transfer (EFT) — Transfer of funds electronically rather than by check or cash. The Federal Reserve's Fedwire and automated clearinghouse services are EFT systems.
• Face value — The principal amount of a bond, which will be paid off at maturity.
• Fair market value — The price a willing buyer will pay and a willing seller will accept for real or personal property.
• Federal Deposit Insurance Corporation (FDIC) — An independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. The FDIC promotes safety and soundness of insured depository institutions and the U.S. financial system by identifying, monitoring and addressing risks to the deposit insurance funds; minimizes disruptive effects from the failure of banks and savings associations; and ensures fairness in the sale of financial products and the provision of financial services.
• Finance — Charge/Cost of credit, including interest paid by a customer for a consumer loan. Under the Truth in Lending Act, the finance charge must be disclosed to the customer in advance. See also Consumer Credit Protection Act of 1988.
• Finance charge — The total dollar amount paid to get credit.
• Finance company — A company that makes loans to individuals.
• Financial — Reference to transactions involving money.
• Financial institution — An institution that uses its funds chiefly to purchase financial assets (loans, securities) as opposed to tangible property. Financial institutions can be classified according to the nature of the principal claims they issue. See also depository institution.
• Financing fee — The fee a lender charges to originate a loan. The fee is based on a percentage of the loan amount; one point is equivalent to one percent.
• Fixed rate — A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.
• Float — A sum of money that represents checks that are outstanding.
• Foreclosure — The legal process used to force the payment of debt secured by collateral whereby the property is sold to satisfy the debt.
• Fraud — Intentional misrepresentation, concealment, or omission of the truth for the purpose of deception or manipulation to the detriment of a person or an organization. Fraud is a legal concept and the application of the term in a specific instance should be determined by a legal expert.
• Garnishment — A notice to an employer or other asset holder requiring that monies, wages, or property due a debtor be withheld and given a creditor to be applied to a specific debt in arrears.
• Gross Pay – Gross income is the money you earn before taxes and deductions. Net pay is what you have left after taxes and deductions. Net pay also is known as take-home pay.
• Individual Development Account (IDA) — A type of savings account, offered in some communities, for people whose income is below a certain level.
• Individual Retirement Account (IRA) — A retirement plan, offered by banks, brokerage firms and insurance companies, to which individuals can contribute each year on a tax-deferred basis.
• Inflation — A sustained increase in the general price level or a decline in the value or purchasing power of money.
• Installment credit — A loan, extended by financial institution or retail firms, to be repaid along with interest charge in fixed periodic payments or, if variable rate of interest is charged, to be repaid in amounts that vary with the interest charged.
• Installment plan — A plan requiring a borrower to make payments at specified intervals over the life of a loan.
• Interest — A fee for the use of money over time. It is an expense to the borrower and revenue to the lender. Also money earned on a savings account.
• Interest payments — The return expressed in percentage earned on an investment each year. These payments are issued every six months based on an annual rate.
• Interest rate — The rate charged to borrow funds, usually from banks or other lending institutions.
• Internet banking — Usually conducted through a personal computer (PC) that connects to a banking Web site via the Internet. Internet banking can also be conducted via wireless technology through both personal digital assistants (PDAs) and cellular phones.
• Investing — The act of using money to make more money.
• Investor — An organization, corporation, individual or other entity that acquires an ownership position in an investment, assuming risk of loss in exchange for anticipated returns.
• Liability — Money an individual or organization owes; same as debt. Liabilities are the opposite of assets. Liabilities can include: home mortgages, car loans, student loans, personal loans and lines of credit, and credit card debt.
• Lien — A creditor's claim against a property, which may entitle the creditor to seize the property if a debt is not repaid.
• Loan — A sum of money lent at interest.
• Market value — The amount a seller can expect to receive on the open market for merchandise, services or securities.
• Maturity — The time when a note, bond or other investment option comes due for payment to investors.
• Money — Anything that serves as a generally accepted medium of exchange, a standard of value and a means to save or store purchasing power. In the United States, currency (the bulk of which is Federal Reserve notes), coin and funds in checking and similar accounts at depository institutions are examples of money.
• Money market savings account — A type of savings account offered by a financial institution.
• Mortgage — A temporary and conditional pledge of property to a creditor as security for the repayment of a debt.
• Mortgage Loan — A temporary and conditional pledge of property to a creditor as security for the repayment of debt.
• Needs – Needs are what you must have to live; wants are everything else you would like to have. Learning to be thrifty means saying yes to only some of your wants, so needs will get met.
• Net worth — The difference between the total assets and total liabilities of an individual.
• Online banking — Access by personal computer or terminal to bank information, accounts and certain transactions via the financial institution’s web site on the Internet. Also known as Internet banking.
• Open-end credit — A line of credit that may be used repeatedly up to a certain limit, also called a charge account or revolving credit.
• Overdraft checking account — A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.
• Payday Loan — A transaction in which a short-term cash advance is made to a consumer in exchange for a customer's post-dated check in the amount of the advance plus a fee, or in exchange for a consumer's authorization to debit a transaction account in the amount of the advance plus a fee at a designated future date.
• Personal Identification Number PIN — A sequence of digits assigned to consumers that are used to identify them when debit cards are used at an ATM, POS terminals or a home device. See also ATM, Credit card, Debit card.
• Personal income — The dollar value of income received from all sources by individuals.
• Predatory lending — Targeting loans to elderly, low-income and other people to take advantage of their financial status or lack of financial knowledge.
• Prime rate — The lowest interest rate on bank loans, offered to preferred borrowers.
• Principal — The unpaid balance on a loan, not including interest; the amount of money invested.
• Promissory note — A written promise on a financial instrument to repay the money plus interest.
• Regulation — A principle rule, or law designed to control or govern.
• Return — The profit made on an investment.
• Risk — The possibility of loss on an investment.
• Savings account — A service depository institutions offer whereby people can deposit their money for future use and earn interest.
• Term — The period from when a loan is made until it is fully paid.
• Terms — Provisions specified in a loan agreement.
• Transfer — To convey or shift from one person or place to another.
• U.S. savings bond — A nontransferable, registered bond issued by the U.S. government in denominations of $50 to $10,000.
• Unsecured credit — Credit extended on the borrower's promise to repay the debt, and for which collateral is not required.
• Unsecured debt — A debt instrument not backed by the issuer's pledging of assets. Unsecured bonds are called debentures.
• Variable rate — A variable-rate agreement, as distinguished from a fixed-rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.
• Wants – Wants are everything you would like to have. Needs are what you must have to live. Learning to be thrifty means saying yes to only some of your wants, so needs will get met.
• Will — A document, also called testament, that, when signed and witnessed, gives legal effect to the wishes of a person, called a testator, with respect to disposal of property upon death.
• Wire transfer — Electronic transfer of funds; usually involves large dollar payments.
• Yield — The return on a loan or investment, stated as a percentage of price.