The terms below appear throughout this site. Each definition is written to be understood on first reading rather than to be technically exhaustive, and several note the specific way the term is commonly misunderstood.
Where a term has a fuller treatment elsewhere on the site, the definition links to it.
A to C
Amortization — The process of paying a debt down to zero through regular fixed payments, where each payment covers the interest accrued and then reduces the principal. Early payments are mostly interest; later ones are mostly principal. This is why paying an extra amount early in a mortgage saves far more than the same amount paid late.
Annual Percentage Rate (APR) — The yearly cost of borrowing expressed as a percentage, including interest and certain required fees. APR is designed to make offers comparable. It is not the same as the interest rate, and on a mortgage the gap between the two tells you how much of the cost sits in fees.
Annual Percentage Yield (APY) — The yearly return on savings, including the effect of compounding. The savings-side counterpart to APR. Comparing an APY against an interest rate rather than another APY will mislead you.
Appreciation — An increase in an asset’s value over time. The opposite is depreciation.
Avalanche method — Paying debts in order of interest rate, highest first, while meeting every minimum. Mathematically the cheapest ordering. See our debt payoff calculator for what the difference is worth on your own balances.
Closing costs — The fees paid to complete a property purchase, covering lender charges, third-party services and prepaid items such as insurance and taxes. Distinct from the deposit and frequently underestimated by buyers.
Collateral — An asset pledged against a loan, which the lender can take if the loan is not repaid. A mortgage is secured on the property; a personal loan is usually unsecured, which is why it carries a higher rate.
Compound interest — Interest calculated on the original principal plus the interest already accrued. It works powerfully for savings held over long periods and equally powerfully against you on a revolving balance.
Credit report — The record of your borrowing held by a credit reporting agency: accounts, balances, payment history and public records. Distinct from your credit score, which is a number calculated from it. Errors in the report are common and correctable.
Credit utilization — The proportion of your available revolving credit that you are currently using. One of the larger inputs into most scoring models, and one of the few you can change within a single billing cycle.
D to I
Debt-to-income ratio (DTI) — Monthly debt payments divided by gross monthly income, expressed as a percentage. Lenders use it to judge whether you can support a new payment. It is the figure most likely to decline a mortgage application that otherwise looks strong.
Deductible — In insurance, the amount you pay before cover begins. A higher deductible lowers the premium and raises what a claim costs you. Not to be confused with a tax deduction.
Deduction — In tax, an amount subtracted from income before tax is calculated, reducing the income that is taxed. Distinct from a credit, which reduces the tax itself and is therefore worth more per dollar.
Down payment — The portion of a purchase price paid up front rather than borrowed. On a home, its size affects the rate offered and whether mortgage insurance is required.
Emergency fund — Cash held in an accessible account to cover essential costs if income stops or an unavoidable bill arrives. Sized on essential outgoings rather than salary. Our emergency fund calculator works from the former.
Equity — The share of an asset you actually own: its market value less what you owe against it. Home equity rises through repayment and through appreciation, and falls if values drop.
Escrow — An account held by a third party into which money is paid for a specific future purpose. In a mortgage, the lender collects property tax and insurance alongside the loan payment and pays them when due, which is why a mortgage payment can rise while the interest rate has not moved.
FDIC insurance — Federal protection for deposits at insured banks, currently $250,000 per depositor, per insured bank, per ownership category. It covers deposits, not investments — a distinction that catches people holding money market mutual funds.
Fixed rate — An interest rate that does not change for an agreed period. Predictable, and usually priced slightly higher than a variable rate to compensate the lender for taking that risk.
Index fund — A fund that holds the constituents of a market index rather than selecting investments individually. Typically carries lower fees than an actively managed fund, and fees compound against returns over time.
Inflation — A general rise in prices, which reduces what a given sum of money buys. Relevant to savings because a return below the inflation rate is a loss in real terms even though the balance grew.
L to R
Liquidity — How quickly an asset can be turned into cash without losing value. A savings account is liquid; property is not. An emergency fund must be liquid, which is the argument against holding one in investments.
Loan-to-value ratio (LTV) — The loan amount as a percentage of the property’s value. Lower LTV generally means a better rate, because the lender’s risk is lower.
Minimum payment — The smallest amount that keeps a credit account current. Usually a percentage of the balance, so it falls as the balance falls, which is what stretches repayment out over years. Meeting it protects your credit file; only exceeding it clears the debt at any speed.
Net worth — Everything you own less everything you owe. A single figure that captures direction better than income does, because it accounts for debt.
Origination fee — A charge for processing a new loan, often a percentage of the amount borrowed. It is captured in the APR, which is why APR is the more honest comparison figure.
Principal — The amount borrowed or invested, separate from the interest. On a loan, only payments that exceed the interest reduce it.
Refinancing — Replacing an existing loan with a new one, usually to obtain a lower rate or a different term. Worth doing when the interest saved exceeds the cost of arranging it, which depends on how long you keep the loan.
Revolving credit — A facility you can draw on repeatedly up to a limit, such as a credit card, rather than a fixed sum repaid over a set term. Interest is charged on the balance carried.
S to U
Secured debt — Borrowing backed by an asset the lender can take if you default. Cheaper than unsecured borrowing, and riskier for you in a different way.
Snowball method — Paying debts in order of balance, smallest first, while meeting every minimum. Costs more in interest than the avalanche in most cases, but clears individual accounts sooner, which some people find easier to sustain.
Term — The length of time over which a loan is repaid. A longer term lowers the monthly payment and raises the total interest paid.
Underwriting — The lender’s assessment of whether to lend to you and on what terms, based on income, debts, credit history and the asset involved. The stage at which an application is most often delayed by paperwork rather than declined outright.
Variable rate — An interest rate that can change over the life of a loan, usually tracking a reference rate. Cheaper than a fixed rate at the outset, with the risk of increase sitting with you.
Using these terms
Definitions are a starting point, not the whole picture — several of these terms carry meanings that shift by product and by lender. Where a decision turns on a definition, check the specific documentation for the product in front of you, and see our Disclaimer on the limits of general guidance.
If a term you have run into is missing, tell us at [email protected] and we will add it.
