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Loan Glossary

Loan Glossary: Key Terms Every Borrower Should Know

A clear, alphabetized reference for common loan terminology. Look up unfamiliar terms and learn the basics without jargon.

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Loan Terms A–C: Amortization, APR, Principal and More

Understanding loan vocabulary is the first step to making informed borrowing decisions. Here are essential terms from A to C.

  • Amortization: The gradual reduction of the principal amount owed on a debt. Early payments typically go mostly toward interest, while later payments go mostly toward principal.
  • APR (Annual Percentage Rate): The annual cost of a loan expressed as a percentage. It includes the interest rate plus other charges and fees such as closing costs, discount points, and loan origination fees.
  • Principal: The original amount of money borrowed, not including interest or fees.

Sources: University of California Office of the President, Fannie Mae

Loan Terms D–F: Debt-to-Income Ratio, Fixed-Rate, Fees

These terms describe common loan characteristics and borrower qualifications.

  • Debt-to-Income (DTI) Ratio: Calculated by dividing a borrower's total monthly debt payments by their gross monthly income. Lenders often use this to assess ability to repay.
  • Fees: Charges associated with a loan, such as origination fees, appraisal fees, or closing costs, which may be included in the APR.

Sources: University of California Office of the President, Fannie Mae

Loan Terms G–M: Interest Rate, Monthly Payment, Maturity

These are common terms you will encounter throughout the life of a loan.

  • Interest Rate: The percentage of the principal charged by the lender for borrowing money, not including other fees.
  • Monthly Payment: The regular amount paid to the lender, typically covering principal and interest, and sometimes taxes, insurance, and fees.
  • Maturity: The date on which the final loan payment is due and the loan must be fully repaid.

Sources: University of California Office of the President, Fannie Mae

Loan Terms N–R: Origination Fee, Prepayment, Principal

Understand these terms to grasp loan costs and repayment flexibility.

  • Origination Fee: A charge by the lender for processing a new loan, often a percentage of the loan amount.
  • Prepayment: Making extra payments or paying off a loan before the scheduled maturity date.
  • Principal: The original amount borrowed, which is reduced through amortization.

Sources: University of California Office of the President, Fannie Mae

Loan Terms S–Z: Term, Variable-Rate, Yield

These terms cover loan duration, interest variability, and overall return.

  • Term: The length of time over which the loan must be repaid, often expressed in years.
  • Variable-Rate Loan: A loan with an interest rate that can change over time, usually in response to market conditions.
  • Yield: The return on investment or the effective interest earned by a lender on a loan, often expressed as an annual percentage.

Sources: University of California Office of the President, Fannie Mae

Frequently asked questions

What is the difference between APR and interest rate?

The interest rate is the basic percentage charged on the principal amount borrowed. The APR (Annual Percentage Rate) is a broader measure of the annual cost of the loan, because it includes the interest rate plus other charges and fees, such as closing costs, discount points, and loan origination fees. Because of these extra costs, the APR is usually higher than the interest rate.

Sources: University of California Office of the President, Fannie Mae
What does amortization mean in simple terms?

Amortization is the gradual reduction of the principal amount you owe on a loan. With equal periodic payments, the earliest payments go mostly toward interest, and later payments go mostly toward principal, so that the loan is fully paid off by the end of the term.

Sources: University of California Office of the President, Fannie Mae
What is a debt-to-income ratio?

A debt-to-income (DTI) ratio is a measure of your monthly debt obligations relative to your gross monthly income. It is calculated by dividing your total monthly debt payments by your gross monthly income. Lenders use DTI to assess your ability to manage monthly payments and repay debts.

Sources: Fannie Mae
What is the difference between a fixed-rate and variable-rate loan?

A fixed-rate loan has an interest rate that remains the same for the entire term of the loan. A variable-rate loan (also called an adjustable-rate loan) has an interest rate that can change over time, usually in response to market conditions.

Sources: Fannie Mae

Sources

  1. Loan terminology glossary — University of California Office of the President
  2. Glossary of Key Terms — Fannie Mae