The ACH network processes electronic financial transactions. This includes Direct Deposit and Direct Payments for consumers and businesses. Federal, state and local governments use ACH as well. When your employer deposits funds in your account electronically on pay day, that is ACH at work. When you pay a bill online or set up autopay for your monthly bills, you’re using ACH. From salaries to mortgage payments to Social Security, tens of millions of Americans use ACH every day.
APR is a standardized measurement of the cost of credit, used in reference to everything from car loans to credit cards. APR is an annualized representation of your interest rate. Since the Truth in Lending Act (TILA) requires that all financial institutions calculate APR the same way, looking at the APR can help you compare loan and credit card offers to secure the best rate. Choosing the vendor with the lowest APR can help you spend less on your debt. With credit cards, your APR comes into play when your debt carries over into the next billing cycle. If you carry a balance on a credit card, you will pay the interest on your balance. Learn more about APR here.
A loan balance is the amount you have left to pay on a loan. Your balance can be different from your payoff amount – the amount you would need to pay on a given day to pay off your loan. Your loan balance can change from day to day because interest gets added to your loan balance regularly. You will carry a balance on a loan until it is paid off.
Bankruptcy is a legal process by which the person filing bankruptcy (the debtor), if successful, has their debts forgiven. However, filing for bankruptcy should be viewed as a “last resort” to pay down debt because it damages credit scores, possibly making it difficult to access credit or financing for years. Bankruptcy begins by filing a petition with the bankruptcy court. A petition may be filed by an individual, by a corporation (entity) or couple together. There are many different types of bankruptcy including Chapter 7, Chapter 13, Chapter 9, Chapter 11, Chapter 12 and Chapter 15. Which type of bankruptcy an individual qualifies for depends on a variety of factors including a means test. People considering bankruptcy should consult a bankruptcy lawyer because of the complexity of the process and because bankruptcy has significant financial and legal consequences. However, individuals can file for bankruptcy without a lawyer. If you do file for bankruptcy, it can stay on your credit report for seven to ten years depending on which type of bankruptcy you file.
You can learn more about bankruptcy by browsing Uprova’s blog posts on the subject.
A budget is a breakdown of your expenses and income for a set time. Creating a budget can give you a detailed picture of your finances, showing you how much you are spending on necessities and where you may be able to eliminate other expenses. It can highlight areas where you are wasting money and ways to save more. The 50/20/30 budget rule is a popular way to break up your expenses and spend responsibly. The rule states that you should spend up to 50% of your after-tax income on needs and obligations, 20% on savings and debt repayment, and 30% towards other expenses. Budgeting can help you create an emergency fund and cover unexpected expenses. You can also pay down debt faster if you include debt repayment in your budget.
A cap is an established limit of a loan amount’s interest rate. It may apply to an individual loan (such as on a variable or adjustable-rate mortgage), or it may be imposed by law and apply to all of the loans made in that jurisdiction.
A cash advance loan is a short-term loan from a bank, online lender, or storefront lender. This is different from a credit card cash advance, which is also a type of loan but is provided by your credit card company. A cash advance loan is a small loan with a short term, typically two weeks or until the borrower’s next payday. Cash advance amounts vary from lender to lender. Many Americans use cash advance loans, because they need cash quickly, as funds can be transferred by the next day in many cases. Cash advance lenders often provide alternative funding for consumers with no or poor credit, but these loans can come with very high-interest rates.
A charge off occurs when a financial institution has decided that a borrower will never repay a loan and deems the loan uncollectable. This results in a negative mark on the borrower’s credit report. A charge off is considered a serious negative event and can adversely impact your credit score and ability to borrow funds in the future. After charging off a loan, the original lender may engage a third party debt collector to attempt to recover what is owed. If you see a charge off reported on your credit report, you could reach out to the lender or creditor to see if you can repay your debt and have the mark removed, but it may be too late. A charge off can stay on your report for seven years. A charge off also does not mean that your debt is wiped clean; you are still legally responsible for the amount owed.
A checking account is a deposit account held at a financial institution that allows the owner of the account to make withdrawals and deposits. A checking account is required to get approved for many types of loans including personal loans. A lender needs to be able to deposit funds electronically to a bank account and sometimes they can only make electronic deposits to checking, not savings, accounts.
Collateral, or security, is an asset that a lender accepts in order to lower their risk in making a loan. The collateral is said to “secure” the loan – for example, a car loan is secured by the automobile, and a mortgage loan is secured by the home. Securing the loan with collateral allows the lender some recourse if the borrower defaults, since in that situation the lender can seize the collateral and sell it. If you obtain a secured or collateralized loan, you risk the loss of that asset if you cannot repay your debt. That is why it is vital that you only borrow what you can afford to repay.
Compound interest is interest on a loan or deposit that accrues on both the initial principal and the accumulated interest from previous periods.
A co-signer is a person who signs an agreement to pay back a loan if you do not. Some people ask their parents, close family members or friends to co-sign on loans that they can’t qualify for on their own. Adding a co-signer to a loan is beneficial to both the lender and the borrower, but can negatively impact the co-signer. A co-signer is obligated to pay back a loan the same as the borrower, so if you can’t make your payments, your co-signer is on the hook. If they do not have the funds to make payments, both of you can face defaulting and the consequences that come with it.
Credit is the ability to borrow money and make purchases with an understanding that you will repay the debt later.
A credit bureau, or credit reporting agency, is an organization that collects and researches information about individuals and sells it to creditors, so that they can use the information in making decisions like whether to move forward with an application or extend credit. Lenders use credit bureau information to evaluate prospective borrowers and their ability to repay a loan.
A credit card is a physical card that is provided to a consumer by a bank or credit union (called an “issuer”) to make purchases, with the agreement that the cardholder will pay back the card issuer for the cost of any items purchased, plus any predetermined fees and interest if applicable. Issuers often work with other companies, such as airlines or e-commerce companies, to provide other benefits to the consumer who uses the card. Only using the credit card for what you can afford that month, and paying the entire statement balance on time, is a sensible way of using credit.
Learn more about credit cards by browsing Uprova’s blogs on the subject!
A credit counseling organization advises consumers on how to pay off or pay down debt. They can help debtors come up with a budget and a plan for debt repayment, and may also directly work with creditors to settle debts.
Lines of credit – including credit cards – are all subject to a credit limit, which is the limit on the amount of credit able to be used to make purchases. Once a borrower hits their credit limit, they are unable to draw on any more funds to make purchases and their credit card will be declined if additional purchases are attempted. Usually once the borrower pays down the debt they will be able to make purchases again.
A credit report is a statement that has information about your credit activities. Your credit history includes your loan payment history and status of your credit accounts. A credit report is used by lenders to determine your credit worthiness, including how much they can approve you for, the interest rate, and fees that may apply.
Articles on Credit Reports and Credit Reporting Agencies can be found on the Uprova blog!
A creditor is the entity, person or institution, that extends credit by giving a person or company permission to borrow money that will be repaid in the future.
A debit card is issued by a financial institution and is linked to the user’s checking account. Unlike a credit card, which in effect borrows money to be paid back in the future, using a debit card immediately withdraws the funds from the user’s checking account.
Debt consolidation is a type of loan or service that combines the debt owed to multiple parties. When a person has multiple debts with high balances, debt consolidation can be a useful tool by allowing the borrower with only one loan payment to manage. Debt consolidation can combine multiple debt types including credit card debt and personal loan debt. It may be the case that the interest rate for the debt consolidation loan is lower than the other debts, allowing the borrower to pay their debt faster.
A default is a failure to live up to one’s duties under a contract. In the case of a loan, this means a failure to pay back the loan as agreed. When a borrower defaults, the lender may send the debt to a debt collection agency whose job it is to reach the borrower and collect on the unpaid funds. Defaulting on a loan can cause a borrower’s credit score to drop drastically. If you can’t make your payment on time, you should immediately contact your lender directly to discuss restructuring your loan terms or other repayment options.
If a borrower is considered delinquent on a loan, it means that they are behind on their payments. Most lenders will declare a loan to be in default if the period of delinquency goes on too long, but may also allow the borrower to get their loan back into a good status before declaring default. You should contact your specific lender if you have questions about delinquency vs. default, since lenders may handle this differently.
A direct deposit is an electronic transfer of funds via the ACH network directly into an account. Most employers use direct deposit to pay employees. Online lenders can also use direct deposit to transfer loan principal into a borrower’s checking account.
ECOA is a U.S. federal law that prohibits lenders from discriminating on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith exercise of any rights under the Consumer Credit Protection Act in their issuance of credit. It also requires creditors to provide applicants with the reasons behind a decision to deny credit. Learn more about ECOA here.
A loan agreement, like all contracts, must be signed to be valid and for the funds to be issued. Many lenders operate online and allow borrower to sign their loan electronically – this digital signature is called an “e-signature.”
The FCRA is a U.S. federal law that protects information collected by consumer reporting agencies and governs what consumer reporting agencies and the users of credit data may do with that information. Information in a consumer report cannot be provided to anyone who does not have a purpose specified in the Act. Learn more about the Fair Credit Reporting Act.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency that was created by Congress to maintain stability and public confidence in the country’s financial system. The FDIC insures bank deposits, and examines and supervises financial institutions for safety, soundness, and consumer protection.
A fixed interest rate is an unchanging rate charged on a loan. It can apply to the entire loan term or part of the term. A fixed interest rate stays the same throughout a set period.
An installment loan is a loan that is repaid in fixed installments. There is a predetermined loan amount and number of payments. However, many installment loan lenders will allow you to pay off debt faster without a penalty.
Interest is defined as the cost of borrowing money. It also applies to the money you may earn from savings.
Interest rates indicate the cost or return as a percentage of the amount you are borrowing or lending.
Some lenders charge a late payment fee when a borrower is late to make a payment. Lenders must disclose any late fees in the loan agreement. Some lenders provide autopay as an option, meaning payments are automatically drafted from a borrower’s checking account, ensuring that they do not miss a payment.
A lender is a financial institution or individual that makes loans directly to a borrower with the understanding and expectation they will be repaid.
A lien is a claim or legal right against assets that were used as collateral. Liens are used to protect the interests of creditors and other people who are owed money by property owners.
A loan agreement is a contract that governs a loan that must be signed by the borrower before funds can be issued. It includes vital information about the loan including rates, fees, repayment terms and more. Lenders are required to show borrowers the loan agreement, and give them the opportunity to read it, before the borrower has to sign. It is very important that borrowers read and understand the loan agreement before signing.
TILA is a U.S. federal law that governs the disclosures that lenders can make about their loans. TILA requires that lenders provide borrowers with certain details about the loan, such as the total cost of credit and the payment schedule, in a common format. TILA is also the reason that all lenders must all use the annual percentage rate when they describe their loans, which allows borrowers to easily compare different offers and find the loan that is best for them. Read more about the Truth in Lending Act here.
An unsecured loan is a loan that is not backed by collateral. Unsecured loans do not require a borrower to secure the loan with assets in order to get funding. Unsecured loans are riskier for lenders than secured loans, so interest rates and fees may be higher than secured or collateralized loans. An online personal loan is one type of unsecured loan.
As opposed to a fixed interest rate, a variable interest rate is one that fluctuates or changes over time. A variable interest rate is usually based on an underlying benchmark interest rate or index that changes periodically.