Debt Dictionary: Important Terms to Know for Financial Literacy

Introduction

Navigating the world of debt can feel like entering a foreign country without knowing the language. Creditors and collectors throw around incomprehensible words like “arrears,” “charge-offs,” and “repossession.”

But understanding these key terms is crucial for taking control of your financial situation. This comprehensive debt dictionary aims to explain over 50 common debt-related words and phrases in clear, everyday language.

Whether you’re dealing with burdensome student loans, crippling medical bills, or harassing collection agencies, the terms defined here will help you advocate for yourself. Knowledge is power when it comes to getting debt relief and achieving financial wellness. Let’s dive into learning the language of debt.

Basic Debt Terminology

Secured debt - Debt tied to collateral, like a home or car, that creditors can seize if payments stop.

Unsecured debt - Debt not tied to collateral, like credit cards, medical bills, and personal loans.

Principal - The original loan amount borrowed or credit used.

Interest - The cost of borrowing money, usually a percentage of the principal.

APR (Annual Percentage Rate) - The total yearly cost of a loan including interest and fees.

Debt consolidation - Combining multiple debts into one new loan, often at a lower interest rate.

Credit score - A number representing creditworthiness that lenders use to make decisions.

Collections - The process of pursuing overdue debt repayments.

Charge-off - When a creditor writes off an overdue account as a loss, yet can still try to collect.

These foundational terms provide a starting point for understanding more complex debt language. Let’s move on to key vocabulary used in the debt resolution process.

Debt Relief and Resolution Terms

Debt management plan - An arrangement made with creditors to pay off debt through reduced payments over time.

Debt settlement - When a creditor agrees to let you pay a "settlement" (lump sum) that's less than the total debt.

Debt validation - The process of requiring debt collectors to prove your debt is valid before paying.

Statute of limitations - The time limit creditors have to sue for payment on a debt.

Garnishment - When creditors take money from your wages or bank accounts to settle a debt.

Bankruptcy - A legal process for eliminating certain debts you can't reasonably repay.

Debt forgiveness - When a creditor agrees to cancel all or part of a debt.

Understanding these terms is key to assessing your debt relief options, negotiating with creditors, and guarding your rights during the resolution process. Now let’s go over important vocabulary related to mortgage and auto loans.

Mortgage and Auto Loan Terms

Mortgage - A loan used to purchase property, like a house, where the property serves as collateral.

Refinance - Taking out a new loan to pay off an existing mortgage, often to get better terms.

Forbearance - A temporary postponement or reduction of mortgage payments.

Foreclosure - When a bank repossesses a mortgaged property after payments stop.

Auto loan - A loan used to purchase a car, where the car serves as collateral.

Repossession - When a creditor takes back an item purchased on credit, like a car, due to missed payments.

Understanding these terms can help you evaluate options if you fall behind on secured loan payments and want to avoid repossession or foreclosure. Next, we’ll define key vocabulary used in personal bankruptcy cases.

Bankruptcy Terms

Chapter 7 - A bankruptcy option that liquidates assets to pay debts and discharges remaining debts.

Chapter 13 - A bankruptcy option that restructures debts into a court-mandated payment plan.

Automatic stay - When collection activities stop due to filing for bankruptcy.

Discharge - The release from personal liability for certain debts after bankruptcy.

Exemptions - Assets protected from liquidation during bankruptcy like primary home, car, etc.

Knowing this terminology can empower you to make informed decisions if considering bankruptcy as a debt relief option. Now let’s shift gears to understanding collection account lingo.

Collections Terms

Default - Being late on a payment as defined in a loan or credit agreement.

Delinquency - Being overdue on a debt payment.

Repossession - Seizure of property after failing to make payments.

Deficiency - The remaining amount owed on a loan after a repossessed property is sold.

Judgment - A court order stating you owe money to a creditor.

Wage garnishment - Deduction of owed money directly from wages.

Cease and desist letter - A letter demanding contact from a collector stop.

Being fluent in these terms allows you to enforce your rights when communicating with collectors. Understanding debt vocabulary grants the power to take control of your financial situation.

Additional Financial Terminology

To expand your financial literacy, here are definitions of some common financial terms beyond debt:

Income statement - A financial statement that summarizes a company's revenues, expenses and profits over a period of time.

Balance sheet - A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.

Cash flow statement - A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents.

Compound interest - Interest calculated on the initial principal and also on the accumulated interest of previous periods.

Credit score - A number representing an individual's creditworthiness, based on their borrowing and repayment history.

Credit report - A record of an individual's credit history, including loan payments, credit card balances, inquiries and more.

Down payment - An upfront payment made when purchasing a large item, such as real estate, a vehicle, etc.

Escrow - A financial arrangement where a third party holds and manages funds or documents on behalf of two other parties.

Gross income - Total income before accounting for taxes, deductions, or other adjustments.

Net income - Gross income minus taxes, deductions, and other adjustments.

Asset allocation - An investment strategy that aims to balance risk and reward by dividing assets among major categories.

Mutual fund - An investment vehicle made up of a pool of funds collected from many investors to invest in securities like stocks and bonds.

Financial statement - A record providing a summary of a company or individual's financial status including balance sheets, income statements, and cash flow statements.

Stock market - A market that facilitates the trading of company stocks and derivatives at an agreed upon price.

Maturity date - The date on which the principal amount of a loan or bond becomes due and payable.

Interest payments - Scheduled payments on a loan that cover the cost of borrowing the principal amount.

Financial transactions - An agreement, communication, or movement carried out between a buyer and a seller to exchange an asset for payment.

Periodic payments - Installment payments made at set intervals over time, usually monthly or annually.

Federal Deposit Insurance Corporation (FDIC) - A government organization that provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor.

Loans allow individuals, businesses, and governments to make large purchases that they couldn't otherwise afford. Understanding loan terminology helps borrowers evaluate options and make informed decisions.

Here are key loan terms defined:



Principal - The amount borrowed that must be repaid, not including interest or fees.

Interest rate - The percentage charged for use of borrowed money, generally charged annually.

Fixed interest rate - An interest rate that remains constant throughout the term of the loan.

Variable interest rate - An interest rate that may fluctuate over the term of the loan depending on market conditions.

Annual percentage rate (APR) - The total annual cost of borrowing including interest and fees, expressed as a percentage rate.

Term - The amount of time given for repayment of a loan.

Amortization - The process of gradually paying off debt through regular principal and interest payments over a period of time.

Collateral - An asset that secures a loan and can be seized if the borrower defaults.

Cosigner - A second person who signs the loan agreement and is equally responsible for repayment.

Default - Failure to make loan payments as required in the loan agreement.

Delinquency - Missing or being late on a loan payment.

Foreclosure - Legal process where a mortgaged property is seized due to default on payments.

Repossession - Taking back an item like a car when loan payments are past due.

Deficiency - The remaining balance still owed after repossessed collateral is sold.

Glossary Entries

Here are definitions for a variety of debt-related terms, organized alphabetically for easy reference:

APR (Annual Percentage Rate) - This is the annual rate charged for borrowing or earned through an investment. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.

Authorized User - This is a person who has permission to use a credit card account but is not legally responsible for paying the bill.

Available Credit - This is the unused portion of credit available for a person on a credit line or credit card.

Balance - This is the amount of money owed on a debt or credit card.

Balance Transfer - This is the process of moving an outstanding balance from one credit card to another, usually to take advantage of a lower interest rate.

Bankruptcy - This is a legal proceeding involving a person or business that is unable to repay their outstanding debts.

CFPB (Consumer Finance Protection Bureau) - This is a U.S. government agency that ensures banks, lenders, and other financial companies treat consumers fairly.

Charge-off - This is a debt that a creditor has given up trying to collect on after you've missed payments for several months.

Collections - This is the process creditors use to try to get consumers to pay unpaid debts. This term can also refer to the department within a credit company that manages overdue accounts.

Co-Signer - This is a person who agrees to pay a borrower's debt if the borrower defaults on a loan.

Credit Counseling - This is a service that provides assistance in dealing with a person's credit issues.

Credit Bureaus - These are agencies that collect credit information about individuals and sell that information to lenders.

Credit Limit and Credit Limit Increase - The credit limit is the maximum amount of credit that a financial institution or other lender will extend to a debtor for a particular line of credit. A credit limit increase is when the lender increases this maximum amount.

Credit Report - This is a detailed report of an individual's credit history, prepared by a credit bureau.

Debt - This is money owed by one party, the debtor, to a second party, the creditor.

Debt Consolidation - This is a form of debt refinancing that involves taking out one loan to pay off many others.

Debt Relief - This is the reorganization of debt in any shape or form, so as to provide the indebted party with a measure of relief.

Debt Settlement - This is a negotiated agreement in which a lender accepts less than the full amount owed – sometimes significantly less – to legally settle a debt.

Debt Settlement Company - This is a company that negotiates with creditors to reduce the amount of debt the person owes.

Delinquency - This is a failure to make payments on a debt by the due date.

Due Date - This is the date by which a payment must be made.

Fees or Late Fees - These are charges added to your account for not paying the bill by the due date.

FICO Score - This is a type of credit score created by the Fair Isaac Corporation that is used by lenders to assess an individual's credit risk.

Hardship - In the context of debt, hardships refer to situations that make it difficult for a person to meet their debt obligations, such as job loss, medical emergencies, or other unexpected events.

Interest - This is the cost of borrowing money, typically expressed as an annual percentage of the loan amount.

Line of Credit - This is a type of credit that allows a borrower to draw from a maximum approved amount of a loan at any time.

Minimum Payments - This is the lowest amount of money that you are required to pay on your credit card statement each month.

Past Due - This refers to a payment that has not been made by its due date.

Principal - This is the original sum of money borrowed in a loan, or put into an investment, separate from the interest or fees.

Residual Interest - This is the interest that accrues on your credit card balance between the billing date and the date you pay the bill.

Recoveries - In the context of debt, recoveries refer to the amount of money a lender is able to recover from a borrower who has defaulted on a loan.

Frequently Asked Questions

Here are some common questions and answers about debt and debt-related terminology: