Personal Loan Glossary: APR, Fees and Contract Terms

A

ACH (Automated Clearing House): The US network that moves money between bank accounts electronically. Loan deposits and most autopay withdrawals travel over it. More: Signing and funding
Advance-fee loan scam: A scam in which someone promises a loan if you first pay a fee, often by wire, gift card or payment app. A real lender takes any fee from the loan or in the agreement, not as a payment before you get the money. More: Verify a lender
Adverse action notice: The notice a lender must send when it denies your application or offers worse terms than you asked for. Under the Equal Credit Opportunity Act it comes within 30 days of a completed application and gives the reasons or tells you how to ask for them. More: If you are denied
Amortization: Paying a loan down through regular payments that cover each month's interest first and put the rest toward principal. Early payments are mostly interest; later ones are mostly principal. More: Loan term length
Amount financed: The credit actually provided to you or paid out for you, as shown on the Truth in Lending disclosure. It is the loan amount minus prepaid finance charges, such as an origination fee taken from the loan, and it is the base the APR is figured on. More: Truth in Lending disclosures
Annual percentage rate (APR): The yearly cost of credit, counting interest and the fees that are part of the finance charge. Regulation Z requires lenders to disclose it, and on a regular loan the disclosed APR must be within 1/8 of 1 percentage point of the true figure. More: Total cost of a loan
Arbitration clause: A contract term that sends disputes to a private arbitrator instead of a court. The Military Lending Act bars mandatory arbitration on loans to covered servicemembers and their dependents. More: Arbitration clauses
Autopay: Automatic monthly payments drawn from your bank account. Many lenders offer a rate discount for it, but under Regulation E most lenders may not make automatic transfers a condition of the loan. More: Autopay and rate discounts
Award letter: A letter from the Social Security Administration, a pension plan or another payer that states your benefit amount. Lenders use it to verify retirement or benefit income. More: Retirees

B

Bank partnership: An arrangement in which a bank makes the loan and a nonbank company markets and services it, and often buys the loan or a share of it. Because a state-chartered bank may charge the rate its home state allows, the loan can cost more than your state's cap for licensed lenders. More: Where to borrow
Bankruptcy discharge: The court order at the end of a bankruptcy case that releases you from personal liability for most covered debts. Lenders often ask for the discharge date when you apply afterward. More: After bankruptcy

C

CDFI: Community development financial institution: a lender, such as a loan fund or credit union, certified by the US Treasury's CDFI Fund to serve low-income and underserved communities. Some make small personal loans. More: Where to borrow
Charge-off: An accounting step in which a lender writes a seriously past-due loan off as a loss. You still owe the debt, it may be sold or sent to a collector, and the charge-off appears on your credit report.
Class action waiver: A contract term, usually paired with an arbitration clause, in which you give up the right to join a class action against the lender. Read it with the arbitration clause and check whether the agreement lets you opt out within a set number of days. More: Arbitration clauses
Co-borrower: A second borrower who applies with you, shares the money and is equally responsible for the whole debt. Lenders weigh both incomes and both credit histories. More: College students
Collateral: Property you pledge to secure a loan, such as a car or a savings account, which the lender can take if you default.
Cosigner: A person who signs your loan and promises to repay it if you do not, without receiving the money. The loan and any late payments can appear on the cosigner's credit report. More: College students
Credit insurance: Insurance sold with a loan that pays some or all of the debt if you die, become disabled or lose your job. It is usually optional; when a lender requires it, its cost belongs in the finance charge and the APR. More: Credit insurance and add-ons
Credit Practices Rule: An FTC rule (16 CFR part 444) that bars the lenders it covers from certain contract terms, such as confessions of judgment, and from pyramiding late charges. It also requires a written notice to a cosigner before the cosigner signs. More: Late fees and returned payments
Credit report: A record of your credit accounts and payment history kept by a credit bureau such as Equifax, Experian or TransUnion. You can get free reports from each of them every week at annualcreditreport.com. More: Check your credit first
Credit union: A not-for-profit financial cooperative owned by its members. Federal credit unions are chartered by the NCUA, which has kept a temporary 18% interest ceiling on most of their loans through September 10, 2027. More: Where to borrow

D

Debt cancellation contract: An agreement, often sold by the lender itself, to cancel all or part of the balance after an event such as death or disability. Like credit insurance, it is an add-on you can usually decline. More: Credit insurance and add-ons
Debt-to-income ratio (DTI): Your monthly debt payments divided by your gross monthly income. Lenders use it to judge whether a new payment fits your budget, and each lender sets its own limit. More: Documents you need
Default: Failing to repay as the contract requires, usually after missed payments. The agreement defines when you are in default and what the lender may then do, such as demand the full balance.
DIDMCA section 521: A 1980 federal provision that lets a state-chartered, FDIC-insured bank charge borrowers in other states the rate its home state allows. Section 525 of the same law lets a state opt out for loans made in that state; Iowa and Colorado have used it, and Colorado's opt-out has been challenged in court. More: Colorado

E

Equal Credit Opportunity Act (ECOA): The federal law, carried out by Regulation B, that bars credit discrimination based on race, color, religion, national origin, sex, marital status or age, or because your income comes from public assistance. A lender may not ignore retirement or benefit income because of its source. More: Retirees

F

Fair Credit Reporting Act (FCRA): The federal law on credit reports. It gives you the right to see your reports and dispute errors, and it limits who may pull your report and why. More: Check your credit first
Finance charge: The dollar cost of credit: interest plus fees you pay as a condition of the loan, such as an origination fee. Late fees are not part of it, and optional credit insurance is left out only if it is voluntary, disclosed and signed for. More: Truth in Lending disclosures
Fixed rate: An interest rate that stays the same for the whole term, so the scheduled payment does not change. More: Fixed and variable rates
Form 1099: IRS information returns that report income other than wages, such as freelance pay on Form 1099-NEC or payments through apps and card networks on Form 1099-K. Lenders may ask for them to verify gig or contract income. More: Gig workers

G

Grace period: The days after the due date before a late fee applies. The loan agreement sets it, and for some lenders state law sets a minimum. More: Late fees and returned payments

H

Hard inquiry: A credit check made when you apply for credit. It shows on your credit report where other lenders can see it and can lower some scores slightly for a while. More: Soft and hard credit checks

I

Installment loan: A loan repaid in a fixed number of scheduled payments, usually equal monthly amounts, over a set term. Personal loans, auto loans and mortgages are installment loans.
ITIN: Individual Taxpayer Identification Number: a nine-digit tax number the IRS issues to people who must file US taxes but cannot get a Social Security number. Some lenders and credit unions accept it on a loan application; many do not. More: ITIN borrowers

L

Late fee: A charge when a payment arrives after the due date or the grace period. State law often limits it, and because it is not part of the finance charge, it does not show in the APR; look for the dollar amount in the agreement. More: Late fees and returned payments
Licensed lender: A nonbank lender that holds a state license to make consumer loans, such as a consumer installment, small loan or regulated lender license. It must follow that state's rate limits and rules on the loans it makes under the license. More: Verify a lender
Loan broker: A company that arranges loans between borrowers and lenders and may charge a fee. Many states require brokers to be licensed; check the license the same way you check a lender's. More: Verify a lender
Loan term: The time you have to repay, in months. A longer term lowers the payment and raises the total interest: $10,000 at 14% is $341.78 a month over 36 months and $232.68 over 60 months, with total interest of $3,960.80 on the longer loan. More: Loan term length

M

Military annual percentage rate (MAPR): The cost measure under the Military Lending Act. It counts interest, most fees and charges for add-ons such as credit insurance and debt cancellation, so it can be higher than the APR on the disclosure. More: Military and veterans
Military Lending Act (MLA): A federal law, with rules at 32 CFR part 232, that caps most consumer credit to active-duty servicemembers and their covered dependents at a 36% military annual percentage rate and bars mandatory arbitration, among other protections. More: Military and veterans

N

Net proceeds: The money that actually reaches your account after fees taken from the loan. On a $10,000 loan with a 5% fee deducted, $9,500 is deposited while you repay the full $10,000 plus interest, which lifts the APR in our example from 14% to 17.65%. More: Net loan proceeds
NMLS: The Nationwide Multistate Licensing System, which many states use to license nonbank lenders and loan brokers. NMLS Consumer Access lets you look up a company's licenses by name or NMLS ID at no cost. More: Verify a lender

O

Origination fee: A one-time charge for making the loan, often a percentage of the amount. It is usually taken out before the money is deposited, so you receive less than you borrow, and it counts in the finance charge and the APR. More: Net loan proceeds

P

Payday alternative loan (PAL): A small-dollar installment loan from a federal credit union under NCUA rules, with a higher rate ceiling than other credit union loans but limits on the amount, the term and the application fee. More: Where to borrow
Personal loan: An installment loan for personal, family or household use, usually unsecured and repaid in fixed monthly payments. Banks, credit unions and licensed nonbank lenders make them.
Precomputed interest: A method in which the interest for the whole term is figured at the start and added to the balance. If you pay off early, how much of that interest is refunded depends on the contract and state law, so an early payoff may save less than on a simple-interest loan. More: Prepayment penalties
Prepayment penalty: A charge for paying a loan off ahead of schedule. Many personal loans have none, state law limits it for some lenders, and the Truth in Lending disclosure must say whether one may apply. More: Prepayment penalties
Prequalification: A lender's estimate of whether you may qualify and at what rate, usually based on a soft inquiry. It is not an approval or a final offer; terms can change after the full application and a hard inquiry. More: Soft and hard credit checks
Principal: The amount you borrowed and still owe, not counting interest and fees. Extra payments applied to principal shorten the loan and cut the interest.

R

Rate cap: A state limit on the interest rate, or on the rate plus fees, that a licensed lender may charge. It may be one flat percentage or tiers that fall as the loan grows, as in Texas. More: Texas
Regulation E: The CFPB rule that carries out the Electronic Fund Transfer Act. For loan autopay, it lets you stop preauthorized transfers by telling your bank at least three business days before the scheduled date. More: First payment and autopay
Returned payment fee: A fee the lender charges when a payment fails, for example because the account lacks the money. Your bank may charge its own fee for the same failed payment. More: Late fees and returned payments
Rule of 78s: An old formula for the interest refund when a precomputed loan is paid off early. It assigns more of the interest to the early months, so an early payoff saves less. Whether a lender may use it depends on federal and state law; ask how any refund is calculated. More: Prepayment penalties

S

Schedule C: The IRS form a sole proprietor files with Form 1040 to report business profit or loss. Lenders that verify self-employed income usually look at the net profit on it, not gross receipts. More: Self-employed
Secured loan: A loan backed by collateral. It may carry a lower rate than an unsecured loan, but the lender can take the property if you do not repay.
Servicemembers Civil Relief Act (SCRA): A federal law that protects servicemembers in civil and financial matters. Among other things, it limits the interest on debts taken on before active duty, once the servicemember asks in writing and sends a copy of the orders. More: Military and veterans
Simple interest: Interest charged only on the principal you still owe, usually figured daily or monthly. Paying early or paying extra lowers the interest you pay. More: Total cost of a loan
Soft inquiry: A credit check that does not affect your scores, such as checking your own report or a lender prequalifying you. Other lenders do not see it. More: Soft and hard credit checks

T

Total of payments: The sum of every scheduled payment if you pay as agreed. In our worked example, a $10,000 loan at 14% for 36 months has payments of $341.78 and a total of payments of $12,304.08. More: Total cost of a loan
True lender: The legal question of who really makes a loan in a bank partnership. Some states have laws that treat the nonbank as the lender, for example when it holds the predominant economic interest in the loan, so the state's rate cap applies to it. More: Where to borrow
Truth in Lending Act (TILA): The federal law, carried out by the CFPB's Regulation Z, that requires a lender to show the APR, finance charge, amount financed and total of payments before you are bound by a loan. More: Truth in Lending disclosures

U

Unconscionability: A legal standard that lets a court refuse to enforce a contract or term so one-sided that it is grossly unfair, often where the borrower had little real choice. Some states rely on it instead of a numeric rate cap for some loans.
Unsecured loan: A loan backed only by your promise to repay, so the lender relies on your credit and income. Many personal loans are unsecured.
Usury: Charging interest above the legal maximum. General usury limits often do not apply to licensed lenders, banks and many loan types, which follow their own rules; our state rules pages show the limits that do.

V

Variable rate: An interest rate tied to an index that can move during the loan, so the payment or the number of payments can rise. The disclosure must explain how the rate can change. More: Fixed and variable rates