Glossary

Solvency: The ability to pay back any legal debt currently owed as it becomes due.

Interest: The price paid for the privilege of borrowing money. It is expressed as a percentage rate over a period of time.

Mortgage: A mortgage is a loan used to finance the purchase of real estate. As the borrower, you repay the principal amount of the loan plus interest, gradually building equity in the property. While the mortgage is in place you will have use of the property, but not the title to it. The property will become yours after the final payment has been made.

Collateral: Any item of monetary value used to secure a loan. In some cases, such as a car loan, the item itself stands as collateral, meaning it can be seized if the loan isn't paid on time or in full.

Lines of Credit: An arrangement between a lender, usually a bank, and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain.

Minimum Payment: The minimum amount that a lender will accept as a monthly payment for a loan. Until January 2006, this amount was usually 2% of the loan balance. Many lenders are phasing in an increase that would nearly double the amount of the minimum monthly payment.

Principal: The balance owed on a debt, excluding interest. The term may also be used to describe the face value of a bond.

Annual Percentage Rate: The APR of a loan is the cost of the credit to you each year, expressed as a percentage of the loan amount. The APR includes most of a loan's up-front fees as well as the annual interest rate, so it represents a more accurate picture of the cost of borrowing than the interest rate alone.

Variable Rate Loan: A loan made at an interest rate that fluctuates based on a base value such as the Prime Rate.

Prime Rate: The prime rate is the interest rate banks charge their best, most credit-worthy customers. The prime rate is often used as a reference point for interest rates on consumer loans. For example, a bank may charge you the prime rate plus three percentage points on a car or home equity loan.