Loan Glossary

Use this glossary while you read an offer for a loan with low credit: find each unfamiliar word in the agreement, check its meaning here, and ask the lender to explain anything that still is not clear before you sign.

Every personal loan disclosure uses a handful of the same terms, and knowing them makes offers far easier to compare. Each term below has its own link, so you can share or bookmark a definition. Words in the same group appear together, starting with the costs that decide what a loan with low credit really costs.

Whether you apply online or visit a branch, loans from branch lenders or web loans from marketplaces, the terms in the agreement mean the same thing. If a personal loan document uses a word you cannot find here, our FAQ may cover it, or you can ask us through the contact page.

The cost terms that matter most are APR, interest rate, origination fee and total of payments, because together they show the yearly price of borrowing and the full amount you will repay over the life of a loan.

Annual percentage rate (APR)

The yearly cost of credit, including the interest rate and required fees such as an origination fee. Lenders must disclose it under the Truth in Lending Act, and it is the best single number for comparing personal loan offers.

Interest rate

The percentage charged on the principal you borrow, before fees. On an offer with an origination fee, the interest rate is lower than the APR.

Fixed rate

A rate that stays the same for the entire term, so each payment is the same amount. Most installment personal loans have fixed rates.

Variable rate

A rate that can change with a benchmark index. Credit cards and some lines of credit use variable rates; most installment loans do not.

Origination fee

A one-time fee for processing a loan, usually a percentage of the amount borrowed. Many lenders take it out of the deposit, so less money reaches your account than you repay.

Finance charge

The total dollar cost of credit, including interest and certain fees, as shown on your Truth in Lending disclosure.

Total of payments

Everything you will pay if you make every payment as scheduled: principal plus all interest and included fees. Use it to compare offers with different terms.

Late fee

A charge for a payment made after the due date or grace period. The amount and timing must appear in your agreement and are often limited by state law.

Prepayment penalty

A fee for paying a loan off early. Most personal loan lenders do not charge one, but always check the agreement.

Representative APR

An example rate used to illustrate costs. Every estimate on this site uses a representative 24% APR; your actual offer may be higher or lower.

The credit terms worth knowing are credit score, credit report, soft and hard inquiries, utilization and debt-to-income ratio, because lenders use them to decide whether to approve a loan with low credit and how to price it.

Credit score

A three-digit number, usually 300 to 850, that summarizes your credit report. FICO and VantageScore are the most common models.

Credit report

A record of your credit accounts, balances, payment history and inquiries kept by Equifax, Experian and TransUnion. You can get free copies weekly from each bureau.

Credit bureau

A company that collects and reports credit information. The three national bureaus are Equifax, Experian and TransUnion.

Soft inquiry

A credit check that does not affect your score, used for prequalification and account reviews. Only you can see it on your report.

Hard inquiry

A credit check made when you apply for credit. It can lower a score by a few points for a while and stays on your report for two years.

Credit utilization

The share of your revolving credit limits you are using. Keeping it below about 30% generally helps your score.

Debt-to-income ratio (DTI)

Your monthly debt payments divided by your gross monthly income. Many lenders look for a DTI under about 35% to 50% including the new loan.

Thin credit file

A credit report with few accounts or a short history. Lenders may rely more on income and bank data to judge a thin file.

Collection account

A debt that the original creditor has passed to a collector after missed payments. It can stay on your report for up to seven years.

Adverse action notice

A notice a lender must give when it declines you or offers worse terms based on your credit, explaining the reason or how to request it.

The loan types you will see most when shopping with fair or low credit are unsecured personal loans, secured loans, installment loans, consolidation loans, lines of credit and short-term loans, each with different costs and risks.

Personal loan

A loan for personal, family or household use, usually repaid in fixed monthly installments. Most are unsecured.

Installment loan

A loan repaid in a set number of equal, scheduled payments. Personal, auto and mortgage loans are all installment loans.

Unsecured loan

A loan with no collateral, such as most personal loans. Approval and pricing rest on your credit and income.

Secured loan

A loan backed by collateral such as a car or savings account. It can bring a lower rate, but the lender can take the collateral if you default.

Debt consolidation loan

A loan used to pay off several debts, leaving one fixed payment. It saves money only if the new APR and total cost are lower than the debts it replaces.

Line of credit

A revolving account you can draw from up to a limit, repay and draw again. Interest is charged only on what you use.

Revolving credit

Credit with a reusable limit and no fixed payoff date, such as a credit card. Compare it with an installment loan, which has a set end date.

Single-payment loan

A small, short-term loan due in full on your next paycheck, often with an APR above 300%. Many states restrict or ban them; an installment loan spreads the cost instead.

Credit-builder loan

A small loan whose proceeds are held in an account until you repay it, designed to build payment history. Credit unions often offer them.

Co-signer

A person who agrees to repay a loan if the borrower does not. A co-signer's credit can improve approval and rates, but they take on the full debt.

Co-borrower

A second applicant who shares ownership of the loan and the obligation to repay it, unlike a co-signer, who only guarantees it.

Repayment terms describe how and when you pay back the money: the term length, the schedule, how each payment splits between interest and principal, and what happens if a payment is late or missed.

Principal

The amount you borrow on a personal loan, not counting interest or fees. Each payment reduces the principal a little more than the last.

Term

The length of time you have to repay, usually stated in months. A longer term lowers the payment but raises total interest.

Amortization

The schedule that divides each payment between interest and principal. Early payments carry more interest; later ones pay down more principal.

Simple interest

Interest charged only on the outstanding principal. Paying early or extra on a simple-interest loan lowers the total interest you owe.

Autopay

Automatic payments drawn from your bank account on the due date. Some lenders offer a small rate discount for it, and you can revoke it in writing.

Grace period

A short window after the due date during which a payment is accepted without a late fee. Not every loan has one.

Default

Failing to repay as the agreement requires, usually after several missed payments. Default can lead to collections, damaged credit and, on secured loans, loss of collateral.

Charge-off

When a lender writes a debt off as unlikely to be collected, often after about 180 days of missed payments. You still owe the debt.

Refinance

Replacing an existing loan with a new one, often to change the rate or term. Refinancing a nearly paid balance can raise total interest.

Hardship plan

A temporary arrangement, such as a reduced payment or deferral, offered by some lenders when you face a job loss, illness or other setback.

During the application you will meet terms such as prequalification, verification, underwriting and funding, which describe the steps between sending a request and receiving money in your account.

Prequalification

An early estimate of whether a lender may approve you and at what rate, usually based on a soft inquiry. It is not a final offer.

Underwriting

The lender's review of your credit, income, debts and identity to decide whether to approve the loan and on what terms.

Verification

The step where a lender confirms your identity, income and bank account, often with documents or a phone call.

Funding

The deposit of loan proceeds into your account after you accept an offer and complete verification. Many lenders fund by the next business day.

Connection service

A company, like ours, that passes your request to lenders rather than lending itself. It does not make credit decisions or set rates.

Speed and marketing terms such as instant decision, same-day funding, direct lender and no credit check describe how a loan is sold, not what it costs, so each one deserves a look at the APR and total of payments before you rely on it.

Instant decision

An automated answer given within seconds or minutes. Ads for loans instant approval usually mean a fast first decision, not final approval; verification can still change or cancel an offer.

Same-day funding

A deposit made on the day you accept, usually only if verification is finished before the lender's cutoff and your bank posts transfers quickly. Next-business-day funding is more common.

Direct lender

A company that makes the loan with its own money and services it itself, as opposed to a connection service or marketplace that passes your request to lenders.

No credit check

A claim that a lender will not pull a traditional credit report. Such lenders often use bank or income data instead and usually charge higher APRs to cover the risk.

Approval promised in advance

A promise of personal loan approval that no legitimate lender can make before reviewing an application. Treat it, and any upfront fee to "secure" a loan, as a warning sign.

Loan marketplace

A site that shows offers from several lenders after one request. Results depend on which lenders participate and on your details.

Cash advance

Cash borrowed against a credit card limit, usually with a higher APR than purchases, an upfront fee and no grace period. Some apps also use the term for small pay advances, which are different again from cash loans repaid in installments.

Total cost of borrowing

The interest and fees you pay on top of the principal. On a $2,000 personal loan at a 24% APR over 12 months, it is $269.44 before any fees.

Consumer protection terms name the laws and agencies that set your rights: the Truth in Lending Act requires clear cost disclosures, the Military Lending Act caps costs for service members, and the CFPB and state regulators handle complaints.

Truth in Lending Act (TILA)

The federal law that requires lenders to disclose the APR, finance charge, amount financed and total of payments before you sign.

Military Lending Act (MLA)

A federal law that limits most consumer credit to active-duty service members and their dependents to a 36% military APR.

CFPB

The Consumer Financial Protection Bureau, the federal agency that supervises many lenders and runs a public complaint database.

State license

Permission from a state regulator to make consumer loans there. You can check a lender's license on your state regulator's website.