Glossary

Loan terms in plain words

How each term is used on this site and in its calculations. Where a statement or offer letter uses different wording, the tool page says which line to look for.

24 terms, alphabetical. Each has its own link, for example /glossary#apr.

Amortization: Paying a loan down with a fixed payment over a fixed term. Early payments are mostly interest because the balance is large; later payments are mostly principal. The schedule lists every payment and how it splits. See Level-payment amortization.
APR (annual percentage rate): A yearly rate that folds fees into the cost of borrowing, so two offers can be compared on one number. The tools show an estimated APR from the cash you receive and the payments you make. It is an estimate for comparison, not a legal disclosure; your lender's disclosed APR is the authoritative figure. See Equal-cash comparison and estimated APR.
Avalanche method: Paying the minimum on every debt and putting any extra money toward the debt with the highest interest rate first. It results in the least total interest. See Debt payoff simulation.
Balance: What you still owe right now. On a statement it is usually labelled current, principal or outstanding balance. It is not the same as the payoff amount, which adds interest accrued since the last payment.
Break-even: The first month at which a refinance has cost you no more than keeping the old loan, counting fees and penalties from day one, and stays that way. If you expect to pay off or sell before break-even, the refinance has not paid for itself. See Refinancing break-even.
Consolidation: Combining several debts into one new loan. It simplifies payments and may change the rate, but the total cost depends on the new rate, fees, and term compared with paying the existing debts down directly. See Consolidate or pay faster?.
Early-exit cost: What a loan has cost you if you pay it off at a given month: the payments made so far plus the payoff, minus the cash you received. Offers that look similar over the full term can differ a lot at month twelve. See Which offer really costs less?.
Equal-cash comparison: Comparing offers on the same cash in hand rather than the same amount on the note. An offer that deducts a fee is grossed up so every offer delivers the same money, and then the payments and total cost are compared fairly. See Which offer really costs less?.
Interest rate: The yearly rate the lender charges on the balance, sometimes called the note rate. On this site a monthly rate is the yearly rate divided by twelve, which is how most installment loans are calculated.
Minimum payment: The smallest amount a lender or card issuer will accept each month. Paying only the minimum keeps the account current but can stretch repayment over many years.
Net proceeds: The cash that actually reaches you after fees are deducted. When a fee is taken out of the loan, the amount on the note is larger than the money in your hand. See Equal-cash comparison.
Origination fee: A fee charged for setting up the loan, often a percentage of the amount. It may be deducted from the money you receive or added to the balance. Either way it is part of the cost of borrowing, and a lower rate with a fee can cost more than a higher rate without one.
Payment: The fixed amount due each period on an installment loan. The last payment is often slightly different because of rounding along the way.
Payoff amount: What it takes to close the loan today: the balance plus interest accrued since the last payment, sometimes plus a penalty. A payoff letter states it as good through a date, with a per-diem amount for each day after.
Per-diem interest: The interest that accrues each day, used to adjust a payoff amount for the exact day the money arrives. It is the balance times the yearly rate divided by 365, or by 360 at some lenders.
Prepayment penalty: A charge some loans impose for paying off early. It counts as a cost of leaving a loan, so the refinancing tool includes it on the new loan's side.
Principal: The amount borrowed, or the part of the balance that is not interest. Each payment covers that month's interest first and the rest reduces the principal. See Where did my payments go?.
Refinancing: Taking a new loan to pay off an existing one. Whether it helps depends on the new rate, any fees and penalties, and how much longer the new term runs. A lower payment alone does not mean a lower cost. See Does refinancing help?.
Rolling minimums: When one debt is paid off, its minimum payment is added to the amount going toward the next debt, so the total you pay each month stays the same until everything is cleared.
Rounding: The tools work in whole cents and round each month's interest the way lenders do, so schedules match statements to the cent. Method pages state the rounding rule they use.
Snowball method: Paying the minimum on every debt and putting any extra money toward the smallest balance first. It clears individual debts sooner, usually at slightly higher total interest than the avalanche method. See Debt payoff simulation.
Term: The number of payments over which a loan is scheduled to be repaid, usually stated in months. A longer term lowers the payment and raises the total interest.
Total cost of borrowing: All payments plus any fees you paid, minus the cash you actually received. It is the number the tools use to say which path costs less.
Total interest: Everything you pay beyond the principal over the life of the loan, before fees. Adding fees gives the total cost of borrowing.