Amount Financed

Another important part of the APR calculation is the amount financed. Reg Z's definition of the amount financed is "the amount of credit provided to you on your behalf."

To determine the amount financed, you must perform the following calculations:

• Determine the principal loan amount
• Add other amounts financed by the credit that are not finance charges
• Subtract any prepaid finance charges (such as points and loan origination fees)

Amortization / Amortize

The gradual repayment of a debt by periodic (usually monthly) installments of principal and interest. Reduce or pay off debt with regular payments.

Loan fees can be amortized over the life of a loan.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) is the cost of credit expressed as a yearly rate. It is a complex formula that includes the interest as well as other charges that qualify as "finance charges."

Closed-ended Consumer Lending Product

A closed-ended consumer lending product is a credit arrangement in which the borrower and the lender agree on the total amount being loaned and the number, size and due dates of each payment. It is paid off in steady increments over time, and when it is completely paid off, it's closed, with no additional funds available.

Examples: Auto loan, Personal loan, Home Equity Loan

Collateral

Collateral is an asset pledged to a lender to guarantee a loan.

Consumer Lending

Consumer lending is credit extended to consumers, individually or jointly, for buying goods and services for personal use.

Click here for information on consumer lending regulations.

Equity

Equity is the difference between the current valuation of an asset and the amount borrowed against it.

Example: If a home is valued at $200,000 and there is an existing lien of $150,000, the amount of equity is $50,000.

Fixed Rate

Rate does not vary with market conditions and remains constant over the loan term. The borrow makes the same (fixed) payment each month.

Interest and Fees

The finance charge is the cost to the borrower to obtain the loan.

Interest charged on a loan is part of the finance charge. Other costs associated with a loan that may also be part of the fees, including:

• Service and transaction fees
• Points and loan fees
• Mortgage broker fees

Liens (Collateral)

Liens (collateral) secure a financial obligation and give lenders a legal claim or right to property or assets a borrower owns because of the obligation. The most common consensual (borrower pledges) liens associated with consumer credit are liens placed on real estate (mortgage), vehicles, equipment, or other types of personal property that have a measurable value.  If the debt is not repaid by the Borrower, the Bank (creditor) has the right to seize and liquidate the asset (collateral) to ensure the repayment of the financial obligation.  

Line of Credit (LOC)

A Line of Credit (LOC) is an amount of money a financial institution is willing to lend an individual. The amount may be re-borrowed after it is repaid without requiring additional loan applications.

Loan Terms

The Loan Terms include the credit amount, interest rate and length of time granted for a loan payment.

Open-ended Consumer Lending Product

Also called a Line of Credit (LOC), an open-ended lending product allows borrowers to make purchases and take cash advances up to a previously agreed limit. It usually has a variable payment based on the amount of money being borrowed at the time, and because the balance owed may vary, the minimum payment each month may also vary.

Examples: Credit card, Home Equity Line

Principal

The principal is the amount of a loan, excluding fees and interest.

Secured Loan

A secured loan requires that the borrow pledge specific assets or collateral, such as a car or a house, that becomes the property of the lender if the credit is not repaid. Collateral provides an added incentive to repay the credit and lowers the risk to the bank.

Unsecured Loan

An unsecured loan is made based on a borrower's credit history and ability to repay, not on collateral. Unsecured loans often have the highest interest rates and the shortest term for repayment because it is riskier for banks than secured credit.

Variable Rate

A rate that can change over the loan term. The rate is tied to an index, such as the prime rate or a U.S. Treasury bill rate, which represents the base rate and an additional fixed percentage or margin (Index rate + margin rate).


For example: If the prime rate is 3.75% and the bank adds a margin of 2%, then the variable rate would be 5.75% (3.75% + 2%).