Link to RefinanceLink to Student DebtLink to Credit Card DebtLink to Tax DebtLink to Morgage DebtLink to Medical Debt

Common Terms and Definitions

A - B - C - D - E - F - G - H - I - J - K - L - M - N - O - P - Q - R - S - T - U - V- W - X - Y - Z


Adjustable Rate Mortgage (ARM)-Also called variable rate mortgage, is where the interest rate on the note is a periodically adjusted based on an index.  This is done to ensure a steady real interest rate.  Payments made overtime by the borrower change over time with the changing interest rate

Adjusted Gross Income-Income adjusted downward by specific deductions but not including standard itemized deductions.  Income can include wages, interest, capital gains, income from other accounts.

Amortization-The gradual reduction of debt through installment payments of principal and interest

Annual Percentage Rate (APR)-The periodic rate multiplied by the number of periods in a year.  (Ex: 3% quarterly rate is equal to 12% annual rate)

Appraisal-The valuation of an asset by an authorized person.  Appraisals are used for multiple purposes, mainly to determine taxes and to evaluate a potential selling price.

Asset-Anything owned that by an individual or entity that has the expectation of providing future benefit.  Can include cash, property, goods, accounts receivable, a company, investments or savings.  Something that holds economic value that has the expectation of providing a future benefit.

Assumable Mortgage-an existing mortgage that can be taken over by the buyer when a home is sold on the same terms given to the original borrower


Back Taxes
-Taxes that are due, but have not been paid on time

Balance Transfer-The act of moving an outstanding balance from one unpaid credit card to another.  This is normally done to achieve a lower interest rate

Balloon (Payment) Mortgage-Is the final payment that repays the remaining principal and interest of a partially amortized or unamortized loan

Blanket Mortgage-A mortgage that covers at least two pieces of real estate as collateral for the same mortgage


Capital gains-An increase in the value of a capital asset that gives it a higher worth than the purchase price.  This gain is not realized until the asset is sold.  These gains must be claimed on income taxes

Casualty-Property damage that results from a natural disaster or other common hazard.  It may be tax deductible in the year of the damage.

Collateral-Assets that are used to secure a loan or other credit.  Mainly is property, but can be other forms of assets.  Collateral becomes the subject to seizure on default.

Collections Appeal-Is a request made by a taxpayer when they do not agree with an IRS decision

Compulsory Payroll Tax-An automatic tax collected from employers and employees to finance specific programs

Compound Interest-Interest that is paid on previously earned interest as well as on the principal.  Interest can be compounded on different terms (ex: Continuously, monthly, quarterly, annually) 

Correspondence Audit-Is when the IRS mails a request for additional information on a tax return

Credit bureau-An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals.  The information they have is used for those who are being considered for credit.  Examples of these companies are: Experian, TransUnion and Equifax

Credit inquiry-An attempt to seek information concerning interest rates and the availability of funds without disclosing your identity, or specifying the need or purpose of the proposed borrowing, or the specifics concerning your credit worthiness.

Credit limit-The maximum amount of credit that can be charged on a particular credit line

Credit Line-The maximum amount of credit a financial institution will extend to a borrower

Creditor-A person or entity who funded the loan and to whom a debt is owed

Credit Report-A detailed report of an individuals credit history prepared by a credit bureau and used by a lender to determine a loan applicant's creditworthiness

Credit Score-Is a snapshot of a person's credit risk at a particular point in time.  It is used by lenders to help determine if a borrower qualifies for a loan


Debt Consolidation-Combining multiple loans into a single loan, often at a lower interest rate and having lower monthly payments

Debt Ratio-Also called debt to income ratio, which is a loan qualifying ration used by lenders to determine if a borrower qualifies for a loan.  It is calculated by taking the borrower's monthly debts and dividing it by their monthly income.

Default-Failure to meet legal obligations in a contract, such as failing to meet monthly debt payments

Deferment-Occurs when a borrower is allowed to postpone repaying a loan.  Normally happens with student loans.  The grace period can help to establish stability and increase the likely hood of full loan repayment

Deferred Interest-Unpaid interest added to the loan balance.  This is common in a negative amortized or option arm loan program.  The minimum payment is less than the interest charges.  The interest that is not paid is added to the balance.

Deficit-A financial situation for an individual, company, or government in which expenses exceed income

Delinquency-Failure to make payments on time.  If delinquent for more than a few months, the process of a Notice of Default and foreclosure normally follow.

Delinquent Tax Returns-Is when a taxpayer fails to file their required tax returns.  Failing to file your tax returns can be construed as a criminal act by the IRS, failure to file is punishable by one year in jail for each year not filed

Dependent Student-An undergraduate student, who is not married, under 24, has no legal dependents, not an orphan, not a veteran and whose parents provide more than half of their financial support

Depreciation-A decrease in an assets value over a period of time.  Depreciation on business equipment, property and other assets is generally tax deductible.

Direct Tax-At tax on sources of income over which the taxpayer has no discretion.  Include income tax, corporate taxes and transfer taxes.


Earned Income-Gross salary, commissions, fees, wages etc, which are received from a job or occupation.  Does not include investment income, rent, or annuity amounts received.

Equity-The difference between the market value of an asset and the claims held against it.  Assets - Liabilities = Equity


FAFSA (Free Application for Federal Student Aid)-The form the student must file to apply for federal Title IV financial assistance, including Stafford Loans.  The student must include financial information on their household so that the expected family contribution can be calculated

Federal Consolidation Loan Program-A federal loan program that enables a borrower to combine two or more eligible loans into a new loan so that the borrower can make one monthly payment.  In most cases the loan payment period is extended which makes the monthly payment lower.

Federal Direct Student Loan Program-A program that originates, and disburses loans for education, parallels those offered through the complementary Federal Family Education loan Program.

Federal Family Education Loan Program (FFELP)-A program that provides for private organizations to market, originate, and service federally guaranteed loans, such as Stafford and PLUS loans to students and their parents.

Federal Stafford Loan Program-A federal education loan program that allows eligible undergraduate and graduate students who attend approved educational institutions to borrow guaranteed loans at a low interest rate.

Field Audit-Is an audit on a corporate tax return where an review of the tax payers records is conducted at the tax payer's location of business

Finance Charge-The amount a borrower must pay in order to obtain credit.  The amount includes all fees, points and interest payments paid by the borrower.

Flat Tax-A single rate tax system.  Also called a proportional tax, which is a system that taxes all entities in a class at the same rate (as a proportion of income)

Forbearance-Temporary postponement of payments or acceptance of smaller payments than previously scheduled which is granted by lenders to reduce the incidence of default and to simplify the administration of the loan programs.


Home Equity Loan-A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home.  Interest paid is usually tax-deductible.  Often used for home improvement or freeing of equity for investment or other real estate or investment.  Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt and education loans.

Income Tax-Tax paid on income within a given financial year.  This is the main source of revenue for the federal government.  It is based on your earned and unearned income.

Indirect Tax
-A tax that is levied on goods or services rather than on persons organizations.  Examples are sales tax, excise tax or value added tax.

Innocent Spouse-Under the innocent spouse rule, on a joint tax return a spouse can claim to not be jointly liable if he or she did not know about errors and did not benefit from them.  In a normal situation both signers on a joint return are individually liable for the entire tax amount due plus any other penalties and interest.

Interest-The charge made to a borrower for use of a lender’s money
Internal Revenue Service

Interest Only Loan-A loan in which for a set term the borrower pays only the interest on the principal balance, with the principal balance remaining unchanged.

IRS Audit-Is when Internal Revenue Services (IRS) examines individual or a corporations tax return to verify its accuracy.  It is the tax payer that is responsible for providing all support of records, so it is encouraged that the filer maintains good records.  There are three types of audits, which are: correspondence audits, office audits, and field audits

IRS Bank Levy-If you are delinquent in paying your taxes, the IRS can seek a levy on your bank account.  This will effectively freeze the funds in your account for seizure

IRS Payment Plan-The IRS encourages tax payers to pay quickly, but for the individuals or businesses that have no other alternative the IRS may allow for a payment agreement for past due taxes


Lender-The organization, bank, or lending institution from which a loan is borrowed

Line of Credit-An agreement with a financial institution to extend credit up to a certain amount for a given amount of time to a specified borrower. 

Liquid Asset-Cash, or an asset that can easily be converted to cash

Luxury Tax -A tax levied on items that are not regarded to be essential for daily living


Medical debt-Debt that is incurred due to health care costs and expenses.  Normally is accumulated when a person does not have health insurance to cover the costs of necessary medications, treatments, or procedures.  Health insurance plans rarely cover any and all health related expenses for insured people.

Minimum finance charge-The lowest possible charge for using a credit card that is composed of interest costs and any other fees.

Minimum payment amount-The minimum amount that must be paid to keep the account from going into default.  The amount can be a set percentage rate or a minimal fixed amount that must be paid every month.


Offer in Compromise-Is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt.  The IRS has the authority to settle federal tax liabilities by accepting less than full payment under certain circumstances.  Taxpayers may be able to take advantage of the Offer in Compromise if they are not able to pay a tax debt in full or an installment agreement

Office Audit -Is when an interview is conducted at a local IRS office based on tax filings


Payroll Taxes-Taxes based on wages, salaries paid and tips.  The tax is deducted by the employer.  This tax funds many finance programs, including social security, health care and worker's disability

Penalty Abatement-Is when someone receives a penalty for not paying taxes and the individual has a good sound reason for not filing and the taxpayer can receive a complete or partial removal of the money owed.  To receive penalty abatement, the IRS will require you have a sound reason

Periodic Rate -The effective rate for a certain period.  (APR rate = 12% then the monthly periodic rate = 1%)

Property Taxes-Taxes paid annual based on the value of property

Principal-The amount of money borrowed or remaining unpaid on a loan.  Interest is charged as a percentage of the principal

Promissory note-A legally binding contract between a lender and a borrower.  This contains the terms and conditions of the loan, including how and when the loan must be repaid


Refinance-When you acquire a secured loan at a low interest rate to pay off anther, higher-interest secured loan for the same property.  Can reduce payments significantly by replacing their high interest debt with lower interest debt.

Reverse Annuity Mortgage (RAM) or Reverse Mortgage-An form of mortgage in which the lender makes periodic payments that are tax free to the borrower against the borrowers home equity up to a certain credit limit.  Normally a mortgage used by the elderly that provides them income until their death, then the home is sold and the lender is repaid.

Revolving credit-A line of credit where credit is extended to customers which is up to a certain dollar amount in which monthly payments must be made to the account.  An example of this is a credit card, where a pre-approved credit amount is set up for making purchases and receives a monthly bill for that amount plus any interest charges



Secured Debt-A type of debt that is collateralized by specific assets in which the creditor has rights to take the property which it is collateralized by in the event of default.

Subsidized loan-A loan in which the borrower is not responsible for all the interest payments.  Mainly this type of loan is used for students while in school.  While the student is in school the government pays the interest on the loan.  The student then must pay the interest after their grace period expires


Tax Liability-The amount of tax you owe on your income or other taxable event

Tax Lien-A claim against real estate arising from unpaid taxes

Tax Sale-The sale of property arising from the non-payment of taxes

Tax Levies-Also property tax, is a tax assessed on real estate by local government.  Tax is based on the value of property that is owned

Tax Liens-A claim imposed by the government to liquidate a persons property until the tax and debt owed is paid fully.


Unsecured Debt-Any type of debt that is not collateralized by a specific asset in the event of default

Unsubsidized loan-A loan in which a student is responsible for paying all the interest that accrues on the loan, interest is charged during and after enrollment, regardless of enrollment or deferment status

Unsecured Claim-A claim in which the payment is not backed by the debtor's collateral or a lien on property of the debtor


W-4-Is the form used to figure out the amount of income tax to have withheld from your paycheck, which is called your withholding allowance.  This represents your total tax deductions divided by the personal exemption rate

Wage Garnishment-When money is deducted from an employee's monetary compensation as a result of a court order.  They can be taken for any type of debt, most commonly for child support, taxes and unpaid court fines.