Loan glossary
Loan terms in plain words, with the formula where there is one.
- Amortization
- Paying a loan off with equal payments, each split into interest on the current balance and principal. Early payments are mostly interest; later ones mostly principal. See the amortization schedule.
- APR (annual percentage rate)
- The yearly cost of borrowing, including certain fees, expressed as a rate. With no fees the APR equals the nominal interest rate. Monthly rate = APR ÷ 12. APR with fees calculator.
- APY / effective annual rate
- The rate after compounding within the year: (1 + APR ÷ 12)¹² − 1. A 12% APR compounded monthly is 12.68% a year.
- Balloon payment
- A lump sum due at the end of a loan whose payments were set as if it ran longer. It equals the balance still owed on that date.
- Biweekly payments
- Paying half the monthly payment every two weeks: 26 half-payments, the same as 13 monthly payments a year, so the loan ends sooner.
- Closing costs
- Fees paid to take out or refinance a loan (appraisal, origination, title and others). A refinance breaks even when the monthly saving has repaid them.
- Compound interest
- Interest charged on interest already added to the balance. Loan calculators here compound once per payment period.
- Debt-to-income ratio (DTI)
- Monthly debt payments ÷ gross monthly income × 100. Lenders use it as one input; each sets its own limits.
- Down payment
- The part of a purchase price paid in cash, so the loan is the price minus the down payment (and minus any trade-in).
- EMI (equated monthly instalment)
- The level monthly payment on an amortizing loan; the same formula as the monthly payment.
- Escrow
- An account a mortgage lender may use to collect property tax and insurance with each payment. Payment with escrow ≈ principal and interest + tax ÷ 12 + insurance ÷ 12.
- Fixed rate
- An interest rate that stays the same for the whole term, so the payment never changes. Every calculator here assumes one unless it says otherwise.
- Interest
- The charge for borrowing: each month, balance × APR ÷ 12 on an amortizing loan.
- Interest-only loan
- A loan (or period) where payments cover only the interest, P × APR ÷ 12, and the balance does not fall.
- Loan term
- The length of the loan, in months or years. A longer term lowers the payment and raises the total interest.
- Loan-to-value (LTV)
- Loan ÷ property value × 100. Combined LTV (CLTV) adds every loan secured on the same property.
- Negative equity
- Owing more on a car or home than it is worth. When trading in a car with negative equity, the difference is usually added to the new loan.
- Origination fee
- A fee charged for making a loan, often a percentage of the amount. When it is taken out of the money you receive, the APR is higher than the stated rate.
- Payoff amount
- What it takes to close a loan today: the remaining balance plus interest owed since the last payment (and any fees your lender lists).
- Points (discount points)
- An up-front fee, usually 1% of the loan per point, paid to lower the rate. The break-even is the cost of the points ÷ the monthly saving.
- Prepayment
- Paying more than the scheduled amount. Extra principal shortens the loan and cuts the interest; some loans charge a prepayment fee, so check your contract.
- Principal
- The amount borrowed, or the part of the balance still owed, not counting interest.
- Refinance
- Replacing a loan with a new one, often at a different rate or term. Compare the new payment, the total interest left and the closing costs.
- Simple interest
- I = P × rate × time, charged on the principal only, with no compounding.
- Trade-in
- A vehicle given to the dealer as part of the payment for another. Its value reduces the amount financed; any amount still owed on it is added back.
Definitions are general and simplified for learning. Your loan contract and your lender’s disclosures define the terms that apply to you.