A-Credit is a high grade that a lender may assign to a loan applicant based on their credit score and other factors. 

A-Credit is a designation that a lender may assign to a borrower with a high credit score. Lower scores or grades can mean higher interest rates and make it harder to get a loan at all.
FICO scores are based on a set of factors: payment history, total debt owed, length of credit history, types of credit, and new credit.﻿﻿﻿﻿﻿﻿ Lenders typically reward high FICO scores with a higher letter grade. Higher scores or letter grades can help them qualify for lower interest rates, making loans less expensive, which in turn makes it easier to keep up with their payments and maintain their strong credit scores. Over time, Daniel's credit score rises to 700, putting him in A-credit territory. A longer credit history can help boost a score because it shows how well the borrower has handled debt over time.

A-Credit

The term accelerated payments refers to voluntary payments made by a borrower in order to reduce the outstanding balance of their loan more rapidly.

In the finance industry, accelerated payments are voluntary payments made by a borrower in order to reduce the outstanding balance of their loan more rapidly. In fact, accelerated payments can benefit borrowers in two ways: in addition to reducing their interest expenses, accelerated payments can also increase the rate at which the borrower accumulates equity in the property being financed. Reviewing her loan terms, she notes that her current interest rate is 3.50% and that the terms of her mortgage permit accelerated payments up to 20% of the outstanding principal balance in each year. In the finance industry, accelerated payments are voluntary payments made by a borrower in order to reduce the outstanding balance of their loan more rapidly. Accelerated payments are typically applied to a loan's principal, which reduces the outstanding balance and required interest in future payments.

Accelerated Payments

An acceleration clause is included in certain loan agreements allowing the lender to end a contract and demand payment if the borrower violates terms of the agreement.

An acceleration clause is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met. An acceleration clause or covenant is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if specific requirements are not met. An acceleration clause is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met. With full payment of the loan the borrower is relieved of any further interest payments and essentially pays off the loan early at the time the acceleration clause is invoked. A lender may choose to include an acceleration clause to mitigate potential losses and have greater control over the real estate property tied to a mortgage loan.

Acceleration Clause

An acceleration covenant is a clause in certain loan agreements allowing the lender to end a contract and demand payment if the borrower violates terms of the agreement.

An acceleration covenant is a contract provision that allows a lender to demand a borrower to immediately repay a loan if specific requirements are not met. Also referred to as an acceleration clause, the acceleration covenant stipulates under what circumstances the lender can demand immediate loan repayment. After a contract breach, when the acceleration covenant goes into effect, the clause relieves the borrower of any further interest payments and requires the borrower to pay back the loan in its entirety. An acceleration covenant is a contract provision that allows a lender to demand a borrower to immediately repay a loan if specific requirements are not met. An acceleration covenant is a requirement in a contract that allows a lender to insist a lender repay a loan immediately.

Acceleration Covenant

An acquittance is a document which shows that a debtor has been released from a debt obligation.

An acquittance is a document which shows that a debtor has been released from a debt obligation by paying it in full. These are called revolving debts, both because the payment can change from month to month, and the balance of the debt can shrink and grow over time. But they can be issued for all types of debts, including installment debt and revolving debt. Banks and other mortgage lenders issue an acquittance once a mortgagor makes the final payment on their mortgage. Banks and other mortgage lenders issue an acquittance once a mortgagor makes the final payment on their mortgage.

Acquittance

Add-on interest is a method of calculating a loan's cost by combining principal and interest into a single amount owed, which is costly to the borrower.

Add-on interest is a method of calculating the interest to be paid on a loan by combining the total principal amount borrowed and the total interest due into a single figure, then multiplying that figure by the number of years to repayment. In simple interest loans, where the interest charged is based on the amount of principal that is owed after each payment is made, the payments may be identical in size from month to month, but that is because the principal paid increases over time while the interest paid decreases. The borrower would pay $4,413.38 more for the add-on interest loan compared to the simple interest loan, that is, if the borrower did not pay off the loan early, reducing the total interest even more. Add-on interest is a method of calculating the interest to be paid on a loan by combining the total principal amount borrowed and the total interest due into a single figure, then multiplying that figure by the number of years to repayment. But in an add-on interest loan, the amount owed is calculated upfront as a total of the principal borrowed plus annual interest at the stated rate, multiplied by the number of years until the loan is fully repaid.

Add-On Interest

Adjustment credit is a short-term loan, which a Federal Reserve Bank extends to a smaller commercial bank.

The term adjustment credit refers to a short-term loan extended by a Federal Reserve Bank to a smaller commercial bank when it needs to maintain its reserve requirements and support short-term lending. The term adjustment credit refers to a short-term loan extended by a Federal Reserve Bank to a smaller commercial bank when it needs to maintain its reserve requirements and support short-term lending. An adjustment credit is a short-term loan extended by a Federal Reserve Bank to a smaller commercial bank when it needs to maintain its reserve requirements. A commercial bank secures an adjustment credit with a promissory note, often using them when interest rates are high, and the money supply is short. An adjustment credit is just one of the options available to commercial banks under the Federal Reserve's Regulation A, which provides guidance and rules about how institutions can borrow from the Fed's discount window.

Adjustment Credit

An advance rate is the maximum percentage of the value of collateral that a lender is willing to extend as the loan amount.

An advance rate is the percentage of the value of the collateral that a lender is willing to extend as a loan. The advance rate helps a borrower determine what kind of collateral to bring to the table to secure the desired loan amount and helps minimize a lender's loss exposure when accepting collateral that can fluctuate in value. By setting an advance rate, a lender can build a cushion into the loan transaction by ensuring that if the value of the collateral drops and the loan goes into default, there is still adequate protection from the principal loss of the loan. An advance rate also benefits a borrower in that it typically allows for a better interest rate on the loan or a larger loan. If a lender has an advance rate of 75%, and the value of the collateral presented is $100,000, then the maximum loan the borrower can receive is $75,000.

Advance Rate

In finance, the term adverse action refers to a type of notice given by a lender when a borrower's credit application has been denied.

In finance, the term adverse action refers to a type of notice given by a lender when a borrower's credit application has been denied. Typically, the factors cited in an adverse action note relate to poor credit history as revealed on the borrower's credit report, such as failing to make debt payments in a full or timely manner. In finance, the term adverse action refers to a type of notice given by a lender when a borrower's credit application has been denied. At the same time, adverse actions are included on a borrower's credit report and might therefore negatively impact the borrower in subsequent loan applications. The purpose of an adverse action notice is to inform would-be borrowers that their loan application has been denied, while also providing information about what factors influenced that decision.

Adverse Action

An adversely classified asset is a type of loan classification in which the loan or other asset is considered, to some degree, to be impaired.

Risk Management Manual of Examination Policies: Section 3-2 Loans

An adversely classified asset is a type of loan classification in which the loan or other asset is considered, to some degree, to be impaired. An example of an asset classified as a _loss_ would be a closed-end credit card loan that is 120 cumulative days past due, or an open-end credit card loan that is 180 cumulative days past due. Besides stating the amounts of adversely classified assets in each category, bank examiners also typically compute the ratio of adversely classified assets to total assets and the ratio of adversely classified loans to total loans. The current method of calculating the Allowance for Loan and Lease Losses means that the most common adverse classifications are _substandard_ and _loss._
An asset may be classified _special mention_ if it has potential weaknesses that need to be examined by a loan manager. An adversely classified asset is a type of loan classification in which the loan or other asset is considered, to some degree, to be impaired.

Adversely Classified Asset

An allowance for bad debt is a valuation account used to estimate the amount of a firm's receivables that may ultimately be uncollectible.

An allowance for bad debt is a valuation account used to estimate the amount of a firm's receivables that may ultimately be uncollectible. When a borrower defaults on a loan, the allowance for bad debt account and the loan receivable balance are both reduced for the book value of the loan. Lenders use an allowance for bad debt because the face value of a firm's total accounts receivable is not the actual balance that is ultimately collected. Lenders use an allowance for bad debt because the face value of a firm's total accounts receivable is not the actual balance that is ultimately collected. The primary ways of estimating the allowance for bad debt are the sales method and the accounts receivable method.

Allowance for Bad Debt

Alternative documentation is a process designed to expedite loan approval where the borrower can submit certain documents to the lender for review. 

Alternative documentation is a documentation process designed to expedite loan approval where the lender accepts certain documents from the borrower as verification of income made on the loan application. Alternative documentation are full documentation loans as compared to stated income stated asset (SISA) loans, which are no-documentation loans. SISA loans are also known as no income-no asset (NINA) loans or no-documentation loans. Alternative documentation is a documentation process designed to expedite loan approval where the lender accepts certain documents from the borrower as verification of income made on the loan application. The passage of the ability-to-repay rule, which allows lenders to make good faith loans based on their assessment of the borrower, also facilitated the rise of alternative documentation loans.

Alternative Documentation

An amortized loan is a loan with scheduled periodic payments of both principal and interest, initially paying more interest than principal until eventually that ratio is reversed.

An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's principal amount and the interest accrued. The columns include the payment date, principal portion of the payment, interest portion of the payment, total interest paid to date, and ending outstanding balance. An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's principal amount and the interest accrued. The interest on an amortized loan is calculated based on the most recent ending balance of the loan; the interest amount owed decreases as payments are made. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount.

Amortized Loan

Amount financed is the actual amount of credit made available to a borrower in a loan. 

Amount financed is the actual amount of credit made available to a borrower in a loan. In a variable rate loan the amortization schedule will adjust for varying rates of interest which will cause changes in monthly loan payments required. For a borrower, interest costs and many of a loan’s fees will usually be based on the total amount of loan financing obtained. It also forms the base for calculating the total friction costs of a loan and the loan’s amortization schedule. The Truth in Lending Act was passed in 1968 and implemented by the Federal Reserve through Regulation Z. The Truth in Lending Act standardizes the disclosures made to borrowers concerning the terms of a loan, most notably in the way costs are calculated.

Amount Financed

The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans.

Section 1274.--Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans. As of Dec. 2019, the IRS stated that the annual short-term AFR was 1.61%, the mid-term AFR was 1.69%, and the long-term AFR was 2.09%. If the lender charges interest at a lower rate than the proper AFR, the IRS may reassess the lender and add imputed interest to the income to reflect the AFR rather than the actual amount paid by the borrower. Any interest rate charged below the stated AFR for the particular term of the loan would be considered foregone interest and, as a result, be taxable. The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans.

Applicable Federal Rate (AFR)

An amount on a loan, cumulative preferred stock or any credit instrument that is overdue, also referred to simply as "arrears". 

An amount on a loan, cumulative preferred stock or any credit instrument that is overdue. On the other hand, while preferred shareholders do not have voting rights—even if they achieve an ownership stake in the issuing company, they enjoy other perks, such as higher claims on company assets then common shareholders, in the event of bankruptcy situations.﻿﻿ Furthermore, the dividend payouts to preferred shareholder behave like bonds, in that they are locked in at fixed rates—a characteristic attractive to more risk-averse investors. Cumulative preferred stock allows for the accumulation of any undeclared preferred dividends from prior periods and the preferential distribution in later periods, before any new dividends and common dividends. Consequently, in order to pay any dividend income out to common stockholders, the corporation must first pay its preferred stockholders $120,000 in arrears, which is calculated by combining the $100,000 in past dividends still owed, plus the current year preferred dividend amount of $20,000. To qualify as dividends in arrears when unpaid, the dividends must be for the kind of preferred stock that has the so-called “cumulative” feature.

Arrearage

Asset-based lending is the business of loaning money with an agreement that is secured by collateral that can be seized if the loan is unpaid.

Asset-based lending is the business of loaning money in an agreement that is secured by collateral. If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its physical assets as collateral. If the company chooses to pledge less liquid assets, such as real estate or equipment, it may only be offered 50% of its required financing, or $100,000.
In both cases, the discount represents the costs of converting the collateral to cash and its potential loss in market value. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. If the company pledges the highly liquid marketable securities on its balance sheet as collateral, the lender may grant a loan equalling 85% of the face value of the securities.

Asset-Based Lending

Automated underwriting is a technology-driven underwriting process that provides a computer generated loan decision, and are used to improve the processing time for all types of loans.

Automated underwriting is a technology-driven underwriting process that provides a computer generated loan decision. Many automated underwriting applications are available for personal loans through online lenders like LendingClub and Prosper however large banks are also integrating automated underwriting platforms as well. In addition to automated underwriting, loan operating systems can be built to generate amortization and installment payment schedules, provide an automated portal for online payments and provide servicing notifications to the lender on payment delinquencies. Freddie Mac maintains and markets a large automated underwriting engine known as Loan Prospector and Fannie Mae has an automated underwriting engine known as Desktop Underwriter. Automated underwriting is a technology-driven underwriting process that provides a computer generated loan decision.

Automated Underwriting

A back-to-back commitment is a commitment to make a second take-out loan that piggybacks another loan.

A back-to-back commitment is a commitment to make a second take-out loan that piggybacks another loan. When a back-to-back commitment is used to roll a construction loan into a mortgage loan, the lender mitigates risk by gaining access to collateral to further secure the loan should the borrower default. Once the house is built and a certificate of occupancy is issued, the bank will make a new loan, probably a first mortgage loan, to take out the construction loan. For example, if a bank issues a loan with the agreement that a second bank will buy it out at a later date, the originating bank mitigates risk by only being liable for a short period of the life of the loan. Bank A agrees to the loan on the condition that a back-to-back commitment is made with Bank B, with Bank B agreeing to buy out the construction loan in a year's time.

Back-to-Back Commitment

A balloon payment is an oversized payment due at the end of a mortgage. Terms are usually for just a short period of time before the payment comes due.

A balloon payment is a large payment due at the end of a balloon loan, such as a mortgage, a commercial loan, or another type of amortized loan. A balloon payment is a large payment due at the end of a balloon loan, such as a mortgage, a commercial loan, or another type of amortized loan. Balloon payments are often at least twice the amount of the loan's previous payments
A balloon payment can be a big problem in a falling housing market when owners might not be able to sell their homes for as much as they anticipated before the payment comes due. Then, the loan then resets and the balloon payment rolls into a new or continuing amortized mortgage at the prevailing market rates at the end of that term. Balloon payments are more common in commercial lending than in consumer lending because the average homeowner typically cannot make a very large balloon payment at the end of the mortgage.

Balloon Payment

A balloon loan is a type of loan that does not fully amortize over its term. Since it is not fully amortized, a balloon payment is required at the end of the term to repay the remaining principal balance of the loan.

A balloon loan is a type of loan that does not fully amortize over its term. defaulting on the loan if the borrower cannot convince their current lender or another entity to finance the balloon payment – and cannot raise the funds to pay off the principal balance
if property values have fallen, being unable to sell the property at a high enough price to pay the balloon payment, and then defaulting on the loan
being able to successfully refinance the balloon loan, but at a higher interest rate, driving up monthly payments (this will be even more true, if the new loan is amortized and includes paying off the principal) Some balloon loans, such as a five-year balloon mortgage, have a reset option at the end of the five-year term that allows for a resetting of the interest rate, based on current interest rates, and a recalculation of the amortization schedule, based on a new term. If a balloon loan does not have a reset option, the lender expects the borrower to pay the balloon payment or refinance the loan before the end of the original term. much lower monthly payments than a traditional amortized loan because very little of the principal is being repaid; this may permit an individual to borrow more than they otherwise could
if interest rates are high, not feeling the full impact of them because, as noted above, the payment is reduced, given the limited pay down of principal

Balloon Loan

A bank confirmation letter (BCL) is a correspondence between banks that confirms the existence of a valid line of credit to one of its customers.

Table of Contents
What Is BCL? A bank verification letter is the same as a bank certification letter; a letter from a bank confirming that an individual has an account at that bank with the total value of the funds in the account. To obtain a bank confirmation letter from your bank you may request in-person at a bank branch from one of the bankers, by a phone call to the bank, and depending on the financial institution, through their online platform. A bank certification letter is a letter issued by a bank that confirms an individual has an account with that bank and the total value of the funds in the account. A bank confirmation letter (BCL) is a letter from a bank or financial institution confirming the existence of a loan or a line of credit that has been extended to a borrower.

Bank Confirmation Letter (BCL)

A B/C loan is a loan to a subprime or thin file borrower, provided by alternative lenders who charge higher interest rates and fees.

A B/C loan is a loan to low credit quality borrowers and borrowers with minimal credit history. The rates and fees on B/C loans are typically high, particularly when compared to standard loans, to account for the riskiness of lending to a borrower with low creditworthiness.
B/C loans are less favorable than A-labeled loans but better than D-labeled loans. B/C loans will typically have interest rates that are relatively higher than A-labeled loans but substantially lower than D-labeled loans. Because of the additional credit risk associated with B/C loans, lenders will usually require higher fees and interest rates than those mandated for A-labeled prime loans. Despite their less-advantageous, even predatory, terms, B/C-labeled loans can often be a good way for borrowers to obtain financing while also improving their credit score and credit history (assuming they make faithful repayments).

B/C Loan

Learn more about bridge loans, which are short-term loans used until permanent financing is secured or an existing obligation is removed.

Table of Contents
What Is a Bridge Loan?
How a Bridge Loan Works
Example of a Bridge Loan
Businesses and Bridge Loans
Bridge Loans in Real Estate
Bridge Loans vs. Traditional Loans Also known as interim financing, gap financing, or swing loans, bridge loans bridge the gap during times when financing is needed but not yet available. Homeowners can use bridge loans toward the purchase of a new home while they wait for their current home to sell. However, in most cases, lenders only offer real estate bridge loans worth 80% of the combined value of the two properties, meaning the borrower must have significant home equity in the original property or ample cash savings on hand.

Bridge Loan

A bullet loan requires a large balloon payment at the end of the term, often used by real-estate developers when financing building projects.

A bullet loan is a loan that requires a balloon payment at the end of the term. In a full lump sum bullet loan, interest will accrue according to the loan terms, usually monthly or annually, and the borrower will be required to pay the total balance in the form of a large lump sum at maturity. In an interest-only bullet loan, the borrower is required to make regularly scheduled interest payments; this reduces the lump sum payoff at maturity to only the amount of the loan's principal. In a take-out loan, the borrower offers the newly completed buildings as collateral for a new loan and then uses that money to pay off the old bullet loan. Some developers may choose to buy single tracts of land with bullet loans, while others may use a bullet loan for developing an entire subdivision with multiple tracts of land.

The  of a Bullet Loan

A bullet repayment is a lump sum payment, typically very large, for the entire loan amount. It's typically paid at maturity.

A bullet repayment is a lump sum payment made for the entirety of an outstanding loan amount, usually at maturity. Loans with bullet repayments are commonly used to reduce monthly payments to interest-only payments during the term of the loans, but a large, final payment of principal eventually comes due. The deferral of principal payments until the loan matures results in lower monthly payments during the life of the loan because these payments usually represent only interest. The property can be sold, with the proceeds used to pay the loan principal, or the loan can be refinanced, taking out a new loan to cover the bullet repayment. The monthly payment schedule clearly favors the interest-only loan, but the interest-only borrower faces a bullet repayment of $320,000.

Bullet Repayment

A bullet is a lump-sum repayment of a loan, often called a balloon payment.

A bullet is a one-time lump-sum repayment of an outstanding loan, typically made by the borrower. A bullet loan requires the principal of the loan to be paid in full the loan matures. A bullet bond is considered riskier than an amortizing bond because it gives the issuer a large repayment obligation on a single date rather than a series of smaller repayment obligations. Other terms for the bullet loan structure include balloon loans or balloon payments. In contrast, bullet loans may require extremely inexpensive, interest-only payments, or no payments at all, until maturity.

Bullet

A buy-up is a type of rebate associated with mortgage loans. It involves paying upfront cash incentives in exchange for higher loan interest rates.

Federal Reserve Announces Final Rules to Protect Mortgage Borrowers From Unfair, Abusive, or Deceptive Lending Practices That Can Arise From Loan Originator Compensation Practices

A buy-up is a type of rebate in which the borrower of a mortgage loan accepts a higher interest rate in exchange for an upfront cash incentive. Because the buy-up results in a higher interest rate on the loan, the borrower is effectively borrowing money at that higher rate and using it to pay for some or all of the settlement costs. Although the exact level of the new interest rate would be subject to negotiation, the typical formula is for each percentage of the rebate to result in a 0.25% increase to the mortgage interest rate. Because the higher interest rate applies to the entire balance of the mortgage, opting for a buy-up is generally only economical if the borrower does not intend to hold on to the mortgage for an extended period of time.

Buy-Up Defined

A call loan is a loan that the lender can demand to be repaid at any time – similar to a callable bond, but in this case, the lender has the power.

A call loan is a loan that the lender can demand to be repaid at any time. However, the loan can essentially be canceled at any time since the brokerage firm can repay the loan with no prepayment penalty and the lending bank can call the loan for repayment whenever it pleases. Call loans are often made by banks to brokerage firms, which use them for short-term financing of client margin accounts when more cash on hand is needed in order to make credit available to brokerage clients to buy securities on margin. The key difference is that with a call loan the lender has the power to call in the loan repayment, not the borrower, as is the case with a callable bond. Occasionally, brokerage firms may use the proceeds of a call loan to buy securities for their own house accounts, to purchase trading securities or for underwriting purchases.

Call Loan –

Capitalized cost reduction is any upfront payment that reduces the cost of financing. Capitalized cost reduction is generally associated with the purchase of a home or automobile.

Table of Contents
What Is a Capitalized Cost Reduction? Understanding Capitalized Cost Reductions
Real Estate
Cars, Trucks, and Heavy Machinery
Some Other Special Considerations
A capitalized cost reduction is any upfront payment that reduces the cost of financing. Regardless of whether a buyer chooses to lease or buy a vehicle, the down payment they pay goes toward reducing the capitalized financing principal they must request. A down payment serves as a capitalized cost reduction by lowering the total amount of principal financing a borrower needs. This means that the payments a borrower must make over the life of the mortgage loan will be substantially lower due to the high initial capitalized cost reduction and the lower financing need overall.

Capitalized Cost Reduction

A cash basis loan is one in which interest is recorded as earned when payment is collected. It is a nonperforming loan, meaning that the borrower hasn’t made any scheduled principal or interest repayments for at least 90 days.

A cash basis loan is one in which interest is recorded as earned when payment is collected. Cash basis loans are nonperforming loans, and interest income can only be recorded when funds are actually received. However, a bank can also form a partnership with a collection agency that can help it pursue payment for cash basis loans in exchange for a percentage of any funds obtained thereby. A cash basis loan is a loan gone bad, therefore one in which interest is recorded as earned only when payment is collected. The bank can sell nonperforming loans at a reduced price to a collection agency, which then becomes the owner of that debt and may attempt to collect on it, perhaps by settling with the debtor for less than the amount owed.

Cash Basis Loan

A character loan is an unsecured loan made based on a borrower’s reputation and credit, rather than a loan secured by a property.

A character loan is a type of unsecured loan that is made because of the lender's faith in the borrower’s reputation and credit. Due to their unsecured nature, character loans and credit card cash advances carry higher interest rates and fees than using a credit card to buy goods or services. A character loan is an unsecured term loan made on the basis of a borrower’s reputation and credit, usually with a higher interest rate and fees than a secured loan. Borrowers with poor credit or no credit may be unable to obtain a credit card or may receive only the minimum credit line. A character loan is a type of unsecured loan that is made because of the lender's faith in the borrower’s reputation and credit.

Character Loan

Cheap money is a loan or credit with a low interest rate, or the setting of low interest rates by a central bank like the Federal Reserve. 

Cheap money is a loan or credit with a low interest rate or the setting of low interest rates by a central bank like the Federal Reserve. Cheap money is a loan or credit with a low interest rate or the setting of low interest rates by a central bank like the Federal Reserve. Cheap money is good for borrowers, but bad for investors, who will see the same low interest rates on investments like savings accounts, money market funds, CDs, and bonds. Although cheap money should, in theory, encourage private borrowing and spending, consumers have been more reluctant to borrow money since the 2008 recession, perhaps because most consumers continue to carry more debt than they did before the recession. Cheap money is money that can be borrowed with a very low interest rate or price for borrowing.

Cheap Money

A classified loan is any bank loan that is in danger of default.

A classified loan is a bank loan that is in danger of default. A credit analyst may use the following specific liquidity ratios to determine short-term vitality:
Current ratio
Quick ratio or acid test
Solvency ratios may entail the interest coverage ratio.
Aside from the possibility of having future credit restricted, borrowers with classified loans really have nothing to worry about. Classified loans have a high rate of borrower default and can raise the cost of borrowing for a bank's other customers.
Many banks undertake a credit analysis to determine the creditworthiness of a borrower and thus the quality of a loan. Lenders normally record classified loans as adversely classified assets on their books as a precaution to prevent further risk and loss. Lenders will generally work through the five C's to determine credit risk, looking into an applicant's:
1.  Credit history
2.  Capacity to repay
3.  Capital
4.  Conditions and terms of the loan
5.  Collateral (In a mortgage transaction, for example, collateral is the house, which the party purchases with the funds from the mortgage.

Classified Loan

A co-applicant is a second named person on a loan or other type of application.

A co-applicant is an additional person considered in the underwriting and approval of a loan or other type of application. Applying for a loan with a co-applicant can help to improve the chances of loan approval and also provide for more favorable loan terms. A co-applicant is an additional applicant involved in the loan underwriting and approval process for a single loan. A co-applicant differs from a co-signer or guarantor in terms of their rights associated with the loan. Often applying for a loan with a co-applicant can also help to increase the amount of principal that is obtained from a loan.

What Is a Co-Applicant?

A co-borrower is any additional borrower whose name appears on loan documents and whose income and credit history is used to qualify for the loan. 

A co-borrower is any additional borrower whose name appears on loan documents and whose income and credit history are used to qualify for the loan. A co-borrower is any additional borrower whose name appears on loan documents and whose income and credit history are used to qualify for the loan. In a loan application with a co-borrower, all of the borrowers responsible for the loan must complete a credit application. By applying with a co-borrower, the son may qualify for the loan under his father’s higher credit score while also receiving a low-interest rate that allows him to pay off other high-interest debt. A co-borrower can be beneficial for a debtor who is unable to qualify for a loan or favorable loan terms.

Defining a Co-Borrower

To cosign is to sign jointly with a borrower on a loan to help a borrower obtain a loan or receive better terms on the loan.

To cosign is to sign jointly with a borrower for a loan. A cosigner differs from a co-borrower in that the cosigner does not receive the principal on the loan, nor does the cosigner initially have to make regular monthly payments. A cosigner takes on the legal obligation to be a backup repayment source for the loan and, as such, reduces the risk for the lender and helps the borrower obtain a loan. Depending on the loan’s terms a lender may immediately begin to report payment delinquencies to credit bureaus for both the borrower and cosigner. Individuals entering into any type of joint credit agreement must understand their obligations, particularly as delinquencies and defaults from either a cosigner or a co-borrower can be reported to credit bureaus at any time.

Cosign

The term collateral value refers to the fair market value of the assets used to secure a loan.

The term collateral value refers to the fair market value of the assets used to secure a loan. The size of a secured loan relative to its collateral value is known as the loan-to-value ratio (LTV). The term collateral value refers to the fair market value of the assets used to secure a loan. For instance, if a loan is secured by publicly-traded stock, then the current market price of those securities can be used when estimating its collateral value. However, the loan's exact size will depend on several factors, such as the perceived reliability of its collateral value, the current state of the market, and the borrower's credit rating.

Collateral Value

Collateral is an asset that a lender accepts as security for extending a loan. If the borrower defaults, then the lender may seize the collateral.

If the homeowner stops paying the mortgage for at least 120 days, the loan servicer can begin legal proceedings which can lead to the lender eventually taking possession of the house through foreclosure.﻿﻿ Once the property is transferred to the lender, it can be sold to repay the remaining principal on the loan. It normally relates to the nature of the loan, so a mortgage is collateralized by the home, while the collateral for a car loan is the vehicle in question. If you are considering a collateralized personal loan, your best choice for a lender is probably a financial institution that you already do business with, especially if your collateral is your savings account. Another type of borrowing is the collateralized personal loan, in which the borrower offers an item of value as security for a loan.

Collateral , Types, & Examples

Collateralization is the use of an asset to secure a loan against default. The collateral can be seized by the lender to offset the loss.

Collateralization is the use of a valuable asset to secure a loan. For example, compare these rates as of March 2020 for collateralized and unsecured loans:
An auto loan could be obtained at an interest rate of about 5% by an applicant with a good credit rating;
A 30-year fixed-rate mortgage could be obtained for an interest rate of about 3.6%.
The average credit card interest rate was 21.28%.
Personal loan rates from banks ranged from about 5% all the way up to 36%.
Companies often attach collateral to bonds when they issue them. If the investor has sufficient assets in the account, a brokerage firm will allow that investor to buy securities with borrowed money, using the assets in the account as collateral. Collateralized loans are inherently safer than non-collateralized loans, and therefore generally have lower interest rates. Collateralized loans generally have a substantially lower interest rate than unsecured loans.

Collateralization

A commercial and industrial (C&I) loan is a type of short-term loan made to a business or corporation, not an individual.

A commercial and industrial (C&I) loan is any loan made to a business or corporation, as opposed to an individual. Lenders usually require proper maintenance of the loan collateral property and hold borrowers to certain covenants such as a debt service coverage ratio (DSCR).
Small and medium-sized businesses make up the bulk of borrowers for C&I loans because they generally cannot generate sufficient cash flow to continuously self-fund operations and because they lack the access to the equity and bond markets that large companies enjoy. C&I loans can be used at any time in the life of a small business when it needs to generate quick cash for working capital, acquisitions, and mergers, or capital financing. Typically, a C&I loan is a short-term loan designed to provide working capital or finance items like equipment or machinery. To further refine the definition of C&I loans, they are distinct from consumer loans and real estate loans.

Commercial and Industrial (C&I) Loan

Lenders charge borrowers a commitment fee as compensation for keeping a line of credit open or to guarantee a loan at a specific date in the future.

A commitment fee is a banking term used to describe a fee charged by a lender to a borrower to compensate the lender for its commitment to lend. A commitment fee is a banking term used to describe a fee charged by a lender to a borrower to compensate the lender for its commitment to lend. The fee is then calculated by multiplying the average unused commitment by the agreed-upon commitment fee rate and again by the number of days in the reference period. The key distinction between the two is that a commitment fee is calculated on the undisbursed loan amount while interest charges are calculated by applying an interest rate on the amount of the loan that has been disbursed and not yet repaid. A commitment fee generally is specified as either a flat fee or a fixed percentage of the undisbursed loan amount.

Commitment Fee

When a financial institution offers a loan balance called a committed credit line, it cannot be suspended without notification.

A committed credit line is a monetary spending loan balance offered by a financial institution that cannot be suspended without notifying the borrower. When a lender provides a committed credit line, the funds offered can be used at the company's discretion, but is not meant to act as a cash reserve.
Committed credit lines differ from uncommitted credit lines in that they legally bind the lender to provide the funds, rather than giving the lender the option of suspending or canceling the credit line based on market conditions. A committed credit line is a legal agreement outlining the conditions of the credit line between the financial institution and the borrower. Committed credit lines differ from uncommitted credit lines, which offer the lending bank discretion based on market conditions. Companies may seek committed credit lines as a buffer against anticipated expenses, such as fees associated with major litigation, to address sudden shortfalls in revenue and profits, or to cover the costs of equipment purchases that were not originally planned for in a fiscal budget.

Committed Credit Line

A competitive bid option is a form of loan syndication in which lenders within a group submit rival offers to fund a loan or debt.

A competitive bid option is a form of loan syndication in which members of a group of banks submit rival offers to fund a loan. With the advent of internet banking and online financial services, individual borrowers can now also benefit from a process similar to the competitive bid option, in which lenders offer quotes for loans, and can have the option to match the best offer. For the bidding banks, the benefit of the competitive bid option is that it allows them the opportunity to offer loans, but without the commitment—the same way a stock option gives an investor the right, but not the obligation, to buy or sell the equities at a given price. A competitive bid option is a form of loan syndication in which members of a group of banks submit rival offers to fund a loan. After that bidding process has established the best rate (or best price), other members of the syndicate have the option to match it or abstain from the deal; those who match will divvy up the loan amongst them.

Competitive Bid Option

Construction interest expense is interest that accumulates on a construction loan used to construct a building or other long-lived business asset.

Construction interest expense is an interest that accumulates on a construction loan used to construct a building or other long-lived business asset. Construction interest expense is an interest that accumulates on a construction loan used to construct a building or other long-lived business asset. Unlike other forms of industry-related interest, construction interest expense is handled differently, because its interest cannot be deducted. Construction interest expense is treated differently than other types of business-related interest due to the nature of the business of construction. For example, construction interest expense that is incurred during the period up until the time the asset begins to produce revenue is capitalized by adding it to the cost basis of the asset.

Construction Interest Expense

Consumer interest is any interest charge on personal loans, including automobile loans and credit card debt. 

Consumer interest is interest charged on consumer credit accounts such as personal loans, automobile loans and credit card debt. Consumer interest is interest charged on consumer credit accounts such as personal loans, automobile loans and credit card debt. Unlike mortgage interest and some interest charged on student loans, consumer interest from personal loans, credit cards, and other debt is a nondeductible tax expense. Consumer interest is interest charged on consumer-focused loans, such as personal loans, automobile loans, and credit card debt. In the past, many consumers used home equity loans as a means to convert consumer interest from credit cards or other types of spending into deductible mortgage interest.

Consumer Interest

A continuation statement is an amendment attached to a borrower's financing statement that extends the lender's lien on the borrower's collateral.

A continuation statement is an amendment attached to a UCC-1 financing statement. Continuations statements are also referred to as UCC-3 continuations statements because they refer to the Uniform Commercial Code (UCC), a set of regulations that govern commercial transactions.
Continuation statements must be filed in the six months prior to a UCC-1 financing statement's expiration. When a lender files a continuation statement, the continuation statement extends the UCC-1 financing statement by five years from the date of filing. If a lender has not filed a continuation statement for a specific financing statement, that statement ceases to be effective. Bank A files a continuation statement on Jan. 31, 2018, after the lapsing of its financing statement, and claiming the tractor as collateral.

Continuation Statement

A secondary loan that shares the same maturity date as the original is said to be coterminous with the first loan.

Coterminous loans refers to a supplemental loan with a maturity date that is the same as a senior debt, or an original loan. Coterminous loans refers to a supplemental loan with a maturity date that is the same as a senior debt, or an original loan. Coterminous loans are supplemental loans with a maturity date that is the same as a senior loan. Lenders might require that the original loan must have a minimum amount of time left—five years, for example—on its term before a coterminous loan is approved. The lender might not allow a coterminous, supplemental loan to be taken out shortly after an original loan has been approved.

Coterminous

A covenant-lite loan is a type of financing with fewer restrictions on the borrower and fewer protections for the lender, often used in leveraged buyouts.

A covenant-lite loan is a type of financing that is issued with fewer restrictions on the borrower and fewer protections for the lender. Although leveraged buyout deals arguably got out of control in the 1980s, and highly leveraged companies and their employees often paid the price, later analysis showed that many LBOs were successful in financial terms, and the overall performance of covenant-lite loans was in line with traditional loans provided to deal makers. Covenant-lite loans also carry more risk to the lender than traditional loans and allow individuals and corporations to engage in activities that would be difficult or impossible under a traditional loan agreement, such as paying out dividends to investors while deferring scheduled loan payments. Covenant-lite loans are different than traditional loans because they have less protection for the lender and friendlier terms for the borrower. Covenant-lite loans provide borrowers with a higher level of financing than they would likely be able to access through a traditional loan, while also offering more borrower-friendly terms.

Covenant-Lite Loan

A covenant is a commitment in a bond or other formal debt agreement that certain activities will or will not be undertaken.

In legal and financial terminology, a covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out or that certain thresholds will be met. Additionally, the rating agency gave the county's outstanding Hennepin County Regional Railroad Authority limited tax general obligation bonds an AAA rating for the same reasons, including the fact that the county can pay the debt using ad valorem taxes on all taxable property. Another common negative covenant is an interest coverage ratio, which says that earnings before interest and taxes (EBIT) must be greater in proportion to interest payments by a certain number of times. In legal and financial terminology, a covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out or that certain thresholds will be met. Examples of affirmative covenants include requirements to maintain adequate levels of insurance, requirements to furnish audited financial statements to the lender, compliance with applicable laws, and maintenance of proper accounting books and credit rating, if applicable.

Covenant

Credit denial is the rejection of a credit application by a prospective lender, usually due to its assessment that the applicant is not creditworthy.

Using Consumer Reports for Credit Decisions: What to Know About Adverse Action and Risk-Based Pricing Notices

Credit denial is the rejection of a credit application by a prospective lender, usually due to its assessment that the applicant is not creditworthy. The rejection can occur due to several reasons, including factors leading to an insufficient credit score such as lack of credit history, over-utilization of available credit, late payments, delinquency, or default. Another possible reason for denial is a lack of credit history—a lender simply does not have enough information on an applicant's past repayment behavior to approve a request for credit. The reason is often due to previous blemishes on the borrower's credit history, but it can also stem from an incomplete credit application or lack of any kind of borrowing history that would provide evidence of past repayment experience. Due to various personal and monetary problems, Julia had a history of missed payments on her credit card and her account was suspended by the card issuer and the negative behavior was reported to all three credit bureaus.

Credit Denial

A credit bureau is an agency that collects and researches individual credit information and sells it to creditors for a fee.

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Fair and Accurate Credit Transactions Act of 2003

A credit bureau, also known in the U.S. as a credit reporting company or credit reporting agency, is an organization that collects and researches individual credit information and sells it to creditors for a fee, so they can make decisions about granting loans. Credit bureaus then add the credit score to the information they’ve accumulated and issue a comprehensive credit report, which provides credit issuers with information that helps them determine credit approval and appropriate interest rates for borrowers. A credit bureau, also known in the U.S. as a credit reporting company or credit reporting agency, is an organization that collects and researches individual credit information and sells it to creditors for a fee, so they can make decisions about granting loans. bureaus are not responsible for deciding whether or not an individual should have credit extended to them; they merely collect and synthesize information about an individual’s credit score and give that information to lending institutions. In 2003, the Fair and Accurate Credit Transactions Act (FACTA) updated the Fair Credit Reporting Act to give consumers the right to get one free credit report every 12 months from credit bureaus.

Credit Bureau

A credit facility is a type of loan made in a business or corporate finance context, such as revolving credit, term loans, and committed facilities.

A credit facility is a type of loan made in a business or corporate finance context. Types of credit facilities include revolving loan facilities, retail credit facilities (like credit cards), committed facilities, letters of credit, and most retail credit accounts. Various types of credit facilities include revolving loan facilities, committed facilities, letters of credit, and most retail credit accounts. A credit facility agreement details the borrower’s responsibilities, loan warranties, lending amounts, interest rates, loan duration, default penalties, and repayment terms and conditions. Some of the most common include:
A retail credit facility is a method of financing—essentially, a type of loan or line of credit—used by retailers and real estate companies.

Credit Facility

A crown loan is an interest-free demand loan named after Chicago industrialist Henry Crown, who used the loans to reduce taxes on investment gains.

Dickman et al. .v. Commissioner of Internal Revenue

Topic No. 431 Canceled Debt – Is It Taxable or Not?

26 USC 7872: Treatment of Loans With Below-Market Interest Rates

A crown loan is an interest-free loan without a maturity date. Under the terms of Internal Revenue Code Section 7872, the IRS generally can consider such loans (and demand loans in general) to be either below-market loans or gift loans, depending on the rate of interest charged and the nature of interest payments foregone by the lender. The U.S. Internal Revenue Service (IRS) started eyeing Crown loans in the 1960s. In 1973, it sought to impose a gift tax on $18 million worth of such loans made to trusts established for children and other close relatives by none other than Lester Crown, one of Henry Crown’s sons. A crown loan is an interest-free loan without a maturity date made between someone in a high-income tax bracket and someone in a lower tax bracket with the goal of reducing the tax on the funds. This ruling, along with additional legislation to close tax loopholes regarding loans with below-market interest rates in the Tax Reform Act of 1984, effectively removed the financial incentive to make Crown loans.

Crown Loan

Cumulative interest is the sum of all interest payments made on a loan over a certain time period.

Cumulative interest is the sum of all interest payments made on a loan over a certain period. Provided money can earn interest, any amount is worth more the sooner it is received.
The general formula for TVM is: FV = PV x (1 + (i / n)) ^ (n x t)
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years
While cumulative interest is additive, compound interest can be thought of as “interest on interest.” Compound Interest = Total amount of Principal and Interest in future (or Future Value) _less_ Principal amount at present (or Present Value)
= \[P (1 + _i_)n\] – P
= P \[(1 + _i_)n – 1\]
(Where P = Principal, _i_ = nominal annual interest rate in percentage terms, and n = number of compounding periods.)
For example, what would the amount of interest be on a five-year loan of $10,000 at an interest rate of 5% that compounds annually? On an amortizing loan, cumulative interest will increase at a decreasing rate, as each subsequent periodic payment on the loan is a higher percentage of the loan’s principal and a lower percentage of its interest. This happens because, when interest is compounded, the money earned through interest is added to the principal periodically, so that more interest is earned in the next period.

Cumulative Interest

Current index value is the most current value for the underlying indexed rate in a variable rate loan. 

If the variable rate is based on a schedule, the borrower’s interest rate will change to the current index value plus the borrower’s margin on that specific date and the fully indexed rate will remain unchanged until the next reset date. In an adjustable-rate mortgage, the variable rate can be volatile, changing every time the underlying current index value changes or whenever the variable rate can be scheduled. The loan rate on a variable rate loan is calculated by adding the indexed rate and the borrower’s margin. Variable rate loans rely on the indexed rate and a margin to calculate the fully indexed rate that a borrower is required to pay.

Current Index Value

Debt loading occurs when one spends cash reserves, maxes out lines of credit, and fails to pay bills in anticipation of bankruptcy protection.

11 U.S. Code Sec. 523. Exceptions to discharge

Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed Under Section 104(a) of the Code

Debt loading is an unscrupulous practice sometimes employed by entrepreneurs and businesses facing bankruptcy. When a company is about to file for bankruptcy, viewing it as a way out of their debt crisis, they may engage in debt loading, since much of the debt may be absolved to a certain degree. The bankruptcy code has many provisions to prevent debt loaders from piling on debt before bankruptcy. As well as being unethical, debt loading may also be considered a civil fraud or even a criminal act, if a judge can determine the debt was accrued with the intent to discharge through bankruptcy. Essentially, the business loads up on as much debt as possible before attempting to clear the debt by filing for bankruptcy.

Debt Loading

The default rate is the percentage of loans outstanding that have been written off by the lender as unpaid. Default rates are economic indicators.

The default rate is the percentage of all outstanding loans that a lender has written off as unpaid after a prolonged period of missed payments. Specifically, these are the names of the indexes: S&P/Experian Consumer Credit Default Composite Index; S&P/Experian First Mortgage Default Index; S&P/Experian Second Mortgage Default Index; S&P/Experian Auto Default Index; and S&P/Experian Bankcard Default Index. Standard & Poor's (S&P) and the credit reporting agency Experian jointly produce a number of indexes that help lenders and economists track movements over time in the level of the default rate for various types of consumer loans, including home mortgages, car loans, and consumer credit cards. The term default rate–also called penalty rate–may also refer to the higher interest rate imposed on a borrower who has missed regular payments on a loan. The default rate of banks' loan portfolios, in addition to other indicators–such as the unemployment rate, the rate of inflation, the consumer confidence index, the level of personal bankruptcy filings, and stock market returns, among others–is sometimes used as an overall indicator of economic health.

Default Rate

Deferred interest loans postpone interest payments for a period of time and can either be extremely costly if not paid off or a way to save money.

Deferred interest is when interest payments are deferred on a loan during a specific period of time. The borrower could choose from four monthly payment options:
A fully amortizing 30-year fixed payment of $599.55
A fully amortizing 15-year payment of $843.86
An interest-only payment of $500
A minimum payment of $321.64
Making the minimum payment means the deferred interest of $178.36 is added to the loan balance monthly.
After five years, the loan balance with deferred interest is recast, meaning the required payment increases enough so that the loan can be paid off in 25 years. Mortgagors could choose a 30-year or 15-year payment, an interest-only payment covering interest but not reducing the principal balance, or a minimum payment that wouldn't even cover the interest due. These credit cards work in the same way as a deferred interest loan with a retailer, in that they offer no interest charges on the balance of the credit card for a specific period of time. Typically, on deferred interest loans, if the balance is not fully paid off before the period ends, interest is backdated and charged on the entire, original balance, regardless of how much of the balance is left.

Deferred Interest

A delayed draw term loan is a special feature in a term loan that stipulates that the borrower can withdraw predefined amounts of the total pre-approved amount of a term loan at contractual times. 

A delayed draw term loan (DDTL) is a special feature in a term loan that lets a borrower withdraw predefined amounts of a total pre-approved loan amount. A delayed draw term loan (DDTL) is a special feature in a term loan that lets a borrower withdraw predefined amounts of a total pre-approved loan amount. For the borrower, a delayed draw term loan offers a limit on how much it can draw on a loan, which can act as a governor to spending, thereby reducing its debt burden and interest payments. A delayed draw term loan is a provision in a term loan that specifies when and how much the borrower receives. Once provided by middle-market lenders via non-syndicated leveraged loans, delayed draw term loan terms have become popular in larger, broadly syndicated leveraged loans.

Delayed Draw Term Loan

Delinquency rate refers to the percentage of loans within a financial institution's loan portfolio whose payments are delinquent.

Delinquency rate refers to the percentage of loans within a financial institution's loan portfolio whose payments are delinquent. Often, especially with corporate debt, lenders will report total delinquency rates on loans according to the borrower's credit quality; this can help investors gain insights into the risks involved with specific loans. For example, if there are 1,000 loans in a bank's loan portfolio, and 100 of those loans have delinquent payments of 60 days or more, then the delinquency rate would be 10% (100 _divided by_ 1,000 _equals_ 10%). To calculate a delinquency rate, divide the number of loans that are delinquent by the total number of loans that an institution holds. If late payments persist, then each month that the borrower is late, the lender may continue reporting the delinquency to the credit agencies for as long as 270 days.

Delinquency Rate

A credit card is said to be delinquent if the customer in question has failed to make their minimum monthly payment as of the most recent due date.

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From the perspective of a credit card company, a particular credit card is said to be delinquent if the customer in question has failed to make their minimum monthly payment for 30 days from their original due date. From the perspective of a credit card company, a particular credit card is said to be delinquent if the customer in question has failed to make their minimum monthly payment for 30 days from their original due date. The average American family credit card debt is $6,270 with 45.4% of American families carrying some credit card debt. Delinquencies can remain on a borrower's credit report for up to seven years, resulting in a lower credit score, making it difficult to utilize other forms of debt. If the account is still delinquent for 60 days or longer, then the credit card company will typically begin the process of debt collection.

Loan Basics

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