Loans Choice
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Glossary; A List of Terms Used in this Guide
Please note that some of the terms used in this list have several meanings. The definitions given here are only those relating to loans and other financial matters.
Administration Charge This is a charge made by the lender to cover their own costs. It may be made for valuations or any other purpose that involves work for the lender.
Adverse Credit History This term is used to describe a person who has a history of defaulting on credit repayments or has county court judgments or has been declared bankrupt.
Annual Equivalent Rate or AER> See definition here.
Annual Effective Rate or AER> See definition here.
Annual Percentage Rate or APR See definition here.
Arrangement Fee The fee charged by a lender for setting up your loan. It is normally payable upon completion but may sometimes be added to the loan.
Arrears The amount that a borrower has fallen behind in repayments on a loan or mortgage.
Bad Credit History Not making payments on time, skipping repayments, exceeding credit card limits etc., all gives you a bad credit history.
Bad Debt A debt that has not been paid by the due date and has been recorded by a credit reference agency.
Balloon Payment A final payment, usually on a lease purchase plan, that finally transfers ownership from the finance company to you.
Bank Base Rate The interest rate set by the Bank of England.
Bankruptcy If you do not have enough money to cover all your debts you may be declared bankrupt in accordance with the Insolvency Act. A bankrupt person is not permitted to hold a bank account or apply for credit in excess of £250 without the court's permission.
Bridging Loan This is a short-term loan. It is usually taken out to help fund the purchase of another house while the old one is being sold.
Broker An individual or company that finds you a loan or mortgage suited to your needs.
Building Society Is an institution regulated by the Building Societies Act. Building Societies are owned by their members and they are restricted in the way they are allowed to raise funds from the money markets. In addition, the Building Societies Commission lays down restrictions on their lending ability. Therefore they are less able to help with some types of loan than are banks.
Cashback An incentive given by a company to encourage you to take out a loan or other mortgage with them.
Charge Also known as a legal charge. It is the means by which a bank or building society enforces their rights to a property and it is recorded at the land registry. A building society can only lend if they have a first charge over a property. A second or subsequent charge may be granted over a property if additional money has been borrowed against it from a bank or finance company.
Collateral A bond or some other form of security that is pledged to guarantee a loan.
Consolidation Loan See Debt Consolidation Loan
Consumer Credit Acts The Consumer Credit Acts (1974) give you, the consumer, important rights such as to have a 5 day "cooling off" period in which you can cancel any loan agreement signed at home. It also gives you little or no liability if your credit card is lost or stolen.
Cooling Off Period See Consumer Credit Acts.
County Court Judgement or CCJ A court order to a borrower who has defaulted on repayments. Legal action such as sending in bailiffs will follow unless payments are made; usually within one month of the order.
Credit Your financial standing or the sum of money at your disposal at a bank or in a savings account etc.
Credit Agreement A signed document of an agreement between you and the lender outlining the terms and conditions relating to the loan.
Credit Card A card from a bank authorizing you to obtain goods on credit.
Credit File The record of your credit history held by a credit reference agency.
Credit History A profile of your financial life. It shows the extent to which you pay your bills on time and how much you may owe particular parties.
Credit Limit The maximum amount you can borrow on a credit card or other loan arrangement.
Credit Reference Agency A company that provides lenders with your credit details and history. There are three main credit reference agencies: Experian PLC, Equifax PLC, and Callcredit PLC.
Credit Score This is your credit status based on searches carried out by a credit reference agency.
Credit Union A non-profit cooperative organization that provides banking, financial services and loans to their members.
Debit Card A card issued by a bank and used for making purchases. The purchase amount is deducted directly from your bank account and is therefore NOT a credit card.
Debt Consolidation Loan The replacement of several loans with a single one, preferably with a lower monthly payment and a longer repayment period. It's also called a consolidation loan.
Debt Management A plan to help and solve credit problems. Usually created by another person after studying your particular details.
Default This is when you are unwilling or unable to pay your debts.
Deposit A partial payment made at the time of purchase; the balance to be paid later in instalments or a sum to secure an item before paying the balance in full.
Drawdown Mortgage A type of mortgage where a lump sum is made available at the start of the agreement and further sums can be obtained later in agreed stages. For example, as work proceeds in renovating an old house.
Effective Annual Rate or EAR> See definition here.
Endowment A life assurance savings scheme designed to pay out a lump sum when the policy matures.
Endowment Mortgage This is an interest only mortgage where you pay into an endowment policy in the hope it will pay off your mortgage balance at the end of the mortgage term. This has proved to be unreliable in recent years.
Equity The difference between the value of your home and the amount owed on it.
Equity Release A means of obtaining a lump sum from the equity locked-up in your home without having to move.
Equivalent Annual Rate or EAR> See definition here.
Finance House/Company A company engaged in making loans to individuals or businesses.
Fixed Rate Interest An interest rate that is the same throughout the life of the loan and cannot be varied.
Freehold An owner of a freehold property legally owns it forever together with the land it stands on.
Graduate Loan This is a cheaper type of loan than the standard loan available to other customers. Usually available to new graduates only.
Guaranteed Earned Income Any income received on top of your basic salary that is not part of your normal basic pay under the terms and conditions of your employment but which you are guaranteed to receive.
Guaranteed Future Value or GFV When buying a car by Personal Contract Purchase you need at the start of the agreement to decide on how many miles you intend to travel and for how long. From this the FGV can be calculated. This is effectively the trade value of the car at the end of the agreement.
Guarantor A person who agrees to be responsible for the payment of another person's debts is a guarantor.
Hire Purchase or HP A system of purchase by paying in instalments. The item only becomes yours after the final payment.
Home Equity Loans Home equity loans are made to homeowners and are secured by a mortgage on the property.
Home Improvement Loan A personal loan taken by the borrower for the express purpose of financing a program of home improvements. It is often a remortgage.
Homeowner Loan A loan given to a home owner and secured on the home owner's property.
Indemnity Insurance You may required to take this out when you obtain a mortgage. You pay, sometimes up to £1000, to protect the lender in case they have to repossess your house and its value is less than the amount you still owe. It particularly applies when you take out a mortgage whose value is close to the current value of the house you are buying.
Individual Savings Account or ISA This is a tax-free savings account available since April 1999. There are limits on the amounts it is possible to invest in such an account. It is often used with an interest only mortgage to provide a lump sum at the end of the mortgage term.
Individual Voluntary Agreement or IVA An IVA is a formal agreement between someone who owes money (the debtor) and the person or persons who lent the money (creditors). An IVA proposal sets out how the debtor is going to repay the creditors; often over a period of five years.
Interest Money charged by a lender to a borrower for the use of their money.
Interest Free A loan made without charging interest is said to be interest free.
Interest Rate The cost of borrowing money, expressed as a percentage, usually over a period of one year.
Lease A contract granting you the use (e.g. a car) or occupation (e.g. a house) of property during a specified time for a specified payment.
Leasehold An agreement which gives you the right to use and occupy property for a fixed period of time. You do not own the property.
Lender The bank or mortgage company that is offering the loan.
Lien A legal hold or claim of the lender on your property as security for a debt or charge. It is the right, given by law, to satisfy debt.
Linked Account This is a savings account that is "linked" to an offset mortgage.
Loan An amount of money that has been borrowed to be repaid at a later date, usually with interest.
Loan Agreement This is a written contract that spells out in detail the terms and conditions of a loan between yourself and the lender.
Loan to Value or LTV It is the percentage of what is owed on a property compared with the property's actual market value.
Mortgage Money borrowed from a lender in order to purchase a house or other property.
Mortgage Indemnity Guarantee or MIG See Indemnity Insurance.
Offset Mortgage This is a mortgage that is linked to a savings or deposit account. If you have a mortgage of £100,000 and savings of £10,000 you only pay mortgage interest on £90,000 but do not receive any interest on your savings.
Over Repayments These are payments that are larger or more frequent than is required by the loan agreement.
Payment Holiday A feature of some mortgages or other types of loan that allows you to defer interest payments without incurring fines or penalties.
Payment Protection Insurance This is a method of insuring yourself in case you cannot make repayments due to illness or redundancy. You should note that most schemes only cover you for a certain length of time, typically one year.
Personal Contract Purchase or PCP This is a method of funding where you lease a vehicle for a set period at a fixed monthly charge. At the end of the contract, there is an optional "balloon payment" which you can pay to buy the vehicle otherwise you can choose to return the vehicle with nothing further to pay. It is an alternative to Hire Purchase.
Personal Loan A personal loan is the basic term for a loan taken out by individuals. It can either be secured against your property or unsecured depending on your personal circumstances and preferences.
Redemption Charge/Penalty An redemption charge is made if you switch your mortgage to another lender within a set period of time. The charge can be as much as the value of six months' repayments but normally only 2-3 months.
Remortgage This is simply a mortgage which replaces a previous mortgage. It is usually taken out with a different lender; perhaps to save money.
Second Mortgage An additional mortgage on a property that already has a mortgage.
Secured Loan A loan that is secured against your property. Therefore you may lose the property if you do not keep up repayments.
Self Certification This happens when the loans company allows you to state your income without needing to provide evidence.
Stamp Duty This is a tax levied on property purchases above a certain amount and on share dealing.
Store Card This is a type of credit card that can only be used in the stores that issue the card such as Marks & Spencer or Argos.
Student Loans They are offered to students to assist payment of the costs of education. They usually charge lower interest than other loans, and are also usually issued or backed by the government.
Tenant Loans A tenant loan is a type of unsecured loan available to those that do not own their own property. For example, you may be living with your parents or be paying rent to a landlord. There is not usually any restriction on the purpose for which the loan is used.
Term This is the period of time between the beginning loan date stated on the agreement and the date when the entire balance of the loan has been paid.
Typical APR The annual percentage rate that a lender offers to the majority of borrowers.
Under Repayments These are payments that are lower or less frequent than required in the credit agreement. You need to agree this with the lender (they may refuse you), much preferably before defaulting on any payments!
Underwriting The assessment made by the lender to decide whether they should approve your loan application.
Unsecured Loan This is a type of loan that does not require you to use your home as security.
Variable Rate Interest The interest rate of this type of loan can vary up or down throughout the loan term depending depending on market forces such as the bank base rate.