52 money terms, in plain English.

APR includes the interest rate plus any additional fees charged by the lender (origination fees, closing costs, etc.), giving you a more complete picture of what a loan actually costs compared to the interest rate alone.

Amortization

The process of spreading a loan into a series of fixed payments over time, where each payment covers both principal and interest.

Auto Loan

A fixed-term loan used to purchase a vehicle, with the car serving as collateral. Typical terms range from 36 to 72 months.

APY

Annual Percentage Yield -- the total amount of interest earned on a savings account in one year, including the effect of compound interest.

Asset Allocation

How you divide your investments among different asset categories like stocks, bonds, and cash. Your ideal mix depends on your age, goals, and risk tolerance.

Adjustable Rate Mortgage

A mortgage with an interest rate that changes after an initial fixed period. Often starts lower than fixed rates but carries risk of future increases.

2 terms

Balance Transfer

Moving debt from one credit card to another, typically to take advantage of a lower interest rate or 0% promotional APR.

Back-End Ratio

The percentage of your gross monthly income that goes toward all monthly debt payments combined. Lenders typically prefer 36% or less.

6 terms

Closing Costs

Fees and expenses you pay when finalizing a real estate transaction, typically 2-5% of the home price. Includes appraisal, title insurance, and attorney fees.

Credit Score

A three-digit number (300-850) that represents your creditworthiness. Higher scores get better loan rates and terms.

Compound Interest

Interest calculated on both the initial principal and the accumulated interest from previous periods -- your money earning money on its money.

CD (Certificate of Deposit)

A savings product that pays a fixed interest rate for a set period (3 months to 5 years). Higher rates than regular savings but your money is locked until maturity.

Collateral

An asset pledged as security for a loan. If you default on the loan, the lender can seize the collateral -- your home for a mortgage, your car for an auto loan.

Capital Gains

The profit from selling an investment or property for more than you paid. Short-term gains (held less than a year) are taxed higher than long-term gains.

6 terms

DTI

Lenders use DTI to assess your ability to manage monthly payments. Most mortgage lenders prefer a DTI below 43%, with many preferring 36% or less.

Down Payment

The upfront cash you pay when purchasing a home or car, expressed as a percentage of the total price.

Deduction

An expense that reduces your taxable income. Standard deduction is a flat amount; itemized deductions are specific expenses like mortgage interest or charitable donations.

Depreciation

The decrease in an asset's value over time. New cars typically depreciate 20-30% in the first two years of ownership.

Diversification

Spreading investments across different assets to reduce risk. If one investment drops, others may hold steady or grow, protecting your overall portfolio.

Debt Consolidation

Combining multiple debts into a single loan, usually to get a lower interest rate or simplify payments. Common for credit card and student loan debt.

4 terms

Escrow

A third-party account where funds are held during a transaction, commonly used for property taxes and insurance in mortgage payments.

Equity

The portion of your home that you actually own -- the difference between your home's value and what you still owe on the mortgage.

Emergency Fund

Money set aside for unexpected expenses like medical bills, car repairs, or job loss. Most experts recommend 3-6 months of living expenses.

Effective Tax Rate

The average rate at which your total income is taxed, calculated by dividing total tax paid by total income. Always lower than your marginal rate.

6 terms

Fixed Rate

An interest rate that stays the same for the entire life of the loan, making your monthly payments predictable.

Filing Status

Your tax category based on marital and family status (single, married filing jointly, head of household, etc.) that determines your tax brackets and standard deduction.

FICO Score

The most widely used credit scoring model, ranging from 300 to 850, developed by Fair Isaac Corporation.

Front-End Ratio

The percentage of your gross monthly income that goes toward housing costs (mortgage, taxes, insurance). Lenders typically prefer 28% or less.

FDIC Insurance

Federal Deposit Insurance Corporation coverage that protects bank deposits up to $250,000 per depositor, per bank, per ownership category.

Forbearance

A temporary pause or reduction in loan payments granted by a lender during financial hardship. Interest usually continues to accrue during forbearance.

2 terms

Gross Income

Your total income before taxes and other deductions are taken out. This is the number lenders and landlords typically use.

Grace Period

The time between the end of a billing cycle and the payment due date during which no interest is charged. Credit cards typically offer 21-25 days.

3 terms

Interest

The cost of borrowing money, usually expressed as an annual percentage of the loan balance.

Inflation

The rate at which prices for goods and services increase over time, reducing the purchasing power of your money.

Index Fund

A type of investment fund that tracks a market index like the S&P 500, offering broad diversification at low cost. A popular choice for long-term investing.

2 terms

Liquidity

How easily an asset can be converted to cash without losing value. Savings accounts are highly liquid; real estate is not.

Lien

A legal claim on an asset as security for a debt. A mortgage is a lien on your home; an auto loan creates a lien on your car.

2 terms

Minimum Payment

The smallest amount you must pay on a credit card balance each month to avoid penalties -- usually 1-3% of the balance or a flat $25, whichever is greater.

Marginal Tax Rate

The tax rate applied to your last dollar of income -- the highest bracket your income falls into. Not the rate you pay on all your income.

1 term

Net Worth

The total value of everything you own (assets) minus everything you owe (liabilities). A snapshot of your financial health.

1 term

Opportunity Cost

The potential gain you miss out on when choosing one option over another. For example, money used for a down payment could have been invested in the stock market.

4 terms

Principal

The original amount of money borrowed in a loan, not including interest.

PMI

Private Mortgage Insurance -- extra insurance you pay when your down payment is less than 20% of the home price. It protects the lender, not you.

Pre-approval

A lender's conditional commitment to lend you a specific amount, based on a review of your credit, income, and assets. Stronger than pre-qualification.

Pre-Qualification

A preliminary estimate of how much a lender might offer you, based on self-reported financial information. Less rigorous than pre-approval.

2 terms

Refinancing

Replacing an existing loan with a new one, usually to get a lower interest rate, reduce monthly payments, or change the loan term.

Roth IRA

An individual retirement account funded with after-tax dollars. Withdrawals in retirement are tax-free. Income limits apply for contributions.

2 terms

Tax Bracket

The range of income taxed at a particular rate. The US uses progressive brackets, so only the income within each range is taxed at that range's rate.

Traditional IRA

An individual retirement account funded with pre-tax dollars (tax-deductible contributions). Withdrawals in retirement are taxed as ordinary income.

1 term

Underwriting

The process a lender uses to evaluate your financial profile and determine whether to approve your loan application and at what terms.

1 term