Debt a Glossary of Terms

Bankruptcy - Having been legally declared financially insolvent. There are two types of bankruptcy - liquidation, in which your debts are cleared (discharged) and reorganization, in which you provide the court with a plan for how you intend to repay your debts.

Collateral - Property acceptable as security for a loan or other obligation.

Collection Agency - A company hired by a creditor to collect a debt that it is owed.

Contract - An agreement between two or more parties, usually written down and enforceable by law .

Cosigner - To endorse (another's signature), as a loan agreement, lease or credit application. If the primary debtor does not pay, the cosigner is fully responsible for the loan or debt.

Credit Bureau - An organization to which business firms apply for credit information on prospective customers.

Credit Report -An account of your credit history, prepared by a credit bureau. A credit report will contain credit history, such as what you owe to whom and whether you make the payments on time, as well as personal history, such as your former addresses, employment record and any lawsuits in which you have been involved.

Creditor - A person or entity (such as a bank) to whom a debt is owed.

Debtor - A person or entity (such as a bank) who owes money.

Debt to Income Ratio - Most mortgage lenders use this ratio to analyze your financial well-being. It is figured by using your monthly debt divided by your monthly income. The lower the percentage the better your financial picture.
This is often referred to as credit worthiness.

Default - To fail to pay money when it is due. A default on a mortgage or loan takes place when you fail to make the loan payments on time, fail to maintain adequate insurance or violate some other provision of your agreement with the mortgage / loan company.

Discharge (of debts) - A court's writing of off the debts of a person or business that has filed for bankruptcy.

Dischargeable Debts - Debts that can be erased by going through bankruptcy.

Down Payment - A cash payment made by a buyer when they purchase a property.

Equity - An increase in the value of your home or decrease in the loan amount on your home creates equity. Equity is the difference between what is owed on your home and the sale value. Most home equity lenders will allow you to borrow up to 80% of that value.

Fair Isaac and Company - Fair Isaac is the company responsible for creating the popular FICO score. This three digit score is created using information from your credit report and ranges from 300-850.

Foreclosure - The forced sale of property to pay off a loan on which the owner of the property has defaulted.

Garnishment - A court order directing a third party who holds money or property belonging to a defendant to withhold it and appear in court to answer inquiries.

Grace Period - A period of time during which you are not required to make payments on a debt.

Guarantor - A person who makes a legally binding promise to either pay another person's debt or perform another person's duty if that person defaults or fails to perform.

Interest - A commission you pay a bank or other creditor for lending you money or extending you credit. Usually calculated as a percentage of the mortgage or loan.

Lien - The right to take and hold or sell the property of a debtor as security or payment for a debt or duty.

Loan Consolidation - The combining of a number of loans into a single new loan. Usually done to gain more favourable terms e.g. lower cost repayments or longer time to pay.

Principal - A sum of money owed as a debt, upon which interest is calculated. If you purchased an item for $100 on your credit card that would be the principal balance.

Repossession - A creditor's taking of property that has been pledged as collateral for a loan.

Secured Debt - A debt on which a creditor has a lien. A car loan would be an example of secured debt.

Term - The time required to repay a loan.

Unsecured Debt - A debt that is not tied to any item of property. Credit card debt is an example of unsecured debt.

About the Author
1st Finance Guide features help and advice on debt consolidation amongst other general finance matters.

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Darren Yates