Loan Glossary

Bad debt – this is a debt that the creditor has not been able to collect from the borrower, this makes it worthless to the lender

Business plan – this is a document that details of a business – where it is right now and how it foresees itself in the future. A business plan is an important document to have when applying for a business or start up loan.

Capital – all of the assets of company that is used in running or operating a business

Collateral – these are the assets that a borrower commits to the lender as security in paying off the loan. In case the borrower reneges on his commitment then the collateral will be acquired by the lender

Repayment period – This is the span of time when you can take out a loan.

Secured loan – A secured loan is named as such because the loan is covered by collateral that the borrower owns. This reduces the risk on the part of the lender.

Unsecured loan – This a type of loan that is not covered by a collateral. A lender is exposed to more risk, thus it is rarer for a lending company to issue an approval for an unsecured loan application.

Debt – This is the amount that is owed from a lending institution. A debt could be owed to a number of different entities – organizations, individuals, lending institutions or banks. Strictly speaking, a debt is usually secured by a note, bond or any other instrument that specifically spells out the repayment details as well as the interest imposed on it. This note is, in turn, secured by lien put on a property or other types of assets.

Debt service – This is the payment amount that is asked for in order to fulfill a debt agreement. This kind of financial obligation can be done on a monthly, quarterly or even yearly basis.

Default – This is the term used for failing to fulfill an obligation. The term default is most commonly used as a way of describing an event where in the rights of one party in an agreement or legal dispute is cut short. For instance, a borrower who fails to pay the monthly payments expected of him in a loan agreement is said to have defaulted on the payments.

Loan agreement – this a contract that is agreed on by a lender and a borrower. This agreement, usually in written form, details the rights and obligations of each party with regards to the loan.

Portfolio – This is a combination or collection of assets that are being kept because of its investment potential and benefits – measured in both financial and non-financial aspects. The mixture of assets are usually varied in both the type and the size as a way of keeping an acceptable risk for the portfolio owner as well as maintaining an acceptable level of return.

Principal – this is a term used to refer to the amount that is received, in this instance, for a loan. It is from the principal amount that the interest will be added.