Glossary of Financial Terms

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401(k) Plan — An employer-sponsored retirement savings plan in which employees invest part of their pay and avoid current taxes on that income. Employee contributions may be  matched by employers, and earnings are not taxed until withdrawn.


Adjustable Rate Mortgage (ARM) — an interest rate that varies, and which the lender can increase or decrease at specified intervals based on changing market conditions.

Affinity Marketing and Affinity Fraud — Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional associations. Salespeople try to gain trust within the group, and then market products/services that may be inappropriate, or worse, fraudulent.

Amortization — The gradual and systematic reduction of debt by periodic payments that include both principal and interest.

Amortization Schedule – a schedule showing the amounts of principal and interest due at regular intervals. The remaining unpaid principal balance should be provided after each installment payment.

Annual Percentage Rate (APR) — The total cost of credit, including interest, fees, and other charges, expressed as an annual rate.

Annuities — contracts between you and an insurance company in which you make a lump sum payment or a series of payments in return for regular disbursements beginning either immediately or at some point in the future. California requires individual annuity contracts for seniors to contain a disclosure regarding the surrender charge period. Make sure to comparison shop and that you understand how the annuity works, the fees and charges involved, and all other terms and conditions.

Appraisal Fee — The charge to estimate the value of property, such as a house, usually for insurance, investment, or mortgage contracts.

Arbitration — a dispute resolution process in which parties agree to be bound by the decision of a neutral third person, the arbitrator, after a hearing that covers both sides of a case or dispute, usually outside the courts.

Asset — any item that has equitable value, like a house or stock, which can be converted into cash.


Balance Inquiry — A basic banking function by which consumers can determine the balance of funds in an account via phone or personal computer.

Balloon Payment — An oversized payment due at the end of a loan.

Bankruptcy — The inability of a person or organization to pay their outstanding debts. The process begins with a petition filed by the debtor (which is most common), or on behalf of creditors.

Bankruptcy Protection  — process invoked by someone in bankruptcy; used because a bankruptcy filing in a court of law stops all collections activity and legal proceedings regarding debt and financial matters. Without bankruptcy protection, your assets may be in danger of being lost to your creditors through lawsuits and judgments.

Bond — An interest-bearing security that obligates the issuer to pay a specified amount of interest for a specified time, usually several years, before repaying the bondholder the face value of the note.

Borrower — Any person or organization that obtains funds from another for a period of time upon condition to repay. A written document is signed by both lender and borrower as evidence of the indebtedness.

Broker Dealers — also called B/Ds, they are salespeople or firms that buy and sell securities for themselves and others. Broker Dealers  must be registered with the federal Securities and Exchange Commission and the California Department of Financial Protection and Innovation. They are duty-bound to make recommendations in keeping with their client’s investment objectives and risk tolerance.


Capital — Wealth in the form of money or other assets owned by a person or organization.

Capital Gain (or Loss) — The difference between the price at which you buy an investment and the price at which you sell it. There are frequently complex tax implications associated with capital gains or losses.

Certificates of Deposit — CDs are a short-  to medium-term investments (usually one to five years) offered by banks or credit unions that pay a higher interest rate than regular savings accounts.

Certified Check — A check which guarantees payment. When a check is certified, it becomes an obligation of the bank, and the funds are immediately withdrawn from the account.

Chapter 7 — A form of bankruptcy wherein a company is required to liquidate its assets to pay off its creditors.

Chapter 11 — A form of bankruptcy that allows a company to remain in business while its owners attempt to pay its debts.

Chapter 13 — A form of bankruptcy that allows adjustments of debts for an individual with regular income. This enables an individual debtor to repay creditors over an extended period, and usually allows the debtor to retain his/her property.

Check Clearing — The process of moving cash/funds from a bank (or other depository institution) from which a check is drawn to the bank in which the check is deposited. This process results in credits to accounts at the institutions of deposit and corresponding debits to the accounts at the paying institutions.

Churning — Excessive buying and selling of stocks or other securities in a customer’s account by a broker seeking to maximize commissions, regardless of the client’s best interests.

Collateral — An asset (such as an automobile or piece of property) that a person offers to secure a loan, promising to give the asset to the lender if loan payments cannot be met. Collateral also refers to the collection of receivables, such as mortgages, which are used to back the interest and/or principal security.

Compound Interest — Interest calculated on the initial principal, including all interest accrued to a point in time.

Co-Signer — A person, other than the principal borrower, who also signs for a loan. In the event the principal borrower defaults, the co-signer(s) assumes liability to repay the loan.

Credit  — The trust which allows one person (or company) to lend money (or goods or services) to another person, where the second person repays the debt at a later date.

Credit Card — A card issued by a financial company which enables the cardholder to borrow funds. These funds may be used as payment for goods and services. A credit limit is predetermined and has the condition that the cardholder will pay back the original borrowed amount plus any additional agreed upon charges.

Credit History — A record of how a person has borrowed and repaid debt.

Credit Rating — An estimate of the amount of credit that can be extended to an individual or business without undue risk to the lenders.

Credit Report — A loan and bill payment history, kept by a credit bureau and used by financial institutions and other potential creditors to determine the likelihood that a borrower will repay future debt.

Credit Scoring System — A statistical system used to determine whether to grant credit to a potential borrower by assigning numerical scores to various characteristics related to creditworthiness. A credit score is primarily based on credit report information typically sourced from credit bureaus.

Creditor — A person, financial institution, or other business that lends money.

Creditworthiness — A creditor’s measure of a consumer’s debt history, future ability and willingness to repay debts, usually determined with a credit score.

Crypto Asset — Refers to a digital asset, which may be a medium of exchange, for which generation or ownership records are supported through a blockchain technology.


Debit Card —  A plastic payment card that can be used instead of cash when making purchases. It is similar to a credit card, except that after a transaction funds are directly withdrawn from a debit card owner’s bank account. It may also be used to withdraw cash at an automated teller machine (ATM).

Debt Service — The amount of money required over a period of time to repay debt, including repayment of principal and interest.

Default — Failure to repay a debt as set in the terms of a credit or loan agreement. When a loan is set into default status, the creditor may demand the remainder of the loan’s balance be paid in full.

Deferment — An action that allows you to temporarily pause or reduce the amount of your federal student loan payments for a specified period. Borrowers are not responsible for paying the interest that accrues during this time. Also see Forbearance.

Direct Consolidation Loan — A type of loan that allows you to consolidate (combine) multiple federal education loans into one loan. The result is a single monthly payment instead of multiple payments.

Delinquency — A situation where a borrower is late or overdue on a payment for a debt, such as  a mortgage, credit card account, or other types of loans. This differs from a default (see “Default” above) as most creditors will allow a loan to remain delinquent for a period of time before considering it in default.

Diversification — A method of balancing risk by investing in a variety of different securities. This strategy also has the opportunity to maximize investment returns.

Dividend — A portion of company profits paid to shareholders, usually in cash but sometimes in the form of additional stock shares.

Dodd-Frank Act — Federal legislation passed in 2010 as a response to the late 2000’s economic crisis, it includes a broad range of reforms affecting nearly all aspects of the U.S. financial system with the goal of preventing a repeat of the 2008 crisis, and sought to establish additional protections for consumers.


Extended Payment — A repayment plan, typically used for student loans, in which payments may be fixed or graduated, and which will ensure that the loans are paid off within 25 years.

Equity — Ownership interest in an asset after liabilities are deducted.

Effective rate – The annual interest rate that is actually earned or paid on an investment, loan or other financial product as the result of compounding over a given time period.


FAFSA – stands for “Free Application for Federal Student Aid” and is the official form used to apply for federal, state and school assistance to pay for college.

Federal Work-Study — A federal program that provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses.

Finance Charge — Also known as a Financing Fee, it is the additional cost for using credit or extending credit, generally charged as a flat fee or a percentage (interest) of the funds borrowed.

Fixed Rate — An interest rate that stays the same for the life of a loan, or for a portion of the loan term, depending on the loan agreement.

Forbearance — Allows borrowers to temporarily stop making payments or temporarily reduce monthly payment amounts for a specific period. Borrowers are responsible for paying the interest that accrues during this time for all loan types. Also see Deferment.

Foreclosure — The legal process (usually initiated by the creditor) used to attempt to recover outstanding debt secured by collateral. The collateral (generally property) is confiscated by the creditor and sold to repay this debt.

Financial Planner — An investment professional who helps clients set and achieve financial goals, through investments, tax planning, asset allocation, risk management, retirement planning and other forms of financial management.

Financial Fraud — The crime of gaining money or financial benefits by deception or lying.


Graduated Payment — A repayment plan, typically used for student loans, where payments are lower at first and then gradually increase to the point where the amount will ensure the loan(s) are paid off within 10 years (within 10-30 years for Consolidated Loans).


Home Equity —  The calculation of a home’s current market value minus any remaining loans or liens attached to it. There may be complex tax implications (see Capital Gains).


Income Driven Payment — Typically used for student loans, this is a repayment plan that sets monthly loan repayments at an amount intended to be affordable based on the borrower’s income and family size. There are four different types available and an application is required.

Individual Retirement Account (IRA) — A retirement savings and investment account that has various tax advantages. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution. Withdrawals from your IRA during retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free.

Installment Plan — A plan requiring a borrower to make regular payments at specified intervals over the life of a loan.

Interest — A fee charged for the use of borrowing or holding money. In a borrower/lender relationship, the interest is an expense to the borrower while generating revenue to the lender. In a depositor/financial-institution relationship, the interest may earn money for the depositor’s account.

Interest Rate — The percentage of interest charged for a loan, usually based on the amount of money borrowed. The interest rate can also refer to the money earned on a deposit in an account with a financial institution. See Key Interest Rates.

Investment Advisors (IAs) — People or organizations that manage clients’ securities portfolios or provide investment advice. IAs have a fiduciary responsibility to their clients – meaning their priorities are to the best interests of their client, regardless of their own. Depending on the amount of assets being managed, investment advisers are required to be registered with the SEC or the California Department of Financial Protection and Innovation.


Key Interest Rates — The specific interest rate that determines bank lending rates and the cost of credit for borrowers. The two key interest rates in the United States are the discount rate and the Federal Funds rate.


Lender — The person or entity which lends money to a borrower. Borrowers should verify with a state or federal regulator that a lender is licensed before signing a contract.

Liability — In personal finance, liability is the amount owed to a lender. Generally, liabilities may include mortgages, car and student loans, and credit card debt.

Lien — The legal right of possession a lender has to a property on which debt is owed. If the debt is not repaid, the lender can confiscate the property (car, house, etc.) and sell it to collect on the debt.

Liquidity — A measure of how easy it is to obtain and use your money. Can also mean the degree to which an asset or security can be quickly bought or sold in the market without adversely affecting the asset’s price.

Liquidity Risk — The risk when a company or bank does not have enough cash, capital or liquid assets to meet short-term financial demands. Can be referenced as when a bank cannot meet their borrower’s and/or depositor’s cash demand or when a person or company has difficulty selling their assets without incurring large losses.

Load — A sales commission charged on certain mutual funds. Different types include front-end loads (paid when shares are purchased) and back-end loads (fees paid when shares are sold). Some mutual funds have both front- and back-end loads.


Maturity — When a note, bond or other investment option is due for payment to investors or creditors.

Mortgage — An agreement to borrow money from a bank or similar organization to buy a home. Usually the house/property is used as a guarantee for the loan.

Money Market Account — Similar to checking accounts at a bank or credit union, but usually pays higher interest rates than a savings account. Minimum deposit levels are higher than checking, allows for a limited number of monthly transactions.

Money Market Fund — A mutual fund that invests in short-term corporate and government debt and passes the interest payments on to shareholders.

Mortgage-Backed Securities (MBS) — Investments or assets that are secured by a mortgage or collection of mortgages. They come in a variety of structures. For more information see the SEC page about the topic.

Mutual Fund — A professionally managed portfolio of stocks, bonds or other investments divided up into shares.


Negative Amortization — Occurs when a repayment that is made is less than the interest charged on a loan, causing the outstanding balance of the loan to increase.

Net Worth — The value of person’s or company’s total assets minus all debts or liabilities. It can be negative if someone owes more than  they have in money or other assets.

Nominal Interest Rates — The rates of interest, paid to a loan or earned through a deposit. When borrowing, it is known as the Annual Percentage Rate (APR) that lenders usually advertise. In this situation, borrowers should also consider the effective rate. When investing, investors should consider inflation and the real rate of return.


Office of the Comptroller of the Currency (OCC) — Under the U.S. Treasury, the OCC regulates all national banks, federal branches, and agencies of foreign banks.

Office of Thrift Supervision (OTS) — Under the U.S. Treasury, the OTS is the primary federal regulator of all federal- and state-chartered savings institutions that belong to the Savings Association Insurance Fund (SAIF).

Open-End Credit — A line of credit that may be used repeatedly up to a certain limit, also known as a charge account or revolving credit.

Open-End Lease — A type of rental agreement that forces the lessee (the person making lease payments) to make a balloon payment at the end of the lease agreement amounting to the difference between the fair market value of the asset and your cumulative lease payments. Open-end leases are also called “finance leases.”

Overdraft Checking — A checking account with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.

Opportunity Cost — The cost of passing up on an investment in favor of another.


Points — For stocks, points refer to how much shares cost and for calculating changes in their value. For mortgages, points are a lump sum payment made by the borrower to the lender at closing in return for a lower interest rate. Generally, each point equals 1 percent of the loan amount. Below are some types of points:

  • Discount points — Sometimes, buying mortgage points (also known as prepaying the interest) when you buy a home can save you significant money over the term of your loan. But it’s important to understand how discount points work and how long it takes for the additional upfront cost to be worthwhile.

  • Seller’s Points — In order to make a home loan cost less for the buyer, the seller pays a lump sum to the to the lender financing the loan.

  • Origination Points — Covers the lender’s cost of processing the loan. Lenders may use different terms like maximum loan charges or loan discounts.

Prepaid Card — A charge card that provides access to money, which was loaded onto it in advance. Types include “non-reloadable” prepaid cards, which cannot be used once the initial funds on the card have been exhausted, and “reloadable” prepaid cards, which allow holders to add additional funds and continue using the card.


Prime Rate — The interest rate that banks charge preferred customers, or those with the highest credit ratings. It is used to determine borrowing costs on many short-term loan products.

Principal — Most commonly refers to the initial amount of a loan; but can also refer to the amount still owed on a loan.

Promissory Note — A written promise by a borrower to repay the money borrowed plus interest by a certain date. This is a legal contract.

Ponzi/Pyramid Schemes — Named after Charles Ponzi, these are fraudulent investment schemes which promise high returns and low risk. Promoters typically pay early investors by using money collected from newer investors. All Ponzi schemes eventually collapse because the number of new investors needed to pay earlier investors becomes unachievable, thus later investors typically lose all of their money.

Portfolio — The collection of all your investments.


Real Interest Rates — Interest rates adjusted for the expected erosion of purchasing power resulting from inflation. Technically defined as nominal interest rates minus the expected rate of inflation.

Refinance — To repay a loan by taking out another loan. Usually done to get a lower interest rate. Refinancing also resets the the repayment period. A consumer might change a four-year loan to a ten-year loan with lower interest and monthly payments. Caution is advised as some new loans may not be good for the borrower. Always verify the license of the lender offering refinancing services.

Renegotiable Rate — A type of home mortgage where monthly payments stay the same for a term, usually of three to five years, while the loan’s interest rate is renegotiated at the end of every term until the loan is paid off. Also called a “rollover mortgage.”

Risk Tolerance — The degree to which an investor is willing to risk losing some (or all) of their original investment in exchange for a chance to earn a higher rate of return. In general, the greater the potential gain from an investment, the greater the risk of losing money or value.


Service Charge — A service charge or a penalty, usually by a bank, such as an ATM fee or an overdraft fee.

Short-term Interest Rates — An interest rate on short-term borrowings or fixed income assets with a maturity of less than one year. This rate is usually lower than those of longer-term investments, and is also known as the “money-market rate” and the “treasury bill rate”.

Simple Interest — Interest that is based on, and paid on, only the original amount of money that was borrowed or invested, and not on any accumulated debt or earnings. On a simple interest loan, the payment first goes toward that month’s interest, and the remainder goes toward the principal. Each month’s interest is paid in full so it never accrues.

Securities — Any investment opportunity in which the investor has a reasonable expectation of making a profit as a result of the managerial or entrepreneurial efforts of others, but where the investor generally has little power over management and limited access to the enterprise’s business records. As a general rule, all securities products and the people who sell them in California must be registered with the California Department of Financial Protection and Innovation (or DFPI).

Standard Payment – The equal installments of monthly payments required to pay off a loan over the set term at the current interest rate.

Stock — A share that represents ownership in the company that issues it. The price of a company’s stock goes up and down, usually depending on the value of the company and how investors speculate the company will perform in the future.



T-Bond — See U.S. Treasury Bonds.

Term — The time frame or period from when a loan (or other contract) is issued until it is fully paid.

Terms — Conditions and requirements included in a loan agreement that usually specify the loan amount, term, interest rate, and other enforceable conditions agreed to by the borrower and the lender.

Thrift Institution — A general term encompassing savings banks, savings and loan associations, and credit unions. These institutions primarily accept consumer deposits and make home mortgages.

Transaction Account — A bank account from which payments can be made to a third party. The most common type is a checking account where one can write a check or use a debit card to deduct an amount from the account and give it to a third party.

Truth in Lending Act (TILA) —The Federal Consumer Credit Protection Act passed in 1989 requiring disclosures of credit terms using a standard format. The law protects consumers against inaccurate and unfair credit billing and credit card practices. It also requires lenders to provide consumers with loan cost information so that they can comparison shop for certain types of loans.

Time Value of Money — The idea that money today is worth more than the same amount in the future, due to its potential earning power.



U.S. Treasury Bonds —  Also known as “T-Bonds,” these are fixed-interest bonds issued by the U.S. government with a maturity of more than 10 years. These bonds pay its investor interest which are only taxed at the federal level and are generally considered low-risk investments as its issuer (the U.S. government) has a low risk of default.



Variable Rate — Unlike a fixed-rate agreement, a variable rate agreement has an interest rate that may change (up or down) over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.

Virtual Currency — Also known as “digital currencies,” this is a digital representation of value that is used as a medium of exchange, a unit of account, and/or a store of value used mostly as a way for people to track, store, and send payments over the Internet. Beware: virtual currencies are not backed by any government or central bank and do not have legal tender status in the United States.


Wraparound —  A loan where the borrower refinances a previous loan at an interest rate between the current market rate and the interest rate at which the first loan was made, which is hopefully lower. This allows the borrower to refinance the first loan without being forced to accept a significantly higher interest rate.


Yield —  The income an investor receives from an investment. The yield is calculated as the coupons or dividends the investor receives in a year, expressed as a percentage of the cost of the investment.

Approved by Kue Lee 7/2019

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Last updated: Jun 1, 2022 @ 2:47 pm