Common Terms Related to Debt and Loan Consolidation

Adjustable rate mortgage (ARM): This type of loan features an interest rate that fluctuates during the term of the loan in accordance with changes in the index rate, which in turn is determined by current market conditions.

 

Agreement: An understanding between a client and, in this case, any financial institution that is in writing and principally concerns the management, modification, or resolution of a debt.

 

Amortization: A debt repayment process whereby borrowers make periodic, monthly mortgage payments of interest and principal over the course of a fixed number of years.

 

Annual percentage rate (APR): Also referred to as the “finance rate”, this represents the total cost of credit including interest, points and loan fees and is expressed in the form of an annual percentage rate. Pursuant to the Federal Truth in Lending Act, creditors must conspicuously disclose the APR in all consumer credit agreements.

 

Arbitration: A negotiation method used to settle a dispute or arrive at a resolution without the need for a formal legal action like a trial or court hearing. Also known as mediation.

 

Bad credit: This is also referred to as a low credit score or a poor credit rating. Factors contributing to bad credit include bankruptcy filings, county court judgments, payments in arrears, late payments, and over-the-limit credit card usage.

 

Bad credit debt consolidation loan: This loan product enables consumers with a bad or poor credit history to pay off high-interest debt with a single loan resulting in one lower monthly payment and a lower interest rate. Bad credit debt consolidation loans provide borrowers the opportunity to settle their debts quicker and to repair their credit rating.

 

Bad credit payday loan: This small, unsecured loan, which is typically due in two weeks or on the borrower’s next payday, provides quick emergency funds to consumers who are temporarily cash-strapped. Bad credit payday loans may be obtained without a credit check, that is, without regard to an applicant’s credit history. Therefore, individuals whose credit report is tarnished by bankruptcy, defaulting payments, or county court judgments may avail themselves of this source of funding.  

 

Bad credit personal loan: This type of personal loan tides borrowers over in emergency situations and may be utilized for any purpose. Examples include extra cash in the consumer’s pocket, debt consolidation, unforeseen expenses, and budget-balancing. A bad credit personal loan is particularly useful for applicants with thorny credit issues such as bankruptcy or with no credit or poor credit. 

 

Balloon payment: One large lump sum that covers the balance due and that a borrower pays at the close of a balloon mortgage.

 

Bankruptcy: In this federal court proceeding, the assets of an insolvent debtor are sold and the proceeds distributed to lenders. Bankruptcy relieves the debtor of his or her liabilities.

 

Budget: A revolving financial plan usually based on one month of spending that looks at both income and expenses with the goal of allocating funds to meet expenses. Often in financial counseling, a budget is worked out as an aspect of debt resolution.

 

Cash advance loan: Alternatively known as paycheck advances, payday advances, and payday loans, this short-term form of credit helps cash-crunched consumers bridge the gap between pay days and cope with a financial emergency. Payday cash advance loans are generally for an amount ranging from $1,000 to $1,500 and must usually be repaid in two weeks. 

 

Cash-out refinancing: This involves getting a mortgage refinance on your original home loan for a higher amount and receives the remaining balance as cash for other purposes.

 

Chapter 7 bankruptcy: Also referred to as “straight bankruptcy”, this form of bankruptcy involves the liquidation of as much of the debtor’s property (unsecured debt) as possible, while reserving him or her sufficient assets to start on a clean slate.  

 

Chapter 13 bankruptcy: This type of bankruptcy is often referred to as “reorganization”, and it involves a repayment plan that sets forth with specificity the manner in which debtors will settle their debts over three to five years. The minimum amount of payment required depends on the debtor’s income, balance, and the amount that unsecured lenders would have been paid if the former had filed for Chapter 7 bankruptcy.

 

Collateral: Also known as security, this is defined as the assets that a consumer pledges to obtain a loan or other form of credit and that may be seized by the lender upon the former’s default.

 

Credit card debt consolidation loan: Borrowers may pay off the balances on several credit cards and save as much as 50% by taking out a credit card debt consolidation loan. This type of loan combines credit card debts into a single low monthly payment with a low rate of interest.

 

Credit card debt management company: This company helps consumers lower their debt by negotiating with creditors to reduce or waive the interest rate and credit card fees and effectively managing their assets. A credit card debt management company also creates debt management plans (DMPs) whereby clients deposit monthly installment payments into an account, which the company then uses to pay off the latter’s creditors. Credit debt management companies can settle consumers’ debts for almost fifty percent of the balance.

 

Credit check: This process involves a review of a borrower’s credit history by a lender prior to the extension of credit. Basically, a credit check helps lenders determine an applicant’s creditworthiness and ability as well as willingness to repay debts. Credit checks reveal a borrower’s payment history (i.e. non-sufficient funds checks, late payments) and other information alerting the creditor of the level of risk that the former poses. 

 

Credit counseling agency: This organization helps borrowers manage their finances and create a workable budget, negotiates with the latter’s creditors to lower interest and waive finance charges, and creates debt repayment plans for its clients.

 

Credit rating: Also known as a credit score, this number ranging from 300 to 900 is assigned by credit bureaus on the basis of a consumer’s creditworthiness- calculated by examining the latter’s payment history, present financial condition, and risk profile (i.e. bankruptcy, foreclosure).

 

Credit repair: Borrowers undertake this process by 1) ensuring that information in their credit reports is accurate, 2) disputing erroneous items with the credit reporting agencies, and 3) developing a spending plan to lower their debt and raise their credit score (i.e. maintaining current balances below 40% of their credit limit).

 

Credit report: A record of a borrower’s credit history (i.e. late payments, prior debts, balances) and public records that is issued by credit reporting bureaus Experian, Equifax, and Trans Union and that assesses creditworthiness.  

 

Credit score: This credit rating which typically ranges between 300 and 850 and is found in credit reports provides an assessment of a borrower’s creditworthiness and his or her risk profile. Factors utilized to calculate a consumer’s credit score include credit history, amount and type of credit used, amount of unpaid balance(s), judgments, and bankruptcy.

 

Credit settlement company: This debt-resolution entity engages in negotiation with lenders to halt collection calls, significantly reduce their clients’ balances, and settle the debt for a lower sum than what is due. Once the debt is settled, the lender informs the credit reporting agencies that the balance has been ‘settled’, ‘paid’ or ‘settled for less than full amount’.

 

Debt consolidation calculator: This tool helps borrowers calculate the monthly payment and savings that may be reaped through consolidation by entering their current loan amounts, outstanding debt, and interest rate.

 

Debt management plan (DMP): A DMP requires borrowers to deposit monthly funds with a credit counseling agency, which disburses them to creditors for purposes of paying off the former’s outstanding debt. DMPs, which typically last 36-60 months, benefit consumers by reducing collection calls and waiving finance charges.

 

Debt settlement: Also referred to as debt negotiation, this is an agreement between a creditor and a debtor for a lump sum settlement of the debt for less than the balance owed. To pay their debts, borrowers make one monthly installment to a debt settlement firm, which in turn places the funds in a trust account and then disburses them to the different creditors in question.

 

Debt-to-income ration: This is the relationship between a person’s monthly earnings or income compared to their outstanding financial obligations. It is typically expressed as a percentage.

 

Default: This occurs when a borrower fails to pay the interest or principal on a loan by the due date.

 

Enrolled agent (EA): This federally-licensed tax specialist prepares tax returns for individuals, corporations, partnerships, trusts, estates and other tax-reporting organizations. An Enrolled Agent is also authorized to advise and represent taxpayers before the Internal Revenue Service for appeals, collections, and audits.

 

Equity: This represents the owner’s interest in the real property or the property’s market value less the amount of any encumbrances (i.e. liens, loans) secured by the real estate.

 

Fair Credit Billing Act (FCBA): This federal legislation is applicable to revolving charge accounts such as retail store accounts, credit cards, and other forms of “open end” credit accounts. Credit card issuers are required to follow a specific procedure when addressing billing disputes on the part of credit card borrowers. Pursuant to the FCBA, credit card companies must investigate and resolve disputes concerning billing.

 

Fair Credit Reporting Act (FRCA): This federal law aims at ensuring that the data contained in consumer reports is complete and accurate, and that it is kept confidential. Borrowers are entitled to review their credit report and to have erroneous statements corrected.  

 

Fannie Mae (FNMA): Also known as the Federal National Mortgage Association, this government-authorized private enterprise buys home mortgages at discounted costs from the original mortgage creditors and then sells them in the secondary mortgage market. Fannie Mae, whose stocks are active on the New York Stock Exchange, operates as a funding source for mortgage lenders.

 

Faxless payday loan: This type of loan may be obtained by completing a quick online application and without having to fax any documents. Faxless payday loans provide fast cash and are available without a credit check.

 

Finance charge: This represents the total cost of taking out a loan or other form of credit and consists of the ensemble of fees that are tacked on to the original loan amount. Finance charges include balance transfer fees, late fees, service fees for transactions, and interest charges.

 

Financial planner: This professional helps clients develop a plan for realizing their financial objectives and provide an assessment in almost every financial area ranging from estate planning, retirement, and taxes to insurance, investments, and savings. A financial planner also assists borrowers in limiting expenditures, freeing up cash, lowering their taxes, and setting up personal budgets.

 

First-time buyer loan: This is a financing vehicle for eligible borrowers, typically consumers who have never owned a home. A first-time buyer loan offers financial aid in a number of ways including 1) deferment of payments, 2) waiver of or very low down payment, 3) restriction on the fees that creditors may charge, 4) loan forgiveness, 5) offer of grants, or 6) partial or complete subsidization of interest charges.

 

Fixed rate mortgage: A type of home loan where the rate of interest remains constant throughout the term of the loan, usually 15 or 30 years.

 

Foreclosure: This is the legal proceeding by which the property of an owner who has defaulted on his or her loan payment is sold to satisfy the debt.

 

Freddie Mac (FHLMC): Commonly known as the Federal Home Loan Mortgage Corporation, this Congressionally-authorized institution purchases eligible residential mortgages from creditors and sells them in the secondary mortgage market.

 

Garnishment: This is a forced method of repayment of debts in which funds are deducted from the debtor’s wages to pay down a debt. Often used by the federal government to recover unpaid taxes.

 

Hardship deferment: To be eligible for a hardship deferment, a debtor must show that the IRS levy is preventing him or her from meeting his daily essential needs. A hardship deferment will put an end to collectors’ calls for a minimum duration of one year.

 

Home equity line (HELOC): Also referred to as a second mortgage, this loan makes it possible for consumers to borrow against their equity in their homes for a specified term and up to a pre-set maximum sum. It is the borrower’s equity in the property and the HELOC’S maximum loan-to-value that determine the maximum amount.

 

Home equity loan: With this type of loan, homeowners may obtain funding that is secured by the equity in their homes. Borrowers may utilize a home equity loan for multiple purposes, such as consolidation of high-interest debt, home improvement, emergency cash needs, and major expenditures.

 

Installment payment plan: Taxpayers may, under certain circumstances, enter into an installment agreement with the IRS to pay off the balance through an installment payment plan. They must inform the IRS of the date they intend to submit their monthly payment and of the amount of their proposed monthly payment. An electronic payment plan is available for taxpayers with a balance due of $25,000 or less.

 

IRS levy: This constitutes seizure and sale of a taxpayer’s property by the IRS to collect a debt owed to it. The IRS may claim monies by selling the delinquent taxpayer’s assets, garnishing his or her wages, or seizing his or bank account.

 

Jumbo mortgage: Also referred to as a “non-conforming” home loan, this mortgage does not qualify for sale to Freddie Mac or Fannie Mae due to different reasons such as underwriting guidelines, loan features, and most commonly, the loan amount.

 

Loan-to-value ratio (LTV): This represents the relationship, expressed in terms of a percentage rate, between the loan amount and the purchase price of real estate offered as collateral. The LTV indicates the amount of equity that a borrower will have in a piece of real estate.

 

Maturity date: This is the date that the last loan payment is due in full. For payday loan borrowers, the maturity date is the following payday.

 

Minimum Payment: This is the smallest amount of money a creditor is willing to accept on a debt to avoid default on the obligation

 

Mortgage rate: The interest rate that a consumer pays to obtain a mortgage or borrow funds from a lender to purchase his or her home.

 

Mortgage refinance loan: A new loan that replaces one or more current debts or loans and that is secured by the same property or assets.

 

Mortgage refinance points: This one-time, upfront fee constitutes a percentage of a borrower’s loan, with one point being equivalent to one percent of the loan amount.

 

Not currently collectible: The IRS may classify a taxpayer’s status as “currently not collectible” if the taxpayer shows an inability to pay his or her tax debts. Upon determining that a taxpayer is currently not collectible, the IRS is obligated to cease collection efforts such as garnishments and levies.

 

Offer in compromise: Delinquent taxpayers may submit an offer in compromise by showing 1) uncertainty as to the tax’s accuracy, 2) uncertainty as to their ability to pay the outstanding tax liability in its entirety, or 3) the injustice or significant economic hardship that payment of the tax would impose. The IRS will accept a proposed settlement if it seems unlikely that the tax debt can be collected in full and the offer in compromise is an equitable.  

 

In order for the IRS to grant an Offer in Compromise, a tax debtor must establish one of the following grounds:

 

  • Doubt as to the correctness of the tax;
  • Doubt as to whether he or she will be able to pay the tax liability in full; or
  • Payment of the tax would be unfair or impose a considerable economic hardship.

 

An Offer in Compromise will be accepted by the IRS when there is little chance that the outstanding debt can be collected in its entirety, and the proposed settlement is an equitable representation of the collection potential.

 

Partial Payment Installment Agreement: This tax debt settlement arrangement enables taxpayers to have a portion of their tax liability forgiven upon satisfying the terms of an installment agreement. Because the tax debtor’s monthly payments to the IRS are not a full pay-off of the debt, this type of settlement is referred to as a partial payment installment agreement.

 

Payday loan: This short-term loan, which is offered on a two-week basis and generally ranges between $100 and $500, helps individuals cover emergency expenses or tides them over until the next payday. Typically, the finance charge per $100 borrowed is $25.

 

Penalty abatement: Through this tax debt resolution method, a tax debtor challenges interest and penalties for a specific length of time. Taxpayers may request a penalty abatement on the basis of 1) an administrative waiver (i.e. bad advice from a tax practitioner), 2) reasonable cause (i.e. a death in the family), or 3) an IRS error.

 

Private mortgage insurance (PMI): Insurance that a lender requires borrowers to purchase when the latter are unable to make a down payment in an amount equal to or greater than the purchase price. PMI protects mortgage lenders from a borrower’s default.

 

Revolving Credit: In a credit agreement of this nature, the borrow can draw money up to a predetermined level so long as some of the borrowed money is repaid according to an agreed upon schedule. The most common forms of revolving credit are credit cards and home equity loans of credit.

 

Rollover: Many payday lenders offer borrowers the option of rolling over or renewing their loan on the due date. By paying the finance charges until the next payday or for the next two weeks, the borrower is allowed to extend or renew the cash advance loan.

 

Secured Credit: In a secured credit loan an asset is put forward as collateral and may be seized if the debt is not paid. An example would be the dwelling itself in the instance of a mortgage or the vehicle in an auto loan.

 

Student loan consolidation: This repayment tool combines a borrower’s multiple student loans into a single loan, which results in substantially lower monthly payments and interest rates and in a longer repayment period. With student loan consolidation, borrowers have only one monthly student loan payment to make, instead of different payments to various lenders. Students may avail themselves of student loan consolidation for most federal loans, such as Perkins, Stafford, and Direct loans and for private education loans

 

Tax debt attorney: This tax professional specializes in assisting debtors to resolve a wide range of IRS tax issues including the following: 1) back taxes, 2) payroll problems, 3) appeals, 4) IRS penalties, 5) unfiled tax returns, 6) wage garnishment, 7) liens and levies, and 8) unmanageable monthly payments. Tax debt attorneys provide audit representation, negotiate payment plans on behalf of their clients, and help borrowers settle their tax liability through an offer-in-compromise or for a fraction of the debt.

 

Tax debt settlement: A tax resolution method available through the federal government. Tax debtors may utilize one of numerous programs offered by the government, such as penalty abatement, an installment agreement, and an offer-in-compromise.

 

Tax deduction: This represents an amount that lowers a taxpayer’s income and consequently the tax to be paid. Tax deductions, which are expenses that debtors may subtract from adjusted gross income, include charitable contributions, mortgage interest, and medical expenditures

 

Tax lien: The IRS or a local taxing authority may file a claim against a defaulting tax debtor’s property or assets for overdue or delinquent federal income or real estate taxes. Taxpayers may be subject to a tax lien if they fail to pay income, estate, county, and/or city taxes.

 

Third Party Administered (TPA) note: Borrowers who utilize the services of a debt consolidation company will find a Third Party Administered mark on their credit report for any debts the latter helped resolve. This mark shows prospective lenders that the applicant experienced financial hardship in the past but displayed a sense of responsibility by seeking to resolve it in a timely and efficient way.

 

Truth in Lending Act (TILA): This federal law aims at protecting the public against unfair and erroneous credit card practices and credit billing. TILA requires creditors to disclose loan terms, such as interest rates, outstanding loan payments and their due dates, and the total loan amount

 

Uniform Consumer Credit Code (UCCC): This law sets guidelines for credit transactions, limits wage garnishment, and protects consumers from predatory lenders. The UCCC requires lenders to disclose loan terms to borrowers and oversees some debt collectors. It establishes the maximum amount that borrowers may be charged for credit and makes it unlawful for lenders to discriminate on the basis of marital status or gender when extending credit.

 

Unsecured Credit: An unsecured credit is not backed by an asset that may be seized in lieu of payment. As a consequence, interest rates on unsecured loans are higher, and the amount of money that can be borrowed is less. The most typical form of unsecured credit in use are credit cards.

 

Usury laws: These state laws establish a ceiling on the interest rate that lenders may impose on different types of loans, such as payday loans.