Loan terms glossary
Plain-language definitions of the terms that show up in loan agreements, payoff statements, and refi paperwork. Each entry has a worked example and links to the relevant calculator.
Start here. For most cost decisions, the calculator that does the heavy lifting is the effective APR calculator — it converts whatever rate-and-fee combination a lender quotes you into a single comparable number. For most payoff-vs-refinance questions, the refinance vs. prepay guide covers the math without you needing to model it yourself.
The cost of borrowing
Every loan has a price tag, and the price isn't just the headline rate. These terms describe what borrowing actually costs — interest accrual, fees baked in, and the penalties some lenders charge if you try to pay off early. Use these when you're comparing two offers and the rates alone don't explain the cost gap.
APR (Annual Percentage Rate) →
The yearly cost of a loan expressed as a percentage, including interest and certain fees. Higher APR = more expensive loan.
Interest →
The price you pay to borrow money, expressed as a percentage of the unpaid balance. On most loans, interest accrues daily on whatever you still owe.
Prime rate →
The benchmark rate U.S. banks charge top commercial customers. Most variable-rate loans — HELOCs, SBA 7(a), credit cards — are priced as Prime plus a margin.
Percentage points (vs percent) →
An absolute difference between two percentages. A rate moving from 5% to 7% is a 2 percentage point change — but a 40% increase in percent terms.
Factor rate →
A pricing model used by merchant cash advances and some online business loans where you owe principal × factor regardless of payoff timing.
Origination fee →
A one-time fee a lender charges to process and underwrite a new loan, expressed as a percentage of the loan amount and usually deducted from the disbursement.
Prepayment penalty →
A fee some lenders charge when you pay off a loan earlier than the agreed term, designed to recoup expected interest.
How loans amortize
How a loan's balance shrinks month by month, and the levers that change the math. Use these when you're modeling extra payments, picking between a short and long term, or trying to move your payoff date earlier.
Amortization →
Paying off a loan with equal payments split between interest and principal, with the split shifting toward principal as the balance shrinks.
Principal →
The original amount of money borrowed on a loan, before interest. Each principal payment reduces the actual loan balance.
Capitalized interest →
Unpaid interest that gets added to the principal balance, increasing the loan's true size. Common on student loans during deferment.
Extra payment →
A payment above the required monthly amount. Properly applied, it reduces principal directly and saves the future interest that amount would have accrued.
Biweekly payments →
Half the monthly amount every 2 weeks — 26 payments per year, equal to 13 monthly. Saves interest only if the servicer applies each partial to principal.
Refinancing →
Replacing an existing loan with a new one, usually at a lower rate or different term. The old loan is paid off in full by the new one.
Mortgage-specific terms
Concepts that show up specifically in home-loan paperwork. Use these when you're reading a closing disclosure, trying to figure out when your PMI drops off, or sizing up a loan offer.
Loan-to-Value (LTV) ratio →
The ratio of a loan balance to the appraised value of the underlying asset. Lower LTV = less risk for the lender, often better terms.
PMI (Private Mortgage Insurance) →
Insurance lenders require on conforming mortgages with under 20% down. Two cancellation paths: request at 80% LTV, or automatic on the scheduled 78% date.
Fannie Mae and Freddie Mac →
Two government-sponsored enterprises that buy mortgages from banks, bundle them into bonds, and resell them. The reason the 30-year fixed-rate mortgage exists.
This glossary is curated by financial function rather than alphabetical order, because the order you'll need these terms isn't A-to-Z — it's by the question you're trying to answer. Each entry stays definition-tight here; the long-form math, decision tables, and worked examples live on the calculators and guides linked from each term. If a term you searched for isn't in the list above, it's probably either too niche to belong in a payoff-math glossary or important enough to be a full guide of its own.