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What Is a Down Payment? A down payment is the amount of money you pay upfront when purchasing something with financing. Instead of borrowing 100% of the purchase price, you contribute some of your own money and borrow the rest. For example, imagine you purchase a home for $300,000 and make a 20% down payment. Your down payment would be: $300,000 × 20% = $60,000 That means you would need to finance the remaining $240,000.

What Is an Installment? An installment is one of a series of scheduled payments used to repay a debt or complete the purchase of something over time. Instead of paying the entire amount upfront, you divide what you owe into smaller payments—usually made weekly, monthly, quarterly, or annually. For example, suppose you borrow $20,000 to purchase a car and agree to repay the loan over five years. Rather than paying $20,000 immediately, you make monthly installments over thos

What Is Principal? In lending, principal is the amount of money you actually borrow. Suppose you buy a $300,000 house and make a $60,000 down payment. You borrow the remaining $240,000. That $240,000 is your original principal. But your mortgage payment doesn’t simply repay the $240,000. Part of your payment goes toward interest—the price you pay the lender for using their money—and part goes toward reducing the principal. That distinction matters.

What Is a Balloon Payment? A balloon payment is a large, lump-sum payment due at the end of a loan term. With a traditional fully amortizing loan, your monthly payments are calculated so that the entire loan balance is gradually paid off by the end of the loan. With a balloon loan, your regular payments may be calculated using a longer repayment schedule, but the actual loan term ends much sooner. The remaining balance then becomes due all at once...

What Is an Adjustable-Rate Mortgage (ARM)? An Adjustable-Rate Mortgage (ARM) is a home loan with an interest rate that can change over time. Unlike a fixed-rate mortgage, where your interest rate stays the same for the life of the loan, an ARM typically begins with a fixed introductory rate for a certain number of years. After that introductory period ends, the interest rate adjusts periodically based on market conditions and the terms of the loan.

What Is a Fixed-Rate Mortgage? A fixed-rate mortgage is a home loan with an interest rate that stays the same for the entire life of the loan. If you take out a 30-year mortgage at a 6.5% fixed interest rate, that 6.5% rate doesn't change—even if mortgage rates later rise to 8% or fall to 4%. Because the interest rate remains fixed, your monthly principal and interest payment also remains the same. One important distinction: your total monthly housing payment can still ch

What Is an Interest-Only Loan? An interest-only loan is a loan that allows you, for a certain period of time, to make payments that cover only the interest being charged on the debt rather than paying down the principal balance. In other words, you’re paying the lender for the privilege of borrowing the money, but you’re not necessarily reducing how much you owe. Suppose you borrow $200,000 at 6% interest and the loan allows interest-only payments.

What Is a Payday Loan? A payday loan is a short-term loan designed to provide a borrower with cash until their next paycheck. These loans are usually for relatively small amounts of money and are often marketed as a quick solution for an unexpected expense or temporary cash shortage. The appeal is easy to understand: you need $500 today, payday is still a week away, and a payday lender is willing to give you the money quickly. The problem is the cost.

What Is a Personal Loan? A personal loan is money borrowed from a bank, credit union, or online lender that is usually repaid through fixed monthly payments over a set period. Unlike a mortgage or auto loan, most personal loans are unsecured. That means the loan is not backed by collateral such as your house or car. Because the lender has no property to repossess if you stop paying, unsecured personal loans may come with higher interest rates.

What Is a Student Loan? A student loan is money borrowed specifically to pay for education-related expenses, such as tuition, fees, books, supplies, and sometimes living expenses. Like other loans, the money eventually has to be repaid, usually with interest. Student loans generally fall into two categories: Federal student loans and Private student loans.

Buying a car is one of the largest purchases most people make outside of buying a home. And unless you’re paying cash, there’s a good chance an auto loan will be part of the deal. But understanding how an auto loan really works can potentially save you thousands of dollars over the life of the loan. What Is an Auto Loan? An auto loan is money you borrow specifically to purchase a vehicle...

You’ve probably heard someone say, “I’m thinking about refinancing my house.” But refinancing isn’t limited to mortgages—and understanding when and why to refinance can potentially save you thousands of dollars. What Does “Refinance” Mean? To refinance means to replace an existing loan with a new loan, usually because the new loan offers better terms. In simple terms, you’re saying: “I already owe this money, but I think I can find a better way to borrow it.”

What Is a Mortgage? A mortgage is a loan used to purchase real estate, with the property itself serving as collateral for the loan. In simple terms, a lender provides the money needed to purchase the property, and you agree to repay that money over a specific period of time—often 15, 20, or 30 years. Your monthly mortgage payment will typically include some combination of: - Principal – the amount that reduces what you owe. - Interest – the cost of borrowing the money...

What Is a Loan? A loan is money that one person or organization—usually a bank, credit union, or other lender—provides to a borrower with the expectation that it will be repaid, usually with interest, over an agreed period of time. In simple terms: You get money today. You promise to pay back more money later. That “more money” is generally the interest you pay the lender for allowing you to use their money. For example, suppose you borrow $20,000 to purchase a vehicle...

What Is a Credit Card? When you use a debit card, money generally comes directly out of your bank account. When you use a credit card, you’re borrowing the card issuer’s money. Every credit card has a credit limit, which is the maximum amount the lender allows you to borrow. Each month, you receive a statement showing your purchases, your balance, your minimum payment, and the date your payment is due.

What Is a Credit Line? Suppose your bank approves you for a $50,000 business line of credit. You don’t immediately owe $50,000. You simply have permission to borrow up to that amount. If you borrow $10,000, you generally pay interest only on the $10,000 you’ve actually borrowed—not the entire $50,000 credit line. As you repay the balance, that borrowing capacity may become available again if the credit line is revolving.

What Is a Credit Limit? A credit limit is the maximum amount of money a lender allows you to borrow on a revolving credit account, such as a credit card or line of credit. For example, suppose you have a credit card with a $10,000 credit limit. If you currently have a $2,000 balance, you have $8,000 of available credit remaining. Pretty simple, right? But here’s where it gets interesting: your credit limit doesn't just determine how much you can spend. It can also affect

What Is a FICO Score? A FICO Score is a type of credit score designed to help lenders estimate how likely you are to repay borrowed money as agreed. FICO stands for Fair Isaac Corporation, the company that developed the scoring system. While there are several types of credit scores today, FICO Scores are widely used by lenders when evaluating borrowers. Most FICO Scores range from 300 to 850. Generally speaking, the higher your score, the better you look to a potential len

What Is a Credit Report? A credit report is a detailed record of your credit history compiled by a credit reporting agency. In the United States, the three major credit bureaus are Equifax, Experian, and TransUnion. Your credit report typically includes information such as: - Credit cards and credit limits - Mortgages - Auto loans - Student loans - Personal loans - Account balances - Payment history - Late or missed payments

The Definition of Credit Score A credit score is a three-digit number designed to estimate how likely you are to repay borrowed money as agreed. In the United States, one of the most commonly used scoring models is the FICO Score, which generally ranges from 300 to 850. The higher your score, the more favorably lenders may view your creditworthiness.