Banking Glossary
Essential banking and financial terms explained in plain language
APR (Annual Percentage Rate)
The yearly cost of a loan including interest and fees, expressed as a percentage. APR provides a more complete picture of loan costs than interest rate alone.
Amortization
The process of paying off a loan through regular installments over time. Each payment includes both principal and interest, with the proportion shifting over the loan term.
ATM (Automated Teller Machine)
An electronic banking outlet that allows customers to complete basic transactions without a human teller, including withdrawals, deposits, and balance inquiries.
Balance
The amount of money in an account at any given time, or the amount owed on a loan or credit card.
Beneficiary
A person or entity designated to receive funds or benefits from an account, insurance policy, or trust upon the account holder's death.
Bond
A debt security where an investor loans money to an entity (government or corporation) for a defined period at a fixed interest rate.
Certificate of Deposit (CD)
A savings product that holds a fixed amount of money for a fixed period, typically offering higher interest rates than regular savings accounts in exchange for reduced liquidity.
Collateral
An asset pledged by a borrower to secure a loan. If the borrower defaults, the lender can seize the collateral to recover their losses.
Compound Interest
Interest calculated on both the initial principal and accumulated interest from previous periods, allowing savings to grow exponentially over time.
Credit Score
A numerical expression (typically 300-850) representing a person's creditworthiness based on credit history, used by lenders to evaluate loan applications.
Debit Card
A payment card that deducts money directly from a checking account to pay for purchases, as opposed to borrowing money like a credit card.
Default
Failure to repay a loan according to agreed terms, which can result in legal action, asset seizure, and severe credit damage.
Deposit
Money placed into a bank account for safekeeping, or the initial payment made when purchasing something on credit.
Direct Deposit
Electronic transfer of payment directly into a bank account, commonly used for payroll and government benefits.
Equity
The difference between an asset's market value and the amount owed on it. In real estate, it's the home value minus the mortgage balance.
Escrow
A financial arrangement where a third party holds money or assets until specific conditions are met, commonly used in real estate transactions.
FDIC (Federal Deposit Insurance Corporation)
A U.S. government agency that insures deposits up to $250,000 per depositor, per insured bank, protecting customers if a bank fails.
Fixed Interest Rate
An interest rate that remains constant throughout the loan term, providing predictable monthly payments.
Foreclosure
The legal process by which a lender takes possession of a property when the borrower fails to make mortgage payments.
Fractional Reserve Banking
A banking system where banks keep only a fraction of deposits as reserves and loan out the rest, effectively creating money through lending.
Interest
The cost of borrowing money, or the return earned on savings and investments, typically expressed as an annual percentage.
Interest Rate
The percentage charged on borrowed money or earned on deposited funds, usually expressed annually.
Liquidity
How quickly and easily an asset can be converted to cash without significant loss of value. Cash is the most liquid asset.
Loan
Money borrowed from a lender that must be repaid with interest according to agreed terms.
Loan-to-Value Ratio (LTV)
The ratio of a loan amount to the value of the asset purchased, expressed as a percentage. Lower LTV ratios typically result in better loan terms.
Maturity Date
The date when a financial instrument (like a CD or bond) becomes due and the principal must be repaid.
Minimum Balance
The lowest amount that must be maintained in an account to avoid fees or qualify for certain benefits.
Mortgage
A loan used to purchase real estate, secured by the property itself. Failure to repay can result in foreclosure.
Overdraft
When an account balance goes below zero due to withdrawals exceeding available funds. Banks may charge overdraft fees or decline transactions.
Principal
The original amount of money borrowed in a loan or invested, excluding interest or returns.
Prime Rate
The interest rate banks charge their most creditworthy customers, serving as a benchmark for other lending rates.
Refinance
Replacing an existing loan with a new one, typically to secure better terms, lower interest rates, or change loan duration.
Reserve Requirement
The minimum amount of deposits banks must hold in reserve rather than lending out, set by central banks to control money supply.
Savings Account
A deposit account that earns interest while providing easy access to funds, ideal for emergency funds and short-term savings goals.
Secured Loan
A loan backed by collateral, offering lower interest rates due to reduced lender risk.
Simple Interest
Interest calculated only on the principal amount, not on accumulated interest.
Term
The length of time until a loan must be fully repaid or a financial instrument reaches maturity.
Transaction
Any activity that affects an account balance, including deposits, withdrawals, transfers, and purchases.
Underwriting
The process of evaluating a loan application to determine approval and terms based on risk assessment.
Unsecured Loan
A loan not backed by collateral, relying solely on the borrower's creditworthiness. These typically have higher interest rates.
Variable Interest Rate
An interest rate that fluctuates based on market conditions or a benchmark rate, resulting in changing monthly payments.
Wire Transfer
An electronic method of transferring funds between banks, typically used for large or urgent payments.
Withdrawal
Removing money from an account through various methods including ATMs, checks, or electronic transfers.
Yield
The return on an investment, typically expressed as an annual percentage of the investment's cost or current value.