Glossary

Core Financial Terms

  • Principal: The original amount of money borrowed or invested, excluding interest.
  • Interest Rate: The percentage charged by a lender for the use of its money, usually expressed as an APR (Annual Percentage Rate).
  • Loan Term: The duration of the loan (e.g., 60 months or 30 years) until it is fully paid off.
  • Amortization: The process of paying off a debt over time through regular installments.
  • Default: The failure to repay a loan according to the agreed-upon terms.

Mortgage & Rent vs. Buy Terms

  • PITI: Stands for Principal, Interest, Taxes, and Insurance. It represents the “true” monthly cost of homeownership.
  • PMI (Private Mortgage Insurance): An extra monthly fee required by lenders if your down payment is less than 20% of the home’s value.
  • Equity: The difference between the market value of your home and the amount you still owe on your mortgage.
  • Closing Costs: Fees paid at the end of a real estate transaction (typically 2% to 5% of the purchase price).

Credit & Debt Terms

  • Compounding Frequency: How often interest is calculated and added to the principal (e.g., daily, monthly, or annually).
  • Minimum Payment: The smallest amount you must pay on a credit card balance each month to avoid late fees.
  • Debt-to-Income (DTI) Ratio: Your total monthly debt payments divided by your gross monthly income. Lenders use this to determine Personal Loan Eligibility.
  • Debt Avalanche: A strategy where you pay off debts with the highest interest rates first to save the most money.
  • Debt Snowball: A strategy where you pay off the smallest balances first to build psychological momentum.

Investment & Interest Terms

  • Simple Interest: Interest calculated only on the initial principal amount.
    • Formula: $I = P \times r \times t$
  • Compound Interest: Interest calculated on the initial principal plus the accumulated interest from previous periods.
    • Formula: $A = P(1 + \frac{r}{n})^{nt}$
  • APY (Annual Percentage Yield): The real rate of return on an investment, taking into account the effect of compounding interest.

Car & Student Loan Terms

  • Depreciation: The rate at which an asset (like a car) loses value over time.
  • Negative Equity (“Underwater”): When you owe more on a loan than the item is currently worth. Common with long-term car loans.
  • Grace Period: A period after graduation (usually 6 months) during which student loan borrowers are not required to make payments.
  • Capitalized Interest: Unpaid interest that is added to the principal balance of a student loan, increasing the total amount you owe.

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