Glossary of Loan Terminology
The amount of the loan borrowed. Example: When a borrower takes a loan of $10,000, this $10,000 is called the principal.
(Compounding) - Accrued and unpaid interest is added to the principal to create a new and higher balance. Example: A $5,000 loan at 10% interest, capitalized annually, will accrue $500 in interest in the first year the principal is outstanding. At the end of the first year, the $500 in interest will be added (capitalized) to the $5,000 principal balance and the loan is now $5,500. At the end of the second year, the amount of interest accrued will be $550, which will be added to the $5,500 for a new balance of $6,050.
An insurance premium deducted from the borrower's loan proceeds prior to disbursement and paid to the guaranty agency that insures the loan. The guaranty agency is a state, regional or national organization acting as an agent for the federal government to administer and insure loans made by lenders.
A non need-based loan on which interest is not paid by the federal government. Borrowers are responsible for interest on all unsubsidized loans from the date the loan is disbursed. Unpaid interest usually accrues and is capitalized at repayment. Depending on the lender, accrued interest can also be capitalized at the end of each quarter or year.
A loan program that allows lenders to pay off a borrower's education loans by creating one new loan. By extending the repayment period (up to 30 years depending on the loan amount) and allowing a single monthly payment, consolidation loans can make loan repayment more manageable for borrowers with high loan balances.
An authorized period of time during which the lender, holder or servicer agrees to temporarily postpone a borrower's total repayment obligation to prevent delinquency or default. An extension of time or smaller payments may also be granted. The interest on the loan will continue to accrue and may also be capitalized during forbearance. As it will take longer to repay the loan, the interest accrues for a longer period thus increasing the total cost of the loan.
A company employed by a lender to perform the administrative tasks, such as collecting payments, processing deferments or a forbearance, answering correspondence, etc.
The institution with legal title to a borrower's loan. The holder may be the lender that originally made the loan, a secondary market to which the lender has sold the loan, or in the event of a default, the guarantor.