Glossary
Personal finance glossary in plain English
This personal finance glossary defines the 42 terms you will meet most often on loan, credit card, savings and auto statements, from APR and APY to amortization, money factor and capitalized interest. Each definition is short and plain, explains why the term matters to your numbers, and links to the calculators and guides where it comes up. Definitions are checked against primary sources.
What is the difference between an interest rate and APR?
An interest rate is the yearly cost of borrowing the principal alone. APR, the annual percentage rate, is the yearly cost of credit expressed as a rate and can include certain fees, which is why lenders must disclose it under federal Truth in Lending rules. When fees are included, APR is higher than the rate.
A
- Amortization
- Amortization is the process of paying off a loan with equal, regular payments that each cover the interest due for the period plus a slice of principal. Early payments are mostly interest; later ones are mostly principal. By the final payment the balance reaches exactly zero, which is how most car, personal and student loans work.
- Amortization Schedule
- An amortization schedule is a table that lists every payment on a loan and splits each one into interest and principal, along with the remaining balance afterward. It shows exactly how the debt shrinks over time, how much interest you pay in total, and what you would still owe at any point.
- APR (Annual Percentage Rate)
- APR is the yearly cost of borrowing expressed as a single percentage that includes the interest rate plus certain required fees, such as origination charges. Because lenders must calculate it the same way under federal Truth in Lending rules, APR lets you compare loan offers on an even footing.
- APY (Annual Percentage Yield)
- APY is the amount you actually earn on savings in one year, expressed as a percentage, after accounting for how often interest compounds. A higher compounding frequency pushes APY above the stated interest rate. Banks must disclose APY under federal Truth in Savings rules, so it is the fairest way to compare accounts.
B
- Balance Transfer
- A balance transfer moves debt from one credit card or loan to another card, usually to take advantage of a low or 0% promotional APR. It can cut interest sharply while you pay down the balance, but most transfers carry a fee, and any amount left when the promotion ends is charged the regular rate.
- Balance Transfer Fee
- A balance transfer fee is a one-time charge for moving debt onto a credit card, usually a percentage of the amount transferred, often with a dollar minimum. The fee is added to your new balance right away, so it is the upfront price of a lower promotional rate and must be weighed against the interest you save.
C
- Capitalized Interest
- Capitalized interest is unpaid interest that gets added to a loan's principal balance. After capitalization, you pay interest on that interest, which raises both your payment and total cost. It commonly happens with student loans after periods when payments are paused, such as school, a grace period or certain forbearance and deferment periods.
- CD Ladder
- A CD ladder spreads savings across several certificates of deposit with staggered maturity dates, such as one, two, three, four and five years. As each CD matures, you can use the cash or reinvest it at the longest rung. The ladder gives you regular access to part of your money while still capturing longer-term rates.
- Certificate of Deposit (CD)
- A certificate of deposit is a savings account that pays a fixed rate for a set term, such as six months or five years, in exchange for leaving your money untouched until it matures. CDs at insured banks and credit unions are covered by federal deposit insurance up to the limit, and early withdrawals usually trigger a penalty.
- Compound Interest
- Compound interest is interest earned or charged on both the original principal and the interest that has already built up. Each period's interest is added to the balance, so the next period's interest is a little larger. Over long stretches, compounding makes savings grow faster and unpaid debts grow faster too.
- Compounding Frequency
- Compounding frequency is how often interest is calculated and added to a balance, such as yearly, quarterly, monthly or daily. More frequent compounding means interest starts earning interest sooner, so the effective yearly yield rises slightly. The effect is real but modest, and it shrinks as rates fall.
- Credit Score
- A credit score is a three-digit number that summarizes how risky you look as a borrower, based on the information in your credit reports. Most widely used models run from 300 to 850. Lenders use scores to decide whether to approve you and what rate to charge, so a higher score usually means cheaper credit.
- Credit Utilization
- Credit utilization is the share of your available revolving credit that you are currently using, shown as a percentage. It is calculated by dividing your card balances by your credit limits, both per card and across all cards. Lower utilization generally helps credit scores, and it is one of the factors you can change quickly.
D
- Day-Count Convention
- A day-count convention is the rule a lender uses to turn an annual interest rate into daily interest. Common methods are 365/365, which divides the rate by 365 and charges actual days, and 365/360, which divides by 360 but still charges actual days. The 365/360 method produces slightly more interest for the same stated rate.
- Debt Avalanche
- The debt avalanche is a payoff strategy where you pay the minimum on every debt and put all extra money toward the balance with the highest interest rate first. When that debt is gone, its payment rolls to the next-highest rate. Mathematically, it usually minimizes total interest and often finishes as fast or faster than other orders.
- Debt Consolidation
- Debt consolidation means combining several debts into one new loan or account, ideally with a lower interest rate and a single monthly payment. Common tools include personal loans, balance transfer cards and home equity loans. It saves money only if the new rate and fees are lower and you avoid running the old balances back up.
- Debt Snowball
- The debt snowball is a payoff strategy where you pay minimums on everything and direct all extra money to the smallest balance first, regardless of interest rate. Each payoff frees up a payment that rolls into the next-smallest debt. It can cost more interest than the avalanche but delivers quick wins that help many people stay on track.
- Debt-to-Income Ratio (DTI)
- Debt-to-income ratio is the share of your gross monthly income that goes to required debt payments, such as loan installments, minimum card payments and housing. Lenders use DTI to judge whether you can take on another payment. A lower ratio signals more room in your budget and generally makes approval easier.
- Deposit Insurance
- Deposit insurance is federal protection for money held at insured banks and credit unions. The FDIC covers bank deposits and the NCUA covers credit union shares, each up to $250,000 per depositor, per insured institution, per ownership category. If an insured institution fails, covered deposits are repaid, including interest accrued up to the limit.
- Down Payment
- A down payment is the cash you pay upfront toward a purchase, such as a car or home, so you borrow less. A larger down payment reduces the loan principal, the monthly payment and total interest, and it lowers the chance of owing more than the item is worth. It can also help you qualify for a better rate.
E
- Early Withdrawal Penalty
- An early withdrawal penalty is a charge for taking money out of a certificate of deposit before it matures. It is usually expressed as a number of days' or months' worth of interest, such as 90 days or six months. If you have not yet earned enough interest, the penalty can reduce your original deposit.
- Emergency Fund
- An emergency fund is cash set aside for unexpected costs or income loss, such as a car repair, medical bill or job gap. It is usually kept in an insured, easy-to-reach savings account. A common target is three to six months of essential expenses, though any starting amount reduces the need to borrow at high rates.
G
- Grace Period
- A grace period is the window between the end of a credit card billing cycle and the payment due date during which no interest is charged on new purchases, as long as you paid the previous statement balance in full. Carry a balance, and you typically lose the grace period, so purchases start accruing interest right away.
I
- Inflation
- Inflation is the general rise in prices over time, which reduces how much a dollar can buy. In the US it is most often measured by the Consumer Price Index, published monthly by the Bureau of Labor Statistics. When your savings earn less than inflation, their purchasing power shrinks even though the dollar balance grows.
- Interest Rate
- An interest rate is the price of money, stated as a percentage of the balance per year. Borrowers pay it to lenders, and savers earn it from banks. The rate alone does not include fees or compounding, so it can understate the true yearly cost of a loan or overstate a simple comparison of savings accounts.
L
- Line of Credit
- A line of credit is a flexible borrowing account that lets you draw money up to a set limit, repay it, and borrow again. You pay interest only on the amount you have drawn, not on the full limit. Personal, business and home equity lines are common, and most carry variable interest rates.
- Loan Term
- The loan term is the length of time you have to repay a loan, usually stated in months for consumer loans. A longer term lowers the monthly payment but increases the total interest you pay, because the balance stays outstanding longer. A shorter term costs more each month and less overall.
- Loan-to-Value Ratio (LTV)
- Loan-to-value ratio compares the amount you borrow with the value of the asset securing the loan, shown as a percentage. A $20,000 loan on a $25,000 car is 80% LTV. Lenders use LTV to judge risk: a lower ratio usually brings easier approval and better rates, while an LTV above 100% means you owe more than the asset is worth.
M
- Minimum Payment
- The minimum payment is the smallest amount a credit card issuer or lender requires each billing cycle to keep the account in good standing. On cards it is often a small percentage of the balance plus interest, so paying only the minimum keeps you current but can stretch repayment over many years and multiply interest.
- Money Factor
- The money factor is the finance charge rate on a car lease, written as a small decimal such as 0.00250. Multiply it by 2,400 to get an approximate equivalent APR, so 0.00250 is roughly 6.00%. Along with the capitalized cost and residual value, it determines the rent charge portion of your monthly lease payment.
N
- Negative Equity
- Negative equity means you owe more on a loan than the asset securing it is worth. It is common with car loans because vehicles lose value quickly while long loan terms pay principal down slowly. If you sell or trade in with negative equity, you have to cover the gap, often by rolling it into a new loan.
- Net Worth
- Net worth is the value of everything you own minus everything you owe. Assets include cash, savings, investments, retirement accounts, home and vehicles; liabilities include mortgages, car loans, student loans and card balances. It is a snapshot of your overall financial position, and tracking it over time shows whether you are moving forward.
P
- Prepayment Penalty
- A prepayment penalty is a fee some lenders charge if you pay off a loan early or pay down a large part of it ahead of schedule. It compensates the lender for interest it will no longer receive. Many consumer loans have no such penalty, but if yours does, the terms must appear in your loan disclosures.
- Principal
- Principal is the amount of money you borrow, or the amount you deposit, before any interest. On a loan, it is the balance that interest is charged against, and each payment's non-interest portion reduces it. On savings, principal is your own money, the base on which interest is earned.
- Promotional APR
- A promotional APR is a temporary, reduced interest rate, often 0%, that a card issuer offers for a set period on purchases, balance transfers or both. When the promotion ends, any remaining balance is charged the card's regular APR. It can save real money if you plan to pay the balance off within the window.
R
- Real Rate of Return
- The real rate of return is what your money earns after adjusting for inflation. It shows the actual growth in purchasing power rather than in dollars. A quick estimate is the nominal rate minus inflation; the exact figure is (1 + nominal) ÷ (1 + inflation) − 1, which is slightly smaller.
- Refinancing
- Refinancing replaces an existing loan with a new one, usually to get a lower interest rate, a different term or a lower payment. The new lender pays off the old loan, and you repay the new one. It saves money when the rate drop outweighs any fees, but stretching the term can raise total interest.
- Residual Value
- Residual value is the estimated worth of a leased vehicle at the end of the lease, set by the leasing company when you sign. It is usually stated as a percentage of the sticker price. A higher residual means less depreciation to pay for during the lease, which lowers the monthly payment, and it is also your buyout price.
- Rule of 72
- The Rule of 72 is a mental-math shortcut for estimating how long money takes to double at a fixed compound rate: divide 72 by the annual percentage rate. At 8%, money doubles in about nine years. It works best for rates between roughly 4% and 12% and can also estimate how fast debt or inflation doubles.
S
- Savings Rate
- Your savings rate is the percentage of your income that you save rather than spend. It is usually calculated as money saved divided by take-home pay, though some people use gross income. A higher savings rate builds emergency funds faster and shortens the time to reach long-term goals, often more than chasing a higher return.
- Simple Interest
- Simple interest is calculated only on the original principal, never on interest already earned or charged. The formula is principal × rate × time. Because interest does not build on itself, simple interest grows in a straight line, which makes it easy to predict and generally cheaper for borrowers than compounding.
- Sinking Fund
- A sinking fund is money you set aside in regular amounts for a specific, expected expense, such as car insurance, holiday gifts or a future car repair. Unlike an emergency fund, which covers surprises, a sinking fund covers costs you can see coming. Spreading them out avoids a budget shock and keeps them off a credit card.
Frequently asked questions
How many terms are in the glossary?
The glossary has 42 terms covering rates, loans, credit and debt, saving and auto financing. We add terms when they come up often in our calculators and guides, and new additions are noted in the changelog. Each term links to the calculators and guides where it matters most.
What does money factor mean in the glossary?
A money factor is how a lease expresses its finance charge. Multiplying it by 2,400 gives an approximate equivalent annual percentage rate, so a money factor of 0.0025 is roughly 6%. The car lease calculator uses it to estimate the finance part of the payment.
What does amortization mean?
Amortization is paying off a loan through regular payments that cover interest first and then reduce the principal. Early payments are mostly interest; later payments are mostly principal. An amortization schedule lists that split for every payment. Our amortization guide walks through a full schedule step by step.
What does day-count convention mean?
It is the rule a lender uses to turn an annual rate into daily interest. Under 365/365, the daily rate is the annual rate divided by 365. Under 365/360, it is divided by 360 but charged for all 365 days, which slightly raises the cost.
What does credit utilization mean?
Credit utilization is the share of your available revolving credit that you are using, such as a $1,500 balance on a $5,000 limit, or 30%. It is one of the factors in many credit scoring models, and lower utilization is generally viewed more favorably.
What is the real rate of return?
It is what your money earns after inflation. A rough estimate is the nominal rate minus the inflation rate. If savings earn 4% while prices rise 3%, purchasing power grows by roughly 1%. The savings, taxes and inflation calculator works it out precisely.
Where do your definitions come from?
Definitions are written by the CalculateInterestPay Editorial Team and checked against primary sources such as the CFPB, the Federal Reserve, the FDIC, the NCUA, the IRS and the SEC's Investor.gov. Each term lists the sources it relies on. If you spot a definition that does not match its source, please tell us.
Can I suggest a term to add?
Yes. Email the general address on our contact page with the term and where you came across it. Terms that appear often on statements, disclosures or our calculator pages are the most likely to be added. We will add it to the glossary once its definition has been checked.
See the terms in action.
Every definition links to the calculators where the term changes your result.