Here are some of the common banking and borrowing terms you might hear or read. If you have a question about any other terms, please let us know and we’ll do our best to explain them!
Adjustable Rate Mortgage (ARM)
An Adjustable Rate Mortgage (ARM) or variable rate mortgage is a loan secured on a property (house) whose interest rate and monthly repayment vary over time. The interest rates charged on Adjustable Rate Mortgages are determined by a publicly published financial index. Adjustable Rate Mortgages transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and is at a disadvantage if the interest rates rise.
Amortization is the distribution of a single lump-sum cash flow into many smaller cash flow installments for easier repayment. With amortization, each repayment installment consists of both principal and interest. Amortization is used in loan repayments where the payments are usually of equal amounts. In the case of a loan, a greater amount of the payment is applied to interest at the beginning, while during the latter portion, more money is applied to principal.
Automated Teller Machine (ATM)
An automatic teller machine or automated teller machine (ATM) is an electronic device that allows a Credit Union member to make cash withdrawals and check account balances without the need for a human teller. Many ATMs also allow people to deposit cash or checks and transfer money between accounts. Find an ATM location.
Board of Directors
The Board of Directors of a Credit Union is a group of volunteer members who govern the affairs of the Credit Union. The Board of Directors is elected by the members of the Credit Union.
Certificate of Deposit (CD)
A certificate of deposit (or CD) is, in the United States, a time deposit, a familiar financial product, commonly offered to consumers by banks, thrift institutions, and credit unions. Such CDs are similar to savings accounts in being insured — by the FDIC for banks or by the NCUA for credit unions — and thus virtually risk-free; they are “money in the bank.” They are different from savings accounts in that the CD has a specific, fixed term — often three months, six months, or one to five years — and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.
A co-signer on a loan agrees to pay another person’s debt on the loan if he/she fails to do so. The act of cosigning is also known as a guarantee.
Collateral is a word used for assets that secure a debt obligation. For example, in the case of a mortgage the house serves as the collateral for the mortgage loan.
Credit History (Credit Report)
Credit history or credit report is a record of an individual’s past borrowing and repaying, including information about late payments and bankruptcy. When you fill out an application for credit, your information is then forwarded to a credit bureau, along with all constant updates on the status of your credit accounts, address or any other changes you have made since the last time you applied for any credit. This information is used by lenders to determine creditworthiness; that is, the means and willingness to repay a debt. This helps determine whether to extend credit, and on what terms. The three major reporting agencies, or bureaus, who provide credit reports to lenders are Experian, Equifax, and TransUnion.
A credit score is a number that represents an estimate of an individual’s financial creditworthiness as calculated by a statistical model. A credit score attempts to quantify the likelihood that a prospective borrower will fail to repay a loan or other credit obligation satisfactorily. A credit score is based on a subset of the information in an individual’s credit report.
A credit union is a not-for-profit co-operative financial institution that is owned and controlled by its members, through the election of a volunteer Board of Directors elected from the membership itself. Only a member of a credit union may deposit money with the credit union, or borrow money from it. A credit union differs from a traditional financial institution (banks, savings and loan, etc.) in that the members who have accounts in the credit union are the credit union’s owners. Since a credit union is a co-operative institution, its policies governing interest rates and other matters are set to benefit the interests of the membership as a whole; for example, credit unions often pay higher dividend (interest) rates on shares (deposits) and charge lower interest on loans. Credit union revenues (from loans and investments) do, however, need to exceed operating expenses and dividends (interest paid on deposits) in order to remain in business, and this excess is used to expense loan losses and build capital. Credit unions offer many of the same financial services as banks, including share accounts (savings accounts), share draft (checking) accounts, credit cards, and share term certificates (certificates of deposit).
A debit card is a card which physically resembles a credit card, and, like a credit card, is used as an alternative to cash when making purchases. However, when purchases are made with a debit card, the funds are withdrawn directly from the purchaser’s checking account or savings account at a credit union or other financial institution.
Debt is that which is owed. There are numerous types of debt obligations. They include loans, bonds, mortgages and promissory notes. It is common to borrow large sums for major purchases, such as a mortgage, and pay it back with an agreed premium interest rate over time, or all at once at a later date (balloon payment). The amount of money outstanding is usually called a debt. The debt will increase through time if it is not repaid faster than it grows.
Debt consolidation entails taking out one loan to pay off others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.
A deposit is a specific sum of money taken and held on account, by a credit union as a service provided for its members.
A dividend is the distribution or sharing of parts of profits to a company’s shareholders. In the case of Credit Unions, dividends are returned to members in the form of higher dividend (interest) rates on shares (deposits) and lower interest rates charged on loans.
A finance charge is any fee or charge representing the cost of credit, or the cost of borrowing. It includes not only interest but other charges as well, such as transaction fees.
Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) is a retirement plan account that may provide some tax advantages for saving for retirement in the United States. There are a number of different types of IRAs, some being employer-provided plans and others usually only being set up by an individual.
Interest is a surcharge on the repayment of debt (borrowed money). Interest rates can be divided into two types: Fixed, where the interest rate stays fixed throughout the life of the debt, and Variable, where the interest rate is usually determined by a reference rate, such as LIBOR or a consumer price index. Sometimes interest rates depend directly on financial ratios or the credit rating of the borrower.
In U.S. law, lien is the broadest term for any sort of charge or encumbrance against an item of property that secures the payment of a debt or performance of some other obligation. Liens can be consensual or non-consensual. Consensual liens are imposed by a contract between the creditor and the debtor. These liens include mortgages and car loans, for example. Non-consensual liens typically arise by statute or by the operation of the common law. These liens give a creditor the right to impose a lien on an item of real property or a chattel by the existence of the relationship of creditor and debtor. An example of this type of lean could include a tax lien, imposed to secure payment of a tax.
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt.
A mortgage is method of using property as security for the payment of a debt. Technically the term mortgage (from Law French, lit. “dead pledge”) refers to the legal device used in securing the property, but it is also commonly used to refer to the debt secured by the mortgage.
Share Draft Account
A Share Draft Account is a type of demand account (or demand deposit, demand deposit account), which is a deposit account held at a credit union, the funds deposited in which are payable on demand. The primary purpose of demand accounts is to facilitate cashless payments by means of check, draft, direct debit, electronic funds transfer, etc. A demand account is commonly known as a share draft account in U.S. Credit Unions checking account in United States banks.