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Payday Lending Glossary

This glossary was created to help you understand some of the terms used in the payday loan industry. It is important for borrowers to understand these terms and to lend responsibly. Payday Loans are not a long term financial solution.

Annual Percent (APR):
This represents the annual cost of credit or the interest rate charged on a loan. The Federal Truth In Lending Act requires payday lenders to conspicuously disclose the APR to prospective borrowers.

Anything owned by an individual that has a cash value. This includes property, goods, savings or investments.

The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt.

Average Daily Balance
The average daily balance is a method used to calculate finance charges. It is calculated by adding the outstanding balance on each day in the billing period, and dividing that total by the number of days in the billing period. The calculation includes new purchases and payments.

Bad Credit:
This refers to a low FICO score or a poor credit rating resulting from a borrower's negative payment history (i.e. defaults, late payments), outstanding debts, bankruptcy filings, and/or other credit-tarnishing circumstances. Lenders view bad credit borrowers as high risk in terms of future payment obligations.

The total amount of money owed. It includes any unpaid balance from the previous month, new purchases, cash advances, and any charges such as an annual fee, late fee or interest. The balance should not be confused with the monthly payment (the minimum payment allowed each month), which is generally 2% - 5% for revolving credit cards.

Balance Transfer
Moving a balance (debt) from one credit card to another. This is often done with special checks or forms, or may be offered as an option on some credit card applications. The usual reason is to shift an ongoing debt to an account with a lower interest rate.

A federal court proceeding whereby a consumer's debts are wiped out and his or her assets are sold.

Beacon Score
This is your credit score that creditors look at when determining if you are credit worthy. Your Beacon Score is determined by negative entries such as late payments which would decrease your score or a positive, timely payment history on your accounts which would increase your score.

Billing Cycle
The number of days between statement dates. This is generally about 25 days.

A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtedness.

Cash Advance
Also known as a payday loan, this short-term loan which is generally in the range of $100-$1000 serves as an emergency source of funding for individuals who need to bridge the financial gap until the next payday. Cash advance loan providers typically require applicants to be at least 18 years of age and steadily employed and to have an active bank account.

Chapter 7
In a Chapter 7 agreement, the court resolves most debts by selling assets and property so that the filer is given a fresh financial start. The court takes all assets including cars, homes, furnishings, jewelry or anything else of value. The assets are sold to pay off the debt. There are some debts that a person may wish to repay on their own instead of having the court resolve it. This is called reaffirmation. Reaffirmation is a special payment plan with the court. For example, if a car loan is reaffirmed, the person keeps the car and makes payments under new terms. Chapter 7 bankruptcy will not eliminate debts due to taxes, child support, alimony, student loans, court fines or personal injury caused by driving drunk or under the influence of drugs. A Chapter 7 filing will remain on a credit report for 10 years.

Chapter 13
In a Chapter 13 agreement, the court creates a debt repayment plan that allows the filer to keep their property. In order to file Chapter 13, a person must have a source of income and promise to pay part of their income to creditors. The court allows the filer to keep any assets that have debts against them if they pay them off under terms determined by the court. A Chapter 13 filing will remain on a credit report for 10 years. With Chapter 13, there is a better chance of obtaining future loans and credit.

Closed End Credit
Generally, any loan or credit sale agreement in which the amounts advanced, plus any finance charges, are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed- end agreements.

Also known as security, collateral refers to assets such as a borrower's car or home that are pledged to a creditor as assurance of debt repayment. In the event of default by the borrower, the lender may sell off assets to satisfy the debt.

Community Financial Services Association of America Through its Best Practices, this national organization protects the public by ensuring that the payday loan industry operates responsibly and that consumers can avail themselves of viable and safe, short-term loans.

Extra requirements other than repayment (such as ?structural adjustment' policies) demanded by the lender before new loans are granted.

Another person who signs for a loan and assumes equal liability for it.

Credit Card
Any card, plate, or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.

Credit Check:
To determine a prospective borrower's creditworthiness, payday lenders may conduct credit checks by requesting detailed reports from one or several of the leading credit bureaus- namely Experian, TransUnion, and/or Equifax. A credit check involves an examination of the borrower's bank statements and credit report, which contains the latter's payment history and indebtedness.

Credit History:
This constitutes a report of a borrower's employment record, loan repayment behavior, available credit lines, present and past addresses, and risk factors such as bankruptcy or late payments. National credit bureaus such as Experian, Equifax, and TransUnion record borrowers' credit histories in the credit reports they issue.

Credit Report:
This is a summary of a borrower's credit history (i.e. outstanding debts, available credit), credit inquiries, and public records such as court judgments or bankruptcy filings. The credit report, which also provides identifying information about the borrower, such as name, Social Security number, phone number, and address, enables lenders to assess creditworthiness and set an applicable interest rate.

Credit Reporting Agency:
Also known as credit bureaus or (CRA), CRAs gather information about borrowers, such as credit history, tabulate their credit rating, and create credit reports for lenders. The three major credit reporting agencies in the U.S. are Equifax, TransUnion, and Experian.

Credit Score:
Also referred to as FICO or a credit rating, this three-digit number which typically ranges from 300 to 850, is a measure of a borrower's creditworthiness based on payment history, balances, and outstanding debts. A credit score may be generally classified as excellent, good, fair, or poor.

Credit Scoring System:
A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness.

A determinative factor for lenders on a borrower's willingness and likelihood to repay a loan or credit extended to you.

Debt Management Company:
This credit counseling agency offers an extensive line of services, such as budget planning, consumer education courses, and debt management plans to assist delinquent borrowers in paying off their bills. Debt management companies negotiate with creditors to lower interest rates and monthly payments, reduce calls requesting payment, and cancel late fees.

Debt Service:
Total payments due on loans (repayments plus interest).

Default Payment:
This occurs when a borrower fails to make timely payments on his or her loan. Defaults, which are listed in credit bureaus' reports, may negatively impact a consumer's creditworthiness.

Deferred Deposit:
In this type of transaction, a lender issues a cash advance to a borrower, receives a postdated check from the latter, and holds it for deposit. The borrower usually has two weeks to repay the loan.

Direct Deposit:
The term used to describe the process of wiring or electronically depositing funds into a borrower's account.

A legal terms meaning a court has erased your debt(s) not to be confused with a "charge off" or "write off" which is an accounting term which does not erase debts.

A charge that payday lenders impose on the principal of the funds borrowed.

Finance Charge:
This numerical figure provides the total cost of credit, including processing fees, service charges, and interest fees.

Fixed Rate:
A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.

Graduated Payment:
Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization.

Interest Rate:
A fixed fee that a borrower pays in order to borrow money. It is usually expressed as a percentage of the sum borrowed.

Legal responsibility to repay debt.

A notice a creditor attaches to your property that tells the world that you owe the creditor money. You cannot sell the property without paying off the creditor because the lien makes the "title" (history of ownership) cloudy and a new owner won't buy under those conditions.

Maturity Date:
This represents the payment due date for the principal and finance charges on a payday loan or other form of credit.

Predatory Lending:
This practice involves the failure to disclose loan terms and cost and/or the deceptive persuasion of prospective borrowers to consent to abusive and inequitable loan terms, such as unreasonably high fees.

The initial loan amount borrowed, excluding interest, costs, and fees.

Also known as extensions, rollovers allow borrowers to renew their cash advance and extend the deadline for repayment to the next payday by paying an additional fee. While some states permit unlimited extensions, many have passed legislation limiting the number of rollovers that lenders may grant.

Truth in Lending Act (TILA):
This federal legislation aims at furthering transparency in consumer credit transactions by requiring clear and conspicuous disclosures to borrowers about the cost and terms of loans. Some of the important disclosures that TILA requires lenders to make are those relating to 1) finance fees, 2) annual percentage rate, 3) late payment or pre-payment penalties, 4) payment schedule, 5) their identity, 6) sum of all the payments, and 7) amount financed.

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