Glossary

aggregate

Any total (e.g., the gross national product; the sum of monthly sales).

amortization

The process of fully paying off indebtedness by installments of principal and earned interest over a definite time.

annual percentage rate - APR

The cost of credit on a yearly basis expressed as a percentage.

annual percentage yield - APY

The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year.

automated clearinghouse - ACH

Electronic clearing and settlement system for exchanging electronic transactions among participating depository institutions; such electronic transactions are substitutes for paper checks and are typically used to make recurring payments such as payroll or loan payments. The Federal Reserve Banks operate an automated clearinghouse, as do some private-sector firms.

automated teller machines - ATM

Computer-controlled terminals located on the premises of financial institutions or elsewhere, through which customers may make deposits, withdrawals, or other transactions as they would through a bank teller. Groups of banks sometimes share ATM networks located throughout a region of the country that may include portions of several states.

automatic transfer service account - ATS

A depositor's savings account from which funds may be transferred automatically to the same depositor's checking account to cover a check written or to maintain a minimum balance.

availability float

Checks deposited by a company that have not yet been cleared.

balloon payment

A large payment that may be charged at the end of a loan or lease.

bank regulation

The formulation and issuance by authorized agencies of specific rules or regulations, under governing law, for the conduct and structure of banking.

bond

A long-term obligation of the U.S. Treasury (more than 10 years maturity).

cashier's check

A check written by a financial institution on its own account, signed by a representative of a financial institution, and then payable to the third party. The purchaser of the check, called a remitter, pays the full face price of the check together with a small premium.

certificate of deposit - CD

A form of time deposit at a bank or savings institution which cannot be withdrawn before a specified maturity date without being subject to an interest penalty for early withdrawal. Small-denomination CDs are often purchased by individuals. Large CDs of $100,000 or more are often in negotiable form, meaning they can be sold or transferred among holders before maturity.

check clearing

The movement of checks from the banks or other depository institutions where they are deposited back to those on which they are written, and funds movement in the opposite direction. This process results in credits to accounts at the institutions of deposit and corresponding debits to accounts at the paying institutions. The Federal Reserve participates in check clearing through its nationwide facilities, though many checks are cleared by private sector arrangement.

clearinghouse

An institution where mutual claims are settled between accounts of member depository institutions. Clearinghouses among banks have traditionally been organized for check-clearing purposes, but more recently have cleared other types of settlements, including electronic fund transfers.

closed-end credit

An agreement in which advanced credit, 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.

collateral

Property that is offered to secure a loan or other credit and that becomes subject to seizure on default.

community reinvestment act - CRA

Enacted by Congress in 1977, the CRA encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes, while maintaining safe and sound operations.

correspondent bank

A bank that accepts deposits of and performs banking services for other depository institutions.

cosigner

A term referring to a person, other than the principle borrower, who signs for a loan. The cosigner(s) assumes equal liability for the loan.

credit

The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.

credit card

Any card that may be used repeatedly to borrow money or buy goods and services on credit.

credit history

A record of how a person has borrowed and repaid debt.

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.

creditworthiness

A creditor's measure of a consumer's past and future ability and willingness to repay debts.

debit card

A card that resembles a credit card but which debits a transaction account (checking account) with the transfers occurring at the same time with the customer's purchases. A debit card may be machine readable, allowing for the activation of an automated teller machine or other automated payments equipment.

default

Failure to meet the terms of a credit agreement.

demand deposit

A deposit that may be withdrawn at any time without prior written notice to the depository institution. A checking account is the most common form of demand deposit.

depository institution

A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks, and credit unions. Although historically they have specialized in certain types of credit, the powers of nonbank depository institutions have been broadened in recent years. For example, NOW accounts, credit union share drafts, and other services similar to checking accounts may be offered by thrift institutions.

direct deposit

A method of payment which electronically credits your checking or savings account.

electronic funds transfer - EFT

Transfer of funds electronically rather than by check or cash. The Federal Reserve's Fedwire and automated clearinghouse services are EFT systems.

exchange rate

The price of a country's currency in terms of another country's currency.

federal deposit insurance corporation - FDIC

An independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. The FDIC promotes safety and soundness of insured depository institutions and the U.S. financial system by identifying monitoring, and addressing risks to the deposit insurance funds; minimizes disruptive effects from the failure of banks and savings associations; and ensures fairness in the sale of financial products and provision of financial services.

finance charge

The total dollar amount paid to obtain credit.

financial instrument

Any written instrument having monetary value or evidencing a monetary transaction.

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.

interest payments

The return expressed in percentages earned on an investment each year. These payments are issued every six months based on an annual rate.

money order

A financial instrument backed by a deposit at a certain firm such as a bank that can be easily converted into cash.

negative amortization

An increase in the principal of a loan, when the loan payments are insufficient to pay the interest due. The unpaid interest is added to the outstanding loan balance causing the principal to increase rather than decrease as payments are made. This situation typically occurs in an adjustable mortgage with an annual cap limiting any increases in the interest rate, and also in a graduated payment mortgage, which has low initial payments so moderate-income borrowers can afford to make the loan payments.

negotiable order of withdrawal account - NOW

An interest earning account on which checks may be drawn. Withdrawals from NOW accounts may be offered by commercial banks, mutual savings banks, and savings and loan associations and may be owned only by individuals and certain nonprofit organizations and governmental units.

nominal interest rates

Current stated rates of interest paid or earned.

open-end credit

A line of credit that may be used repeatedly up to a certain limit. (Also called a charge account or revolving credit.)

overdraft checking account

A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, generally with a finance charge on the overdraft.

points

In reference to a loan, points consist of a lump sum payment made by the borrower at the outset of the loan period. Generally, each point equals one percent of the loan amount.

principal payments

The face amount or par value of a debt instrument where interest is paid. The interest payment is not part of the principal.

qualifying ratio

A borrower's total regular monthly debt as a percentage of gross monthly income.

Regulation Q

Federal Reserve Board regulation imposing caps on the rates that banks may pay on savings and time deposits. Currently time deposits with a denomination of $100,000 or more are exempt from Reg Q.

renegotiable rate

A type of variable loan rate involving a renewable short-term 'balloon' note. The interest rate on the loan is generally fixed during the term of the note, but when the balloon comes due, the lender may refinance it at a higher rate. In order for the loan to be fully amortized, periodic refinancing may be necessary.

security interest

The property or a portion of property offered as security.

seller's points

In reference to a loan, seller's points consist of a lump sum paid by the seller to the buyer's creditor to reduce the cost of the loan to the buyer. This payment is either required by the creditor or volunteered by the seller, usually in a loan to buy real estate. Generally, one point equals one percent of the loan amount.

surcharge

An extra charge imposed on those who purchase with a credit card instead of cash.

transaction account

A checking or similar account from which transfers can be made to third parties. Demand deposit accounts, negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, and credit union share draft accounts are examples of transaction accounts at banks and other depository institutions

uncollected funds

The amount of bank deposits in the form of checks that have not yet been paid by the banks on which the checks are drawn.

variable rate

A variable rate agreement, as distinguished from a fixed rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.

wire transfer

Electronic transfer of funds; usually involves large dollar payments.

yield

The return on a loan or investment, stated as a percentage of price.

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