Debt

Question 1

Principal

Answer 1

The original amount borrowed

Question 2

Interest

Answer 2

The cost of borrowing money; the additional amount to the principal you must pay

Question 3

Fixed Interest

Answer 3

An interest rate that stays the same for the life of the loan

Question 4

Variable Interest

Answer 4

An interest rate that can change with the market conditions (credit cards do this)

Question 5

Amortization

Answer 5

A “schedule” or breakdown of how much of each loan payment goes toward principal and how much toward interest

Question 6

Down Payment

Answer 6

An amount of money you “put down”, or give the bank, towards the cost of the item you are borrowing. Reduces the amount you have to borrow.

Question 7

Collateral

Answer 7

An item of value the lender can take ownership of to repay your loan if you default. (example: the car is the collateral in a car loan)

Question 8

Co-signer

Answer 8

A additional person who agrees to be responsible for paying the debt. Helpful when your credit is low or non-existent

Question 9

Origination Fee

Answer 9

An additional charge that pays for your loan to be prepared. Usually 0.5% to 1% of the purchase price. Common on auto, student and mortgage loans.

Question 10

Closing Costs

Answer 10

A variety of extra costs associated with getting a mortgage: includes government fees, property taxes, prepaid taxes & insurance. Is often around 5% of the purchase price.