Financial Terms You Should Know Before You Owe

By Sam Swenson | Updated January 21, 2023
reading time 3 min read
Woman sitting on sofa learning about financial terms

Financial terminology can be overwhelming and confusing, but it’s important to understand it before taking out a loan. We’re here to help make it simple for you.

Here are 11 common loan terms every borrower should know and understand before getting a loan. These terms will help you make informed decisions and avoid misunderstandings when talking with lenders. Understanding these terms will help you to navigate the loan process with more confidence.

APR (Annual Percentage Rate): The total annual cost of borrowing. This rate includes interest, fees and any additional costs associated with your loan. To ensure you’re evaluating the true annual cost of borrowing across lenders, it’s  best to compare APRs.

Automated Clearing House (ACH): A network used for all kinds of fund transfer transactions, including direct deposit of paychecks and monthly debits for routine payments. For example, it can be used to make automatic loan payments between borrowers and lenders or service providers.

Basis Points (bps): One hundredth of one percent  (one basis point = 0.01%). Changes to interest rates are often described in basis points. For example, if an interest rate went from 4.5% to 5%, it would be described as 50 basis points higher.

Debt Consolidation Loan: A loan used to replace one or more loans that have high interest, unfavorable terms, or both. Most commonly this takes place with credit card debt, but you can also consolidate other sorts of debt.

Debt-to-Income Ratio: The ratio used to determine the share of a borrower’s monthly income that goes towards paying debts. Lenders use the debt-to-income ratio as a factor in determining a borrower’s eligibility for a loan as well as how much money they may borrow.

Learn more about the debt-to-income ratio.

Deferment: A set period of time during which the borrower may pause their loan payments.

FICO: The most widely used credit score model in the US. Your FICO score is used by prospective lenders to estimate your level of risk as a borrower. Your FICO score is calculated using a proprietary equation that evaluates information in your credit report. Scores can range from 300 to 850. 

Learn more about credit scores.

Interest Rate: The cost of borrowing money. You must pay interest in addition to the principal amount you borrow.  Each of your monthly payments are part interest and part principal.

Prepayments: Payments made in excess of scheduled repayments. This can reduce future monthly payments and/or the loan term. Depending on the interest rate, it can make a lot of sense to make prepayments on your loan.  But some lenders charge penalties or prohibit borrowers from prepaying, so be sure to check the fine print on any loan agreement you sign.

Principal: The total amount borrowed. In the most simple terms, this amount is multiplied by the interest rate to determine periodic repayments.

Underwriting: The process that a financial company uses to assess the eligibility of a potential borrower to receive a product (credit, insurance, mortgage, or equity). Traditional lenders use your credit report, credit score, and income information as their primary source of underwriting criteria. In addition to those, Upstart’s underwriting model evaluates potential borrowers based on their education¹ and work experience.

The bottom line on financial terms

It takes time to become fluent in financial terms, but it’s important to learn as much as you can about the borrowing process before you sign a loan agreement. Understanding financial language can help you make better financial decisions.

At Upstart, we understand that a credit score isn’t the only factor that defines a person’s creditworthiness. Our AI model looks at a variety of information when making loan decisions, not just credit score. 

¹Neither Upstart nor its bank partners have a minimum educational attainment requirement in order to be eligible for a loan.

*This content is general in nature and provided for informational purposes only. This content is not specific to Upstart, except where explicitly stated. This content may contain references to products and services offered through Upstart’s credit marketplace. Upstart is not a financial advisor and does not offer financial planning services.

About the Author

Sam Swenson

Sam is a fee-only financial planner, CPA, and freelance writer. After nearly a decade in various Wall Street roles, Sam found a niche in creating objective, accessible, and actionable financial plans for everyday people. Sam has also published long- and short-form personal finance and investment planning content on various websites across the internet. Outside of work, Sam enjoys running, biking, reading, and philosophy, as well as spending time with his wife, daughter, and goldendoodle.

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  1. Checking your rate won’t affect your credit score: When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information may be reported to the credit bureaus.
  2. Upstart’s model considers education: Neither Upstart nor its lending partners have a minimum educational attainment requirement in order to be eligible for a loan.
  3. 41% more approvals and 33% lower rates than a traditional model: As of publication in April 2026, and based on a comparison between the Upstart model and a hypothetical traditional model using Upstart data from Jan – Dec 2025. For more information on the methodology behind this study, please see Upstart’s Annual Access to Credit results here.
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  7. APRs from 6.2% – 35.99%, with 3 or 5 year terms: The full range of available rates varies by state. The lowest rates are only available to the most qualified applicants. A representative example of payment terms for an unsecured Personal Loan is as follows: a borrower receives a loan of $10,000 for a term of 60 months, with an interest rate of 17.50% and a 7.25% origination fee of $725, for an APR of 21.23%. In this example, the borrower will receive $9275 and will make 60 monthly payments of $252. APR is calculated based on 5-year rates offered in March 2026. There is no downpayment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will be approved.
  8. Instant deposits: To receive instant funding, your bank account must support instant transfers. If your account does not support instant transfers, funds will be available to you depending on your bank’s transaction processing time and policies.
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  11. HELOC APRs as low as 6.52%: Terms shown here are subject to change without notice. APRs for initial advances range from 6.52% to 18.00% based on rates offered as of April 2026. The lowest rate is only available to consumers willing to become a member of a credit union and to those who meet a minimum FICO score of 780, CLTV under 70%, and DTI under 45%. Your actual rate will depend on many factors such as your credit history, combined loan-to-value ratio (CLTV), line amount, loan term, lien position, and property state. Origination fee to open an account is between 0% and 4.99% of the approved credit limit. The Annual Percentage Rate (“APR”) is variable and based on the Prime Rate as published in the Wall Street Journal “Money Rates” table plus or minus a margin. Your APR will never be less than 3.99% or greater than 18.00%. Property insurance is required.
  12. No annual fee, prepayment penalty, or fees to redraw: Terms shown here are subject to change without notice. Origination fee to open an account is between 0% and 4.99% of the approved credit limit. The Annual Percentage Rate (“APR”) is variable and based on the Prime Rate as published in the Wall Street Journal “Money Rates” table plus or minus a margin. Your APR will never be less than 3.99% or greater than 18.00%. Property insurance is required.
  13. 2,500+ Variables:As of 3/31/2026. “Variables,” often also referred to as “features,” refers to raw variables and combined variables considered in our AI models. A “raw” variable is a non-combined, conceptually distinct unit of data, such as “applicant-reported savings.” A “combined” variable is data that has been transformed, combined, or otherwise engineered from a raw variable or set of raw variables, such as “applicant-reported savings” divided by “loan amount.
  14. Fully automated loans: In Q2 2026. Percentage of Loans Fully Automated, which is defined as the total number of loans in a given period originated end-to-end (from initial rate request to final funding for personal loans and small dollar loans, and from initial rate request to signing of the loan agreement for auto loans) with no human involvement required by the Company divided by the Transaction Volume, Number of Loans in the same period.