Personal loan and debt terms, explained in plain English

A lump sum of money you borrow from a bank, credit union, or online lender, then pay back in fixed monthly payments over a set term — usually 2 to 7 years. Most are unsecured, meaning you qualify based on your credit and income, not by putting up collateral.

A personal loan used for one specific purpose: paying off multiple higher-interest debts (usually credit cards) so you're left with a single loan, a single payment, and — if it's priced right — a lower interest rate than what you were paying before.

An unsecured loan is approved based purely on your credit and income — nothing of yours is at risk if you can't pay it back, beyond the damage to your credit. A secured loan is backed by something you own (a savings account, a CD, your car title), which can get you a lower rate, but the lender can take that asset if you fall behind.

A revolving credit line secured by the equity in your home, letting you borrow, repay, and borrow again up to a limit during a set "draw period" — similar to a credit card, but usually at a much lower rate since your home backs it.

A loan secured by your home's equity, paid back in fixed installments at a fixed rate. Unlike a HELOC's revolving credit line, you get one lump sum up front — closer to a second mortgage than a credit card.

A short-term, small-dollar loan typically due on your very next payday, carrying extremely high fees that translate to triple-digit APRs once annualized. In many states these operate outside standard interest-rate caps entirely.

An installment loan (like a personal loan or auto loan) is a fixed amount repaid in equal payments over a set term. Revolving credit (like a credit card or HELOC) gives you a credit limit you can borrow against repeatedly, with payments that vary based on your balance.

Instead of borrowing new money to pay off what you owe, a debt settlement company negotiates with your creditors to accept less than your full balance. This usually requires you to stop paying those creditors first to create negotiating leverage, which can damage your credit in the meantime, and any forgiven balance can be reported to the IRS as taxable income.

A structured repayment plan, usually set up through a nonprofit credit counseling agency, where you make one monthly payment to the agency, which distributes it to your creditors — often at a reduced interest rate the agency negotiated on your behalf. Unlike debt settlement, you still pay your full balance.

A service, often nonprofit, that reviews your finances and helps you understand your options, which can include setting up a debt management plan. Worth talking to before jumping into debt settlement or bankruptcy.

A legal process that can eliminate or restructure debt you can't repay, under court supervision. It has serious, long-lasting credit consequences and is generally treated as a last resort after other options have been considered.

A payoff strategy where you put extra money toward your smallest balance first, regardless of interest rate, then roll that payment into the next-smallest balance once it's paid off. Built for motivation — quick, visible wins early on.

A payoff strategy where you put extra money toward your highest-interest debt first, regardless of balance size. Mathematically saves the most money in interest overall, even if it feels slower emotionally at first.

The real yearly cost of borrowing, expressed as a percentage — it includes the interest rate plus most fees, which is why it's usually a more honest number to compare across lenders than the interest rate alone.

Lets a lender estimate what rate you'd likely get without affecting your credit score — this is what happens when you "check your rate" on a comparison site.

Happens when you formally apply for and accept a specific loan or credit product. It can cause a small, temporary dip in your credit score and stays on your credit report for about two years.

A number, typically 300 to 850, that summarizes your credit risk based on your payment history, amounts owed, length of credit history, new credit, and credit mix. FICO is the scoring model most widely used by lenders.

The percentage of your monthly gross income that goes toward debt payments. Lenders use it alongside your credit score to judge how much more debt you can reasonably take on.

The percentage of your available revolving credit (mainly credit cards) that you're currently using. Keeping this below 30% is generally considered good for your credit score; below 10% is even better.

A one-time fee some lenders charge to process your loan, usually 1% to 10% of the loan amount. It's typically subtracted from your loan proceeds up front, so a $10,000 loan with a 5% origination fee actually puts $9,500 in your account.

A fee some lenders charge if you pay off your loan ahead of schedule, since it cuts into the interest they expected to collect. Not all lenders charge this — worth checking before you sign.

A fee charged when a payment isn't made by its due date, on top of any interest that continues to accrue. Some lenders also report late payments to credit bureaus after a certain number of days past due, which can hurt your score.

The smallest amount a lender requires you to pay each month to keep an account in good standing, often calculated as a small percentage of your balance. Paying only the minimum on credit cards is usually the slowest, most expensive way to pay off debt.

State laws that cap the maximum interest rate a lender can legally charge. These caps vary significantly by state and often depend on the type of lender and loan structure — some loan types are exempt entirely.

The time limit, set by state law, during which a creditor or debt collector can sue you to collect an unpaid debt. This varies by state and debt type, and making a payment or acknowledging the debt in writing can sometimes restart the clock.