Glossary

Lending glossary: loan terms explained

Short, plain-English definitions of the terms lenders, MFIs and SACCOs use every day. Each definition stands on its own, and the longer entries have their own page with a worked example.

A

Aging report: An aging report groups a loan portfolio into buckets by days past due, such as current, 1-30, 31-60, 61-90, 91-180 and 181+ days, and shows the balance and number of loans in each. It reveals how much of the portfolio is late and how late, and feeds portfolio at risk and provisioning.
Amortization schedule: An amortization schedule is a table of every scheduled payment on a loan, showing how much of each payment is interest, how much repays principal, and the balance remaining afterwards. Early payments are mostly interest and later ones mostly principal, so the balance reaches zero with the final payment. More about amortization schedule.
Annual percentage rate (APR): The annual percentage rate (APR) expresses the yearly cost of a loan, including interest and usually certain fees, as a single percentage so that different loans can be compared. Definitions vary by country, and a flat rate loan has a much higher APR than its quoted flat rate suggests.
Arrears: Arrears are amounts that are overdue on a loan: installments that should have been paid by now but have not been. A loan in arrears is also called delinquent or past due. Arrears are measured in currency and in days past due, and they drive portfolio-at-risk and provisioning figures.

C

Collateral: Collateral is an asset a borrower pledges to secure a loan, such as a vehicle, land, equipment or savings. If the borrower defaults, the lender may take and sell the asset, subject to the law and the loan agreement, to recover what is owed. A loan backed by collateral is a secured loan. More about collateral.
Compound interest: Compound interest is interest charged on the original principal plus any interest already added, so the balance grows faster over time. The amount after n periods is P × (1 + r)^n. It is standard for savings and for loans where interest accrues and is added to the balance.
Credit score: A credit score is a number that estimates a borrower's likelihood of repaying, based on their credit history. Lenders use bureau scores or their own scoring to inform approval decisions. In LoanTabs, the credit score is a field you record on the borrower; LoanTabs does not calculate scores.

D

Days past due (DPD): Days past due (DPD) is the number of days since a loan's oldest unpaid installment was due. If an installment due on 1 March is still unpaid on 20 March, the loan is 19 days past due. DPD places each loan in an aging bucket and is the basis for portfolio at risk. More about days past due (dpd).
Declining balance interest: Declining balance interest, also called reducing balance interest, is charged only on the amount of principal still owed. As the borrower repays principal, the interest charge falls with each payment. It costs the borrower less than flat rate interest at the same quoted rate.
Disbursement: Disbursement is the release of loan funds to the borrower after approval. It marks the end of loan origination and the start of servicing, when the repayment schedule begins. Fees deducted at disbursement reduce the cash the borrower actually receives.
Dividend (SACCO): In a SACCO, a dividend is a share of the annual surplus paid to members on the shares they hold, at a rate approved by members at the annual general meeting. It is separate from interest on savings and can only be paid if the SACCO has sufficient distributable surplus.

E

Effective interest rate: The effective interest rate is the true annual cost of a loan once the timing of payments, and often fees, are taken into account. For a flat rate loan it is the reducing balance rate that would produce the same payments, and it is typically 1.7 to 1.8 times the quoted flat rate. More about effective interest rate.

F

Flat rate interest: Flat rate interest is calculated once on the original loan amount for the whole term, then divided into equal installments, regardless of how much principal has already been repaid. It is simple to quote but costs more than it appears: 12% flat over a year is roughly a 21.5% reducing balance rate. More about flat rate interest.

G

Grace period: A grace period is a set number of days after a due date during which a late payment is not treated as overdue and no penalty applies. It can also mean an initial period at the start of a loan before repayments begin. Lenders should state it in the loan agreement and apply it consistently.
Group lending: Group lending is a microfinance model in which loans go to members of a group who support, and often jointly guarantee, each other's repayment. Groups meet regularly, repay in frequent small installments and unlock larger loans over successive cycles. Peer accountability stands in for collateral.
Guarantor: A guarantor is a person or company that promises to repay a loan if the borrower cannot. Guarantors do not receive the money but take on the obligation if the borrower defaults. A guarantee is only worth something if the guarantor is reachable, has means and understood what they signed.

I

Installment: An installment is one of the scheduled payments that repay a loan, made at regular intervals such as weekly or monthly. Each installment usually covers interest and part of the principal. Equal installments keep the payment the same each period; equal principal installments start higher and fall.
Interest-only loan: An interest-only loan charges interest each period on the full principal and repays the principal in a single payment at the end. Monthly payments are the smallest of any method, but the borrower faces a large balloon payment at maturity, so term, purpose and security need care.

J

Joint liability: Joint liability is a rule under which the members of a lending group are collectively responsible for each other's loans. If one member cannot pay, the others are expected to cover it, or future loans to the group are withheld. It is the core mechanism of solidarity group lending.

K

KYC (know your customer): KYC, or know your customer, is the process of verifying who a borrower is and whether they can repay before lending. It covers identity, address, income or business, references and the purpose of the loan, with copies kept on file. Many countries require it under anti-money-laundering rules. More about kyc (know your customer).

L

Loan loss provision: A loan loss provision is money set aside, and recorded as an expense, to cover loans a lender expects not to recover. It is commonly calculated by applying a rising percentage to each aging bucket. Provisions keep profit and the loan book's value honest before losses become certain. More about loan loss provision.
Loan management software: Loan management software is a system that records and automates a loan from application to closure: approvals, disbursement, repayment schedules, interest, fees, receipts, accounting and reports. Lenders use it instead of spreadsheets to keep accurate records, control who can approve loans and see portfolio risk.
Loan origination: Loan origination is the process of creating a loan: taking the application, recording the borrower's details and documents, agreeing terms, reviewing and approving the loan, and disbursing the funds. It ends at disbursement, when loan servicing begins. More about loan origination.
Loan product: A loan product is a standard set of terms a lender offers: amount range, term range, interest method and rate, fees, repayment frequency, penalties and security requirements. Defining products lets every loan on the product follow the same rules and keeps officers within policy.
Loan servicing: Loan servicing is the management of a loan after it is disbursed: recording and allocating repayments, keeping the schedule and balance accurate, producing receipts and statements, following up overdue accounts and closing the loan. It lasts as long as the loan does. More about loan servicing.
Loan term: The loan term is the length of time over which a loan is to be repaid, such as 12 months. Together with the amount, interest method and repayment frequency, it determines the size of each installment and the total interest. Loan products usually set minimum and maximum terms.

M

Microfinance institution (MFI): A microfinance institution (MFI) is an organization that provides small loans, and sometimes savings and other services, to low-income people and small businesses that banks often do not serve. MFIs can be non-profits, licensed companies or cooperatives, and often use group and individual lending.

N

Non-performing loan (NPL): A non-performing loan (NPL) is a loan on which payments are seriously overdue, commonly 90 days or more, or which is otherwise impaired. Definitions vary by regulator. The NPL ratio, NPLs divided by total loans, is a standard measure of loan quality and is close to portfolio at risk over 90 days.

P

Penalty (late fee): A penalty, or late fee, is a charge applied when a borrower misses or delays an installment. It can be a fixed amount or a percentage of the overdue balance, and starts after any grace period. Penalties must be stated in the loan agreement, and some countries cap or restrict them.
Portfolio at risk (PAR): Portfolio at risk (PAR) is the share of a loan portfolio that is overdue beyond a set number of days: the outstanding balance of loans more than N days late divided by the total outstanding portfolio. PAR30 uses 30 days and PAR90 uses 90. It is the standard measure of loan quality. More about portfolio at risk (par).
Principal: Principal is the amount of money borrowed and still owed, excluding interest and fees. Each installment on a reducing balance loan repays part of the principal, and interest is charged on what remains. On flat rate loans, interest is calculated on the original principal for the whole term.

R

Reducing balance interest: Reducing balance interest is charged only on the principal still owed, so each period's interest falls as the borrower repays. With equal installments the payment is P × r ÷ (1 − (1 + r)^−n). On 1,000 at 12% over 12 months, interest totals 66.19, against 120 on a flat rate. More about reducing balance interest.
Repayment allocation: Repayment allocation, or the payment waterfall, is the order in which a loan payment is applied to what is owed. A common order is penalties, then fees, then interest, then principal. The order matters most for partial or late payments, because it decides which balances are cleared first.
Restructured loan: A restructured loan is one whose terms have been changed after disbursement, for example by extending the term or reducing the installment, usually because the borrower is in difficulty. Restructured loans should be tracked separately and classified prudently so that restructuring does not hide arrears.

S

SACCO: A SACCO, or savings and credit cooperative, is a member-owned financial cooperative whose members save together, buy shares and borrow from the pooled funds. It is governed by an elected board and an annual general meeting, and surplus is returned to members as dividends and interest. More about sacco.
Secured loan: A secured loan is backed by collateral, an asset the lender may take and sell if the borrower defaults. Security lowers the lender's risk and often the rate, but it only helps if the asset is owned by the borrower, properly valued, and legally enforceable.
Share capital (SACCO): Share capital is the total value of shares members have bought in a SACCO. It forms the cooperative's permanent capital base and represents members' ownership. Shares generally cannot be withdrawn while a member remains in the SACCO, and they earn dividends rather than interest.
Simple interest: Simple interest is calculated only on the original principal for the time it is outstanding: Interest = Principal × Rate × Time. It never charges interest on interest. Of 1,000 borrowed at 12% for three years, simple interest is 360, and the total owed is 1,360.

U

Unsecured loan: An unsecured loan has no collateral behind it: the lender relies on the borrower's promise and creditworthiness, sometimes with a guarantor. Because recovery is harder, unsecured loans are usually smaller, shorter and priced higher, and need stronger verification and affordability checks.

W

Write-off: A write-off removes a loan from the balance sheet because it is judged unlikely to be collected, usually against a provision already held. Writing off is an accounting decision, not forgiveness: the borrower's obligation may continue, and any later recovery is recorded as income.