Glossary

Arbitrage

A practice that attempts to take advantage of the difference in price, rate, or value of something in order to generate profit without incurring any cost. For example, arbitrage is possible when money is available to borrow at a lower interest rate than it will be invested at by the borrower.  Arbitrage scenarios can be risky, as the margins are usually small and risky investment terms are sometimes required to

Balance Transfer

A transaction where a balance owed is transferred from one account to another.  Often the new account has more favorable terms, prompting the transfer. Balance transfers are usually discussed in the context of the credit card industry; often credit card companies offer a balance transfer deal to new and existing customers to encourage their customers to move balances.  These deals often offer a period of 0% interest, making them appealing

Credit Card Rewards

Programs set up by credit card companies to encourage more spending using credit cards as the payment type. Usually a credit card rewards program offers the card holder airline miles, cash back, or points that can be used towards gift cards, cash, travel, and other luxuries. Credit card rewards usually award the card holder with somewhere between 0.5% and 5% of the amount they charge to their cards. For example,

Default

A failure to pay back a loan according to the agreed loan terms. Defaulting on a loan often prompts negative consequences for the defaulting party including negative notes on credit reports, a drop in credit ratings, and having the remaining balance sent to a collection agency.

FIRE

FIRE is an acronym that stands for “financially independent, retired early.”

Lender Credit

Money credited to a borrower during the origination of a loan, often designed to lower fees and costs. In a mortgage transaction a lender credit is often offered to a borrower who chooses an interest rate slightly higher than the lowest rate available to them. With a higher rate, the lender is able to sell the loan on the secondary market at a more favorable rate, allowing them to give

Lending Club

A peer lending marketplace. Lending Club allows investors to buy “notes” that represent a fragment of a borrower’s personal loan.  Lending Club acts as the middle man, vetting the borrowers, and handling details like payments, setting rates, etc. They charge a fee for maintaining each loan, but most of the interest paid towards loans goes to the loan investors who purchased notes on the loans.

Net Worth

Total assets (things worth money), minus total liabilities (money owed). A high net worth is an important part of reaching financial independence. Many people hold a large percentage of their net worth as home equity and retirement savings.

Passive Income

Any income obtained with little or no ongoing work from the recipient. Passive income is usually received as a result of an earlier effort – for example, passive rental income is paid to the owner of real estate who put in the initial work to buy a rental property, and there is little ongoing work involved in maintaining the income from their real estate investment. A classic example of passive

Windfall

Money received unexpectedly, usually in a lump sum.  A bonus at work or an inheritance are common examples of a windfall.