We understand that getting to grips with the subject of credit risk is no easy task, which is why we’re committed to supporting the market with clear, accessible knowledge—sharing the insights we've gained from years of innovation in the online lending and credit risk sector.

Whether you’re a skilled underwriter, a junior credit risk analyst, or simply trying to make sense of financial jargon and acronyms, we are here to help you identify and understand the key terms and what they really mean.

Credit scoring to anti-money laundering, there’s no need to worry, below is our glossary of credit risk terminology designed to equip you and your fintech with the essential knowledge you need. Click a term from the list to jump to its definition, or scroll through at your own pace.

(Tip: Use 'CTRL + F' to search for a specific term)

Credit risk terms and definitions

A comprehensive glossary to support your understanding of key concepts in credit risk.

Affordability Assessment 
Evaluating a borrower’s ability to repay a loan based on income, expenses, and existing financial obligations.

Anti-Money Laundering (AML)
Regulations and processes designed to prevent money laundering and financial crimes by monitoring transactions and verifying identities.

Read our blog on the alarming rise in digital fraud.

Arrangement 
An agreement between a borrower and lender to address missed or late payments. It involves changing the loan terms such as extending the repayment period, lowering payments, or allowing a temporary break to help the borrower catch up with payments and prevent further penalties.

Asset Finance 
Financing solutions that allow businesses to acquire equipment, vehicles, or other assets by spreading the cost over time through loans or leasing agreements.

Automated Credit Decisioning 
The use of a decision engine incorporating pre-defined rules and algorithms to evaluate and approve or reject credit applications quickly and accurately.

Explore how our Auto Decision Platform (ADP) can enhance your credit decisioning capabilities.

Bridging Loan 
A short-term loan that helps borrowers buy a new property before selling their current one. It gives the borrower quick access to funds to cover the purchase, lasting only until they secure a long-term loan or sell their old property. Bridging loans often have higher interest rates due their short-term nature.

Building Societies 
Member-owned financial institutions that provide savings accounts and mortgages, operating as alternatives to traditional banks.

Explore case studies from the building societies we partner with.

Buy Now, Pay Later (BNPL) 
A short-term financing option allowing customers to defer payments or split purchases into instalments, often interest-free. Also referenced as Deferred Credit.

Read our blog on the UK Government’s regulation of Buy Now, Pay Later (BNPL) services.

Buy-to-Let (BTL)
A type of mortgage designed for individuals purchasing property to rent out rather than occupy as a primary residence.

Read the press release from David Wylie, Chief Commercial Officer at LendingMetrics, on the buy-to-let market.

Challenger Banks 
Digital-first banks that leverage technology to offer innovative services and compete with traditional high-street banks.

Commercial Lending 
Loans and credit facilities specifically tailored to meet the needs of businesses, such as financing for expansion or capital investments.

Commercial Mortgages 
Loans secured against commercial properties, including offices, warehouses, and retail spaces, typically for business purposes.

Consumer Duty 
Rules set by the Financial Conduct Authority to ensure financial services deliver fair outcomes for consumers, focusing on transparency, value, and customer support.

Consumer Lending 
Loans issued for personal purposes, including mortgages, credit cards, personal loans, and car finance.

Credit Bureau 
A credit bureau, also known as a credit reference agency (CRA) or credit reporting agency, is a company that collects and manages information about individuals' credit history and financial behaviour. Lenders use this data to assess creditworthiness when processing applications for loans or credit. Examples include Experian, Equifax, and TransUnion.

Explore how DeeJoop leverages multi-bureau data to present a clear view of a customer’s credit profile.

Credit Industry Fraud Avoidance System (CIFAS) 
A UK-based non-profit fraud prevention service where members (financial institutions and businesses) collaborate to protect against fraud using a shared database of suspected and confirmed fraudulent activity. Individuals who are concerned about potential identity theft or fraud can apply for Protective Registration with CIFAS.

Credit Risk 
The likelihood that a borrower will fail to meet their repayment obligations, resulting in losses for the lender.

Credit Score 
A numerical representation of a borrower’s creditworthiness based on their financial history and payment behaviour.

Credit Scorecards 
A credit scorecard is a mathematical model that assigns a numerical score to a borrower based on their credit history and other relevant information. This score helps lenders quickly assess the risk associated with lending to a particular applicant.

Current Account Turnover (CATO) 
The total value of all money moving in and out of a current account over a specific period, usually monthly or annually. It includes all deposits, withdrawals, payments, and transfers. Companies use CATO data to analyse account activity assisting in risk assessment, limit setting and affordability calculations.

Default 
In credit, a default occurs when a borrower fails to meet the terms of their credit agreement, usually by missing payments or not paying the full amount due. This can lead to the lender closing the account and potentially taking further action to recover the debt, such as passing it to a collection agency or taking legal action. A default is a serious negative event that can negatively impact a borrower's credit score. 

Delinquency 
A situation where a borrower fails to make a loan payment or credit payment by the due date. It shows the payment is late, but the account isn’t yet in default. If payments remain missed for an extended period, it can negatively impact credit scores and could result in loan default and/or debt collection agencies becoming involved.

Equity 
In credit, equity generally refers to the owner's stake or net worth in an asset, often a home or a company. It's the value of the asset exceeding any outstanding debts or liabilities against it. For example, if you own a home worth $300,000 and have a mortgage of $100,000, your equity in the home is $200,000. 

Exposure at Default (EAD) 
The total amount of money a lender will lose (including any accrued interest or fees) at the exact time the borrower fails to repay or defaults.

Financial Conduct Authority (FCA) 
The UK’s regulatory body responsible for overseeing financial services, protecting consumers, and promoting competition while ensuring market integrity.

Read our blog on the FCA’s 5-year strategy to support the growth of UK financial services.

First Charge Mortgage 
A first charge mortgage is the primary loan secured against a property, giving the lender the first claim on the property's equity in case of default or sale. It's the main mortgage used to purchase a property and has priority over any subsequent loans secured against the same property.

Gross Debt Service Ratio (GDS)
Gross debt service ratio is a debt service measure that financial lenders use to assess the proportion of housing debt that a borrower is paying in comparison to their income. The gross debt service ratio is one of several metrics used to qualify borrowers for a mortgage loan and determine the amount of principal offered.

High-Cost Short-Term Credit (HCSTC) 
Loans with high interest rates, typically short-term, such as payday loans.

Hire Purchase 
A financing arrangement where borrowers acquire assets by paying instalments over time, gaining ownership once all payments are completed.

Identity and Verification Checks (IDV) 
A simple and secure service provided by a vendor to verify the identity of an individual in a few easy steps. It verifies the identity documents of a customer for authenticity and validates that they are indeed who they claim to be.

Interest Coverage Ratio (ICR) 
In buy-to-let (BTL) mortgages, the interest coverage ratio (ICR) is a key metric used to assess a property's affordability, and the potential risks associated with lending to a landlord. It essentially measures how well the rental income covers the mortgage interest payments.

Joint Borrower Sole Proprietor (JBSP) 
A joint borrower sole proprietor mortgage allows a homebuyer to include other individuals on the mortgage application to improve affordability, but only the primary borrower owns the property. This means the other borrowers, often family members, are jointly responsible for the mortgage repayments but do not have any legal claim to the property. 

Know your Customer (KYC) 
KYC helps financial service businesses understand their customers and manage risks effectively through a process of verifying the identity of their clients. It involves collecting and checking personal information like identification documents, address, and financial background to prevent fraud, money laundering, and ensure compliance with legal and financial regulations.

Loan Origination System (LOS) 
Software platforms that manage the entire loan application workflow, from submission and credit assessment to approval and disbursement.

Loan-to-Cost (LTC) 
The loan-to-cost (LTC) ratio is a metric used in commercial real estate construction to compare the financing of a project (as offered by a loan) with the cost of building the project. The LTC ratio allows commercial real estate lenders to determine the risk of offering a construction loan. In self-build mortgages, this metric is used to determine risk at the build stage of the project.

Loan-to-Share (LTS) 
The value of the loan against the percentage of share owned by the applicants in the shared ownership property.

Loan-to-Value (LTV) 
LTV is a crucial metric that compares the amount of a loan to the value of the asset it's secured against, typically a property. It's usually expressed as a percentage and helps lenders assess the risk associated with a loan. A lower LTV (meaning a larger down payment) generally indicates lower risk for the lender and may result in better loan terms, such as lower interest rates. 

Mortgage 
A type of loan from a bank, building society, etc, to assist in purchasing a property. The loan is secured against the property, meaning if you can't keep up with the repayments, the lender can repossess and sell your property to get their money back. Mortgages can be first charge or second charge.

Read our blog on how technology is reshaping the mortgage lending landscape.

Non-Revolving Credit 
A form of borrowing where a fixed amount of money is borrowed once, then repaid over a set period. The credit line does not replenish after repayment.

Open Banking 
A secure way of sharing financial data between banks and authorised third-party providers using APIs, enabling consumers to access better financial products and services.

Explore how OpenBankVision (OBV) delivers powerful insights through Open Banking data.

Principal 
The original amount of money borrowed or still owed on a loan, excluding interest. 

Query (Q) 
On a credit report, the letter "Q" may appear. Q stands for "Query" and it shows that there is a question or dispute about a credit account. While this status does not directly affect an individual’s credit score, it can influence how lenders view an individual’s financial history.

Revolving Credit 
A flexible loan or credit line that lets you borrow up to a set limit, repay it, and then borrow again without reapplying, e.g. a credit card. Payments are made on the interest on the amount you’ve borrowed, and as you repay, your available credit is replenished, allowing continuous access to funds.

Second Charge Mortgage 
A loan secured against a property that already has a first charge (usually a mortgage). If the property is sold, the first charge lender gets paid first, and the second charge lender is paid from the remaining funds. Second charge loans are often used to borrow additional funds without changing the original mortgage.

Secured Loans 
Loans that require collateral, such as a property or a vehicle. The failure of an applicant to repay the loan enables the lender to repossess the collateral and sell it to recover the loan amount.

Shared Ownership 
Shared ownership is a government-backed scheme that allows eligible individuals to purchase a share of a property, typically between 10% and 75%, while paying rent on the remaining share to a housing association. It's designed to help those who can't afford to buy a home outright to get onto the property ladder. 

Staircasing 
Staircasing in shared ownership mortgages allows homeowners to gradually increase their ownership stake in a property, reducing rent and building equity. This process involves buying additional shares from the housing association or landlord, typically in set percentages, and can lead to 100% ownership, making the homeowner the sole owner.

Subprime Loan 
A loan given to individuals with low credit scores or poor credit histories, making them riskier prospects to lenders. Because of this higher risk, these loans normally have higher interest rates and less favourable terms. 

Top Slicing 
Top slicing offers a solution for landlords who may present with affordability issues, in relation to fulfilling ICR requirements. This approach allows lenders to consider a borrower's surplus personal income to cover any shortfall in the rental income needed to secure the loan. The ICR will generally always need to cover at least 100% of the mortgage payments to allow top slicing to be used.

Underwriting 
The process of assessing borrower risk and determining eligibility for loans or insurance products, based on financial data and creditworthiness.

Unsecured Loans 
Loans that do not require collateral, such as personal loans and credit cards, where lending decisions rely solely on creditworthiness.

 

Continue the Conversation with LendingMetrics

We remain committed to supporting our partners across the credit risk industry. If you would like to learn more about LendingMetrics and how our award-winning software solutions can enhance your decisioning capabilities, we invite you to get in touch.

Book a complimentary demo with our expert team today and discover how we can help drive smarter, faster credit decisions across your business.