English bank vocabulary 3: Borrowing money & loans exercise

This online exercise on bank vocabulary looks at and explains English banking vocabulary connected to loans and borrowing money from a bank. It also looks at vocabulary connected to having problems with loans from a bank.

To learn both essential bank vocabulary and the different types and names of bank accounts, do our online exercise on 'English bank vocabulary 1: The essentials'.

For more advanced English vocabulary on loans, do our online exercise on 'Bank loan vocabulary'.


Exercise: Borrowing money from a bank

In the following conversation between two friends, Peter explains to Juan about borrowing money from a bank and the possible problems that people have when repaying a loan.

From the context, try to guess what the meaning of the words/phrases in bold are. Then do the quiz at the end to check if you are right.

Juan:'Why do people borrow money from a bank?'

Peter:'They borrow money from a bank if they need or want to buy or pay for something and they don't have enough money to do it. The main way people borrow money is in a loan, where they borrow a fixed or set amount of money (e.g. £10,000). They have to pay it all back to the bank within a fixed amount of time (e.g. 2 years, 30 years etc...). Normally, people have to pay back to the bank some of the money they borrowed each month until they have paid the bank all the money that they owe them. This money people pay back to the bank each month for a loan is called a monthly repayment.'

Juan:'How much interest do banks charge on loans?'

Peter:'It depends on both the credit history of the person applying for a loan and how long they are going to repay it for.

Before giving somebody a loan, banks look at a report (called a credit history) which shows the history of the loans that the person both has had and still has to repay. If the person has had problems repaying/paying back loans in the past, then they will have a bad credit history and the bank will charge them a higher interest rate than somebody who has a good credit history (who has had no problems repaying loans in the past).

In addition, the interest rate a person has to pay also depends on how long the person is going to take to repay the loan to the bank. Banks charge people interest during the time they are repaying money for a loan back to them (e.g. 6% interest each year a loan is being repaid). So for a bank to make money, the interest rate would have to be higher for a loan where you repay it all over 6 months than one where you repay it all over 30 years. A loan used to buy a house, which is called a mortgage, normally has a low interest rate because it takes a long time to repay it (between 20 to 30 years).'

Juan:'And does the interest rate on a loan change while you repay the loan?'

Peter:'It depends on what type of interest rate your loan has. Some loans have a variable rate of interest, where the interest rate can go up and down because of the changes in inflation (one year it's 7%, the next it's 5%). Other loans have a fixed rate of interest, where the interest rate you pay on the loan stays the same until you have repaid all the loan.'

Juan:'Ok.'

Peter:'There are also other ways that you can borrow money from a bank. A common way that businesses use to borrow money is called a line of credit. This is a special type of account where a bank agrees to give a business the ability to borrow money from them when they need to.'

Juan:'But isn't that a loan?'

Peter:'Not really, because with a line of credit a business is given an amount it can use/borrow (e.g. £7,000) if it wants to. The business can choose to borrow as little or as much of that money when it wants (e.g. it could use £5 or the full £7,000). It's more like a credit card than a loan (where you borrow a fixed amount).'

Juan:'Is a line of credit the same thing as an overdraft?'

Peter:'It’s very similar, but an overdraft is where the bank allows/permits its customers to use or withdraw more money than they have in their current/checking accounts when they want to. Whereas a line of credit is only given to business customers, overdrafts are normally given to both business and non-business customers.'

Juan:'So with both a line of credit and an overdraft, the customers can borrow as much money as they want from the bank?'

Peter:'No. The bank sets/gives an overdraft limit or credit limit (for lines of credit) on how much their customers can borrow from them. Which means a maximum amount of money they can borrow/use.'

Juan:'What happens if somebody withdraws or spends more money than the limit of the overdraft or line of credit?'

Peter:'It depends on the bank. Some banks won't allow them to withdraw or spend the money and tell them they have insufficient funds. Which basically means they don't have the money in their bank account or they have gone over their overdraft limit. Other banks will allow them to withdraw or spend the money, but then the customer will have to pay bank charges, which is extra money they have to pay to the banks. These bank charges can be very high.'

Juan:'And what happens if you can't pay the money that you have borrowed back to a bank?'

Peter:'When a bank sees that a loan repayment is overdue, which means it hasn't been paid when it should have been and it is late, they will contact the person who has the loan or borrowed the money and ask them to pay it. Normally, the person will have to pay bank charges for the overdue repayment. If the person or company defaults on the loan, which means they can't or won't repay the loan to the bank, the bank will try different ways to try to get the money they have loaned/lent to them back. Not paying back/defaulting on a loan, will give the person or company a bad credit history.'



Quiz: English bank vocabulary 3 - Borrowing money & loans

Below is a definition/description of each of the words/phrases in bold from the above text. Now fill in the blanks with one of these words/phrases in bold. Only use one word/phrase once and write it as it is in the text. Click on the "Check Answers" button at the bottom of the quiz to check your answers.

When the answer is correct, two icons will appear next to the question. The first is an Additional Information Icon "". Click on this for extra information on the word/phrase and for a translation. The second is a Pronunciation Icon "". Click on this to listen to the pronunciation of the word/phrase.

1. A bank account where a bank allows a business customer to instantly borrow money from them when they need to, is called a    

         

Line of credit:
(noun) A 'line of credit' is a short-term loan (i.e. the money is paid back to the bank quickly) where the bank provides their customer with a quantity of money they can use instantly if they need or want to. 'lines of credit' always have a maximum limit and unlike a normal loan (where the customer borrows a fixed amount of money), it is the decision of the customer how much of the money available in the 'line of credit' they do or don't use. In many ways it is the same as a 'credit card', but only for businesses or companies.

An 'overdraft' is similar to a 'line of credit'. Whereas a 'line of credit' is normally a separate bank account, an 'overdraft' is an extension to an existing checking/current bank account (both for business and non-business accounts), which allows the person/company to use more money than is in their bank account (basically borrow money from the bank).

The reason banks give businesses a line of credit, is because there is normally a delay between making/selling products or providing a service and actually being paid for them. A line of credit helps businesses survive during this time.

In Spanish: "línea de crédito".

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Line of credit:

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2. A bank loan which is used to buy a house or property, is called a    

         

Mortgage:
(noun) A 'mortgage' is a type of bank loan used to buy property (e.g. a house, land, buildings etc...). Most 'mortgages' are long-term loans (i.e. they are paid back to the bank over 10 years or more). They are a type of 'secured loan'. This means that if the person is unable to repay the loan, the bank have the right to take the ownership of the property from the person.

In Spanish: "hipoteca".

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Mortgage:

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3. When you don't have enough money in a bank account to withdraw/take out any more, you have    

         

Insufficient funds:
(noun) It basically means 'you don't have enough money in your bank account to either pay for something or to withdraw money'. This phrase is commonly used by banks to tell customers that they can't use more money. It is used if you don't have enough money in your current/checking account or if you gone over/exceeded your 'overdraft limit' or 'credit card limit'.

'funds' in this context means the money that you have available to use in the bank account. And 'insufficient' means not enough.

In Spanish: "fondos insuficientes".

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4. When a person is unable to repay the money they have borrowed from a bank, he/she    

         

Defaults:
(verb) The infinitive is 'to default'. This is the situation when somebody who has a loan from a bank is unable or unwilling (doesn't want to) repay the loan to the bank. For example, 'Simon has defaulted on his mortgage'.

There are various consequences of a person 'defaulting'. Bank will normally first try to restructure loan repayments (you pay less each month but for longer). If this doesn't work/help they can repossess (take ownership of) some of your property (your house or car). This normally happens if the loan is a 'secured loan' like a mortgage or a car loan. For loans for a small quantity of money they may 'write it off', which means they'll just stop trying to get you to give them the money.

No matter what the bank does, when a person 'defaults' on a loan it will affect the person's 'credit history'. Making it more difficult in the future for the person to borrow money and increasing the amount of interest that they have to pay if they can.

In Spanish: "incumplir/no pagar".

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Defaults:

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5. A type of interest rate which can change during the time of the loan, is called    

         

Variable rate:
(adjective) 'variable rate' or 'flexible rate' is one of three main ways/methods that you can pay interest on a loan. It basically means that the interest you pay will change/vary during the length of repaying a loan. The interest rate will change depending on the rate of inflation (the increase in the price of products in the economy as a whole) and others factors.

The other two main methods of paying interest are: 'fixed rate' (where the interest you pay doesn't change throughout the period of a loan) and 'split rate' (where a part of the interest you pay on a loan is 'fixed rate' and the other part is 'variable rate').

In Spanish: "tasa variable".

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Variable rate:

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6. When you can use/spend more money than is in your bank account, you have an    

         

Overdraft:
(noun) This is a type of short-term loan (i.e. the money is paid back to the bank quickly) where the bank provides their customer with a quantity of money if they have no money left in their bank account. 'overdrafts' are normally used with current/checking accounts. With an 'overdraft', the bank allows the person to continue spending money from their account when their account balance has reached zero. 'overdrafts' always have a maximum limit (called an 'overdraft limit') which the person/company can use.

An 'overdraft' is similar to a 'line of credit'. Whereas a 'line of credit' is normally a separate bank account, an 'overdraft' is an extension to an existing checking/current bank account (both for business and non-business accounts).

In Spanish: "sobregiro/descubierto".

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Overdraft:

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7. The name for the extra money a customer has to pay a bank if they are late with a loan repayment, is called    

         

Bank charges:
(noun) Is also called 'charges'. This is the commonly used name for a type of 'fee' that a customer/borrower has to pay a bank or lending institution if they do something that they have agreed not to do in the loan contract. With a loan, you will normally have to pay 'bank charges' if you are late making a loan repayment. It is also common that you will have to pay them if you pay off a loan earlier than you originally agreed to (because the bank loses money it would get from you in interest payments).

Most banks and lending institutions no longer call this extra money that their customers have to pay them 'charges'. They normally call them 'fees' instead (e.g. late payment fee, policy cancellation fee etc...). They believe it makes them sound better.

In Spanish: "cargo".

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Bank charges:

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8. A report that shows details of what a person has borrowed both in the past and now, is called a    

         

Credit history:
(noun) Also called a 'credit report'. This is a record of what a person or business has borrowed both in the past and the present, if they have had problems repaying the borrowed money, how many loans a person has been refused and how many times somebody has requested to see their 'credit history'.

'credit histories' are used by bank to see what the risk is of lending a person or business money (the chance of them not repaying the money). They use a person's or business's 'credit history' to help them decide both if they should give a loan to the person/company and what interest rate they should charge (the worse the 'credit history', the higher the interest rate).

Most 'credit histories' also contain a 'credit score' (sometimes called a 'credit rating' for companies). This is a number (between 300-850) which shows the risk of lending the person or business money (the lower the number, the lower the risk of the person/company defaulting/not paying the money back).

A person or business will have a bad 'credit history' and 'credit score' if they have had problems repaying loans in the past. Also, if they currently have a lot of loans to repay, their 'credit history' will be seen as worse (and more of a risk) than somebody who currently doesn't have any or fewer loans to repay.

In Spanish: "historial de crédito".

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Credit history:

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9. Each time you give the bank money to repay a loan/money you have borrowed from them, is called a    

         

Repayment:
(noun) It is also called a 'loan payment'. This is the name for each time you 'pay back'/'repay' money to a bank for a loan. For most types of loans, people have to make 'repayments' every month and the bank will tell you how much money the 'repayment' has to be (e.g. £327 per month). With some short-term loans like a 'line of credit' or 'credit cards', the bank will require you pay them back a minimum amount of money in each 'repayment', but you can repay them more if you want to.

The amount of time that you repay money to a bank for a loan, is called the 'repayment period'. For mortgages/house loans, the 'repayment period' is normally around 20 or more years.

In Spanish: "pago/reembolso".

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Repayment:

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10. The maximum amount of money that a person can use in an overdraft, is called the    

         

Overdraft limit:
(noun) An 'overdraft' is when a bank allows a person to use/withdraw more money than they have in their current/checking account. It is a type of short-term loan. When a person is given an 'overdraft', they are given a maximum of how much money that they can use in their 'overdraft' (e.g. £2,000), and this is what is called the 'overdraft limit'.

Depending on the bank, if you go over/exceed this 'overdraft limit', you either won't be able to use more money (and be told you have 'insufficient funds') or you will have to pay high 'bank charges'/'overdraft fee' for the money you use (e.g. £5 a day or £25 per transaction).

In Spanish: "límite de sobregiro/descubierto".

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Overdraft limit:

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11. When a repayment for a loan is late, it is called    

         

Overdue:
(adjective) This basically means that a loan repayment is 'late'. Most banks require people who have borrowed money from them to regularly pay them back part of the money on specified dates (e.g. the 1st day of every month) until the loan is fully repaid (paid off). When a repayment isn't received on this date, it is called 'overdue'.

Normally when a loan repayment is 'overdue', the bank will try to contact the person and get them to quickly pay them the money they should have. Sometimes, the person will have to pay 'bank charges' (extra money) for 'overdue'/'late' repayments. This depends on the bank.

In Spanish: "vencido/en mora".

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Overdue:

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12. A type of interest rate which doesn't increase or decrease during the time of the loan, is called    

         

Fixed rate:
(adjective) 'fixed rate' is one of three main ways/methods that you can pay interest on a loan. It basically means that the interest you pay doesn't change/vary during the length of repaying a loan. So you know that you will be paying the same amount of interest throughout the whole period of the loan.

The other two main methods of paying interest are: 'variable rate' (where the interest rate can go up or down) and 'split rate' (where a part of the interest you pay on a loan is 'fixed rate' and the other part is 'variable rate').

In Spanish: "tasa fíja".

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Fixed rate:

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Practice

Now that you understand the new vocabulary, practise it by creating your own sentences with the new words/phrases.