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Banks and financial institutions often like to use a lot of complicated terminologies on their website and in information brochures. If you’re a little confused by a particular financial term, or just want a bit more information about a particular word or phrase you’ve read about – we’ve listed below some of the most common financial terms that you might come across.
Annual Percentage Rate (APR) is a term you will hear in relation to interest rates, or other charges which are applied to financial products like loans and credit cards. The APR represents the amount of interest that you will pay each year on the borrowed money. APR is a standard measure used by different providers, to allow you to make comparisons across different financial products.
The process of moving debt between two different accounts. This might be used to refer specifically to a credit card balance transfer, where the outstanding balance of one or more credit cards is moved to another account. This is usually done to take advantage of better payment terms or interest rates.
This refers to the overall wealth of an individual or a business. This includes all of their cash held in accounts, assets such as property – as well as any financial investments such as stocks, shares and pensions.
When this refers to an account, ‘credit’ generally means an amount of money received into the account. When it is used in relation to a loan/credit card – ‘credit’ means that amount that is available to spend.
A credit report is a financial document compiled by one of the three credit agencies, that provides information about an individual’s financial situation. It might include information about previous bankruptcies and defaults, county court judgements (CCJs), and any companies they have a directorial role in. This report can be read by lenders when making a decision as to whether to lend money or not.
When a financial organisation agrees to provide credit (such as a credit card), there will be an upper limit on the amount of credit that can be borrowed at any one time. For example, a credit card may have a credit limit of £5000. Once the limit has been reached, some of the debt must be paid back, before you will be able to spend any more on the card.
If you have multiple debts, for example on different credit cards, the process of debt consolidation allows you to bring these debts together in one place, meaning that you make a single repayment, rather than having to juggle multiple different payments. It may be used as a technique to lower overall interest rates paid.
Some assets tend to lose their value over time, for example, a brand new car worth £15,000 may only sell for £10,000 second hand, a year later. This lost value is called depreciation. Not all assets depreciate – items that retain or gain value over time are described as ‘appreciating’ value.
This term refers to the overall value of an asset, once all of the debts against is are taken into account. This is commonly used in the context of mortgages; for example, if your home is would £250,000, but you still have a £150,000 mortgage outstanding against it, it means you have £100,000 of equity in the property.
When you take out a loan, there will be a certain charge that you will be expected to pay – effectively the cost of taking out the loan. This is what is referred to as ‘interest’. Interest might be calculated in different ways. One type of interest is ‘fixed rate’. This means that the interest rate is agreed at the start of the loan period, and does not change during the lifetime of the loan. This means that the repayments against a fixed-rate loan are predictable, and payments do not fluctuate.
If you are seeking to take out a loan, or another financial commitment like a rental agreement, the lenders may look at your credit history. If you cannot prove that you are financially able to meet the required repayments (for example if you do not have enough income coming in), you may be asked to provide a guarantor. A guarantor is another person who has an established credit record, who agrees that they will cover any debts you owe if you are unable to make repayments.
This is the extra money that a lender charges, for the act of loaning you money. This is calculated as a percentage of the initial amount that you borrow. There are different types of interest rate (see ‘fixed interest rate’ and ‘variable interest rate’.)
A lender is the organisation who grants the loan to the borrower. They are the entity who is owed the money (a debt) who may also be referred to as a creditor.
Loan-to-value is a comparison of the value of an asset, against the value of a loan taken out against it. This is commonly used in mortgage agreements. If a house is worth £100,000, a bank generally will not agree to provide a loan (mortgage) of the full £100,000. They may agree to provide a £90,000 mortgage – meaning you would need to pay the remaining £10,000 as a deposit. This would be a loan to value ratio of 90% – the loan they are providing is worth 90% of the value of the house. A lower LTV is generally regarded as a lower risk investment for the bank, meaning they are likely to lower the rate of interest charged.
The representative APR is a figure that lenders can use in advertisements, to describe the interest rate that they will offer the majority (51%) of their customers. This is designed to provide an idea of what interest rate you can roughly expect if you apply for a loan – although it is not a guarantee. Nearly half of the people who apply to them for a loan can expect to be offered a higher interest rate.
An additional tax paid directly to the government at the point that a property is purchased. The rate of stamp duty varies depending on the value of the property, but also on whether it is the only property that you own.
This type of loan is not backed by any kind of asset. For example, a mortgage is a secured loan – if you do not pay it back, the bank has the right to reclaim the cost by selling your property. A credit card is an example of an unsecured loan – there is no physical asset that a company can contractually seize and sell in order to reclaim money that you owe them.
In contrast to a fixed interest rate, a variable (or floating, or adjustable) interest rate does not remain the same for the lifetime of the loan. It may go up or down, depending on the financial performance of the market.