When you’re applying for a loan, credit card or mortgage, you’ll encounter a range of financial jargon that may leave you feeling a bit stumped.
But all the confusing language you come across can often be the devil in the detail and getting to grips with these financial terms will allow you to make better-informed decisions about your money.
We’ve put together a financial glossary of the key terms that will help make borrowing easier to understand.
Financial terms and definitions
When you’re preparing to take out a loan, there are some common finance terms you need to know. Agreeing to terms and conditions you don’t understand is a risky business, which could result in you paying back more than expected or being unaware of when your payment terms will change. A far more sensible idea is to arm yourself with knowledge of basic financial terms and concepts as detailed in our glossary.
Common finance terms you need to know
This list of financial terms will help you successfully navigate the world of personal finance.
Arrears
This term describes falling behind with regular payments (for example, monthly mortgage or rent payments), or not paying the required minimum amount.
Assets
Your assets are the things you own, like vehicles and property. This can include those you don’t yet own outright, which you may have bought on finance.
Annual Percentage Rate (APR)
APR is used to compare the terms of a loan offer with another. It includes all costs associated with a loan, including interest rates, arrangement fees and loan insurance.
Balance transfer
This term refers to the process of moving credit card debt from one credit card onto another. This commonly happens when customers switch to a new card, as the new credit card company normally offers a lower rate of interest to transfer the existing debt. Most start at low or even 0% interest but increase after an introductory offer has expired.
Base rate
The Bank of England sets the UK’s base interest rate. Banks, building societies and other lenders use this as a guide to set their own interest rates for loans and savings. Changes to the base rate can have a sizeable impact on borrowing, so need to be considered before you apply.
Broker
Brokers are normally an independent person, rather than a bank or building society. Brokers have access to a wider market of finance products so they can search for the right product for your circumstances.
Capped interest
Capped interest is a mix of variable and fixed rate interest. For a rate that falls below the cap, you will pay a variable rate. If interest rates rise above the cap, you will pay at the capped rate and nothing more.
Compound interest
Compound interest is interest earned on the initial amount of a loan, deposit or savings. Interest is accumulated and added back to the principal sum, giving you interest on top of interest.
Consumer Price Index (CPI)
The CPI details the prices people are paying for everyday household items. It’s used as an indicator of inflation by keeping track of how much the cost of living rises and falls.
Credit history
Credit referencing agencies have your credit history on file. This is a record of loans you’ve taken out – such as mortgages, personal loans and mobile phone contracts. It contains details on the amount paid and how well you managed to keep up with payments.
Credit rating
Your credit rating is informed by your credit history. How well you have managed your money in the past (credit history) will alter your credit rating, or credit score. This can be checked with several providers and is used to inform lenders of how much of a risk you might be when you apply for finance.
Debt consolidation
Debt consolidation is when you take out a single loan and use this money to pay off other debts. Grouping debts together can be a more efficient and organised way of staying on top of the money you’ve been borrowing and could save you money on paying several interest rates at once. However, if the single loan is over a longer term than the debts you are paying off, this may cost you more in total interest payable.
Default
When you fail to meet the terms and conditions of a loan, or on any another type of borrowing, such as payment deadlines and amounts, you risk defaulting on the loan – failing to pay the agreed amount.
Dividends
Dividends are the money that’s paid to the shareholders of a company. They can be paid in cash, but also as shares of stock. How valuable dividends are depends on the earnings and success of the company.
Duration
Duration refers to the term of a loan – the period in which the loan is repaid. This is an important factor to consider, because the longer you take to repay a loan the more it will cost you in total.
Early settlement / early repayment
This is when you’re able to repay the money you owe before the agreed repayment term. As lenders prefer loans to last their full term to earn the maximum amount of interest, they may apply early settlement charges to compensate.
Equity release
Equity release is a way of accessing the money tied up in your home during retirement (for those over the age of 55). It’s a type of mortgage with interest rates that are typically higher than standard mortgages.
FCA
The FCA (Financial Conduct Authority) is the body that regulates the UK’s financial services industry.
Fixed interest rate
Fixed interest rates are those where payment amounts don’t fluctuate from one month to the next and are not impacted by things like a change to the base rate. Because they offer protection against rising levels of interest, these rates are often slightly higher than market averages.
Guarantor
A guarantor is a third party who agrees to accept responsibility over loans and repayments for someone else if they fail to meet the payments. Often this is a parent or family member. The guarantor gives the lender extra assurance that their money is safe. If the borrower defaults on the loan, the guarantor becomes responsible for repayments.
Inflation/deflation
Inflation is a sustained increase in the cost of goods and services over a period of time, while deflation is a decrease. Both are monitored using the CPI.
Interest rate
The interest rate attached to a loan or other type of lending is a percentage of the loan that a borrower must pay on top of loan repayments. Essentially, it’s the money you pay for the privilege of borrowing.
ISAs
An ISA is an individual savings account. ISAs encourage individual savers to put more money aside because the money they accumulate is free of tax. This is up to a set amount every year, currently £20,000 for the 2020/21 tax year.
Loan-to–value ratio
Loan-to–value (LTV) is a term used in the mortgage industry. It’s a ratio that sets the amount a person is borrowing (loan) against the cost (value) of the property they’re buying, expressed as a percentage. So, borrowing £75,000 to buy a property worth £100,000 results in a loan-to–value ratio of 75%. It means this person is borrowing 75% of the value of their property.
Minimum payment
A minimum payment is the lowest amount of money that must be paid back on a credit card each month. This sum is calculated in a complex way. Paying below this amount can result in financial penalties.
Policyholder
A policyholder is the title given to someone who holds insurance on an asset, a possession or financial product. People sometimes buy insurance on financial products to make sure they can still pay them back if there’s a change to their circumstances, like loss of earnings or serious injury.
Pre-approval
While many borrowers think pre-approval means approval is assured, this is not always the case. Your loan application has not yet been, and may not be, approved at this stage. Pre-approval often means initial credit checks have been run but further, more thorough checks, will have to take place, which can lead to an application being rejected.
Recession
Recession is when an entire country’s economic wellbeing takes a downward turn. It is measured by falling employment figures and a drop in Gross Domestic Product (GDP).
Remortgage
Remortgaging a property normally happens if customers find a better deal with another provider. The new mortgage company pays off the outstanding balance to the customers’ previous mortgage provider and begins a new repayment scheme with the homeowner.
Risk
Credit risk is a measure of a borrower’s likelihood of repaying a loan. Lenders evaluate borrowers’ levels of credit risk by looking at their credit history before deciding whether to lend them money.
Total amount repayable
Total amount repayable, or TAR refers to the full amount a loan will cost you, on a monthly or yearly basis, to pay back. TAR includes the amount of the loan itself, the interest on it and all other charges.
This handy list of financial terms and jargon should help you navigate the world of personal finances far more fluently. Once you’ve got a good understanding of what the different financial terms mean, you should be ready to apply for a loan, credit or other borrowing. For further information, visit the Know How blog.
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