Finance Jargon Buster
The world of money, finance and debt can be confusing, and complex terminology doesn't help. Here's our essential guide to finance jargon...
1. APR
APR stands for the Annual Percentage Rate of charge. You can use
it to compare different credit and loan offers.
The APR includes important factors such as:
- the interest rate you must pay;
- how you repay the loan such as the length of the loan agreement (or term), when you should make the repayments, and amount of each payment); and
- Certain fees associated with the loan.
2. Compound interest
What this means on a basic level is that you will be charged interest on your interest - a fantastic way for credit card companies to make more money.
Say you have a debt of £100 on your credit card which charges 15.9% APR. In the first month you will be charged £1.33 interest (the annual charge is 15.9% or £15.90 per year - divide this by 12 to get your monthly interest charge). This will be added to your debt, so your new balance will be £101.33.
Because you interest is then compounded, your interest in the second month will be £1.54.
3. Credit Cards and Store cards
Always try to avoid the Credit Card trap!
The idea of being able to pay back what you owe in smaller amounts over a longer period of time, make Credit Cards a popular way of borrowing money. However, it is easy to begin using a Credit Card to pay for everyday living, leading to your monthly payments backing up. This can lead to you becoming trapped in a debt than can reach vast levels.
Each credit card varies depending on the APR of that particular card, and always remember to aim to repay monthly what you owe to avoid stacked up debts.
4. Credit scoring / Credit History
Banks and Credit Card companies use Credit Score checks in order to calculate the risk a consumer may be to the organisation through lending and to mitigate losses due to bad debt. If the organisation is satisfied with the checks, you shall receive the Loan. If you fail any of the checks, it is more than likely you will be refused the loan.
A poor credit score is a typical reason for being refused a loan. The state of a current loan in your possession, and whether it has been subject to late payments or non-payments, or the depth or other commitments such as mortgages, will all affect your credit rating.
Property Repossession, County Court Judgements against you, or any cancellations of a credit or store card by the provider will also result in a negative score.
Remember! There is no such thing as a credit black list.
5. Debt Consolidation
Debt consolidation is the process of taking all of the debts of which you are struggling with, and combining them into one manageable repayment scheme you can afford. However, the downside to debt consolidation is that you increase your debt, and end up paying increased sums over longer periods, permitting lower monthly repayments.
6. Interest free credit - buy now, pay later
Interest free credit deals allow you to buy items and pay for them in instalments at the cash price.
For example, you could buy a new television under an interest free deal, which allows you to pay for the price of the computer in instalments spread out over two years. Some plans also allow you to defer payments, for period usually around 9-12 months.
Interest free credit agreements will supply you with a date when the full payment is due by. If your balance is not fulfilled by this date, you may be charged interest on your balance.
7. Individual Voluntary Agreement - IVA
Individual Voluntary Arrangement (IVA) is a formal alternative for individuals wishing to avoid bankruptcy. The IVA is effectively an agreement between a person in debt and the people he or she owes money to (creditors) to pay off the debt in full over an agreed period of time - usually a 3 - 5 year period.
8. Late Payments
Missing a payment is not uncommon. 5.5 million Of us missed a bill payment last year. However, there is a longer term effect to missing a bill payment, a damaging Credit History, and in the long run Legal Action.
One or two late payments tend may sometimes be bypassed on your Credit Score, however multiple late payments will unpleasantly affect your credit rating, and could take months to rectify. Setting up a direct debit through your bank in order to make the minimum payments necessary, will ensure that you don't forget to make your payments and will avoid extra charges.
9. Loan Sharks
Loan Sharks are unlicensed moneylenders. If a moneylender is licensed they will be regulated by the office of Fair Trading (OFT) and will be abiding by the OFT's codes of practice.
A loan shark is an unlicensed moneylender. Licensed moneylenders are regulated by the Office of Fair Trading (OFT) and must follow the OFT's codes of practice. Borrowing money from a Loan Shark will result in:
- get a loan on very bad terms
- paying an extortionate rate of interest
- harassment for late payments
- pressure to borrow increased loans in order to pay for previous debts
You have not committed a crime by borrowing from a loan shark, they have committed the crime. And, if reported, they could face a prison sentence.
10. Minimum Payment
In regards to your credit card debt, the organisation providing your card will state a minimum payment for you to make each month. This is done through calculating a percentage of your balance, with a straight forward fact that the higher your balance, the higher your minimum payment, and vice versa.
Always remember that by choosing to pay back the minimum monthly repayment you shall only be covering your interest charge, meaning your balance is not being reduced leaving your balance untouched.
11. Payment Protection
Payment Protection usually covers the consumer against the following:
- Accident
- Sickness
- Unemployment
- Death
- Redundancy
- Circumstances preventing earning a wage to service the debt
With taking on a Loan being an enormous strain on your finances, payment protection is there to aid you if you are unable to meet the payments. The Payment Protection arrangement guarantees the loan will be paid if you are unable to. However, this does mean that repayments may be higher, although you will have safety in knowing you will always be able to make the repayments.
12. Personal loans from a bank or building society
A personal Loan from a bank or building Society will often come with a lower APR than one available through a credit card or store card. Therefore if you happen to have debt on your credit card, it may be worth talking to your bank or building society to enquire whether you can convert it into a Loan.
13. Reward Cards
These can be very handy if you consistently pay off your full card balance every month, and if this is the case, are worth investigating. The current market has many organisations offering cards with rewards. For example the British Airways Amex card offers discounted flights through Air Miles schemes, and the Tesco card offers shopping and eating out discounts.
14. Travel Protection
When purchasing your travel tickets by credit card, on a transaction of £100 or more, your money becomes automatically under the Consumer Credit Act. Also, if the company you booked with goes out of business, you will receive a refund.
15. Unsecured loans and Secured loans
Secured loans value your property and set it against the amount you have borrowed. However, this type of loan produces major disadvantages, such as running the risk of repossession if payments are not met.
Loans from organisations such as banks, and are not secured on property, are called Unsecured Loans. Although you must note that if payments are missed on these Loans, your credit score may be affected, and future securing of loans or mortgages may be difficult in the future.
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