If managing your finances isn’t difficult enough, finance and money matters seem to have their own language which you need to understand too! If you struggle to remember the difference between a debtor and a creditor, or inflation and interest, then here are some of the most common personal finance terms with simple explanations.
Annual Percentage Rate (APR)
The total annual cost of a loan or debt and includes interest, fees, and charges. Whilst your annual interest rate may be lower, the APR is the true cost of a debt over a year. The higher the APR, the more expensive it is for you, the borrower.
Arrears
If you fall behind paying a loan, credit card or finance agreement, your “arrears” are the total amount that you are behind in your repayments.
Assets
Things you own that have a monetary value. The balance of your bank account is an asset, but assets also include those things you could sell and convert into cash. The most valuable assets people usually own are property, vehicles, jewellery, and investments.
Balance
he amount you have in your bank account, or that is left to pay on a credit card, loan, mortgage, or invoice.
Base rate
The standard interest rate set by a central bank which other financial institutions use as a guide when setting their own interest rates.
Borrower
A person that takes out a loan from a bank or financial company with an agreement to pay it back later, typically with interest.
Budget
A financial plan which summarises your income and expenditure, and helps you see if you are spending too much each month. A budget is a useful tool to help you manage your finances as it helps you understand what you are spending and how you can cut costs.
Cost of living
The cost of the basic things an “average” person would typically spend their money on each month, such as housing, food, energy bills, and healthcare. When people talk about “the increasing cost of living” it relates to the increasing cost for the average person each month to pay their essential bills.
Credit
Money that is lent to you by a bank, finance company or credit card provider, which allows you to “buy now, pay later”. Interest is usually charged on the amount borrowed and you are always expected to pay the credit back.
Credit agreement
When you take out a credit card, finance agreement, lease, loan or mortgage, you will have to sign a credit agreement. This is a contract between you and your lender that states what, when and how you are required to repay the money you have borrowed, plus the interest and fees the loan incurs. Breaking a credit agreement can result in additional charges, impact your credit rating, and can result in your Creditor issuing legal proceedings against you.
Credit history
A record of your financial dealings over the past few years which is used by credit reference agencies to advise banks and finance companies of your credit rating when you apply for new loans and credit.
Credit limit
The maximum amount you are allowed to owe on a credit card at any one time. If you reach your credit limit, you must pay off some of the balance before you can use your card.
Credit rating
Based on your credit history, credit reference agencies will allocate you a credit rating which allows banks and finance companies to assess how suitable you are as a customer and whether you are likely to repay credit.
Credit reference agencies
Organisations which gather and store information on your credit history and calculate your credit rating.
Credit score
See “Credit rating”.
Creditor
Someone you owe money to. See also “lender”.
Debt
Money that you owe to someone else.
Debtor
A person who owes money to someone else.
Default
If you are continually in arrears on a credit agreement and miss several repayments, your creditor may eventually mark you as being “in default”. This means you are in breach of your credit agreement and may result in your creditor starting legal proceedings to recover the money you owe them. Being ‘in default’ may also impact your credit score and could prevent you from getting credit in the future.
Discretionary spending
The things you choose to spend your money on each month which are not essential and could be cut out to improve your budget. For example, dinner at a restaurant.
Essential spending
The things you spend your money on each month which are essential. For example, accommodation, food, and lighting/heating.
Finance agreement – A credit agreement which is used to finance the purchase of a specific item, such as a new mobile phone or a car.
Gross income
Your income before taxes and social security payments are deducted.
Income tax
Tax payable to the government on the income you earn.
Inflation
The rate at which prices increase over a given period of time.
Interest
The amount you are charged to borrow money, and the amount you receive from your bank if you have savings in an account with them.
Interest rate
The percentage of what you have borrowed that you will be required to repay on top of the amount you have borrowed. Also the percentage of your savings you will be paid by your bank for having a savings account with them.
Lender
Someone who lends you money. See also creditor.
Minimum payment
The minimum amount you must pay your credit card company each month against your outstanding balance. Paying just the minimum amount each month will result in it taking longer, and costing you more, to clear your credit card balance.
Mortgage
A long-term loan secured against an asset. Most generally used to purchase property.
Net income
Your income after taxes and social security payments are deducted.
Repayments
The agreed sum of money you must pay back each month on a loan, credit card or finance agreement to avoid getting into arrears or default.
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