If you don’t want to fall victim to bad financial decisions, it is essential to have financial literacy. Banks and financial institutions often create an aura around this subject using financial jargon and it can confuse and befuddle you. This is one of the main reasons why as a non-expert, you might fall into certain economic pitfalls. 

If you want to navigate through life successfully with proper financial security, then today’s guide is for you. We will be delving into some of the most common financial jargon which can make interactions with your bank and investor easier.

Let’s begin!

7 Financial Jargon Everyone Should Know

When you are suddenly accosted with terms like APR, base rate or credit score, you can find yourself reeling from the constant stress and panic of not knowing. However, armed with the right knowledge, you can take advantage of everything that banks and government (think, tax relief) offer you to save and grow your money. 

Payday Loans

Let’s start with the most basic term, quick payday loans. These are quick and unsecured loans, usually for a smaller amount of money with high interest rates. Payday loans are short-term loans and the principal amount is usually equal to a portion of your next paycheck. You can borrow anywhere from £50 and £1,000, depending on your needs. It’s best to repay the loan when your next salary is due otherwise, the high interest rate and fines can cost you heavily. 

APR

APR stands for Annual Percentage Rate and you’ll always come across this term when you take out any loan such as a student, payday, credit card or personal loan. 

APR is the total amount you would be levied for taking out a loan or spending on a credit card. It will give you an idea of how much you would pay for borrowing money. Usually, the lower the APR is, the better the loan rates are for you. 

For example, if you borrow £2,500 at an APR of 10% annually, you would need to pay £250 as interest. So, after a year when you pay back, you would be paying £2,750.

Compounding or Compound Interest

This is like Jack’s magic beans. Compound interest is what makes your money grow, especially in investment accounts. In compound interest, you would not just get interest on the initial money that you have invested, but also on the interest amount that you have acquired over the year at the same interest rate. So, the longer you keep your investment, the more you earn.

Let’s assume that you invest £1,000 at 10% compounded interest. At the end of the year, you earn £100, making your total amount to £1,100. The next year, you earn interest not just on the initial £1000 but on the £100 interest you earned as well. So next year, the total investment stands at £1210. 

Inflation

We keep hearing about inflation and for good reason.

Inflation is the increase in prices of products and services over a period and is a measure of the cost of living. When the interest rate of the money saved in the bank is lower than the inflation rate, then you lose money. Thus, as the cost of things increases, the value of money drops. 

Diversification

This term is used in context to your investment portfolio. It means you put your entire investment amount in different portfolios, like stocks, bonds and mutual funds. Through diversification, you decrease your risk. So for example, if the stock market crashes, you won’t lose all your money, if your portfolio is diversified and all of your money isn’t invested only in stocks.

Secured & Unsecured Loans

Secured loans include lenders having collateral against your loan, this could be anything from your car to your home or any asset of value. If you fail to repay the loan, the lender can take possession of your asset to recover the loan amount you took.

On the other hand, an unsecured loan doesn’t have collateral attached to it as a security. 

For unsecured loans, the lender will check your credit history and income to determine the loan amount. Repayment is usually for a shorter period and non-payment can lead to fines and even legal actions. Common unsecured loans include payday loans and personal loans.

Credit Score

A credit score is how your banks and other financial institutions determine your creditworthiness. A credit score is based on your current credit you owe, history of repayment record or whether there was any default on previous loans. Ensure you pay your loans on time and ahead of the timeline to prevent any negative credit scores. 

Summary

It is always best to Google the term or ask your financial advisor for input and advice. Knowing your credit score, having a balanced investment portfolio and proper financial knowledge can help you sail through difficult times. It is best to go in armed with the right knowledge rather than diving in blind.