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Finance Glossary

This section addresses some of the most commonly used terms in personal finance. Here, we provide simple explanations and descriptions on financial and legal jargon to help you deal confidently with all your money matters.






Financial Term Description
A
A-Credit The best possible credit rating you
can have based on the FICO (Fair Isaac Corporation) scoring model. Higher
credit scores will allow you access to the best interest rates and offers
currently held by your lender.
A-Day Refers to 6th April 2006 when major
pension reforms were introduced in a bid to streamline the system.
Abandonment When a person who has expressed an
interest or has a a right to a property gives that up, either by declaring
their intention to give it up or by physically leaving the property. Also
applies to trademarks, copyrights, patents etc. style='mso-spacerun:yes'>
Abandoned option The laspsing of an option at time of
expiry.
Abatement Decrease or reduction, most
commonly used to describe the reduction of a tax payment or debt re-payment.
Abeyance Suspension of right to real estate
while lawful ownership is being decided.
Ability to pay Borrower’s ability to meet their
current and future debt obligations. In taxation terms, people earning more
money will pay more income tax because of their ability to pay.
Absorbed Most commonly referring to the
expensing of a cost rather than passing it on, or the merging of one company
into another following an acquisition.
Accelerated depreciation Used for bookkeeping for tax
purposes, accelerated depreciation demonstrates how a property is losing its
value over time. Where a property’s value is depreciating quickly,
depreciation can be accelerated so that the majority of the value is lost in
the first few years of ownership but slows down in latter years. style='mso-spacerun:yes'>
Accelerated payments Payments made in addition to
required payments on an outstanding debt, resulting in early pay-off or
savings on interest.
Acceleration clause Right by which a lender can demand
full repayment of an outstanding balance.
Acceptance Formalisation of an agreement
between concerned parties i.e. Acceptance of an offer or counter offer on a
property
Accrued Interest Interest that accumulates on a
fixed-rate security or bond in between payments.
Actuary A risk-assessment specialist for
accounting and insurance.
Adjustable Rate Loan A loan or mortgage wherein the
interest rate changes throughout the loan term, based on how much is still
owed, and the national base interest rate.
Administration Fee A cost that may be charged for the
initial application for a loan. This has become increasingly common among
lenders. Also known as an Application Fee.
Adverse Credit See Bad Credit
Allowance The amount one can earn before they
are subject to taxation by the Inland Revenue. This changes yearly, and
varies for different age groups (UK).
Annual Percentage Rate The calculation by a lender of how
much interest will accrue on a loan in a year. This is not, however,
necessarily the amount of interest a borrower will be charged - credit
history and income also affect the levels. style='mso-spacerun:yes'>
Annuity A payment made in regular
installments from an insurance company at a certain time, following previous
payment(s) to that company (e.g. a pension).
Applied Interest Rate The base rate at which a loan will
gain interest. Does not include inflation or other charges into account, so
is not an accurate calculation of the interest a lender will charge the
borrower.
Appreciation The increase in value over time of
an asset or investment.
Asset Any item one owns that has monetary
value (e.g. life insurance, an antique, a car etc.), and all debts owed to
that person.
B
Bad Credit Indicates that a person has a poor
record of repaying loans, debts and bills, has a CCJ against them, or has
filed for bankruptcy in the past. Having bad credit can make it difficult to
obtain loans in the future.
Bad Credit Loan A loan designed specifically for
those with a poor credit history.
Usually has a much higher interest rate than other loans, but successful
repayment of this loan can improve credit score.
Balance The amount of money in one’s bank
account, whether in credit or in deficit.
Balance Sheet A statement declaring a business’s
financial standing, with its assets weighed up against its debts.
Bank Account A means of securely storing one’s
money in a financial institution.
Banker’s Draft A means of financial transfer
wherein the money is transferred directly from the bank, rather than one’s
personal account, to the chosen account.
Bankruptcy The absolutely inability to repay
any debts, leading to one being declared insolvent and excused from paying
debts by the courts. This can have extremely negative effects on one’s future
credit rating.
Basic Rate The minimum national interest rate
(set by the Bank of England in the UK). style='mso-spacerun:yes'>
Basic State Pension The pension one receives from
paying national insurance throughout one’s professional life. style='mso-spacerun:yes'>
Beneficiary One for whom a trust is established.
Benefits Government funded regular payments
made to compensate those who cannot work due to illness or disability, or to
help cover the living expenses of people seeking work or whose income is too
low to manage alone.
Bond A corporate or government issued
security that one invests in as a loan in order to be paid interest in the
future.
Bridging Loan A short-term loan for those who
need a substantial sum of money but for a short time only, e.g. in between
selling one’s old home and buying a new one.
Budget The amount of money one has
available to spend, taking into account one’s income and the need to pay
bills and living expenses.
C
Cancellation Period The period after being approved for
a loan during which time a borrower can back out of the agreement should they
discover any hidden charges or false information. style='mso-spacerun:yes'>
Capital In its basic meaning, a certain
amount of money. It is also the total amount of money a borrower owes to a
lender, including the base amount and the accrued interest.
Capital Gains The profit earned when an asset is
sold for more than its original price.
Capital Gains Tax Tax paid on profit acquired from the
sale of an asset.
Capital Loss Opposite to capital gains - when an
asset is sold for less than its original price. Can be used to offset capital
gains when calculating one’s income tax.
Car Loan A loan used for purchasing a car.
Cash Loan An unsecured, short-term loan for
those who need money immediately.
CCJ Stands for County Court Judgements,
which are used to punish those with outstanding debts and damage the
offender’s credit rating.
Checking Account A bank account whereby the holder
is able to write cheques against the money deposited in the account.
Child Tax Credit Government issued credit available
for families earning under £58,000 (UK) or $110,000 (US) as a means to help
with the expense of raising children.
Collateral Valuable assets used to secure a
loan.
Commission A percentage of the value of an
investment or other financial service given as payment to a financial advisor
for their consultancy.
Construction Loan A loan used for building or
remodelling the home. It is not repaid until the construction is complete.
Council Tax The charge place on property
according to its estimated value and the number of adult residents.
Credit Card A credit card provides a set amount
of money for the borrower each month, which is repaid either partially
(meeting the minimum repayment required) or in full at the end of that month.
If the minimum repayment is not met, a late payment fee will be charged. If
it is not paid off in full each month, the balance left over will be subject
to interest.
Credit Crunch Economic downturn leading to reduced
availability of loans and borrowed credit.
Credit Limit The maximum amount of money
available to a borrower, as decided by the lender.
Credit Rating A person’s financial history,
taking into account their record of borrowing money and their ability to
repay, as well as any CCJs or other issues that might affect their
suitability to take out a loan.
Credit Report The documentation of a person’s
credit history that is investigated by potential lenders, and is available
for individuals to see via companies such as Experian.
Crisis Loan An interest-free loan provided in
emergencies, e.g. the sudden and unforeseeable loss of all money, or a
medical emergency that must be paid for.
Critical Illness Cover An insurance policy that will mete
out a lump sum of money should the holder fall ill with one of the illnesses
specified in the policy.
D
Debit Card A swipe card that allows one to pay
for purchases by directly transferring money from the holder’s account to
that of the seller.
Debt Money owed on a loan to a company or
individual lender.
Debt Consolidation Loan A loan that combines of all one’s
debts into a single amount to be repaid.
Deductions Expenses that can be excluded from
one’s income when completing a tax return form.
Default The failure to meet minimum loan
repayments, which can lead to being taken to court and adverse credit.
Deficit The amount by which one’s outgoings
have exceeded their income.
Delinquent An overdue loan repayment. If the
delinquency continues, it can lead to the loan being defaulted.
Dependent Anyone who is supported by one’s
income (i.e. children under 18). These can be exempted on one’s tax return.
Depreciation A tax deduction to reflect the
gradual loss of value of assets or property.
Discount Loan A loan that begins with lower
interest rates to attract borrowers, then eventually increases to a standard
rate.
Direct Debit A pre-arranged payment made at
regular intervals that transfers money directly from the holder’s account to
the required payee.
Dividend A portion of a company’s profits
paid out to shareholders, usually in cash, or sometimes in stocks.
Due Diligence The investigation undertaken by a
potential lender into a borrower’s financial history to ensure that they will
be able to repay the loan.
E
E-Loan An electronic loan application,
submitted online rather than in person with the lender.
Earned Income The money received in return for
one’s work, including salary, tips, commissions etc.
Earnings The money left over after all
outgoings have been deducted (e.g. taxes for personal earnings, production
costs for commercial earnings).
Early Repayment Penalty Also known as Early Redemption
Penalty. This is a charge laid on those who repay a loan or mortgage early or
in a lump sum, as lenders earn their money from the interest that accumulates
over the loan term. This charge covers their losses. style='mso-spacerun:yes'>
Equity The difference between the market
value of an asset, and the amount that is still left to be repaid on it (e.g.
when one begins to pay off the mortgage on a house).
Exemption An amount that can be subtracted
from one’s gross income on a tax return, based on age, disability, dependents
etc.
F
Federal Reserve The central bank of the USA.
First Mortgage The original mortgage taken out on
a house, and given priority over subsequent mortgages taken out (i.e. if a
subsequent mortgage defaults, the first mortgage must be paid off before anoy
other).
Fixed-Rate Loan A loan with an unchanging interest
rate that does not fluctuate with the national base interest rate.
Flexible Loan A loan wherein the repayments can
be altered to suit one’s current finances, so if one has a varying income and
earns less in one month, they can pay less on their loan for that
installment. The interest is calculated accordingly.
FSA Financial Services Authority - the
financial watchdog for the UK.
G
Government Bonds A secure investment provided by the
government (also known as gilts or treasury bonds) which essentially work on
the basis that they are a promise by the government to pay the holder back
their investment in the future.
Gross Income The amount earned by an individual
before taxes are deducted.
Guarantor An individual who acts as a backup
for one taking out a loan. Should that person default on a payment, the
guarantor is expected to continue the payments.
H
Hedge Fund An investment scheme for wealthy
investors with extremely high minimum investment rates that looks to make
money through diverse and largely unregulated stock market schemes. style='mso-spacerun:yes'>
Hire Purchase Essentially means ‘buy now and pay
later’ - one puts down a deposit on an item and make regular payments
thereafter until the purchase is complete.
Home Equity Loan A secured loan that uses the equity
of one’s home as collateral.
Home Insurance Protection paid for one’s home that
will cover costs should it be damaged or burgled.
Home & Contents Insurance Many insurance companies now offer
protection on the contents of one’s home as well as the house itself rather
than having to take out separate policies for each item. One should, however,
have any particularly valuable items insured separately as home and contents
insurances is fairly broad and doesn’t really allow for anything especially
expensive.
Homeowner Loan See Mortgage.
I
Income Money earned by an individual in
exchange for work.
Income Tax Tax paid on one’s earnings. style='mso-spacerun:yes'>
Inflation The average rise of the cost of
goods in an economy based on the ratio of supply and demand - when demand is
greater than supply, suppliers tend to raise prices to stay afloat, pushing
interest rates higher . Lower inflation
suggests a healthier economy.
Inheritance Tax The tax paid on the sale of a
property over a certain price when the homeowner has died. This also covers
any assets left as inheritance seven years prior to the owner’s death.
Insolvency The inability to repay debts and
loans.
Insurance A scheme one pays in to in order to
get compensation in the future to protect themselves, their homes, and their
property should the terms of the policy be fulfilled. style='mso-spacerun:yes'>
Insurance Policy The contract outlining the terms of
the insurance - the length it lasts, what it covers, and so on.
Interest Essentially the fee paid to a lender
in order to borrow money from them.
Interest-Only Loan A loan in which the borrower pays
towards the interest only, not the loan amount itself. It has lower monthly
costs but ultimately will involve the borrower paying off the actual loan in
a lump sum.
Interest Rate This decides the level of interest
paid by a borrower. The basic rate is the Annual Percentage Rate, but an
individual’s income and credit history also affect the rate.
ISA Individual Savings Account. A
tax-free savings account in which one can keep savings without them being
subject to further income tax.
IVA Individual Voluntary Agreement. An
agreement between the lender and borrower to reduce the level of payments if
the borrower is struggling to repay their debts. style='mso-spacerun:yes'>
J
Joint Account A bank account shared by two or
more people into which each party pays money. Having a joint account can
affect one’s credit rating either positively or negatively, depending on the
credit history of the people or person one shares with.
K
Kickback An illegal payment made secretly on
conversion of a referral that results in a transaction.
Kiddie Tax A tax law for minors put in place
in 1986 to prevent parents or guardians giving money to their children to
avoid higher taxes. Children under the age of 17 whose income surpasses a
certain amount will be taxed at the same rate as their parents or guardians. style='mso-spacerun:yes'>
L
Late Payment Charge A monetary charge on a loan or
credit charge that occurs if the borrower fails to meet minimum monthly
repayments.
Liability One’s outgoing debts, e.g. a
mortgage or student loans.
Life Insurance A protection against the holder’s
life that is paid into throughout a person’s life and will pay out a lump sum
to their family when they die (providing the death is by a means named in the
policy).
Liquidity The ability to transform assets into
cash quickly and without loss of value.
Liquidation Bankruptcy on a corporate
scale.
Loan A pre-agreed amount of money that
an individual can borrow from a bank, building society, or other such
company, or another individual. The lump sum of money must be paid off in
monthly installments over a set length of time, usually with interest charged
on top in order for the lender to make money.
Loan Agreement The formal written agreement
between two parties that sets out the details of the loan, e.g. term length,
monthly increments etc.
Long-Term Loan A loan in which the repayment
period is spread over a number of years. Usually anything over three years is
considered long-term. Long-term loans typically have lower interest rates
M
Margin The minimum amount of collateral one
must have in order to buy on margin.
Margin Buying To part finance the purchase of
securities or assets with money borrowed from a broker.
Market Rate The basic amount of interest that
must be paid on a loan.
Mortgage A long-term loan designed
specifically for the purchase of a house which is secured against the
property, so should a payment be missed, the house is at risk.
N
Negative Covenants A clause or ‘promise’ within a loan
agreement designed to prevent the borrower from taking certain actions that
would risk the lender’s money, such as taking out other loans simultaneously.
Negative Equity If an asset has a lower market value
now than it did when first purchased.
Net Worth The amount left when one subtracts
one’s liabilities from one’s total asset value. Net worth may affect one’s
credit rating and likelihood of being accepted for a loan.
O
Offset The reduction of debt through
taking out and opposing two funds, so one loan will pay for the debts of the
other, if their repayment dates are staggered - using loan A to pay for Loan
B at the beginning of the month, then Loan B once it is paid up for that
installment pays for Loan A at the end of the month, for example. One can
also take an offset mortgage which uses one’s existing savings to reduce the
overall amount owed.
Option The right to buy or sell stocks and
securities within a specific time frame.
Overdraft A scheme that allows one to
withdraw more money from the bank than they actually possess in their
account. One is then essentially in debt to the bank, and will incur heavy
fines and interest should they go beyond their agreed overdraft limit. Most
overdrafts also charge interest on use of the overdraft itself.
Overpayment Paying more money than required for
a monthly installment on a loan. For instance if the borrower has come into
some money one month and wishes to contribute a larger sum to paying off
their debt, they can make an overpayment. Most borrowers will allow this
without charge, but may not allow full repayment of the loan without an early
repayment penalty.
P
Payday Loan A short-term small loan designed to
bridge the gap between paycheques. These supply amounts up to £1000 and must
be repaid within one month.
Payment Holiday A break in loan repayments if one
has come up against unforeseen circumstances such as redundancy that make
timely repayment difficult. Not all lenders will allow these breaks, but if
it can be arranged, it will prevent a late payment charge being made against
the borrower.
Pension A scheme that one pays in to
throughout their working life, which is returned to them in regular
installments once they have retired. State pensions are gained through
national insurance payments, while personal pensions are paid in to by the
individual at their own behest. Most companies also offer a pension plan to
their workers.
Personal Loan A loan that can be taken out by an
individual for any purpose. It can be for any amount, and can be secured or
unsecured.
Portfolio A summation of all the assets one
owns. Strong investments increase the value and viability of the portfolio.
PPI Payment Protection Insurance.
Insurance taken out against loan repayments to cover the costs in case of
sudden illness or unemployment that leaves one unable to meet the
installments.
Pre-approved Loan Usually refers to a mortgage; an
agreement between the lender and borrower that the borrower will be given a
loan, before they have begun property hunting. This makes them more
attractive to sellers as they can guarantee the sale will not fall through.
Premium The amount one pays for an insurance
policy.
Principal The actual amount of money one
invests or is given by a lender, before other charges such as interest are
taken into acount.
Profit The amount that is left after taxes,
expenses, debts, and bills have been deducted.
Q
Qualified Plan A US company pension scheme that
meets the minimum national requirements to ensure the post-retirement
security of its employees.
Qualifying Years Years in one’s working life in
which national insurance payments have been made. A certain number of
qualifying years must be met in order to secure the basic state pension.
Quarter The unit of division in the
financial year. For instance, many bills are paid quarterly.
Quotation A tailor-made loan outline that
states exactly how much the borrower would receive, what the terms would be,
and so on, created by the lender based on the potential borrower’s income and
financial history.
R
Recession An economic downturn that sees a
rise in unemployment and a decrease in share prices and public spending.
Recourse The seizure of assets by a lender
should a borrower refuse to repay a loan.
Refinance Changing one’s type of loan or loan
provider in order to receive fairer interest rates or terms.
Refused Credit To be turned down for a loan or
credit card, usually due to a poor credit rating.
Return The profit or loss made on one’s
investments, calculated by including income and value changes and dividing by
the principal amount of investment.
Revenue Money gained in return for services.
Also the taxes collected by a government.
Risk An assessment of the likelihood of
one’s investment going awry. For instance, investing in stocks has a higher
risk than keeping money in the bank because of the fluctuating nature of the
stock marker. However, higher risk usually equates to higher potential
returns.
Rollover Moving money from one investment
into another.
Roll Over Not to be confused with the above,
this is when a borrower has to extend their loan repayments beyond the agreed
term due to the inability to complete the repayments in the decided period.
The interest rate is usually raised once a roll over has occured. style='mso-spacerun:yes'>
RPI Retail Prices Index. Used to monitor
the average cost of products.
S
Salary One’s regular wages.
Savings Account An account into which one deposits
money to be accumulated. Interest is paid into the account based on how high
the balance is.
Secured Loan A loan that holds a valuable asset
as collateral so that if payments are not met, the lender has a guarantee
that their money will be reimbursed one way or another. Because of this
security for the lender, interest rates are normally much lower. style='mso-spacerun:yes'>
Security Collateral; an asset that is held
against a loan so that the lender is assured that they will receive their
money back even if the borrower fails to meet repayments.
Self Assessment A tax return declaring one’s
income, capital gains, and tax allowances that should be filled out annually
if one is self-employed or has complex finances. style='mso-spacerun:yes'>
Short-Term Loan A loan that is taken when one
requires money only for a short period of time, usually up to a maximum of
about three years.
Standard Variable Rate An interest rate on a variable loan
that rises and falls in accordance with the base national rate (as set by the
Bank of England in the UK) but often with an increase of one or two percent
as decided by the lender.
Stockbroker Professional buyer and seller of
stocks and shares, or one who advises others on what to invest in.
Stock Market The platform for exchange of stocks
and shares.
Stocks and Shares Part of a company that can be
bought and invested in, meaning one essentially owns a part of that business.
Money can be made or lost on these shares depending on the company’s standing
within the stock market.
Student Loan Student loans cover two areas:
Firstly, a low interest personal loan offered to students to pay for
university tuition fees. Secondly, a maintenance loan used to help with
living expenses. The amount given on the latter is calculated by the income
and circumstances of the student’s family. style='mso-spacerun:yes'>
Subprime Borrowers with a poor credit history
who are unnattractive prospects to potential lenders.
Subprime Loans Also known as Bad Credit Loans.
Surplus The opposite to deficit; where
income or assets exceed outgoings.
T
Tax The charge levied by the government
against certain products and a person’s income. Taxes are used to fund public
ventures and programmes.
Tax Allowances Amounts that can be deducted from
one’s total income, e.g. disabilities, age. style='mso-spacerun:yes'>
Taxable Income The amount on which one’s tax bill
is actually decided. It is the income after all allowances and exemptions
have been deducted.
Tax Bracket The amount of tax one pays is
decided by the amount one earns. The tax rate increases in increments based
on blocks of salary levels, e.g. in the UK, those earning over £31,000 are
classed as being in the upper tax bracket and pay 40% tax on how much they
earn over the base line of that bracket (so someone earning £40,000 would pay
40% on the £9,000 difference).
Tax Credits Amounts payable by the government
to those who need it, such as families with dependent children, those caring
for relatives, or low income earners.
Term The period of time assigned to a
borrower in which they must repay their loan.
Term Insurance Insurance that only lasts for a
fixed period of time and must be renewed or extended.
Title Search An investigation undertaken by a
title company before an individual pays off their mortgage to ascertain
whether or not that person legally has claim of ownership, i.e. no
outstanding or defaulted loans.
Travel Insurance Protection against any mishaps that
should occur whilst abroad, including sudden illness or cancelled flights
etc.
Travel Loan A short-term small loan for the
purpose of funding a holiday or general travel. It pften has high interest
rates that accumulate while one is travelling, so can be very expensive.
Treasury Bond A government issued bond that one
pays into, with the promise of receiving the payment back in the future.
Trust An account set up in the name of
another person, into which the holder deposits money or assets to be set
aside for the future of that person. Also used to protect assets from certain
taxation, or to simplify the transfer of property and assets from person to
person.
Trustee One who manages a trust fund on
behalf of the beneficiary.
U
Underwriting The assessment of a potential
borrower’s suitability for being given a loan, by checking their credit
history and ability to repay the loan.
Unearned Income Money that is not part of one’s
working salary or commissions, i.e. investments or capital gains.
Unit Trust An open-ended investment wherein
the value of the assets is determined by how many units one holds, multiplied
by the cost of those units, minus the transaction fee. style='mso-spacerun:yes'>
Unsecured Loan A loan that does not hold any
assets as collateral. These typically have much higher interest rates than
secured loans because the lender has no guarantee that their money will be
recouped if the borrower defaults, so they must charge more interest in order
to make the loan profitable for them.
V
Valuation Assessment of a property or asset’s
worth, typically before putting it up for sale.
Variable Interest Rate A loan wherein the monthly interest
will change in accordance with the Standard Variable Rate. style='mso-spacerun:yes'>
W
Warrant Certificates issued by a company
that allow the holder to buy a set number of stocks at a set price for a set
period of time.
Warranty A statement by a third party that a
borrower’s claims when applying for a loan are true. If this proves to be
false, the person who made the warranty can also be punished along with the
borrower.
Whole-of-life Insurance Life insurance that lasts
throughout one’s entire life, rather than just a fixed term that must be
renewed, so one’s relatives will always be protected against the holder’s
death.
Withdrawal When money is removed from an
account or investment.
Working Capital The amount of money a company has
once expenses or liabilities have been deducted.
Working Tax Credit A payment made to those who work
the required number of hours per week (currently 16 hours minimum for those
under 25, 30 hours for those over 25 in the UK) who, if they are under 25,
support a dependent (a child or disabled person) and have a low income.
X
Xenocurrency Currency that operates outside of
its official borders.
Y
Yield The income as a percentage returned
from an investment.
Z
Zero Coupon Bond A bond that pays no interest at all
during its term but releases it all once it has matured.