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A quick glossary of personal finance terms

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Understanding how to manage your money can be a complex thing full of jargon and terms you might be unfamiliar with.

Understanding them is critical to get the best out of both your investments and to make sure you’re getting good credit offers when you need them. Here are just a few personal finance terms you should know.

Retirement Annuity

A retirement annuity differs from a retirement fund because it is a type of retirement savings that is designed to be used by those paying contributions themselves, compared to a retirement fund that is usually offered by employers. Many people who start retirement annuities are self employed or want to supplement their employer offered retirement fund. Someone with two or more forms of income, some of which might not be pensionable income, like rental or interest income, might have a retirement annuity to ensure they’re saving the right amount of money for retirement. Retirement annuities are usually locked and only accessible from a certain age.

Defined Contribution vs Defined Benefit Plans

A defined contribution plan is a retirement plan that is directly equitable to the amount of money you pay into it. Usually this means you will have to make contributions to a defined contribution plan that will be based on a projection of how much money you’ll need when you retire. This differs from a defined benefits plan where your employer will offer you a set pay-out when you retire, which usually doesn’t require any specific contributions or a reduced contribution from you. There are some other differences in defined benefits like a pension and a cash-balance plan that are worth looking into if you are offered a defined benefit plan.

Secured and Unsecured Loans

A secured loan is a type of loan that requires collateral that acts as a form of security for the lender. Collateral is something of value – like an investment or physical asset that the lender can attach to your loan. This means if you default on the loan, this collateral can be claimed by the lender to recover the loan balance. If the loan is for an asset, the purchased asset often is the collateral. In the case of a home loan, this usually means the bank will foreclose on your house, or for a car, repossess the car.

An unsecured loan doesn’t require any collateral, but there are still consequences for defaulting. Lenders can hand your account over to collections agencies and take legal action against you. If you miss payments, this can also affect your ability to take more credit in future.

Revolving Credit

A revolving credit agreement is, as the name suggests, a credit agreement whereby as you repay amounts used, that amount becomes available again for you to spend. The most common application of revolving credit is in the form of a credit card or overdraft facilities. Revolving credit offers access to extra funds when you need it without having to apply for a new credit agreement and will have a credit limit attached to it. These can be both secured and unsecured credit agreements.

Annual Percentage Rate

The annual percentage rate (often expressed as APR) is the amount of interest that is charged for borrowing or earned by investing. The annual percentage rate is expressed as a percentage and represents the actual fee or income that is levied annually. It doesn’t reflect any compound interest that might be charged or earned, but rather reflects the total cost or income. In the case of a loan, the APR doesn’t always include additional fees like administrative fees so you should always check the total cost of credit carefully. One way of comparing the cost of credit is with Payday UK, a broker that can give you access to quickly compare offers between direct payday lenders and find an option that is the most favourable for you.

Credit Score

Your credit score is a culmination of many of the different factors that influence your credit rating and ability to get approved for credit. It’s usually expressed in a score from 300 to 850 and considers many things. The most common aspects it will use in calculation is the amount of credit you have overall and how much of it you use every month. It will look at your repayment history and how often you miss payments and it will check how often you apply for credit. Your credit score is considered fair if it’s above 620, and unfavourable if its below 550. Knowing and understanding your credit score can make improving it easier, particularly if you’re gearing up to apply for a home loan or big credit agreement.

Debt to Income Ratio

Your debt to income ratio is another important part of your credit eligibility. To work it out, you simply take your total monthly debt payments, divide it by your total gross income and times it by 100. This will give you your debt to income ratio as a percentage of your income that is used to service existing debts. It’s one factor that lenders will look at when determining the outcome of a credit application. The idea behind this ratio is that the higher this percentage, the more of your income is used to service debt and the bigger chance of a default on monthly payments if new debt is added to an already high debt to income ratio. Most lenders require that your debt to income ratio needs to be below 43% to qualify for a home loan, though this isn’t a law and you may still qualify for loans if your income is higher or you have an excellent credit rating and record.

Forbearance

During 2020 and the COVID-19 pandemic, many lenders offered those with existing loans a payment break or payment holiday which is actually called a forbearance. It’s a temporary postponement on the requirement to make monthly payments on your loan. Usually it will be in lieu of forcing a property in foreclosure (remember that happens if you default on a secured loan). During this forbearance, interest and fees will continue to accrue on the loan account, so it means the total cost of credit will increase from the initial agreement. For this reason, a forbearance should be a last resort. It can be applied for if you are retrenched or your income is suddenly lost too, but would be at the discretion of the lender.

Bear and Bull Markets

When we talk about investments, we’ll often hear the terms bear market or bull market. They’re terms used to describe the general stock market conditions and if they are gaining or losing value. A bull market, or a market that is bullish is one that is gaining in value. A bear market is the opposite – one that is losing value. In general, over a longer time period, most markets are bullish by nature or they wouldn’t be a good platform for investments, but sometimes a good time to invest is during a bear market when the price of stocks are lower. This is riskier though.

These are just a few of many different personal finance terms that you should know, and you’re likely to come across many more than these in your lifetime. Understanding them means you’ll have a better grasp on your finances.

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  1. Pingback: A Quick Glossary of Personal Finance Terms – Gary Skentelbery | Warrington Gazette

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