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Glossary Of Financial Terms

ACH:
An ACH is an Automated Clearing House. This type of service manages electronic transactions between financial institutions, consumers and companies. See BACS.

AER:
An AER is the Annual Equivalent Rate. This figure is used to show an example of the interest rate that would be applied if interest were given on an account over the course of a year.

APR:
The APR (Annual Percentage Rate) is the rate that shows the full cost of borrowing on lending products. This rate includes all of the costs of borrowing such as interest charged and any fees that are payable. It is used to make it easier for consumers to make ‘like for like’ comparisons on products.

Arrangement Fee:
A fee charged in certain cases when you take out a financial product to cover the costs of administration.

Arrears:
Monies that you should have paid at a specified time but which you did not pay.

Asset:
Something which has a particular financial value. So, your assets could include cash, your home and anything you own.

BACS:
The Automated Clearing House of the UK. The organisation is owned by various financial institutions. See ACH for a description of the BACS service.

BACS Transfer:
A BACS transfer is made when an electronic transaction is initiated. This payment tells a bank, for example, to pay money into a specific account.

Bad Credit:
A situation where your credit history is impaired because of financial problems you have had such as missed payments or payment defaults.

Balance:
The amount of money that is in a financial account.

Banker’s Draft:
A banker’s draft is a kind of cheque but, instead of being issued by an individual or company, it is issued by a bank directly from the individual/company account.

Base Rate:
The industry interest rate that is used by financial institutions to set their interest rates for both lending and for saving. In the UK this is usually the Bank of England base rate.

Cash Advance:
See Payday loan.

CHAPS:
CHAPS (Clearing House Automated Payment System) is a method of electronic money transfer. This kind of payment can be made from one account to another on a same day basis.

CHIP and PIN:
An automated system that allows you to pay for goods via a PIN (Personal Identification Number) on a special card reader that reads the CHIP of a credit or debit card.

Cleared Funds:
Monies that are now available in a bank account for use by the account owner.

Credit Cards:
Cards that allow you to pay for things on credit. Your card gives you an amount of money that you can spend (see credit limit) and you then pay it back later.

Credit Check:
A check that is run on your credit report by a financial institution when you want to take out one of their borrowing products.

Credit Limit:
The amount of money that you can potentially borrow/use on a product such as a credit card.

Credit Report:
A report that gives financial institutions information about you and your financial track record.

Credit Score:
A numerical scoring system that takes the information in your credit report and which is used to show lenders whether you would be a good risk to lend money to.

Debit Cards:
Debit cards are cards that are linked to bank accounts. You can use these to pay for things that you buy and the money will come directly out of your account.

Debt:
Money that is owed.

Debt Consolidation:
A process that bundles all of your debts together and that then pays them off by taking out an umbrella loan product.

Default:
An incident when somebody does not make a payment(s) that they are due to make.

Direct Debit:
A formal instruction that makes regular payments that can be for variable amounts to an individual/business from your bank account.

Discounted Rate:
A rate that is set at a discount below a base rate. This kind of rate is often used with mortgages.

Equity:
The amount that you yourself own in something. So, for example, the difference between the value of a house and the mortgage outstanding on it will be your equity stake in the property.

Equity Release:
A method of releasing the equity that you hold in a property by borrowing against it.

Exchange Rate Transaction Fee:
The fee charged by a bank for transactions in foreign currency - i.e. when you take money out of a cashpoint on holiday or buy something abroad.

Fixed Rate:
An interest rate that does not change but remains fixed.

Flexible Mortgage:
A mortgage that gives you some flexibility by allowing you to overpay, underpay and take payment holidays.

Gross:
An amount of money before deductions have been made.

Guarantor:
An individual who gives a commitment to lenders that repayments will be guaranteed on behalf of another individual. If the individual responsible for making the repayments defaults on them then the guarantor will have to pay them.

Insurance Policy:
A policy that gives you financial protection against events such as death, injury and damage to yourself and your property.

Interest:
The money that you will pay a lender when you borrow money from them or the money that is added to savings.

Interest Free:
A financial product that does not incur interest charges.

Interest Only Mortgage:
A mortgage where your repayments only go to pay off the interest charged. The capital you originally borrow must be paid back separately when the mortgage is done.

Interest Rate:
The percentage rate that is given to money that is borrowed or saved to show how much interest you will pay or earn.

Investment:
A product that you can buy/put money in with the aim of getting more money back.

Loan:
Money that is lent to you by a financial institution or lender.

Loan Term:
The length of time that a loan lasts.

Mortgage:
A loan designed to allow you to buy a property.

Net:
An amount of money after deductions have been made.

Outstanding Balance:
The money that is left over in a financial account after a payment or withdrawal has been made.

Overdraft:
A system that is added to many bank current accounts that allows you to borrow money from your account to a pre-set amount.

Overpayment:
A payment on a mortgage or other loan product that is higher than the payment due.

P.A.:
Per annum/every year.

Payday Loan:
A cash loan that is given for a period of days or weeks before repayment is due. This kind of loan is given for smaller amounts (i.e. up to £750) than standard loans.

Payment Holiday:
An option offered by some lenders that allows you to take a break from making payments on your borrowings.

Penalty:
A fee that is charged if you do something that you shouldn’t with a financial account such as make a late payment or go overdrawn without permission.

Rate of Return:
The profit rate that you earn on a specific investment product or financial account.

Remortgage:
The process of taking out a different mortgage to replace a current deal or to raise a loan against equity.

Repayment Mortgage:
A mortgage where your monthly repayment goes to pay off both the capital sum borrowed and the interest that will be charged.

Rollover:
An agreement from a lender to allow a cash advance/payday loan to carry over for a period of time without repayment.

Security:
A guarantee that you give a lender to back up your borrowing. If you default on your borrowing then they can use your security to get their money.

Shares:
A term that denotes ownership in a company listed on a stock exchange.

Share Certificate:
A certificate that shows how many shares you own in a company.

Standing Order:
An instruction that is made to a bank to make regular payments for the same sums.

Unauthorised Overdraft:
A situation where your bank account balance goes into a negative state and you do not have authorisation to have an overdraft.

Uncleared Funds:
All of the money in a bank account including money/cheques that have not yet cleared (See cleared funds).

Underpayment:
A payment on a mortgage or other loan product that is lower than the payment due.

Variable Interest:
Interest that is charged at a rate that may increase or decrease according to changes in the base rate.