So you know your culottes from your palazzo pants and Alexander Wang from Alexandre Vauthier. But if you’re anything like me, you’re far less clued up on financial jargon. I’m on a mission to improve my financial literacy and I’m dragging you along with me. Here are some essential financial terms you may have already encountered:
Essential Financial Terms: APR
Definition: APR, aka annual percentage rate, is the ‘measure of how much it costs to borrow money’. You will generally see it when looking at loans, credit cards and mortgages. It tells you much how much your borrowing will cost in relation to the amount borrowed. So if you borrow £1000 at a rate of 15% APR and don’t make any repayments all year, you will pay £150 in interest. All lenders calculate APR the same way, making it easier to compare products.
TOP TIP: Lenders have two APRs – Typical (better) and Representative (not as good). By law, they have to offer the Typical APR to 66% of their customers. You won’t know which rate they will offer you until you apply.
Essential Financial Terms: AER
This acronym is all about stacking those papers. AER stands for annual equivalent rate. In trying to understand AER myself I came across a couple of equations. Needless to say the equations left me feeling rather anxious and still none the wiser. In layman’s terms, AER is the rate of interest earned on a savings or current account over the period of a year. AER takes into account a wide range of factors. Including how often interest is paid, the value of compound interest, the impact of withdrawing money and any introductory bonuses. For this reason, AER gives the clearest picture of total earned interest.
TOP TIP: AER is the key to comparing savings accounts. All accounts calculate interest differently and have different ways of adding value. AER will enable you to see the best option overall.
Essential Financial Terms: ISA
Most UK savings accounts are subject to income-tax but an ISA is a tax-free way to save your money. They work by giving you a tax-free allowance. The allowance for 2018/19 is £20,000. So, your savings will be tax-free as long as you pay in less than that before 6th April 2019. Worth noting are the Help To Buy ISA schemes, where the government will gift you up to £3000 for saving to buy a house. Useful diagram here.
Essential Financial Terms: Balloon Payment
This is one for the drivers. Balloon payments offer lower monthly payments offset by a large lump sum paid at the end of the loan term. The size of the balloon payment is based on the future value of the car. They are usually large because they are the sum of the unpaid value of the car and monthly payments. At the end of the loan term you can refinance the balloon payment by taking out another loan for the car. Approval for this will depend on your credit score.
TOP TIP: Car loan checks are less stringent than forms of borrowing so make sure you can afford the balloon payment at the end of the month on your current earnings.
Definitely not the most exciting content but these essential financial terms come up in products aimed at young people all the time. Knowing a few key things to look for will save you from feeling overwhelmed by financial jargon. As well as, taking out the wrong loan or account.
Words by Akilah Cohen