Let’s face it, the world of finance has a bad case of the Baffles*. It’s riddled with clunky jargon and acronyms that could be made loads simpler.
To clear up the confusion, we’ve de-Baffled some the financial words that leave our heads in a spin.
APR simply stands for Annual Percentage Rate. Unlike an interest rate, an APR takes into account any additional fees or charges. It represents how much it will cost to borrow money each year, over the term of your loan.
A car loan works exactly the same way as an unsecured loan, but it’s given by a lender specifically for you to buy a car.
Once you’ve been approved for an unsecured loan by a lender, the money is paid into your account so you can purchase the car (or van, motorbike or whatever vehicle you want).
A County Court Judgment (CCJ) is a court order which tells you to pay money you owe to a debt. It’s one of the actions your creditors can take as part of the debt collection process.
The word ‘consolidation’ can sound a bit fearsome. Relax though. It’s just a fancy word for bringing or merging together – in this case it means bringing together debt.
A consolidation loan helps you to repay multiple debts by grouping them into one lump sum. Therefore repaying a single figure each month.
A credit card gives you access to a line of credit. Unlike a loan, where the money is paid into your bank account, you are instead provided with a credit limit.
A credit footprint is information recorded on your credit report whenever there’s a hard search on your credit file. For instance, this can happen when you take out a mobile phone contract, get a credit card or set up with a new broadband provider.
It shows the date (usually the same day the search was carried out), the name of the lender and what type of credit check the lender conducted.
There are also two kinds of search that each affect your credit footprint in different ways. A ‘soft search’ and a ‘hard search’. So what’s the difference?
A soft search doesn’t affect your credit report – in other words, it doesn’t show other lenders that you’ve checked your eligibility for loans or credit cards.
However, as you might have guessed, a hard search does leave a mark on your credit report – that’s because it gives lenders a full view of your loan and credit history. Lenders can see credit agreements from up to the last six years, as well as how you managed the loans and credit.
Rest assured, we only use soft searches that don’t affect your credit score.
A credit report records a person’s loan, credit and banking history, and is prepared by businesses called credit bureaus, or credit reference agencies.
These credit bureaus gather financial information, assess everything and then work out what is called a credit score. Lenders will look at credit reports to evaluate if that person is eligible for a loan, and what the level of risk is.
Your credit score is worked out based on the credit history contained within your credit report. Your credit score is not an exact science and different companies each use different measures, depending on their criteria when working out your score.
Very roughly speaking, if your credit report shows that you’ve always repaid your loans on time, you’re on the electoral roll and your accounts are well managed, your credit score should be high (which improves your chances of receiving a loan or credit).
But, if your credit report shows that you’ve missed repayments or made repayments late, or that you’ve received a County Court Judgement, your credit score could be low (which might reduce your chances of receiving a loan or credit).
Early repayment penalty
This is a charge that can be added if you choose to pay off a loan or mortgage before the agreed length of the loan repayments has finished.
Eligibility criteria just means how suitable or well-matched you are for the type of loan or credit you’re looking for.
It is made up of a list of checks and requirements to help lenders decide if you’re a suitable borrower for a particular loan or type of credit.
First charge mortgage
A first charge mortgage is just another name for a mortgage. With a mortgage, your loan’s secured against the property you’re buying. It gives your lender or bank a security (basically means they can take it back) if you can’t make repayments.
This type of borrowing is usually available on purchases for items like a fridge freezer, sofa, smart TV, even a car.
With some lenders this begins with a down payment (sometimes called a deposit, it’s just the first payment you put down), then you pay the balance plus interest in instalments over a set number of months.
You should always check the total cost of borrowing when using hire purchase.
This is a short-term loan that’s usually a small amount to be repaid the next payday. Watch out though, payday loan interest rates can be extremely high because of the short lending terms offered with these loans. Be cautious and always check the terms and conditions before you take one out.
Personal or unsecured loan
These are loans that are not secured against an asset, like a property. So they are called ‘unsecured loans’.
An unsecured personal loan can be anything from £500 up to £25,000 and offers a fixed repayment figure across a number of months.
This allows you to postpone (meaning delay temporarily, not stop) your repayments for an agreed time. The cost of the missed repayments is spread across your remaining payment term after the repayment holiday.
Secured or homeowner loan
A secured loan is often called a homeowner loan. It’s different to an unsecured loan because it’s usually for larger amounts (from around £5,000) and over longer repayment periods.
To ensure that you repay the loan, lenders will hold it against (or secure it against) an asset – a thing of value, usually your home.
Basically, this means your property’s at risk (the lender or bank can take your property back) if you don’t keep up repayments.
A secured or homeowner loan can sometimes be called a ‘second charge mortgage’, but these are the same type of loans with different names.
Similar to a credit card, this allows you to make purchases on credit from a particular store or brand. The difference between this and a credit card is that, with a store card, goods can only be purchased from a particular store, named on the store card.