Do you ever get confused when reading your latest mortgage statement or comparing loan products? If so, the chances are that you’re not alone, with the financial services sector packed full of confusing jargon and mysterious acronyms.
This issue is hardly helped by the fact that more than half of UK students continue to receive no financial education in schools, despite this being made mandatory by the Conservative government back in 2013.
We’ll explore some of the most confusing terms below, explaining exactly what they mean and why you should care.
APR
If you’ve ever applied for a loan or a credit card, you’ll notice that each product carries its own unique APR.
This acronym stands for Annual Percentage Rate, and it refers to the interest and fees associated with a loan or financing agreement applied annually.
This explains the cost of borrowing from your chosen lender, as it’s applied to the amount you receive in order to calculate the sum you’ll eventually repay.
This is a key consideration when pursuing any line of credit, as it will impact on your monthly repayments and ability to repay the debt in full.
Base Rate
You may have heard the term ‘base rate’ banded around recently, with the Bank of England (BoE) having increased this to 0.75% recently.
This was the second hike of 0.25% in the last eight months, following a period of 10 years in which it remained completely unchanged.
The base rate is the percentage charged for lending between banks and the BoE, and it has no direct impact on households.
However, this base rate is used by high street banks and lenders to calculate the interest payable on mortgages and similar financial products. This will also define the interest rates applied to savings accounts, although banks will not always share base rate hikes with their customers.
Debt Consolidation
Debt consolidation is a relatively new financial term and one that refers to an innovative solution for people who owe money to multiple creditors.
It is a method that takes all of your outstanding debts and restructures them into a single payment plan. What this means is that you’ll take out a single loan to settle your existing debts, before repaying your new creditor through a manageable monthly repayment on an agreed date.
It can include both secured and unsecured debts, from mortgage arrears to personal loans and credit cards. It has been designed primarily to help people manage and reduce their debts more effectively, particularly as it stops you from having to pay interest across multiple accounts.
Balance Transfer
Interest is one of the biggest issues associated with credit cards, as this can accumulate quickly and make it impossible to reduce your debt by making the minimum monthly repayment.
So, if you owe money on a credit card that is charging you interest, you should consider paying this off by using an alternative card with a lower rate.
Some providers even offer cards with 0% interest for a limited period of time, and this beneficial process is commonly referred to as a balance transfer.
It will certainly reduce your monthly repayment while helping you to make some serious inroads into your original credit card debt.
