Don’t let the banker beat you with his parlance
Have you ever received a bill, for example, and there are about 4 seemingly needless pages, filled with blocks of text that, you just really don’t understand? I’ve never met you, but I’m almost certain that you have.
These seem to come with everything these days – credit card statements, bank statements, insurance policies. And they do seem to have one thing in common, and that is money. Money is what makes the world go round, and the world is a big place. This has led to their being an almost foreign language being developed when the subject arises in anything official.
Admittedly, there is a lot to talk about when it comes to money, but there really could be an easier way to relay the needed information, but apparently, there isn’t. Banks especially, love this. In a rather furtive way, this is how they make sure that they get the best arrangement for your dealings, not you. You could call me paranoid, but it’s true. They reel you in with attractive and alluring offers, only for you to later learn that the attractiveness and allure of the offer in question only lasts for a year – then it turns into the ugly step-sister and flees in a pumpkin.
Okay, that argument may have turned into a weird, Grimm-like metaphor, but it still stands. But this is what you need to be careful of. Don’t let a lack of understanding or knowledge cause you financial problems down the line with a mortgage, a loan, a credit card – anything! Here are some examples to get you started on your newly found mission to conquer financial gobbledygook.
Fixed vs. Variable Rate
These are terms that you are likely to hear when applying for a mortgage, or even a loan. Fixed rate and variable rates are known to cause confusion at times when the person applying for the mortgage doesn’t really know what they are.
A variable interest rate is fairly straight forward I suppose; it is an interest rate that can change over time, either way. So, you might fare better off with a variable rate, if it’s going to be lower, but then again, you could end up paying more if it rises. It is a gamble of sorts, as banks will set these rates on the base rate set from the Federal Reserve.
A fixed rate on the other hand, stays the same – it does not change. However, this is usually just for a set amount of time. And this is where some people lose out. They are drawn in by attractive introductory rates, but end up paying a lot more down the line. Don’t let this happen to you, know exactly what you are paying, and how long you will be paying it for.
Unsecured vs. Secured Loans
These are options that you will come across when applying for a loan, surprisingly. They are the two main options when it comes to personal loans, and while there isn’t all the much difference between them, it is still a difference you should know.
You’ve heard of credit ratings, correct? Well, this is what decides whether you get an unsecured loan or not. The lender will look at your credit rating, and decide whether you are financially responsible enough for them to loan you their money. Pretty straight forward.
A secured loan on the other hand, depends on whether you are a home owner or not. If you are, and you want a loan, with a secured loan you are telling the lender that if you are unable to pay the loan back, you will pay the balance by selling your house.
There is more to know about the difference between secured loans and unsecured loans, so make sure you read up enough to make a properly informed decision when it comes to taking out a loan.
Simple vs. Compound Interest
More terms that you will hear when it comes to borrowing, and it can make quite a big difference to the payments that you will be making.
Simple interest is, well, simple. That is why it’s called simple interest. When paying simple interest, it is based or set by the original amount of money borrowed. So, if you borrow x amount, then you will be paying interest on x amount.
Compound interest, however, is different, much different. Again, if you borrow x amount from the bank, and you are paying y interest on this amount, when the interested is next computed (period lengths change from bank to bank) then you will then pay your y interest on the original x amount PLUS the amount equal to the y interest already compounded – hence the name. So, basically, the longer your borrowing period, the amount you are paying interest on will rise.
Again, don’t let yourself be caught out with this. Make sure you know exactly what kind of interest you will be paying and how long for.
And the others…
These are just a handful of examples from the world of finance, but still definitions that you should know. However, there is a plethora of other terms out there. Chances are, you won’t come across them all, but at the same time, you likely will come across a few of them.
This makes it worth doing the research. There are other, more expansive guides out there that will help you learn your financial terminology. I’m not saying you should sit down, read them all and have them memorized in the off chance that you will encounter them; nobody has the time for that. What I am saying is that when you are looking to borrow, or take out a mortgage, or do anything financially related really, know the product or the service. Go in with an understanding of exactly what it is you are undertaking. This will always give you a better chance of not only getting the best deal, but it will also help you with general management of your finances. If you know what lies ahead, then you aren’t going to be surprised down the line.