Glossary of Common Words on Phrases Relating to Loans and Finance

This glossary lists all terms common to personal loans policies.

Adverse Credit

A bad credit record, such as CCJ's , repossession orders, IVA's or arrears.

AER

The Annual Equivalent Rate is the figure that helps with comparisons of one financial product with another, and is generally quoted on interest paid on savings and investments. It shows what the rate would be if interest was paid just once a year.

Allowances

These are concessions from the Inland Revenue which can be used to reduce your taxable income. Your Personal allowance is an amount of income that is tax free. Personal allowances for 2005 - 2006: under 65yrs - £4,895, 65yrs-74yrs - £7,090, 75yrs+ - £7,220

Annuity

This is an insurance policy that provides a regular income in exchange for your pension fund, or a lump sum to a Life Company. It is advisable not to automatically accept the annuity offered by your existing company, as you have the legal right to take it to another Life Company who may well offer a better rate.

APR

All lenders are required by law to tell you what their APR - Annual Percentage Rate - is before you sign an agreement. The rate quoted on loans and credit cards may be the monthly or annual rate of interest you pay, but the APR figure calculates the total amount of interest that will be paid over the whole term of the loan, so the lower it is the better for the borrower.

Audit

An official examination of accounts by a qualified accountant external to the company.

Banker's Draft

This is a cheque made out to the creditor by the debtor's bank, it is drawn on the banks funds rather than the debtor's and is considered more secure than a personal cheque.

Bank of England

The Bank of England's Monetary Policy Committee sets the interest rates to achieve the Treasury's inflation target. The BOE is also responsible for the regulation of the banking industry.

Bankruptcy

This is when an individual who cannot pay their debts has been served a Bankruptcy order by a court. The petition can be filed by the individual or by his creditors. For a first-time Bankruptcy within a 15 year period for debts under £20,000 the procedure is known as a Summary Administration, and you may be discharged after two years. A first-time bankrupt with debts over £20,000 may be discharged after three years.

Base rate

This is the lowest rate at which a lender will charge interest. The Bank of England sets the rate, which is currently 4.75% and was last changed on August 5th 2004.

Bridging Loan

This is a short-term loan to cover what will eventually be covered by long-term finance. Sometimes a Bridging-loan is required by purchaser of a property who hasn’t yet sold their original house.

Cancellation Period

The Consumer Credit Act provides a period of time after signing a contract during which customers are entitled to cancel their purchase of some financial products, in certain circumstances.

Cash flow

The amount of cash that flows in and out of a business. The company is 'cash positive' if more money comes in, and ' cash negative' if more cash goes out.

CCJ's

A County Court Judgement is issued for failure to pay an outstanding debt. This will go on file and subsequently affect your credit rating. Bailiffs can be used to enforce payment of CCJs.

CGT

Capital Gains Tax is liable on gains made when you sell assets, such as shares. The allowance is £8,200 for the 2004/2005 tax year. The tax depends on the level of your income liable to income tax.

Child Tax Credit

This is generally available to families with children who have an income of up to £58,000 a year and who work at least 16 hours a week.

Cooling off period

The 14 days a new policyholder has during which they can cancel an insurance/assurance policy.

Corporation Tax

The tax payable by a company on its profits.

CPI

The Chancellor of the Exchequer now bases the UK inflation target on the Consumer Price Index (CPI). The Consumer Price Index differs from the RPI in that it excludes housing costs. The CPI inflation target is set at 2 per cent.

Credit rating

A points rating used by banks, mortgage companies and other financial institutions that offer loans. An individual or company is assessed for credit worthiness and risk. Your credit report is compiled by credit reference agencies using public records, such as: the electoral roll, court judgments and bankruptcies and also information from other lenders and financial institutions. If you are declined credit the lender should inform you the main reason for this. If the decision was based upon a bad credit report, you should obtain the name and address of the Credit Reference Agency they used. You have the right to view the information contained in your credit report to make sure it is accurate.

Credit Reference Agency

These are the agencies that compile credit records of consumers and releases the information to companies offering credit terms, such as Equifax or Experian. You are legally entitled to a copy of your Statutory Credit Report by post for a fee of £2 : Equifax, Plc. Credit File Advice Centre PO Box 1140 Bradford BD1 5US or Experian Consumer Help Service, PO Box 8000, Nottingham NG80 7WF

Debt Consolidation

Debt consolidation loans combine all your outstanding debts into one loan in order to obtain more manageable monthly payments. Consolidating can eliminate the high interest charges on credit cards debts.

Debt Management

A Debt Management Plan (DMP) enables you to make reduced repayments to your creditors over a number of years. A debt management company will negotiate the payments with your creditors on your behalf.

Fixed rate

The interest rate is fixed for a specific period.

Flexible Loan

The lender gives you a credit limit which allows you to then decide how much you need to borrow, when you want to borrow it, and how much you repay each month. You will probably pay a higher rate of interest than with a regular fixed rate loan. However, the interest with a flexible loan is calculated daily on the outstanding balance, so if you make an over-payment you will immediately reduce the overall amount you pay.

Gross income

Your income before any deductions have been made, particularly tax.

Guarantor

A person who agrees to guarantee the debts of another. If the borrower fails to make his/her payments then the guarantor will be obliged to make those repayments.

Hire Purchase

The buyer pays an initial deposit and takes possession of the goods. After all the instalments are paid over a specified period the ownership passes to the purchaser.

Home Income Plan

This allows homeowners, especially the elderly, to release the equity that they have in their home without having to sell it. There are two types of Home Income:

Reversion

- the property is sold to an insurance company, but the owner remains in residence and is paid an income. When the owner dies, the life insurance company takes over the property. Annuity - a mortgage, or re-mortgage is secured on the property. The proceeds are used to purchase an annuity to produce an income. With annuities the older you are then the higher the income you can achieve, so home income plans are more appropriate for people in their 70's.

Inflation

The general rise in prices across the economy over a year.

Inheritance tax

A tax payable by your heirs on any gifts in the seven years before death, and on the value of assets when he or she dies – this is exempt between a husband and wife or to charity. This applies to any amount over £275,000, and the tax rate is 40% for deaths on or before 6th April 2006

Interest rate

The percentage rate at which interest is charged on a loan, or paid out on savings. The rate will vary according to the base rate and the type of loan or savings plan.

ISA

An individual savings account – allows you to save up to £7,000 in each tax year without paying extra income tax.

IVA

An Independant Voluntary Agreement is a formal arrangement between you and your creditors - set up by a licensed insolvency practitioner - whereby you agree to make reduced payments towards the total amount of your debt, in order to pay off a percentage of what you owe.

Liabilities

The debts of a person or company.

Life Assurance

This pays out a lump sum when the policyholder dies and is advised to protect large commitments, such as a house mortgage.

Liquidation

When a company ends - through being unable to pay its debts, or if it ceases trading.

Loan

An advance of money from a lender to a borrower over a set period of time. The borrower is obliged to repay the loan, usually monthly, with interest. There are many different loan options suitable for varying circumstances: Secured, Unsecured, Debt Consolidation, Bridging, Flexible, etc

Net interest

The interest on your savings after tax at basic rate has been deducted.

Offset

To set one amount against another, such as a repayment against a debt. Offset mortgages set your current account balance and savings against your borrowing. This can pay your mortgage off faster and reduce your interest payments.

Personal Loan

A loan from a lender to a borower for personal use, such as the purchase of a car, holiday, home improvements, etc. A Personal Loan can be Unsecured or Secured.

RPI

The Retail price index is an index of the average price of consumer goods and services used to measure the rate of inflation. This differs from the CPI in that it includes housing costs, such as: council tax, mortgage interest payments, house depreciation, buildings insurance, etc

Secured Loan

This loan is secured on your property by the lender. This ensures the lender is minimising the risk of losing the money, and as a result is able to offer a Secured Loan at a lower APR than an Unsecured Loan. A Secured Loan is also easier to obtain even with a bad credit history, such as arrears or county court judgements.
With secured loans you should be aware that your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it. 

Self Assessment

All taxpayers are obliged by law to maintain records of all income and capital gains, and need to complete a self assessment if you are self-employed, a company director, a business partner, an employee with 'complicated' tax affairs, such as capital gains or you pay the higher tax rate,etc

SVR

The Standard Variable Rate is the interest rate the lender charges which fluctuates with the changes in the base rate – this affects your interest payments accordingly.

Term Assurance

This is a life assurance policy taken out for a specified period, after which it then lapses.

Unit Trusts

Investment funds that are managed portfolios; they are usually shares, but can also include cash, bonds and gilts.

Unsecured Loan

An Unsecured Loan costs more in repayments than a Secured Loan, but does not carry the risks to your home if you unable to keep up repayments.

 

These Products are not regulated by the Financial Services Authority (FSA)