Understanding financial terms and jargon can be a challenge for many people, especially those who are not familiar with the world of finance. Whether you are dealing with a financial advisor, reading a bank statement, or reviewing a credit report, it is important to have a solid grasp of the financial language that is used. In this article, we will explore some of the most common financial terms and jargon, and explain what they mean in plain English.
Interest Rate: An interest rate is the cost of borrowing money. When you take out a loan, you agree to pay back the money you borrowed plus interest, which is usually expressed as a percentage of the loan amount. The interest rate can vary based on a number of factors, including your credit score, the length of the loan, and the type of loan.
APR: APR stands for Annual Percentage Rate, which is the total cost of borrowing money, including interest and fees, expressed as a percentage of the loan amount. The APR can help you compare the cost of different loan offers, and can be a useful tool when choosing a credit card, mortgage, or other loan.
Dividend: A dividend is a payment made to shareholders of a company. Companies that earn a profit can choose to distribute some of that profit to shareholders in the form of dividends. Dividends can be paid in cash or as additional shares of stock.
Principal: Principal is the amount of money that is borrowed or invested. When you take out a loan, the principal is the amount of money you receive, and when you make an investment, the principal is the amount of money you contribute.
Collateral: Collateral is something that is pledged as security for a loan. When you take out a loan, you may be required to put up collateral, such as a car or a house, to secure the loan. If you fail to repay the loan, the lender can seize the collateral to recoup their losses.
Credit Score: A credit score is a numerical rating that is used to evaluate your creditworthiness. Your credit score is based on factors such as your payment history, the amount of debt you owe, and the length of your credit history. A high credit score indicates that you are a low-risk borrower, while a low credit score indicates that you are a high-risk borrower.
Liquidity: Liquidity refers to the ease with which an asset can be converted into cash. Assets that can be easily sold or converted into cash are considered to be highly liquid, while assets that are difficult to sell or convert into cash are considered to be illiquid.
Yield: Yield is the return on an investment, expressed as a percentage. When you invest in a bond, for example, the yield is the interest rate that you earn on the bond.
Capital Gains: Capital gains are the profits that are realized when an investment is sold for more than its purchase price. When you sell a stock, for example, the difference between the sale price and the purchase price is your capital gain.
Diversification: Diversification is a strategy that involves spreading your investments across a variety of different assets. By diversifying your investments, you can reduce your overall risk and increase your chances of achieving positive returns.
Understanding financial terms is an essential part of managing your money effectively. By taking the time to learn about these concepts and how they apply to your financial situation, you can make better-informed decisions about your investments, loans, and other financial products. If you have questions about financial terms or need help managing your finances, consider working with one of our credit union representatives who can help guide you through the process.