Finance jargon: Your dictionary

With so many complicated phrases and acronyms out there, making sense of financial jargon can feel impossible at times. But when navigating loans, savings, or investments, understanding these definitions is crucial as they can help you make informed decisions.

So, with this in mind, we’ve pulled together a simple finance dictionary, covering all the key financial terms. Ready to brush up on your knowledge and boost your financial literacy? Let’s dive into it.

For more beginner-friendly finance knowledge, explore our personal finance 101 guide. We’ll share this glossary alongside a full, in-depth look into money management in our dedicated whitepaper.

Financial terms glossary

A

AER (Annual Equivalent Rate) 

AER expresses the interest rate on a savings account or investment, factoring in how often interest is paid over a year.

APR (Annual Percentage Rate) 

APR represents the total cost of borrowing, including any interest and additional fees. It’s a useful measure for comparing the overall cost of different credit products.

Arrears

Falling behind on your payments or not paying the required amount.

B

Balance transfer

The process of moving an outstanding balance from one credit card to another, typically to take advantage of lower interest rates.

Budgeting 

Budgeting is the process of creating a plan of how you manage your money. It helps you track your income and expenses to avoid overspending and save for the future.

C

Cash flow 

Cash flow refers to the movement of money in and out of your account over a specific period.

Credit history / credit report

Your credit history is a record of your borrowing activities, including loans, credit cards, and mortgages.

Credit rating / credit score 

A number that indicates your creditworthiness. Lenders use this number to assess how likely it is that you’ll repay on time and in full.

Credit reference agency (CRA) 

CRAs – like Experian, Equifax, and TransUnion – collect and maintain information about an individual’s credit history. Lenders then use these reports to assess your creditworthiness.

Credit utilisation rate

The percentage of a total available credit that is currently being used. To maintain a healthy credit score, this should ideally sit below 30%.

Compound interest

Interest calculated on both the original loan amount and any previously added interest. It can make debts grow faster.

Consumer Credit Act

A UK law from 1974 that sets out rules for borrowing and lending. It includes customer rights and rules lenders must follow.

D

Debt consolidation 

Debt consolidation combines multiple debts into a single loan or payment to make things easier to manage.

Debt management plan (DMP)

A plan set up through a debt charity or organisation to help you pay off your debts.

Debt-to-income ratio (DTI) 

This compares how much of your income goes towards paying off your debts. For instance, if you earn £3,000 a month, and pay £900 in repayments, your debt-to-income ratio is 30%. Lenders then use this ratio to assess whether you can afford to take out additional debt.

Default 

A default occurs when the terms of a loan agreement are not fulfilled. Defaults can cause damage to your credit score and may lead to further penalties.

Default sum

A charge for missed, late, or returned payments. You’ll get a notification called a ‘Notice of Default Sums’ when this happens.

E

Emergency fund 

An emergency fund is money set aside for unexpected expenses. This provides you with a financial cushion and should ideally cover 3-6 months of living expenses.

F

FCA (Financial Conduct Authority) 

A regulatory financial services body responsible for ensuring customers are protected.

Financial resilience

Your ability to handle unexpected financial shocks, like losing a job or facing a big expense, without falling into debt.

Fixed interest rate

An interest rate that remains the same throughout your entire loan agreement. This means that your payments will be predictable and won’t fluctuate.

FOS (Financial Ombudsman Service)

An independent organisation that reviews complaints between customers and financial service providers.

G

Gross income

Your earnings before any tax or deductions.

Guarantor 

A person who agrees to pay the debt if the original borrower fails to do so. This provides backup assurance to the lender that any outstanding amounts will be settled.

I

Interest 

The cost of borrowing money, usually expressed as a percentage. It’s applied to loans, credit cards, mortgages, and savings accounts.

Interest rate

The cost of borrowing or saving money, often shown as a percentage.

ISA (Individual Savings Account) 

An ISA is a tax-free savings account. There are several different types, including stocks and shares ISAs, cash ISAs, Lifetime ISAs and innovative finance ISAs.

L

Late payment fee

If you fail to make a payment by the agreed due date, a late payment fee will be added to your account.

Loan agreement 

A formal contract between a lender and a borrower that outlines the terms of the agreement.

Loan calculator

An online tool that shows you how much your monthly repayments will be, based on the loan amount and repayment term.

Loan shark

An individual or company that lends money to people illegally and often without being properly regulated. Borrowing from loan sharks can often lead to significant financial stress because of the very high interest rates. In some of the worst cases, they’ve also been known to physically harm people who fail to repay them.

M

Minimum payment 

The minimum amount that must be paid each month on a loan, credit card, or other form of debt.

Mortgage 

A loan taken out to purchase a property, typically repaid in monthly instalments.

O

Overpayments 

Extra payments that are made on top of the agreed monthly amount. These can be made to pay off debt or reduce interest.

Overdraft 

When you withdraw more money from a bank account than is available, resulting in a negative balance.

P

Payday loan

A short-term, high-interest loan designed to be repaid on your next payday.

Pension

A financial plan that provides a source of income after retirement. It’s a long-term savings strategy where money is accumulated during a person’s working years.

Power of Attorney

A legal document allowing someone else to make financial decisions on your behalf. This is usually granted to a close relative.

R

Rebate of interest

A reduction in interest if you repay your loan early.

Repayment term 

The length of time over which a borrower agrees to repay debt. This specifies how long you have to pay back the full amount (including interest) and the frequency of payments.

S

Savings account 

A bank account that earns interest on the money you save, allowing you to set aside funds for future needs or goals.

Secured loan 

A loan backed by an asset or collateral (such as a home, car, or savings account). If the borrower fails to repay, the lender can seize the collateral.

Soft search 

Also referred to as a soft enquiry, this is a type of credit check that does not impact your credit score.

Subsequent Notice of Sums in Arrears (SNOSIA)

A follow-up letter sent every six months if you’re still behind on payments.

T

Terms of lending

The rules and conditions you agree to when you take out a loan.

Total amount repayable

The total cost of your loan, including the amount borrowed and all interest and fees.

U

Unsecured loan 

A loan that isn’t tied to collateral like your home, car, or savings.

V

Variable interest rate

An interest rate that can change over time, affecting your monthly payments.

Why is understanding financial terminology so important?

Understanding basic financial terms is essential when it comes to navigating your personal finances. It empowers you to make informed decisions, avoid mistakes, and take control of your future.

So, bookmark the above financial dictionary, and refer to it as you continue to grow your knowledge.

How to learn about money

If you’re looking for additional insights on financial education, just head over to the Moneyboat blog. As a starting point, why not check out our guide on financial wellbeing tips and support? This covers everything from building a budget to saving for the future.

And don’t forget, you can always contact Citizens Advice, StepChange, or MoneyHelper for free guidance.