Financial Terms Glossary

LVR, BNPL, dividends… There are so many buzzwords when it comes to finance, and it can quickly feel overwhelming if you're a little hazy around specific terms. And the worst part about that knowledge gap? It could be costing you money. ‍ Ahead of making big financial decisions like applying for a loan, it's essential you're across how things work so you can get this best deal. For example, understanding what a 'comparison rate' means will help you compare lenders and shop around for the best option. ‍ Below, we take the mystery out of the lingo to help you build your financial knowledge (and hopefully make it feel a little less overwhelming).

Personal Loans

Asset

There are two types of assets: tangible and intangible. A tangible assist is something you can touch, a physical object like a vehicle or land. This is most commonly used as security or collateral against a personal or home loan. Let's take a SocietyOne personal loan as an example. If you own a car, you can use this asset as security and access larger loan amounts, longer loan terms and lower interest rates.

Providing an asset reduces the risk to the lender, and you're likely to get a better deal. It's important to note if you default on repayments, the lender has the right to repossess and sell the asset to pay the outstanding debt.

Borrowing Power

How much money can you borrow? The answer to this question depends on your borrowing power or 'serviceability' and is calculated based on your current financial position, including your total income, expenses, existing debt obligations and intended new debt.

Collateral

When your credit score is low, you might require a secured loan because you cannot offer your creditworthiness as a guarantee that you'll repay the loan. A secured loan means you use an asset you own as collateral, or security. Collateral lowers the risk to the lender by offering them security because they can recoup their money by selling your asset if you fail to repay the loan.‍

Comparison Rate

A comparison rate considers the interest rate and the known fees that are payable in connection with a loan (such as establishment charges), making it easier to understand the true cost of the loan. All lenders use the same formula to calculate the comparison rate so you can easily shop around and choose the most favourable loan.

Debt Consolidation

This refers to the process of consolidating all your debt onto one personal loan or debt to save you money by reducing the amount of interest paid across multiple debts over time. Consolidating debt into one loan can also make it easier to manage repayments.

Early Repayment Fee

Some lenders charge an early repayment fee if you pay your loan ahead of schedule to recoup some of the interest fees they calculated they'd make from lending you money during the term of your loan. It's important to note SocietyOne never charges an early repayment fee. If you can pay your debt off entirely, we won't penalise you.

Establishment Fee

An establishment fee is a charge the borrower pays when opening a new loan account.

Fixed Interest

Interest is paid at a fixed rate over a loan term, and it doesn't fluctuate over time. This generally means the loan repayments remain the same over the life of the loan.

Interest

When you borrow money, interest is the amount you pay to borrow the money. It is calculated as a percentage of the amount borrowed. For example, on a $10,000 loan with an interest rate of 7% per annum, you would pay $700 interest in the first year.

Interest Rate

The interest rate refers to the charged over the loan term to borrow money. The interest rate is expressed as a percentage.

Investment Loan

An investment loan can be used to purchase assets that will generate revenue.

Loan Portability

Most common with home loans, loan portability is a feature that allows you to keep the same loan product but change the supporting security. It can save you the time and costs of refinancing.

Loan Term

This is the period in which you need to pay off the loan debt. The total amount is usually divided into instalments. Personal loan terms are typically 2-7 years.

Loan-to-Value Ratio (LVR)

The ratio is the total amount of money you are borrowing to purchase an asset, converted to the percentage of the total value of the asset.

For instance, you plan to purchase a property that costs $600,000 and your loan amount is $400,00. The formula is as follows:

• LVR = (loan ÷ value) x 100
• (400,00 ÷ 600,00) x 100 = 67% LVR

Personal Loan Account

When taking out a loan, you'll have access to your personal loan account. In the account, you can find all of the essential information regarding your loan, specifically the transaction history and schedule of repayments. Having a personal loan account is important to keep track of the repayments, check the interest rate, or loan insurance. Depending on the account, it can offer other services to help you manage your loans.

Personal Loan

This type of loan offers the funds to pay for personal use, like a home renovation, a new car, going on holiday, taking up study, or consolidating debt. Loan terms are shorter than home loans, usually between 2-7 years. Borrowers have the option of either unsecured or secured personal loans, depending on whether they want to put an asset up as security.

Secured Loan

Unlike an unsecured loan, a secured loan requires an asset used as security or collateral. It's a good option if you can't be backed by creditworthiness, like if you have a low credit score. Putting an asset up as collateral reduces the risk to the lender because they can acquire your asset and sell it to recoup their money if you fail to pay the loan. Because the risk to the lender is lowered, they may also offer a lower interest rate. A secured loan may also enable you to borrow more.

Security, Also Collateral

Security is usually an asset, like a vehicle, that a borrower puts up to guarantee a secured personal loan. If the loan is not repaid, the lender may sell the asset to get their money back.

Term Deposit

Also known as a fixed deposit, a term deposit is an account with a financial institution where money is deposited for a set period - usually a few years. The interest rate is usually fixed for the term and is generally higher than a regular banking transaction or savings account. There may be fees for releasing the deposit ahead of the term.

Unsecured Loans

The opposite of a secured loan, an unsecured loan does not require an asset for collateral. The lender determines the borrowing capacity according to your creditworthiness. Since this kind of loan poses a higher risk for the lender, the interest rate may be higher than a secured personal loan option.

Variable Interest

The opposite of a fixed interest rate, a variable interest rate may fluctuate, becoming higher or lower during the loan term.

Credit Score

Black Marks

Black marks are something you should avoid at all costs. Compare it to a wine stain on your white t-shirt - annoying and difficult to wash off. When it comes to applying for credit, black marks indicate poor financial management. Black marks can appear on your credit history or report if you default on credit repayments or bills. They can also be marked in the credit history due to more severe issues like bankruptcy. If you have black marks showing on your credit report, you may find it challenging to obtain a loan or credit approval.

Credit

There are two definitions of credit:

• The amount of money received into a bank account.
• The amount of money available to spend (as a loan).

Credit Assessment

Credit assessment is the process of assessing a borrower's ability to repay a loan or credit card debt. It includes looking into your credit history and your income, expenses and existing liabilities.

Credit Limit

The credit limit is the maximum amount of money offered by a bank or lender.

Credit Report

Also known as a credit file, this is a report detailing your credit history, including every time you have applied for credit or defaulted on a repayment. A credit reporting agency holds it, and a lender can only access it with your permission.

Credit Score

Your credit score is a number between 0 to 1,000 or 1,200 representing your trustworthiness as a borrower. The higher the number, the better your credit score.  Your score is calculated using your credit history, and it's based on:

• The amount of money you have borrowed 
• Whether you pay on time or not
• The number of applications you have applied for

When you have a high credit score, you are considered less risky because you have a history of good financial management.

Creditor

It's the person, banking institution or lender to whom you owe money.

Line of Credit (LoC)

Whereas a personal loan provides one lump sum, a line of credit is a revolving loan you can access as often as you like up to a predetermined credit limit. Like a credit card, you repay the LoC every month and are typically charged a variable interest rate. Significantly, you're only charged interest on the money you've withdrawn, not your balance.

Risk-Based Pricing

Sometimes, lenders offer customers specific interest rates or other loan terms based on their financial history. To evaluate the risk, the lender might factor in your:

• Credit score
• Timely payments
• Fixed assets
• Collateral
• Income statement
• History of credit payments

Home Loans

Deposit

Amount of money held in the bank. The deposit can also be used as collateral to secure a debt.

Depreciation

A reduction in an asset value over time.

Dividends

A payment made by a company to its shareholders. The payment is taken from the company's earnings and is based on the number of shares a person holds.

Encumbered Asset

An encumbered asset is a property you own but has an interest registered against it. This means you want to use your property as collateral, but you are still paying off the loan on it.

Equity

Refers to the value of an asset such as a home or car, minus any money owing on it. Say you own a home valued at $750,000 with a mortgage of $550,000. You have $200,000 in equity.

Guarantee

This is a legal agreement between a guarantor and a lender. A guarantor promises a lender that if a borrower does not repay a mortgage , the guarantor will also be liable  for the debt.

Mortgage or Home Loan

Both terms refer to the loan used to purchase a property. That property is collateral and can be seized by the lender if you fail to pay the debt.

Negative Gearing

This is a long-term investment strategy where you purchase an asset and wait for it to generate revenue or increase in value. It's called 'negative gearing' because the funds required to own property are higher than the returns. For example, the rental income from your investment property is less than the interest payments on the loan used to purchase the property.

Origination

This is the multi-step process every individual must undergo to obtain a mortgage or home loan. This term also applies to personal loans.

Pre-Approval

Pre-approval indicates that a lender - usually a bank - is willing to approve a loan when you find the right property. Based on your overall financial position, the lender will give you a good idea of your borrowing capacity but won't provide a complete or final approval. Although it's not a requirement of the home buying process, pre-approval is a valuable way to determine your borrowing capacity so you can confidently search for a property and negotiate with more certainty.

Principal

The original sum of money borrowed or still owing on a loan.

Stamp Duty

This is also known as property transaction tax. It's paid when a buyer purchases land or property.

Unencumbered Security

An encumbered asset has a registered interest against it. In contrast, an unencumbered asset is without a mortgage, meaning it's free of creditors' claims.

Redraw Facility

A borrower uses this feature to access extra money that has been deposited into a loan account, like a home loan.

Reserve Bank of Australia (RBA)

The central bank of Australia which determines the official cash rate (OCR). The OCR determines the interest rate on home loans.

Offset Account

An offset account is either a transactional or a savings account connected to a loan account. Whatever amount of funds you have on your offset account will reduce or offset the interest on your loan account by reducing the outstanding balance of the loan.

Financial Wellbeing

Balance Sheet

A balance sheet is a financial statement or report that includes information about a company's assets and liabilities and is used to evaluate its financial position. While you won't need one of these for a personal loan, you'll likely need to provide these kinds of documents when applying for a business loan.

Balance Transfer

Has a 0% balance transfer tempted you at some point? Banks often offer low or zero interest rates for an introductory period to attract new credit card customers. Here's how it works. Say you have a credit card with an interest rate of 20% p.a., a limit of $20,000 and a balance of $10,000. That could be a lot of interest you're paying. Now, with a 0% balance transfer for, say, 12 months, you could save a lot of money in interest paid by moving your $10,000 balance to the new credit card. When considering this option, you must be confident you can repay the total amount within the offer period and won't be tempted to add new charges to the credit card. If you can't, you could become stuck in a cycle of debt.

BNPL (Buy Now Pay Later)

An increasingly popular form of credit for retail purchases, the loan is divided into equal parts and paid by instalments over time - usually over a couple of months. BNPL is interest-free, but you are charged fees if you fail to meet your repayments.

Budget

A personal budget is the tracker of your total income and expenses. A budget could help you manage your everyday spending or the funds required to pay for a wedding. There are many different methods, but they're all designed to keep your spending within your means, pay off debt and put money away in savings. Think of budgeting as 'your spending rules' to ensure you have enough funds to cover life's essential and non-essential parts - including for a rainy day.

Cash Flow

A cash flow refers to what comes in (salaries, interest from saving accounts, dividends) and what goes out (bills, groceries, rent) of your bank account. To know your net cash flow, you subtract your outflow from your inflow. If you are in the minus, you have a negative net flow. But if there is a surplus, you have a positive net flow.

Cash Flow Management

When you know your cash flow, you know how much money you're likely to receive as well as your upcoming expenditures. It helps you know exactly how much you should save and how much you can spend without suffering significant losses or shortages of cash in future.

Cash Management Account (CMA)

You can access CMAs through a financial institution and easily manage your account from one platform. They usually offer many services and features, but with lower interest rates than other savings or deposit accounts.

Compound Interest

Compound interest is a great thing that can help you accumulate more money over time. It does this by generating interest on the money you initially deposited, called the principal, in addition to the interest you've already earned. Simply put, you make interest on interest.

Here's an example. You invest $10,000 in a savings account at a 5% interest rate for five years, and you earn interest monthly. At the end of five years, you'll have $12,834 because of the compounding effect. But if you earnt interest at the end of the five-year term, you'd only have $12,500.

Margin Call

A margin call is a demand from your brokerage firm to increase the amount of equity in your account in the instance that the value of your asset decreases. As a result, the loan-to-value ratio (LTV) drops too low. A lender requests a deposit to level up the previously agreed upon ratio if this happens. 

Non-Bank Lender

When the lender is not a bank but, for example, a finance company or any other non-financial institution.

Self-Managed Super Fund (SMSF)

An SMSF is a private super fund that you manage yourself. When you manage your own super, you put the money typically managed by a retail or industry super fund into your own SMSF. You choose the investments and the insurance.

Transactional Account

An account you use to manage day-to-day expenses like depositing, withdrawing, and transferring money.

Product Disclosure Statement (PDS)

When receiving financial advice or a product, a provider must present a PDS to disclose the risks, commissions, benefits and other factors related to the product. It's important to read this carefully.

Final Words...

Understanding key financial terms is an essential step in building your financial knowledge. To learn more about credit scores, personal loans and financial wellbeing, check out the SocietyOne blog articles.

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The information on this website is of a general nature. It does not take your specific needs or circumstances into consideration, so you should consider your own financial position, objectives and requirements and seek financial advice before making any financial decisions.