Loans Glossary and Jargon Buster
Puzzled by loan terms? Try our financial jargon buster
Adverse Credit -AEA
- AER
- Allowances - Annuity
- APR - Audit - Banker's
Draft - Bank of England - Bankruptcy - Base rate - Bridging
Loan - Cancellation Period -
Capital Gains Tax -Cash
flow - CCJ'S - Child
Tax Credit - CGT - Cooling
off period - Corporation Tax - CPI
- Credit rating - Credit
Reference Agency - CTC -
Debt Consolidation
- Debt Management - Fixed
rate - Flexible Loan
- Gross income - Guarantor
- Hire Purchase - Home
Income Plan - Inflation - Inheritance
tax - Interest rate - ISA
- IVA - Liabilities -
Life Assurance - Liquidation
- Loan - Net interest
- Offset - Personal Loan
- RPI - Secured Loan -
Self Assessment - Student
Loan - SVR - Term
Assurance - Unit Trusts
- Unsecured Loan - Working Tax
Credit
Adverse Credit
A bad credit record, such as CCJ's
, repossession orders, IVA's or arrears.
AEA
The Annual Exempt Amount is the yearly allowance for Capital
Gains Tax (CGT)
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 2007 - 2008: under
65yrs - £5,225, 65yrs-74yrs - £7,550, 75yrs+ - £7,690
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 as it can't usually 'bounce'.
Beware, however, as the frequency of forged drafts has increased in
recent
years and there are many scams designed to separate the unwary from
their goods/money.
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's Monetary Committee sets the rate. The
UK current bank base rate.
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.
Capital Gains Tax
See CGT
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 Annual Exempt Amount (AEA) is £9,200 for the 2007/2008
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 a gross
income of under £58,000 a year. Families with an income close
to the threshold only receive a minimal amount. CTC is paid to families
with children regardless of whether the parents are employed.
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. The main rate of
corporation tax (businesses with profits over £1.5m) is 30%
for 2007. It will be cut to 28% from 1 April 2008. The small companies
rate (profits up to £300,000) is 20% in 2007. It will rise to 21%
in 2008 and 22% 2009. 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.
CTC
See Child Tax Credit
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
£300,000 in the tax year 2007/2008. The Iheritance Tax rate is
40%.
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 UK residents over 18years
old 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.
Student
Loan
 Student
loans in the UK are publicly financed by the government body - Student
Loans Company, and are provided to help students with their living costs
whilst studying in higher education.
The student
is required to start repaying the loan from the April after graduation,
and when their gross income exceeds the threshold salary
level of £15,000. The interest rate on the loan
is linked to the rate of inflation, and is adjusted annually in
line with the Retail Prices Index (RPI). From September
2006 to 31 August 2007 the rate is 2.4%.
The loans are repaid through
the tax system known as Income-Contingent Repayment (ICR)
which adjusts payments to the Loans Company according to the gross
income of the payee. 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.
Working Tax Credit
A payment of in-work credits to those with low-incomes,
and can include childcare
costs. Families are eligible for the childcare tax credit if
the parent/ parents work for at least
16 hours a week. WTC is also for non-parents as well.
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