Financial Freedom Week 7 Recap: Lending Lingo
Posted Feb 17, 2015
Working in a financial institution I frequently forget that many people don’t understand the acronyms and terminology that are used in our industry. This week we dedicated time to break down and define some of those labels and terms that our members are likely to come into contact with.
If you are lending money from a financial institution, inevitably you will come across the terms, “APR” or “Annual Percentage Rate”. APR is the annual cost of borrowing money. There are other ways to figure this cost like a monthly rate or daily rate; but APR is widely used so consumers can rate-shop for loans and credit cards on a fair playing field. For example a loan with an APR of 5% will cost less than a loan with an APR of 10%, assuming other things like fees or service charges are equal.
Another common term that frequents the financial offices is “Loan to Value”, meaning the loan balance in comparison to the value of the collateral.
Our business services officer, Peter, was able to break down some of the more confusing but important terms such as “Amortization” and “Negative Equity”. Amortization is the process of paying off a loan in installments over the life of a loan. Negative equity simply means that a person owes more on something than it is actually worth.
On a more positive note we also talked about what “Good Debt” looks like. Good debt involves things that you need on a daily basis such as a house or car. Good debt is usually owed on things that you really need and would have trouble living without. An easy way of spotting good debt is to look at the interest rates that are charged on a particular loan. The rates on loans that qualify as good debt tend to be low and in the case of examples such as a mortgage are even tax deductible.
The final idea that we went over during Lending Lingo was an explanation of the difference between a cosigner and a joint borrower. Put simply a cosigner does not benefit from being part of a loan while a joint borrower does.
Hopefully, this information will assist our members in the future when they are looking at lending options.