The Importance of Understanding Personal Finance Terms

According to a recent survey British people are more familiar with text speak than personal finance terms. This lack of knowledge surrounding such an important area of our lives has even lead to financial trouble for some people, due to confusing certain monetary terms we’re referring to or being unaware of them.

People still have a poor understanding of finance terms despite banks and other financial companies avoiding the use of jargon. Rather than ignore or glide over these, you should build a better understanding and use it to your advantage.

Mortgage and credit concept.

Here are several examples of useful finance terms that will help you get started:

Secured and Unsecured Loans

The main two types of loans available are secured and unsecured (or personal) loans. Secured loans, such as those available from Nemo are ones which are secured against your home (or other asset) so you must ensure you can afford the repayments or your home may be repossessed. Generally, secured loans can be taken out for a higher amount over a longer term. A secured loan is one of many options.

Personal loans do not require the borrower to be a homeowner so makes them easier to come by for many and with less risk. However, these aren’t always relevant if you wish to borrow a larger amount of money.

Credit Cs

When seeking credit, whether to be initially granted or have it extended, lenders use an evaluation method made up of the five Cs of credit. The first is character, which is essentially assessing your reputation. Next is capacity that takes into account your ability to make repayments on time.

Capital is the finances you already possess and income while collateral includes any assets of significant value (such as a property) which you are happy to use as a guarantee. Finally comes the conditions, which are the terms of the credit, made up of interest rates, timescales and other minor details.

Net Worth, Liabilities and Assets

Net worth is used both in terms of businesses and personal finance. Liabilities are the debts and monetary obligations you possess (such as paying monthly rent and phone bills), while assets are any resources which have economic value like a property or a job which generates cash flow.

Net worth is the difference between your assets and debt. A positive net worth is desired as this demonstrates you receive more money from your assets than liabilities, whereas a negative net worth shows more is being lost than gained. A decent understanding of common financial terms should help you make informed decisions in the future.

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