Financial Terms You Need To Know To Understand Your Debt

Woman studying financial termsThere are a number of financial terms you would come across with frequently when you are trying to manage debt. From the time you take on loans to your repayment journey all the way to paying them off, there are a few words that you would see from time to time. It is a good idea to be familiar with them so you understand your finances and debt payments better.

This is similar to playing sports or taking up a new hobby, you need to understand the language of the sport. To be able to play better or communicate with other players, the language is important. It puts everyone on the same page and able to play well together. They are able to accomplish their goal which follows the same in life.

Familiarizing yourself with financial terms equips you to better manage your finances. It can be debt repayment, saving for a house,  a car, college, or even for retirement. Understanding basic financial lingo will help you on your journey. That being said, here are a few of the most common terms you will come across in your finances.

Principal amount

You will come across this often when you start taking out loans as go through life. When you need a car, you will start to look at car loans. For a house, you will talk to the bank applying for a mortgage loan. Even when you or your kids are going to college, student loans would be on in the discussion. This is basically the amount you borrowed from your lender. If you are looking at your credit card, this is the amount you charged for your purchase. If you are looking for a mortgage loan, this is the total contract price of the house you need to borrow money from.

Interest rate

There is no specific rate for each type of debt but there are guides lenders use to determine your rate. Simply put, this is the cost of borrowing money from lenders or even other people. This amount is added to your monthly payment until you pay off your loan. When you want to have a better understanding of your debt, this is one of the financial terms you need to look at.

Different lenders all have different ways to compete for the interest rate. Though the major component of this would be your credit score. Lenders would look at your credit score to help determine if you have been meeting your past financial obligations. This serves as a barometer whether they will loan you or not.

If they do, your score will also help determine the interest rate they will put on your loan. The general rule is that the higher your score is, the lower your interest rate could be. The same applies when you have a low score, the higher your rate can be. This is how lenders try to manage the risk of extending a loan to consumers. The riskier it is, the higher the interest rate will be.

Payment Due Date

One of the most important financial terms you need to look out for is payment due dates. This is basically the date when your monthly payments are due. It may sound easy but once you are trying to manage more than one payment, it could start to become a nightmare. Especially so when you are already running on a tight budget.

The problem when you start missing payments are the payment penalties set by your lender. These fees and charges and even an increase in interest rate will make your future payments higher. It can even lead to losing some credit card rewards you have accumulated over the years. These are just a few of the reasons why this date is crucial.

However, consumers need to understand that they might be able to change their due date depending on their lenders. They can call and see if it is possible. If it is, it would be better to either time it with others or schedule it when you know money is coming in. Just make sure that it is reflected in your statement and that you update your payment calendar as well.

Compound interest

One of the most powerful tools you need to know about is compound interest and how it works. When you start looking at financial terms, this is the one that should stand out. For one, compound interest can be a financial tool you can use to your advantage or it can be something lenders use to make you pay more.

As a tool, you can use it to help you grow money over time on the sidelines. A lot of people use this for their retirement fund letting interest make the amount grow. The way it works is that as you earn interest, it adds on to your principal amount. The next time your money earns interest, the principal is bigger making the earnings bigger. This continues on until you need the money making earn interest on interest.

On the other hand, lenders can also this especially when you start missing payments for consecutive months. Once you miss a payment, lenders can add interest to your total amount and add that to the total payment due. The next month, interest will be based on the new total amount due to increasing the amount. This is why the longer you hold off paying your debt down, the bigger it is at the end.

Repayment period

This is basically your repayment schedule stating when you start paying, how much it is every month and when your last payment will be. It is useful because it gives you an overview of your repayment schedule. This can help inspire you as you slowly cross out the months you have paid off on your schedule.

FICO score

One of the financial terms you will commonly come across when managing your own money and even debt is your FICO score. This is one of the most widely used scoring mechanism to help lenders look at how responsible you are with your finances. As mentioned earlier, the higher your score is, the lower your interest rates can be and the lower your payment will be.

The FICO score or Fair Isaac Corporation is the one most commonly used by lenders. As a consumer, it is best that you have an idea what it is made up of. No one really knows the exact way scores are computed but there are factors that are considered into it. According to AAA Credit Guide, the average credit score Americans have is at 695. This is considered “fair” and just five points away from a “good” rating.

Payment history is one of the biggest components in score computation. Lenders want to know how well you paid your previous obligations. The amounts you owe also plays a part in your score when benchmarked with your credit limit. Credit history, as well as applications for a new credit, can also play a part in your credit score computation.

There are a number of financial terms you need to understand if you want to understand your debt obligations better. Knowing these will also give you an upper hand in managing your overall finances and help you reach your goals faster. It can also give you the chance to understand and maybe stay away from costly financial mistakes.