At Expert Pensions Claims, we want you to be confident about the basic financial terms and concepts that are out there. We believe that knowing about important financial terms would limit the chances of you falling into the hands of common scams, such as financial mis-selling. So, with this in mind, we have compiled a guide that details 30 financial terms that you need to know. Read on!
Compound Interest
Compound interest is commonly defined as ‘interest on interest’. When you’re investing, compound interest is gained on the amount that you have deposited, as well as any interest you’ve earned over time. However, when you’re borrowing, compound interest is charged on the amount that you loaned originally.
Asset
Now, you may have heard of this financial term already. An asset is anything of value that can be converted into cash. For an individual, examples of personal assets include cash and cash equivalents, savings accounts, personal property, and investments.
Asset Allocation
To put it simply, asset allocation is where you choose to put your money. The three main asset classes are stocks, bonds and cash (or cash equivalents). It is best to allocate your assets in places that line up with your personal goals and time horizon.
FICO Score
A FICO score is a significant type of credit score. An individual’s credit score is based on several factors, such as payment history, the length of credit history, and the total amount owed. The higher your FICO score, the better the terms you may receive on your next loan or credit card.
Net Worth
Net worth is simply the difference between your assets and your liabilities. An individual can calculate their net worth by adding up all of their money or investments and then subtracting their existing debt.
Capital Gains
Capital gains are defined as the difference between how much something is worth at present value and how much it was originally purchased for.
Rebalancing
Rebalancing is the process of bringing your bonds back to your required percentages. To rebalance your financial portfolio, an individual could sell some of their stocks and reinvest their money in bonds.
Defined-contribution Plans
Defined-contribution plans are essentially retirement plans that companies may offer in which both you and your employer can make contributions regularly.
Permanent Life Insurance
Permanent Life Insurance is a type of policy that provides coverage over a lifetime. Such a policy also offers a component called ‘cash value’ that you can use while you’re still alive. However, it’s important to note that using this cash value means that you could reduce your death benefit and pay more taxes.
Term Life Insurance
Term Life Insurance gives an individual coverage for a set time, generally between a five to 30 year period. If you die within the set period, your beneficiaries receive a payout. If you don’t, your policy expires with no value.
Umbrella Insurance
Umbrella Insurance provides an individual with additional liability coverage beyond what their property may provide. It is advisable to consider umbrella insurance if you’re at risk of being sued for property damage or other people’s injuries.
Liability
Liability is a common financial term that refers to a legal obligation to repay or otherwise settle for debt. Liabilities are considered either current (payable within one year or less) or long term (payable after one year).
Liquidity
Liquidity refers to how quickly an asset can be turned into cash for full market value. In the business world, the more liquid your assets – the more financial flexibility you have.
Annual Percentage Rate
Annual Percentage Rate (APR) is the yearly real cost of a loan, including all interests and fees. The total amount of interest to be paid is based on the original amount loaned and this is represented in percentage form.
Credit Report
A person’s credit report provides a summary of their personal credit history, showing information such as bankruptcies, loans, late payments, and recent enquiries.
Bankruptcy
Bankruptcy is a legal process for businesses or individuals facing severe financial challenges. A plan is provided for the reduction and repayment of debts over time. However, it is important to know that turning to bankruptcy will harm business credit scores.
Pension release scam
A pension release scam is a type of scam that is used to lure individuals to ‘cash in’ their pension. This is in exchange for the promise of upfront cash and one-off ‘deals’ with guaranteed high returns.
Delinquency
Delinquency, or financial delinquency, is when a borrower fails to repay a debt obligation by the term that was originally agreed.
Return On Investment
Return on Investment, commonly referred to as ROI, is a performance measure used to calculate the efficiency of an investment or a number of different investments. ROI is simply calculated by dividing the return of the investment by the actual cost of the investment.
High-Risk Investment
A high-risk investment refers to an investment that carries a high amount of risk. This means that there is a strong chance of losing a substantial amount (if not all) of your investment.
Fixed Interest Rate
A fixed interest rate refers to the interest rate on a loan that is established from the beginning and does not change for the lifetime of the loan. A benefit of using a fixed interest rate on a loan is that repayments amounts are consistent, meaning that it is easier to budget for the future.
Loan-to-value
Loan-to-value is defined as the ratio of the market value of the asset to the value of the loan that is used to purchase the asset. For the lender, loan-to-value informs them of the potential losses that may be regained from selling the asset.
Personal Allowance
Personal Allowance refers to the amount that most people can earn before being subject to income tax. The base rate limit for 2019 to 2020 is currently £37,500.
Shared Ownership
Shared Ownership allows you to purchase part of a property using a shared ownership mortgage while another party (usually a housing association) owns the rent. You pay rent each month on the portion you don’t own, but you have the chance to increase your ownership over time.
Recession
You’ve seen it on the news, but what does a recession actually mean? It is essentially an economic condition that is defined by a decline in GDP. During a recession, the stock market usually drops, the housing market declines, and unemployment increases.
Equity release
Also known as a lifetime mortgage, an equity release enables you to unlock cash from your home in retirement. However, as interest rates are higher than traditional mortgages, an equity release is considered to be a costly way of accessing cash.
Bonds
Bonds are essentially regarded as being investments in debt. When an individual buys a bond, they are lending money to an entity for a set time at a fixed interest rate. They then receive periodic interest payments over time and get back the loaned amount at the bond’s maturity date.
Premium
You may have seen this term plastered on various TV adverts about insurance. A premium refers to the payments that you make to an insurance company to maintain your coverage. You have the choice to pay premiums monthly, quarterly, semi-annually or annually.
FCA
The FCA, known as the Financial Conduct Authority, is the independent regulator of the UK Financial Services industry. This body does not investigate individual complaints. Complaints should be made directly to a firm and then to the Financial Ombudsman Service if the provider’s response is not sufficient.
Pension mis-selling
Pension mis-selling refers to being given suitable advice about your pension scheme. Whether the risks weren’t explained to you, or you were not given the right information you need, it’s easy to claim back compensation for your mis-sold pension. At Expert Pension Claims, queries related to pension mis-selling are what we deal with. If you think that you have been mis-sold a pension, contact our team today to check if you’re eligible for compensation. We promise to provide you with a high-quality service – our past clients can assure you of that!
