Category Archives: Financial Terms Explained

Exercise your finances like you would your body to excel

financial exercise

If you’ve been watching the Tour de France you are probably at least slightly impressed by the endurance and physical condition of the cyclists. Likewise, footballers playing in the World Cup in extreme Brazilian conditions are in great shape. You may even feel a little envious.

But you must remember. These guys aren’t born like this. It’s not luck that makes them that way. They have worked at it. Really, really worked at it.

If you feel inspired by these great athletes then remember it is going to be hard work. There’s no quick fix. The same mentality can be applied to the way you approach your personal finances.

To take charge of your physical health, doctors encourage you to know your numbers, such as blood pressure, cholesterol, blood sugar, and BMI (body mass index).

When you’re looking at your financial situation you should apply a similar approach. The following ‘exercises’ will help you get into shape, financial shape.

Exercise 1: Identify Income

Make sure you understand credit card terms so that you can avoid the pitfalls of short-term borrowing

Credit card terms explained

Many customers get trapped by credit card offers because they do not understand the terms of a headline grabbing deal. A greater understanding of what is expected by a card firm can help individuals avoid problems with short-term borrowing that can stretch budgets for years.

Balance Transfers – Look Out For Transfer Fees and Duration

It is easy to be attracted to offers of zero per cent balance transfers but the small print usually provides detail which must also be considered. A balance transfer rate of zero per cent is excellent but how long is this provided for and what is the transfer fee?

It is likely that any amount transferred will be subject to a hidden charge of approximately three or four per cent. Therefore a transfer of ten thousand pounds could incur a fee of up to four hundred pounds which would be added to the debt.

Why do self employed workers set up companies?

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Despite being one-man bands, there are a growing number of individuals taking advantage of tax planning to establish limited companies and increase their own cash availability.

Why Are Limited Companies Popular?

If an individual has a business or trade that revolves around a particular skill, they can work as a sole trader and pay tax through their self-assessment tax return.  They will pay income tax and make National Insurance contributions.

Income earned through employment or self-employment is subject to National Insurance in addition to income tax. It may be possible for workers to save on National Insurance by being paid dividends instead of a salary; this is because dividends are not subject to National Insurance.

Mortgage repayment options are an important consideration – what are my options?

What are my options when considering a mortgage?

Mortgage lending opportunities have been reduced in recent years following the revelation that many applications for borrowing were not backed by worthy assets or a sustainable repayment plan.

Mortgages are typically provided by high street banks but the types of mortgage products available differ greatly in terms of the impact they have on individual customers.

What are the options that are out there?

Low Monthly Repayment Versus Capital Reduction

New applications for fixed rate mortgages are now vetted much more closely due to the number of customers believed to have no provision for the point at which a fixed rate deal runs out. Despite this there remains a number of fixed rate opportunities in existence and the benefit of enjoying a low monthly commitment for a mortgage can provide greater financial flexibility.

It is important to be disciplined with any plan to create a fund with which to repay the capital outstanding on the mortgage but the lack of fixed capital repayments mean that borrowers can withstand many short term cash flow difficulties without compromising the security of their home.

Three Financial Terms Explained: Cost of Borrowing, Failure to Meet Payment Targets and Inflation

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Many individuals are turned off by financial jargon and do not understand many of the standard terms used in financial advertising. A lack of knowledge can be a dangerous thing as many financial products are dressed up as attractive to customers when they are actually uncompetitive.

Cost Of Borrowing

Borrowing can be undertaken through a formally arranged loan or overdraft facility. An overdraft must technically be repaid on demand, although a lender may have an understanding that this is not always practical and will work to renegotiate terms if they wish to remove the facility. The account holder can go overdrawn up to the agreed overdraft value but it will be expected that activity will cause the overdrawn balance to vary.

A loan is more structured and involves borrowing a fixed capital amount before agreeing to repay at fixed intervals, usually monthly, and at interest rates that are fixed or set to vary with the base rate of interest as set by the Bank of England. Interest represents the cost of borrowing and is expressed as a percentage of the outstanding balance or capital amount borrowed.

Eliminating the Confusing Jargon: APR, Credit Ratings and Inflation

APR, Interest Rates and Inflation

Many adults are unfamiliar with the terminology used by banks when advertising financial products.

Banking has changed enormously in recent years and changes introduced to make the industry more transparent has increased confusion because people are unaware of the meaning behind certain terms.

Schools are introducing the concept of financial awareness to the curriculum so that students are equipped to deal with the financial challenges that may lie ahead. Many adults are unable to benefit fully from a diverse banking sector because they do not comprehend the financial language that appears in advertising, a greater understanding would lead to increased financial freedom.

PaydayUK explains credit ratings and scores

Credit Scoring definition

For many people, terminology like credit ratings, credit history and credit scoring can be quite confusing.

So here are our quick definitions;

A person’s credit rating is an evaluation of their ability to fulfill financial commitments. This evaluation is based on their past financial activity (called their credit history) such as credit card payments, loan repayments or mortgage repayments. A credit rating is usually derived by considering ranges of credit scores, so, for example, a credit rating of ‘good’ would be aligned alongside credit scores at the higher end of the score spectrum.

What not to do when considering taking a short term loan

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Short term lender PaydayUK has the following tips for anyone considering taking a payday loan.

Payday loans are a good way of bridging the gap until payday when an emergency expense rears its ugly head.

However, there are a number of really important factors that need to be taken into account when taking a payday loan.

You should not do any of the following when taking out a payday loan:

  • Fail to understand the overall cost of the loan

While payday lenders are required by law to display the Representative Annual Percentage Rate (APR) of their product, it is not always the clearest indicator of cost. APR is the interest payable on that loan over the duration of a year and does not take into account shorter loan periods.

Why is your interest so high? PaydayUK addresses the misconception

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The simple answer is that the level of interest isn’t as high as the Annual Percentage Rate (APR) makes it look.

Payday loans and other short term loans have become a major talking point in recent years. One of the main reasons for this is the high APRs displayed on their adverts. Unfortunately a large proportion of this furore is based on misunderstanding the nature of APRs and the differences between them and regular interest rates.

Short term lenders, like most financial lenders, are required by law to display their product’s Representative APR when advertising that product.* APR is the interest payable on the amount borrowed as an annual rate charge, i.e. the total interest rate you would pay if you borrowed that money for a whole year.**

When used for loans that last a short period of time the picture becomes, to a certain extent, distorted. PaydayUK has a representative APR of 2,090 per cent but not one of its customers will ever have to pay an interest of anywhere near that.

Secured versus unsecured loans: What’s the difference?

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There is a lot of potentially confusing terminology surrounding the different ways it is possible to borrow money.

If you’re considering applying for a loan you need to know the difference between two of most common categories; secured and unsecured loans.

Secured loans

Secured loans are when the borrower offers some form of collateral in exchange for the borrowed money.

The underlining principle with these loans is that in the event of the borrower failing to repay the loan, the lender can take ownership of the collateral.

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