Banking is full of terms and concepts that can be difficult to comprehend, even for industry professionals. But with banking and finance such an important part of our daily lives, taking the time to learn some new phrases could yield profitable results, according towww.nerdwallet.com.
Here are five essential banking terms every consumer should know:
Prime rate
This benchmark is the interest rate that banks and other financial institutions charge their best customers for loans. It is used to set interest rates for many other products, including home equity loans, adjustable-rate mortgages, lines of credit and credit cards.
The prime rate is tied to the federal funds target rate that governs overnight interbank lending. This is an important gauge because when it changes, the prime rate also changes.
Annual percentage rate
The APR is the cost per year of a debt such as a loan, including the nominal interest rate and any related fees, expressed as a percentage of the principal owed.
It is an important figure to understand because it represents the actual yearly cost of borrowing money.
Cash advance
Credit card holders get this when they receive cash directly from the account, often through the ATM or by using a cheque issued by the card provider. While an advance can deliver fast cash, it typically comes with a fee (certain percentage of the amount).
The interest rate the card issuer charges on this sort of borrowing can be significantly higher than the rate on purchases or balance transfers. It is best to reserve cash advances for emergencies.
Overdraft
This happens when money is withdrawn from a bank account and more than the available funds. This often results in an overdraft fee as the financial institution covers the difference. This often costly charge can be avoided by keeping extra money in the account as a buffer.
Collateral
This is typically an asset used to secure a loan. If you fail to repay a debt, the lender may seize the property used as collateral, such as a residence financed with a mortgage or a car purchased with an auto loan.
Banking may be awash with jargon, but understanding these essential terms should help you navigate through it and steer your finances in the right direction.
