Glossary

Finance words, in plain English

The terms you will meet when you compare loans, explained simply. Meanings can differ a little between countries and lenders, so always check the details of your own offer.

A

Amortising loan
A loan you pay off with regular repayments that cover the interest and part of the amount borrowed, so the balance reaches zero at the end of the term. Most personal, business and equipment loans work this way. Try it: Estimate repayments.
APR (annual percentage rate)
The yearly cost of borrowing shown as a percentage. Depending on the country it can include some fees as well as interest, so it is useful for comparing loans. Always check what a lender's APR includes. Try it: Compare two quotes with their fees.
Arrears
Repayments that are overdue. If you are in arrears, you have missed one or more repayments and owe them on top of your normal ones. Talk to your lender early if this happens.
Asset finance
Finance to buy or use a business asset, such as a vehicle, tractor or machine. The asset is often used as security for the loan. A chattel mortgage, hire purchase and a lease are common types. Try it: Try the equipment calculator.

B

Balloon payment
A larger final repayment at the end of a loan, often used in vehicle and equipment finance. It lowers the regular repayments but leaves a lump sum to pay (or refinance) at the end. Try it: See what a balloon does in the equipment calculator.
Break-even point
The point where the money something brings in equals what it costs, so you are neither ahead nor behind. For a purchase on finance, it is when the extra profit or savings cover the repayments and running costs. Try it: Try the break-even calculator.
Bridging finance
Short-term finance that covers a gap, for example between buying a new property and selling an existing one. Try it: Find the gap months in the cash-flow planner.

C

Cash flow
The money coming into and going out of a business or household over time. A business can be profitable but still run short of cash if customers pay late or costs come in first. Try it: Plan 12 months of cash flow.
Chattel mortgage
Common in Australia and New Zealand for vehicles and equipment: you own the asset from the start and the lender holds a mortgage over it until the loan is repaid. Try it: Compare buying outright with finance.
Collateral (security)
An asset you offer to back a loan, such as property, a vehicle or equipment. If the loan is not repaid, the lender may be able to take and sell it. See secured loan.
Comparison rate
Used in Australia. It combines the interest rate and most fees into one percentage, worked out on a standard example loan, so it helps you compare lenders. Your own cost can differ if your amount or term is different. Try it: Compare two quotes with their fees.
Credit limit
The most you can owe on a credit card, overdraft or line of credit at one time. Some lenders count the full limit, not just what you owe, when they look at your debts. Try it: Try the line of credit estimator.
Credit report and credit score
Your credit report lists your borrowing and repayment history. A credit score is a number based on that history. Lenders use them to help assess an application.

D

Debt consolidation
Rolling several debts into one new loan, so you have one repayment instead of many. It can lower your repayments, but a longer term or fees can mean you pay more in total. Try it: Try the debt consolidation check.
Debt-to-income ratio (DTI)
Your total debts compared with your income before tax. For example, debts of twice your yearly income give a ratio of 2. Lenders each use their own measures and limits. Try it: Try the debt-to-income snapshot.
Default
When a borrower does not keep to the loan agreement, most often by not making repayments. A default can lead to extra fees, the lender taking the security, and a mark on your credit report.
Deposit
Money you pay upfront towards a purchase, so you borrow less. A bigger deposit means a smaller loan and a lower loan-to-value ratio. Try it: Estimate the cash you need upfront.
Depreciation
The drop in an asset value over time as it ages and gets used, for example a vehicle or machine. Tax rules for depreciation differ by country, so ask your accountant. Try it: Include loss in value in the cost per km.

E

Early repayment fee
A fee some lenders charge if you pay a loan off early or make extra repayments, especially on fixed-rate loans. Also called a break cost.
Equity
The part of an asset you own outright: its value minus what you still owe on it. For example, if a property is worth more than the loan against it, the difference is your equity.
Establishment fee
A one-off fee some lenders charge to set up a loan. Also called a setup or application fee. Try it: Include fees in the equipment calculator.

F

Finance broker
A person or business that helps you find and apply for finance from one or more lenders. A broker does not lend the money. Ask how they are paid and which lenders they work with.
Financial hardship
When you cannot keep up with repayments, for example after illness, job loss or a bad season. Many lenders have a hardship process that may change your repayments for a time. Contact your lender as soon as you can. Try it: Read about finance in a bad season.
Fixed rate
An interest rate that stays the same for an agreed period, so your repayments stay the same too.

G

Guarantor
A person or company that agrees to repay a loan if the borrower cannot. Being a guarantor is a serious commitment: get independent advice first.

H

Hire purchase
A way to buy equipment or a vehicle where the lender owns it while you make regular payments, and you own it once the last payment is made. Compare with a chattel mortgage. Try it: Compare leasing with buying.

I

Interest
What a lender charges you for borrowing money, usually shown as a yearly percentage of the amount you still owe. Try it: Estimate repayments.
Interest-only loan
A loan where, for a set time, you pay only the interest and none of the amount borrowed. Repayments are lower at first, then go up when the interest-only time ends, and you usually pay more interest overall. Try it: Compare interest-only with principal and interest.
Invoice finance
Getting cash now against invoices your customers have not paid yet. With factoring the lender buys the invoices and usually collects the payments; with invoice discounting you borrow against them and still collect the payments yourself. Try it: Try the invoice finance estimator.

L

Lease
An agreement to use equipment or a vehicle that someone else owns, in return for regular payments. At the end you may be able to return it, extend the lease or buy it. Try it: Compare buying outright with finance.
Lender
The bank, credit union, finance company or other business that lends you the money and sets the loan terms.
Line of credit
A limit you can draw on and repay as needed, paying interest only on the amount you use.
Loan-to-value ratio (LVR or LTV)
The loan amount as a percentage of the value of the property or asset used as security. A lower ratio usually means less risk for the lender.

O

Offset account
A savings or everyday account linked to a loan. The money in it is taken off the loan balance when interest is worked out, so you pay less interest. Not every loan has one.
Overdraft
A limit on a bank account that lets you spend more than you have in it, up to an agreed amount. You pay interest on the amount you go below zero, and there may be fees. Try it: Compare an overdraft with a term loan.

P

Payout figure
The total you need to pay to close a loan on a given day. It is usually the balance owing plus any interest due and fees, such as an early repayment fee. Ask your lender for the exact figure. Try it: Try the early payout estimator.
Pre-approval
An early sign from a lender that it may lend you up to a certain amount, based on what you have told it so far. It is not a final approval, and it usually has conditions and an end date.
Principal
The amount you borrow, not counting interest and fees. Try it: Estimate repayments.
Principal and interest (P&I)
Repayments that cover both the interest and part of the principal, so the balance goes down over time. See also amortising loan. Try it: Estimate repayments.

R

Refinancing
Replacing an existing loan with a new one, for example to change the rate, the term or the lender.
Repayment holiday
An agreed break from repayments, or lower repayments, for a short time. Interest usually keeps adding up during the break, so the loan can cost more overall.
Residual value
An amount left to pay at the end of a lease if you want to keep the item. It works like a balloon payment on a loan. Try it: Compare leasing with buying.

S

Seasonal finance
Finance set up around a business with uneven income, such as a farm, so that more is repaid in the months when money comes in, like harvest, and less in the quiet months. Try it: Try seasonal repayments.
Secured loan
A loan backed by an asset (security or collateral), such as property, a vehicle or equipment. If the loan is not repaid, the lender can take the asset.
Serviceability
Whether you can afford the repayments on a loan. Lenders check your income, costs and other debts, and may test the repayments at a higher rate than the one offered. Try it: Try the repayment stress test.
Settlement
The day a purchase is finalised: the money is paid, the loan starts and ownership passes to you. For property, it is when you get the keys. Try it: Estimate the cash needed before settlement.
Stamp duty
A government tax on some purchases, such as property and sometimes vehicles. Whether it applies, and how much it is, depends on where you are, so check with your local government or a professional. Try it: Include duty in the property cost estimator.

T

Term
How long you have to repay a loan, for example five years. Try it: Compare loan terms.
Trade-in
An old vehicle or machine you give to the seller as part payment for a new one. Its value comes off the price, so you borrow less. Try it: Try the car loan calculator.

U

Unsecured loan
A loan that is not backed by an asset. It is usually for smaller amounts and can cost more than a secured loan.

V

Valuation
An estimate of what an asset, such as a property, vehicle or machine, is worth. A lender may arrange its own valuation to work out how much it will lend against the asset. See loan-to-value ratio.
Variable rate
An interest rate that can go up or down during the loan, so your repayments can change.

W

Working capital
The money a business needs day to day to pay wages, suppliers and bills while it waits to be paid. Try it: Plan 12 months of cash flow.

This glossary is general information only, not financial, legal or tax advice. Estimate repayments or find the right finance.

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