When you’re fresh into the finance world as a young adult, it can feel tricky navigating your way through financial products as they start to become more prominent in your everyday life.
Whether you’re looking at buying your first home, picking out your first credit card or setting your first savings goals, chances are there are some new finance terms that you may have come across or not be entirely familiar with yet.
To make things a little easier, we’ve put together a quick go-to financial guide, packed with a bunch of financial terms and definitions that you can refer back to, as you start to dig deeper into the world of personal finance:
Part 1: Deposits
- Base Rate/Standard Rate: The expected interest rate a savings account comes with (without spending or depositing conditions).
- Bonus Rate: An additional interest rate on top of the base rate that generally comes with conditions, such as deposit requirements each month or spending restrictions/conditions.
- Introductory Rate: An interest rate offered to customers when they first open an account that only lasts for a specific period of time (usually for the first few months). The rate will then revert to the base rate for as long as you hold the account.
- Term: The length of time you allocate to have your funds locked away and accruing interest. (These often range from a month to five years).
- Maturity: When your selected term is up. This may be when you receive the interest that you made on your deposited amount.
- Automatic Rollover: A term deposit feature where, at the time of maturity, your deposited amount automatically gets rolled over into another term of the same length. Remember, interest rates aren’t always the same between original and rolled over terms.
Part 2: Credit Cards
- Minimum Repayments: Lowest amount you are required to pay on your credit card month-to-month to avoid being charged late payment fees.
- Balance Transfer: When you transfer your existing credit card debt to a new card – where the new interest rate on your transferred balance will either be 0%, or a special low rate for a limited time. This can initially save you money in the short run, but if you can’t pay off the balance in time it might actually cost more.
- Interest-free Days: A feature offered on new credit card purchases (usually up to 55 days). When you buy something using your card, you have a set number of days before you are charged interest on that transaction. Keep in mind, you do not receive interest-free days on cash advances or purchases during a balance transfer offer.
- Credit Score: A number (ranging from zero to 1,200) which lenders use to determine how good of a borrower you are. It is based on your credit report – which includes what type of credit products you have ever used, your repayment history, any defaults on bills, credit cards or loans, credit applications, and rental history. Your credit history may also include any history of bankruptcy and/or debt agreements. The higher your credit score, the less risky you are to potential lenders.
Part 3: Loans
- Variable Rate: An interest rate that moves with the market, which is determined by the official cash rate of the Reserve Bank of Australia (RBA).
- Fixed Rate: A rate that is locked in for a certain period of time. It protects borrowers from fluctuation in the market.
- Revert Rate: The rate that you receive after your fixed term is up. It is usually higher than the fixed rate and is a variable rate, so is subject to change as the market changes.
- Comparison Rate: A rate that is used when comparing loan products. Unlike the standard variable rate, it’s calculated to include the cost of fees and charges that can affect the overall cost of the loan.
- Secured: A loan where collateral is needed in order to guarantee repayment, which could include a residential property or a vehicle.
- Unsecured: A loan where collateral is not needed to guarantee repayment. Unsecured loans tend to be subject to higher interest rates.
- Debt Consolidation: A loan that combines multiple debts into one simple repayment with a lower interest rate. This could include combining your credit card, personal loan or car loan debt.
- Owner Occupier: A borrower, where the house they are buying is their primary place of residence.
- Principal & Interest: Principal and Interest loan repayments are calculated so that you pay back all of the money you borrowed (principal) and all of the interest that will be charged over the term of your loan. When the term ends (usually 30 years), you will end up with a nil balance on your loan.
- Interest Only: An Interest Only loan allows you to pay only the interest on the loan, rather than paying back both principal and interest. At the end of the interest only period (usually five years), you will still owe the full amount you originally borrowed if you haven’t made voluntary repayments. Once the interest only period is over, borrowers either have to pay the principal amount in full or can revert to principal and interest repayments.
- Loan to Value Ratio (LVR): the ratio of the amount that you borrow, to the amount the property is worth. The Loan to Value Ratio is a calculation that financial lending institutions use to assess the risk of approving a loan to a borrower. The Loan to Value Ratio is expressed as a percentage of the value of your house. It is calculated by dividing your loan amount/s by the value of the security property/ies.
- Lenders Mortgage Insurance (LMI): Lenders Mortgage Insurance (LMI) is insurance that protects the lender in the event the borrower defaults and the security property is sold and the funds from the proceeds of the sale are not enough to discharge the loan. The LMI then pays the Lender the shortfall.
- Mortgage Protection Insurance: insurance that borrowers have the option to take out in case they are unable to make repayments due to illness, job loss or even death.
- Offset Account: A transaction account that is linked to your mortgage to offset the interest that is payable on your home loan.
- Extra Repayments Feature: A home loan feature that allows borrowers to make additional contributions to their loans on top of their regular monthly repayments. In some cases, these are unlimited and in others they are capped to a certain amount per year.
- Redraw Facility: A redraw facility is a facility where you can withdraw money from your loan account if you have made extra repayments to your home loan. The benefit of having a redraw facility is that the additional repayments can reduce the interest you pay, but you can withdraw them easily when you need them. Note: you cannot use a redraw facility to access funds that are made up of your regular monthly repayments.
Part 4: Insurance
- Premium: The cost of your insurance policy. Often you can opt to pay weekly, fortnightly, monthly and even annual premiums depending on your insurer. By paying your premiums, your insurer will cover you for any instances that fall under your policy.
- Excess: The amount of money you need to pay before your insurer covers any other costs, such as medical expenses, car damage or travel incidents. Your excess is stated on your insurance policy and in most cases you can negotiate a cheaper insurance premium if you accept paying a higher excess.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.