10 Essential Banking Terms You Need to Know
1. Compound interest:
To put it simply, this refers to interest paid on the returns your money earns, so that your principal balance grows at a faster pace. Compounding is an important concept to understand, as it can play a vital role in achieving long-term financial goals, like saving for retirement.
To put it simply, this refers to interest paid on the returns your money earns, so that your principal balance grows at a faster pace. Compounding is an important concept to understand, as it can play a vital role in achieving long-term financial goals, like saving for retirement.
2. 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, which is set by Federal Reserve policymakers and governs overnight interbank lending. This is an important gauge, because when it changes, so will the 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, which is set by Federal Reserve policymakers and governs overnight interbank lending. This is an important gauge, because when it changes, so will the prime rate.
3. Escrow:
This describes money or a financial instrument held by a third party on behalf of two others engaged in a transaction. The most common example is during the purchase of a home—escrow is used when a buyer and seller sign a purchase agreement, and the money involved is held in escrow to be delivered when certain conditions are fulfilled. Lenders often use escrow accounts to hold money from mortgage borrowers for property tax and insurance payments, both to make covering those obligations easier and to ensure they’re paid.
This describes money or a financial instrument held by a third party on behalf of two others engaged in a transaction. The most common example is during the purchase of a home—escrow is used when a buyer and seller sign a purchase agreement, and the money involved is held in escrow to be delivered when certain conditions are fulfilled. Lenders often use escrow accounts to hold money from mortgage borrowers for property tax and insurance payments, both to make covering those obligations easier and to ensure they’re paid.
4. Co-signer:
This refers to someone who agrees to take responsibility for another person’s debt in the event payments aren’t made. Lenders may require a co-signer on a loan for a high-risk borrower with poor credit or a scanty credit history. Parents sometimes co-sign a child’s car or student loans. Such debts are reflected on both co-signers’ credit reports, and a default will affect each one.
This refers to someone who agrees to take responsibility for another person’s debt in the event payments aren’t made. Lenders may require a co-signer on a loan for a high-risk borrower with poor credit or a scanty credit history. Parents sometimes co-sign a child’s car or student loans. Such debts are reflected on both co-signers’ credit reports, and a default will affect each one.
5. 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’s an important figure to understand because it represents the actual yearly cost of borrowing money.
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’s an important figure to understand because it represents the actual yearly cost of borrowing money.
6. Annual percentage yield:
The APY is the interest earned annually on a savings or investment account, including the effects of compounding. The quoted APY tells you how much you’re really making on your money. For example, $10,000 in savings earning a nominal 4% a year would provide a 4.08% APY with daily compounding, according to this calculator.
The APY is the interest earned annually on a savings or investment account, including the effects of compounding. The quoted APY tells you how much you’re really making on your money. For example, $10,000 in savings earning a nominal 4% a year would provide a 4.08% APY with daily compounding, according to this calculator.
7. Cash advance:
Credit card holders get one of these when they receive cash directly from the account, often through an ATM or by using a check issued by the card provider. While an advance can deliver fast cash, it typically comes with a fee of 3% to 5% of the amount, which may be capped at several hundred dollars. 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’s best to reserve cash advances for emergencies.
Credit card holders get one of these when they receive cash directly from the account, often through an ATM or by using a check issued by the card provider. While an advance can deliver fast cash, it typically comes with a fee of 3% to 5% of the amount, which may be capped at several hundred dollars. 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’s best to reserve cash advances for emergencies.
8. Overdraft:
This happens when money is withdrawn from a bank account and more than exhausts the available funds, often resulting in an overdraft fee as the financial institution covers the difference. These often costly charges can be avoided by keeping extra money in the account as a buffer.
This happens when money is withdrawn from a bank account and more than exhausts the available funds, often resulting in an overdraft fee as the financial institution covers the difference. These often costly charges can be avoided by keeping extra money in the account as a buffer.
9. Returned item:
This is a check or debit that is turned back because there isn’t enough money in the account it’s drawn on. As with overdrafts, there is a fee for returned items, which can cost $5 to $35, depending on the financial institution, and there may also be charges from the recipient of the check or debit. You can avoid this situation most easily by keeping a cash cushion in the account.
This is a check or debit that is turned back because there isn’t enough money in the account it’s drawn on. As with overdrafts, there is a fee for returned items, which can cost $5 to $35, depending on the financial institution, and there may also be charges from the recipient of the check or debit. You can avoid this situation most easily by keeping a cash cushion in the account.
10. Collateral:
This is typically an asset used to secure a loan. If you fail to make payments on the debt, the lender may be able to seize the property used as collateral, such as a residence financed with a mortgage or a car purchased with an auto loan.
This is typically an asset used to secure a loan. If you fail to make payments on the debt, the lender may be able to seize the property used as collateral, such as a residence financed with a mortgage or a car purchased with an auto loan.
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