Useful Terms

Useful Terms

Here are a number of personal finance terms which you may find useful to know or know more about.

AER
This stands for Annual Equivalent Rate. This is like APR (see below) but for savings. It is used to compare the interest you will receive when you keep your money in a current or savings account.
APR
This stands for Annual Percentage Rate and is a calculation by lenders to show what the interest rate and fees are on a credit product, for example a loan or credit card, which allows borrowers to compare different products.
ARREARS
An amount that you were due to pay but have not. If you are in arrears you may incur additional charges on top of interest and it will affect your credit history.
BALANCE TRANSFER
The movement of the amount owing from one account to another account. A credit card balance transfer, for example, involves the movement of the amount owed on a credit card to another credit card account. This is usually for the purpose of taking advantage of better interest rates.
BORROWER
The person who takes on debt, for example a loan.
BUDGET
In relation to personal finance, a budget is a spending plan showing our income and estimated expenses for a period. You can use a budget to work out how much something might cost, for example buying a car and the associate costs, or to plan for a holiday, and then use this information to work out how much you are able to save towards it.

A budget is not set in stone and can be changed to account for events as you become aware of them, for example if you have created a budget for the year and then book a holiday you would have to incorporate the cost into your budget.

CASH
The notes and coins that you have in your wallet, purse or pocket.
COMPOUND INTEREST
Interest calculated on the total amount borrowed plus any previously accumulated interest. The best example of compound interest comes from credit cards. In comparison, simple interest is calculated only on the amount borrowed.
CREDIT
In relation to a loan or credit card, this is the amount you have been allowed to borrow or have available to spend. In relation to a bank account, a credit is an amount paid into your account.
CREDIT CARD
A credit card looks exactly like your debit card and is used in the same way, for example chip and pin or contactless. The cardholder is able to borrow funds to pay for goods and services on the condition that they will pay back the original amount plus interest. You will have a pre-set limit of how much you can spend and will receive a bill each month showing what you have spent and what your minimum payment to be made is. You can pay off any amount over the minimum, if you pay the full bill you may not need to pay interest. If you pay an amount less than the total you will pay interest on the balance. On your next bill, you will see the amount left from the previous plus interest. You will pay interest on the remaining balance plus interest already paid. This is called compound interest. If you do not make at least the minimum payment on your card, you will incur additional charges for late payments and it will affect your credit history.
CREDIT REPORT
You won’t have this until you turn 18. It is a listing of any borrowing or debt you have, except student loans. Your report will show all of your personal details, including previous addresses and whether you are registered to vote. A credit report shows 6 years of information on your payment history. If you miss payments, have a credit limit increased or go into an overdraft, this will show on your record for 6 years. Your credit report will be used alongside other details about your circumstances and income to assess whether you can borrow money or take out credit products.
CREDIT LIMIT
This is the amount you have been approved to borrow or to spend up to. You might be given a £500 credit limit on a credit card, therefore you can spend anything up to £500.
CREDITOR
This is the person who has lent you money and who you are due to repay.
CURRENT ACCOUNT
This is your normal everyday bank account. Current accounts differ, in terms of the benefits and costs that come with them, between banks. Student, Basic and Everyday are examples of names given to current accounts.
DEBT
The amount of money you have borrowed, plus the interest. This is the total amount that you will have to repay and is the amount that will show under each creditor on your credit report.
DEPOSIT
In terms of bank accounts, this is an amount of money paid into an account.

It can also be an amount paid towards goods with an arrangement to pay the outstanding balance at a later date, when you buy a car for example.

DEBT MANAGEMENT PLAN
A repayment programme that helps you get out of debt within a reasonable amount of time, for example, as set up by an organization such as StepChange.
DIRECT DEBIT
This allows someone you owe money, for example EE for your phone bill, to take the amount you owe them directly from your bank each month. The amount will come out on a set date but the amount can change every time.
GROSS INCOME
This is the amount of money you have earned before any deductions are made. Deductions could include tax, national insurance, student loans and pensions.
INCOME TAX
This is an amount deducted from your pay when you are earning over a certain amount per year. How much you pay depends on how much you earn annually and where you live in the UK – Scottish people pay more than the rest of the UK. This type of tax goes to the government for their spending. When the Chancellor comes up with his budget for the year, he is spending your tax money.
INTEREST
Earned interest is an amount paid to you for having money in your savings or current account.
When you borrow money, the amount you pay back is usually always more than the amount you’re are given. This extra amount is called ‘interest’ and is the cost associated with borrowing from a lender.
Interest can be fixed or variable. Fixed interest is calculated at the same percentage for a set period. Variable interest can change depending on what the Bank of England sets their rate at. If the Bank of England increases the ‘base rate’ of interest, then you may get more interest on your savings or you could have to make larger payments on your mortgage.
LOAN TERM
This is how long you will have to make repayments on a loan. For example, a 36-month loan term means you will make payments every month for 3 years.
MINIMUM WAGE
This is the least amount you are legally allowed to be paid per hour. This depends on your age and whether you are completing an apprenticeship.
MORTGAGE
A special type of loan to buy a property. The property is used as security for the amount borrowed. If payments are not made on the loan the lender can repossess your property.
NATIONAL INSURANCE
This is an amount deducted from your pay when you are earning over a certain amount each month. It is sometimes referred to as NI and is very important as you must have paid it for a set number of years before you are entitled to a state pension. The NI that you pay now is used to fund certain benefits and state pensions for other people now.
NATIONAL LIVING WAGE
This is a minimum wage that must be paid to workers over the age of 25.
NET INCOME
This is your take home pay after all the relevant deductions have been made from your gross income. This is the income figure that you would use in your budget.
OVERDRAFT
This is when a bank allows you to spend more money than you have in your current account.

An arranged overdraft is one where you have asked the banks permission first. There may be a charge for this which your bank will provide. Student accounts may provide a free overdraft while you are a student.

An unarranged overdraft is more expensive than an arranged overdraft simply because you have not asked the bank for permission to overdraw on your account.

P45
This is a document issued to you when you leave a job.

A P45 has 4 parts (Part 1, Part 1A, Part 2 and Part 3).

  1. Your employer sends details for Part 1 to HM Revenue and Customs (HMRC) and gives you the other parts.
  2. You give Part 2 and 3 to your new employer (or to Jobcentre Plus if you’re not working).
  3. Keep Part 1A for your own records.

It gives your new employer details of your tax code and earnings so that they can set you up easily on their system without having to wait on HMRC tell them what code you should be on.

P60
This is an annual statement, issued to you by your employer that gives an overview of your earnings and deductions for the year.
PAYSLIP
Payslip example
PAYDAY LOAN
A small, short-term loan that is repaid when the borrower receives their next pay. The interest charged on these loans is astronomical and the lenders do not carry out checks to ensure that the borrower will be able to repay.
PENSION
A pension is a fund that you pay a sum of money into, usually each month via your employer who will also contribute. The fund is invested until you reach retirement age and is then used an income source.
PERSONAL LOAN
An amount of money lent at a specified APR and term. Banks and Credit Unions are examples of companies who might provide you with a personal loan. Personal loans are loans that a bank or other lender makes that are not secured against any asset such as your home. They’re also known as unsecured loans.
SAAS
Government agency that gives financial support to Scottish students and those meeting residency criteria in Scotland doing higher education courses in the UK. A living cost loan is available for all students and a tuition fee loan to those studying outside Scotland.
SAVINGS ACCOUNT
This is a type of bank account used for keeping funds separate from your everyday money. You cannot spend money straight from your savings account, but it is usually very simple and fast to move money from your savings into your current account. There are lots of different types of savings account to choose from.
SECURED LOANS
A secured loan, is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.
STANDING ORDER
A payment you have set up via your bank account. The same amount will be paid each time to the same person/company on a set date for a certain period of time.
STUDENT LOAN COMPANY (SLC)
In Scotland, the SLC collect the repayments of your SAAS loans after you have finished studying and are in employment.
STUDENT LOAN
A loan taken out to cover the living costs associated with studying at college or university. The loan must be applied for each year and the amount given depends on personal circumstances. You will pay interest on student loans. The interest begins to accrue when you take the loan, but you do not start to make repayments until the April after you graduate, and only when you are earning above a level set by SAAS/SLC. www.studentloanrepayment.co.uk
TAX CODE
This is a special code issued by HMRC to tell your employer how much tax they should deduct from your earnings based on your income.
TUITION FEES
All students going to college or university on a full time course, are subject to tuition fees. In Scotland these are paid on your behalf by SAAS. If you are planning to study outside of Scotland you will need to pay these fees yourself. SAAS can provide a tuition fee loan, which you will repay once you are earning above a level set by SAAS/Student Loans Company.
ZERO HOURS CONTRACT
This is a contract of employment where you are not guaranteed any minimum hours by your employer.