Financial Education Basics from A to Z

Below are some basic financial terms that everyone should become familiar with in order to live financially smart lives.

Definitions of Common Financial Terms

The road to financial literacy401(K) plan — a tax-deferred investment and savings plan that serves as a personal retirement fund for employees.

Annual Percentage Rate (APR) — the cost of credit on a yearly basis expressed as a percentage.

Annuity — a series of equal payments made at regular intervals, with interest compounded at a specified rate.

Appreciation — an increase in the value or price.

Balance — the amount owed on a loan or credit card or the amount in a savings or investment account.

Bankruptcy — a legal proceeding declaring that an individual is unable to pay debts. Chapters 7 and 13 of the federal bankruptcy code govern personal bankruptcy.

Capital — A person's savings and other assets, which can be used as collateral for loans.

Collateral — Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security.)

Compound interest — Interest that is calculated on the original principal plus all interest accrued to that point in time. Since interest is paid on interest as well as the amount borrowed, the effective interest rate is greater than the nominal interest rate. The compound interest rate method is often used by banks and savings institutions in determining interest they pay on savings deposits "loaned" to the institutions by the depositors.

Cosigner — A term referring to a person, other than the principal borrower, who signs for a loan. The cosigner(s) assumes equal liability for the loan.

Finance charge — The total dollar amount paid to get credit.

Fixed rate — A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.

Foreclosure — The legal process used to force the payment of debt secured by collateral whereby the property is sold to satisfy the debt.

Inflation — A sustained increase in the general price level or a decline in the value or purchasing power of money.

Interest — A fee for the use of money over time. It is an expense to the borrower and revenue to the lender. Also money earned on a savings account.

Lien — A creditor's claim against a property, which may entitle the creditor to seize the property if a debt is not repaid.

Liquidity — Quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process. Sometimes used more broadly to encompass credit in hand and promises of credit to meet needs for cash

Mortgage Loan — A temporary and conditional pledge of property to a creditor as security for the repayment of debt.

Predatory lending — Targeting loans to elderly, low-income and other people to take advantage of their financial status or lack of financial knowledge.

Principal — The unpaid balance on a loan, not including interest; the amount of money invested.

Recession — A significant decline in general economic activity extending over a period of time. Usually declared after two consecutive quarters of declining gross domestic products.

Securities — Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).

Subprime Lending — Lending provided to those who do not qualify for "prime" rates, those rates reserved for borrowers with virtually blemish-free credit histories. Subprime lending that involves unscrupulous practices is considered predatory.

Unemployment rate — The percentage of the labor force that is unemployed and actively seeking a job.

Variable rate — A variable-rate agreement, as distinguished from a fixed-rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.