Jargon Buster: Loans

APR

APR stands for Annual Percentage Rate and basically tells you how much it will cost to borrow money. The calculation, which is expressed as a percentage, takes into account the interest you’ll be charged on your loan or credit card, as well as any fees you might be required to pay on top of that. The figure is averaged out to give a yearly rate and designed to help consumers make a direct comparison between different offers, although it’s not the only thing you should consider.

APRC

This stands for annual percentage rate of charge and is quite similar to APR. It is used for mortgages, including second charge mortgages (secured loans).

Arrangement fee

Also known as an application fee, this is the one-off charge a borrower may be required to pay for the loan to be set up. This fee usually applies to mortgages or business loans.

Balance

When it’s used in the context of a loan, this is the amount you still owe a lender to pay off your loan in full. When talking about bank accounts, a bank balance is the amount of money you have available in your account.

Bankruptcy

Bankruptcy is a court order that you can apply for if you’re unable to repay your debts. Someone you owe money to can also apply to make you bankrupt even if you don’t want this.  

When you’re made bankrupt, you don’t have to deal with the people you owe money to (known as your creditors). Someone called the Official Receiver takes control of your money and property, and deals with them instead.

When the bankruptcy order is over, the amount you owe is usually written off and creditors have to stop most types of court action to get their money back.

Base rate

This is the rate of interest that the Bank of England charges other banks and lenders when they borrow money. It will influence what interest lenders will charge.

Bridging loan

As the name suggests, a bridging loan can help cover you financially if you’re looking to buy a new house but haven’t yet sold your current one. These loans can be expensive.

Commercial bridging loans are meant only to plug the gap before you sell a property, or secure longer-term finance once a project is completed.

Business loan

These are loans designed for new businesses and to help build existing businesses. Some lenders will offer short term finance, while others will allow you to borrow larger amounts over a longer period. Usually, a company has to be VAT registered to be able to apply for a business loan. There could also be a minimum monthly turnover requirement and some business loan lenders only lend to limited companies. Most lenders will run a credit check on both your business and you. They will likely want to see details of your up-to-date accounts or business plan if you are a new business, and may require security or an asset as a guarantee.

Cancellation period

The period in which you are entitled to change your mind and cancel a financial commitment or service.

Car finance

Car finance is provided by the dealership you buy your car from, or a broker. You’ll often have several choices, the most common of which are known as hire purchase (See: Hire purchase) and personal contract purchase (See: PCP).

Car loan

Car loans are for people looking to buy a vehicle, but who might not have the means to pay upfront. They’re a type of personal loan from a bank, building society or finance provider, and can often be ‘secured’, whereby the car itself is used as a guarantee in case you can’t meet repayments. This means you can’t use the money for anything other than buying a car – unlike an unsecured personal loan where the funds can be used at your discretion for anything from a holiday to home improvements.

CCJ

This stands for County Court Judgement and is issued by a County Court in the event you fail to repay a loan or other outstanding debt, such as council tax or utility bills. It can be enforced by bailiffs, and will also have an adverse impact on your credit rating.

Charges

Charges and fees are usually the same things in finance. They can be issued for services offered by a financial services provider, like a bank, a broker or a lender, but also if the terms of an agreement are broken (late payment charges, for example).

Consumer Credit Act

This legislation makes sure borrowers are given all the information they need before and during a loan, including the terms of credit agreements, the calculations and full written details of the true interest rate (the APR) and, in certain situations, a cooling-off period during which you can change your mind and cancel the loan agreement. Note, however, that the Consumer Credit Act doesn't apply to mortgages or second charge mortgages (secured loans).

CPA

CPA stands for Continuous Payment Authority. It’s a ‘recurring payment’ and is set up when you give permission to a company to regularly take payments from your debit/credit card, such as for a payday loan.

On a debit card, you can check your bank statements to see if you’re paying CPAs. Put simply, any regular payments coming from your statement that isn’t listed as direct debits (DD) or standing orders (SO) could be  continuous payment authorities.

You can cancel CPAs by contacting the company or your bank.

CRA

Credit reference agencies (CRAs) compile your credit report. There are three CRAs in the UK: Experian, Equifax and TransUnion. They gather information about your credit history, put this into a credit report and calculate a score for you based on this information. Lenders will ask one or more of these agencies for information about you before accepting your loan application. You have the legal right to request a copy of your credit report from one of these agencies, but there is usually a nominal charge for doing so.

Credit

Credit is money borrowed from a bank or credit provider on the condition that it’s paid back in accordance with the agreement you’ve signed, usually with interest added. Types of credit include loans (such as personal loans), mobile phone contracts, credit cards and pawnbroking.

Credit score

A credit score is a number that rates how suitable you are for credit – in other words, how much of a risk you're deemed to the lender. It is based on the financial history shown on your credit report. A higher number or score means a lender will likely lend to you, and you may be offered better deals on things like credit cards, personal loans and phone contracts.

Credit report

A credit report is a file that holds information about your financial history. This information is used to create a credit score (See also: Credit score). A credit report will hold information such as credit activity, loans, credit cards and other forms of debt that you currently have, as well as your past credit history. It will also show if repayments have not been made on time – for example a late loan repayment.

Credit union

This is a non-profit organisation run by volunteer members who pool their savings to provide each other with loans at low rates of interest. To be part of a credit union you generally have to share a common bond with other members, such as living in the same area, working for the same employer or belonging to the same church or trade union.

Debt consolidation

Debt consolidation is a way of bringing together several loans or debts into a single loan (called a consolidation loan) to make your monthly repayments more manageable. The new loan might offer a longer repayment period, lower interest rate or both.

Default

This is when a person fails to make their loan repayments and is issued with a default notice. Defaults are recorded on your credit file and may affect your credit score in future.

Early repayment charge

A one-off fee you may be charged if you decide to pay off your loan early, before the term set when applying for the loan.

Employee loan

Also known as a salary loan, employee loan or salary advance, the borrower is given a proportion of their salary (generally up to 50%) before payday, and repayments are automatically deducted from his or her wages in the next pay cheque or spread in instalments over the subsequent few months of pay cheques.

FCA

The Financial Conduct Authority (FCA) is an independent body that regulates the financial services industry in the UK. All credit lenders and brokers must be authorised by it to do business in the UK.

Fees

(See: Charges).

Fixed interest rate

This is the term used to describe a set rate of interest that cannot go up or down during the period of the loan.

Hard credit check

Hard credit checks leave a mark, known as a credit footprint, on your credit report. They usually happen when a company you apply for credit with makes a complete search of your credit report to asses your suitability for a loan. Too many hard credit checks over a short period of time might  affect your credit score for six months, and could reduce your ability to get approved for credit in the future.

Utility providers and mobile phone companies may also perform hard credit checks when you apply to use their services.

Hire purchase

This is a type of car finance (See: Car finance ). Effectively your finance company will ‘buy’ the car and secure the loan against it. You’ll normally be required to stump up a deposit (usually around 10%) after which you’ll make fixed monthly repayments over an agreed period (usually one to five years). You could lose the car if you miss payments, and it won’t properly be yours until you’ve paid the whole sum off, including the Option to Purchase fee (typically £100-£200).

Interest rate

This is the percentage at which interest is charged on a loan or mortgage. Depending on the type of loan, this can be fixed or variable. The advertised interest rate for a loan is known as the APR (or APRC for mortgages).

Lending criteria

These are key requirements, outlined by a lender, to determine whether you’ll be eligible to apply for a loan. They could include your income level or age.

Loan

A loan is a sum of money borrowed (usually over a set period) from a lender and repaid according to mutually agreed terms set out in advance. You are usually liable to pay interest on this debt.

Loan agreement

The name for the formal agreement between a lender and borrower which stipulates the terms and conditions of the loan. This includes the length of your loan, the amount you have borrowed, the APR, and the amount and date of each monthly repayment.

Loan calculator

This handy online tool estimates how much you will pay for your loan overall, depending on the amount you’re borrowing, the interest rate and the repayment period you pick.

Loan payment deferment

This allows you to start your repayments slightly later (usually two to three months) than after the first month of the agreement.

Loan term

This describes the length of time over which you agree to repay your loan in full.

Monthly repayments

The amount paid every month by the borrower to the lender to ultimately pay off the loan and interest.

Mortgage

Also known as a first charge mortgage, these are large loans given to people who want to buy a house. The loan is secured against the property, so it can be repossessed by the bank if the borrower fails to make their agreed repayments.

Overdraft

A bank overdraft lets you use more money than you have available in your bank account, effectively allowing your account balance to go below zero. If you have a current account, then you may already have an overdraft facility in place. Otherwise, you may be able to apply for an overdraft with your bank. Not all types of accounts have overdraft, for example online current accounts and prepaid cards (also known as e-money accounts).

Overpayments

This term covers any extra payments you make over the monthly repayment amount originally agreed with your lender.

Payday loan

(See: Short term loan)

Payment holiday

Following new guidance from the Financial Conduct Authority (FCA), payment holidays are now also referred to as ‘payment deferrals’. They’re the same thing: they enable you to pause your monthly payments for a temporary period. Some lenders will require the number or month of payment holidays to be decided at the application stage.

During a payment holiday, interest could still be added to your loan balance. This means a possible increase to your monthly payments (when they restart) and the total cost of borrowing. Also bear in mind that although taking a payment holiday will not worsen the status on your credit file, some lenders may take into account information like this when making future lending decisions.

Payment Protection Insurance (PPI)

PPI is an insurance policy to cover your loan repayments if you’re unable to work because of accident, injury or redundancy.

Although the idea is good, it’s been mis-sold in the past and many of the policies haven’t been up to scratch. If you can rely on the financial support of family or a partner, have enough savings or adequate sick pay, PPI might not be necessary. Meanwhile, if you’re self-employed or doing temporary work, some PPI policies may not even cover you.

PCP

Personal Contract Purchase is a type of car finance (See: Car finance). Your finance company ‘buys’ the car, while you pay a deposit and monthly instalments. The instalments cover the depreciation of the car’s value, plus interest, and are usually lower than a hire purchase scheme (See: Hire purchase) or personal loan (See: Personal loan). At the end of the contract you can either buy the car by paying the outstanding balance in what’s known as a ‘balloon payment’, give the vehicle back, or swap it for another car on a new PCP contract (although this usually means sticking with the same dealer).

Peer-to-peer lending

Peer-to-peer loan platforms usually have a large number of private investors who lend money direct to a business or individual, cutting out the more traditional lenders such as banks and building societies. They connect people who have money to lend and are looking for a good return, with individuals or companies wanting to borrow. Normally both lenders and borrowers get a better rate of interest using this method. Applying for these loans is mostly done online.

Personal loan

Personal loans are also known as unsecured loans, simply because they’re not backed by an asset, like your home. They’re for individuals (not businesses) and you’ll get the money you need upfront, which you’ll pay back over a fixed period (usually three to ten years), in regular instalments. Typically you can borrow between £1,000 to £25,000.

Personal loans are suited to people looking to borrow a little more than they might ordinarily get from a credit card. Larger balances will usually come with a lower interest rate than their credit card equivalent, and they’re typically fixed (although variable interest rates on personal loans do exist, so check the small print before signing).

Representative APR

We’ve already established that APR includes the interest rate, plus any arrangement fee/other fees. However, this interest rate won’t necessarily be the one you get if your loan’s successful, so lenders will instead advertise a ‘representative’ figure. Basically this means only 51% of successful applicants have to get it, while the rest could well end up with a more expensive loan than they applied for. If you’ve a poor credit history, you’re more likely to be among that number.

Mortgage lenders will show a representative APRC, which will usually apply to all applicants who are accepted for a loan.

Second charge mortgage

A second charge mortgage is a secured loan (see ‘Secured loan’). It is an “additional” or second mortgage on a property with an existing mortgage. It allows you to use the equity (or part of it) that you have on your home.

In a sense it frees up money you have already paid into your current mortgage. It’s different to a remortgage however, which allows you to refinance the whole amount of an existing mortgage on your home. 

A word of warning though: if you fail to meet repayments, the lender can file to repossess your house to settle the debt, so think carefully before taking on this sort of loan.

Section 75

Section 75 is an important UK consumer protection law made in the 1970s that means your credit card provider must take the same responsibility as the retailer if things go wrong with a purchase.

If you pay for something costing more than £100 and up to £30,000 on your credit card, your provider must protect your purchases, meaning you could get your money back if there's a problem (for example, if you buy flights from a travel company using your credit card that goes bust following the purchase).

Credit cards are the main area covered, but the law also applies to store cards, store instalment credit and some car finance agreements (but not hire purchase).

Secured loan

A secured loan means that it is guaranteed or secured against an asset or assets should you fail to make repayments. It is a way to cover the lender should you default of loan payments. For example a mortgage is a secured loan: if you fail to make your mortgage repayments your lender or bank can reposes your home as collateral.

Short term loan

These are loans that you typically pay back fairly rapidly (certainly in less than a year, and often within a couple of months) either in instalments or, as is the case with some payday loans, when your next salary arrives.

The proper term for a short term loan  is High Cost Short Term Credit. Why ‘high cost’? Because although you're typically borrowing small amounts (anywhere between £50 and £1,000 is the norm), the interest you pay tends to be significantly higher than other loans.

Soft credit check

Unlike a hard credit check (See: Hard credit check) soft credit checks have no impact on your credit score or any future credit applications you might make. They are purely an initial look at certain information on your credit report. Companies perform soft searches to decide how successful your application would be without conducting a full study of your credit history.

Total amount repayable

This figure gives the total cost of your loan, comprising the amount borrowed and the interest charged.

Unsecured loan

These loans aren’t secured against an asset (i.e. your home), which normally restricts the amount you can borrow. Most lenders offer up to £25k unsecured.

Variable rate

This is when the interest rate you are charged goes up or down, which means your monthly interest payments could change accordingly.