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Getting a good grip on finance takes an understanding of the basic terms that go along with it. When it comes to loans, keeping track of definitions could prove as tricky as installing advanced home security systems. Understanding basic terms like “interest rate” and “annuity” will help you make educated decisions about potential loans.
Interest Rate
If you’ve ever considered taking out a loan, you’ve come across this term. Interest rate is the amount paid over a certain period of time for the use of the money.
Compounding
Compounding is when interest is added to the principal, creating additional interest. That’s why, though the interest rate is generally given as a yearly figure, the actual amount of interest can be greater. Interest can be compounded weekly, monthly, yearly—even continuously.
APR
Otherwise known as the Annual Percentage Rate, APR is used to compare loans using the average interest rate once all added costs are taken into consideration. This is because loans can come with additional costs, like points or fees.
Points
Points are quoted as a percentage number. They are the amount added to the principal of a loan. Lenders use points as a method of covering the costs of processing a loan.
Annuity
Though the name suggests otherwise, the interval of an annuity doesn’t have to come out to a year. An annuity is an amount paid at regular intervals. With fixed annuities, the amount paid is fixed; variable annuities occur when the amount paid changes.
Though it comes with a plethora of terms, understanding finance doesn’t have to be a headache. Getting a grasp on these basic terms will get you far.
