Understanding Basic Finance Terms

If your like many, you dont always understand what people are talking about when it comes to loans. Without understanding the basic terminology when it comes to loans you just arent setting yourself up right to make an educated decision when it comes to applying for a loan. There are hundreds of terms; Below are some of the most important:

Assets
Assets can be described as anything that holds value. Assets can be all types of things from cars to houses. Assets can be used in helping to build credit. For example if you are applying for a house loan, you might use your car as an asset, to show that if you default on a payment, that you have assets to fall back upon such as your car.

Capital
Capital can be a bit of tricky term as it can be used in several different situations to do with finances. Capital can be described as the assets that are available for use towards creating further assets; it can also apply to the cash in reserve, savings, property, or goods.

Debt
Debt is amount of money or something of value that is borrowed from a person referred to as a debtor. Usually a debt that is borrowed will carry some type of penalty along with the payback such as an interest, or service.

Debt Consolidation
Debt Consolidation is replacing multiple loans with a single loan that is normally secured on property. This can often reduce your (the borrowers) monthly outgoing interest payments by paying only one loan which is secured on the property sometimes over a longer term. Because the loan is secured, the interest rate will generally be considerably lower.

Equity
Equity is the difference between the value of a product (for example a house) and the amount that is owed on it.

Liabilities
Liabilities refers to the sum of all outstanding debts in which a company or individual owes to its debtors.

Principal
Principal is used to describe the amount of money that is borrowed without including any interest or additional fees.

Term
Term refers to the length of a debt agreement. For example if you were to take out a loan for a house over 10 years. 10 years would be the term.

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