Annual Percentage Rate (APR)
The annual percentage rate of a loan basically tells you how much that loan would cost you in a year, even if it is paid off sooner or later. It's the percentage of the amount borrowed that you would pay in a year.
Here is a simple example...
If you borrow $100 with 5-percent interest and the loan is for a year, your APR would be 5 percent. However, if you borrow the same $100 with the same 5-percent interest, but it's due in one month, the APR would be 60 percent (5 percent times 12, because it would cost you $5 for the same $100 every month).
Similarly, if a credit card has a monthly interest rate of 1.5 percent, the APR actually would be 18 percent, because you would be paying 1.5 percent each month for 12 months (1.5 x 12 = 18).
APR is useful in comparing loans because you're comparing how much each loan would cost over the same period of time.
Other common situations make the calculation more complicated. What's important for the purposes of our discussions is the basic understanding provided above.
Basis
In financial transactions, the basis is the amount you paid for something that you're now selling.
If you sell an investment such as stock or real estate, your tax liability is determined by your profit (how much you sold it for minus the basis).
Capital Gains
Income you make by investing money (as opposed to earning a salary for your labor).
Credit Report/Score
Your credit report and score estimate the risk of lending you money.
Your credit report contains a list of your accounts (such as credit cards and loans), including information such as your credit limit, your outstanding balance, and your payment history.
Your credit score is a number that is calculated based on the information in your report. It often is referred to as a FICO score - an acronym for Fair Isaac Company - the company that developed the algorithms that calculate your score for the agencies.
The higher your score the more a bank is likely to lend you, and the lower your interest rate may be. But it can be used in other ways. An apartment might charge a higher security deposit if your credit score is low. It might affect whether you are offered a job.
You have three credit scores - one from each of the main credit reporting agencies. You're entitled to a free copy of your credit report from each of the three agencies. To find out how, visit our Resources page.
Credit Reporting Agencies
Companies that monitor your credit history - including accounts you hold and your payment record. The three main companies that perform this function are...
o Experian
o TransUnion
If you fail to make payments on a loan or credit card, for example, the bank may report the delinquency to any of these agencies.
The information is used by companies you want to conduct certain types of business with, such as applying for a loan or credit card, renting an apartment, buying a cell phone under a contract, or even applying for a job.
Down Payment
When you take out a loan to buy something expensive such as a car or a house, you often will pay a small portion of the price up front, and then borrow the remainder.
The money you pay up front is what's called the down payment.
Fiduciary Rule
2016 regulation from the Department of Labor (DOL) that requires financial planners recommending investments for retirement accounts to provide advice in your best interest, rather than theirs.
For example, while an advisor is required to recommend investments suitable to your goals, he can suggest an investment that will earn him a higher fee - rather than one that would provide you with the best return. This rule prevents that.
It also is known as the Conflict of Interest Rule.
Click here to read the White House fact sheet for the rule.
Referenced by...House passes bill to revoke consumer and financial protections (2017-Jun-08)
Rule protecting retirement will take effect in June (2017-May-23)
Fiduciary Rule will protect those investing for retirement (2016-Apr-04)
Hedge Fund
Investment designed to make money regardless of whether the stock market rises or falls.
Hedge funds are made available to only wealthy investors. As a consequence, they are the least regulated by the Securities and Exchange Commission (SEC), under the presumption that these investors can handle the potential risks.
For more about hedge funds, read the Investopedia report.
Interest Rate
The primary cost of a loan.
In the simplest example, if you borrow $100 with a 5-percent interest rate, the cost of the loan would be $5 (you would pay back a total of $105).
Mortgage
A loan used to buy property such as a house. It typically is paid back over many years (for example, a 30-year mortgage used to buy a house).
Mortgage Insurance Premium (MIP)
An insurance premium on mortgages backed by Federal Housing Administration (FHA) insurance. The premium is paid by the homeowner.
Pass-through Company
A company whose income is reported on the owner's individual income tax return.
In other words, the income is passed through from the company to the owner.
Payday Loan
A short-term loan typically used to cover a temporary need - such as an emergency car repair or a smaller than usual paycheck due to an irregular work schedule.
Payday loans also are referred to as cash advance loans, deferred deposit, and deferred presentment loans - depending on the laws in a particular state.
For a more in-depth explanation of payday loans, read our discussion of this issue
Payment Card
A plastic card that allows you to buy things without using cash. There are a few basic types of these cards. Transactions with them appear to work the same, but the ways they process your money differ.
Debit Card: A debit card uses money you already have in a bank account. When you pay for something using s debit card, the purchase amount is subtracted (debited) from the account associated with the card. You still may receive a monthly statement, but you won't owe any money because the amount of each purchase was taken out at the time of the purchase. The exception to this is that a bank may allow you to purchase more than you have in your account - in which case you will be charged a fee, as well as being required to pay interest on the amount the bank paid for you.
Prepaid Card: Similar to a debit card, a prepaid card has a certain amount of money associated with it. For example, you might use a prepaid card for money you receive from the government. Instead of sending you a payment, the government simply adds the amount to the balance on your card. When you buy something, the value of the card is reduced by the purchase amount. You can learn more about prepaid cards at the Consumer Financial Protection Bureau website.
In recent years, cashless purchases do not necessarily require an actual card. You can, for example, pay for something with a credit card linked to your mobile phone. You simply hold the phone over an electronic reader, and the transaction is processed as if you had used a physical credit card.
Subprime Loan
A type of loan offered to someone who might be considered too much of a risk for a traditional loan - whether due to a low credit score, low income, or other factors.
Because of the added risk, subprime loans are provided at a higher interest rate than traditional loans.
For more about subprime loans, read the Investopedia story.
Usury laws
Laws that govern the amount of interest that can be charged on a loan. Usury laws are enacted to protect consumers by preventing a bank from charging excessively high interest rates.