Everyone will need to go through credit, loans, and investments sooner or later. The problem here is that for most first timers, the terminologies encountered are a bit tedious to understand. Haven’t you ever wondered why most people only pretend to understand the business page in the newspaper?

Let’s try to define some terms here so that the next time you invest in a property or consider getting a loan, you will better comprehend what your financing agent explains to you. You’ll never know, understanding a few key terms could actually save you from getting yourself, and your personal finances, in an unpleasant state.

You’ve probably seen and heard the term interest in any number of occasions. Although it is a very common term, some people still do not fully understand what it means. Knowing the meaning of interest is vital, especially if you are applying for a loan.

Interest is the fee or the amount of money you pay on top of the money you borrowed. Put simply, if you borrowed $5 and your lender says you pay them $7, and then the interest is $2 worth. Of course, in the real world, you do not just borrow money; you can also borrow stock shares, consumer products, aircraft’s or even factories. The interest is based on what the value is of the thing that you borrowed. The bigger the value is, the bigger the interest.
The interest is a fee that lenders earn from lending their money or assets to you. It is sort of a rental fee since you will be using their property to further your financial growth. There is another term that should be added in this equation and that is the principal.

The principal is the actual value of the money or the asset that you borrowed (the $5 from the previous example). Now if for example you chose to pay the $5 in a period of 5 days, paying a dollar a day, the person who lent it to you would not be able to enjoy the full benefit of having $5 in his pocket so he needs to add a little extra. If you agree on you adding a quarter to the dollar that you would pay him everyday, that means you added an extra 40% to your overall debt. That is the interest rate.

Now, a mortgage is when you promise one of your properties in exchange for a loan. Citing the previous example, if instead of just borrowing $5 from your friend, you both agree that he gets to keep your bicycle if you are unable to pay, then you now have a mortgage loan. While you still haven’t paid the loan fully, your friend technically “owns” the bicycle. Of course when you have paid your obligations, the bicycle is returned to you. Otherwise, if you do not pay him in the 5 days that you promised, your friend gets to keep your bicycle forever.

Tags: Financial terms, Get through financial vocabulary less the headache

This entry was posted on Thursday, September 18th, 2008 at 8:11 pm and is filed under Business Credit Cards. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.