Common Financial Terms

Collateral

Collateral is used to describe an object of high value that is used to guarantee the repayment of a loan. If repayments are late, or the agreement is defaulted, the collateral is taken in place of the repayment. Amongst the most common types of collateral are people’s houses in regards to their mortgage payments, or their cars if ‘part-ownership’ deals have been made. Collateral is almost always something extremely valuable.

Secured and Unsecured Loans

A secured loan is one that has collateral to back it up in the event of default, they usually have lower interest rates due to the fact that if payment isn’t made the lender has the ability to take ownership of the collateral and sell this to make up the money that they are still owed.

Accordingly, unsecured loans are loans that don’t have collateral. Instead they charge higher interest rates so that if the repayment is unable to be made, the lender will already have received back much of his original capital and therefore make the smallest loss.

Equity

Equity refers to the monetary value of a property or business after the amount that is still owed on the loan originally used to purchase it is taken off. Most commonly that loan is the mortgage on someone’s house, which means the equity is the part of the house that is owned directly and solely by the individual and not the bank, or mortgage lenders. The more money that a person pays towards their mortgage then the more equity that they are considered to have.

Equity, therefore, is linked to collateral in as much as it is the equity that an individual holds on their house that is considered as the collateral in mortgage agreements.

Default

Defaulting is when an individual is unable to fulfil their obligations in regards to a financial agreement. Simply put, if you are unable to meet the payments of a mortgage, or of an insurance policy, then this is considered defaulting. In regards to the current global credit crunch, the problems are simplistically assigned to large numbers of people defaulting on their mortgages in America. This was due to certain financial institutions taking the risk of agreeing mortgage terms with people who would not certainly be able to meet the terms of their mortgages.

These are just a few of the simplest terms that are found when addressing Personal Finance, particularly in regards to loans, credit cards, bank accounts, and mortgages. It is important to be closely familiar with them when dealing with anything financial to help you get the most from your savings - a slight misunderstanding can have grave consequences.

Take a look at Alliance and Leicester’s website for more information on your savings options.