A guide to the many terms used in the consumer finance market.
acceptance rate – Percentage of customers who are successful when applying for a loan or credit card. Applicants 66% or more must be offered the advertised rate known as the Typical APR (see ‘Typical APR’, below).
Annual Percentage Rate (APR) The rate of interest payable annually on the loan or credit card balance. This allows potential customers to compare lenders. Lenders are legally required to disclose your APR under the Consumer Credit Act.
outstanding amount Arrears are the missed payments on a loan, credit card, mortgage or most types of loans. The borrower has a legally binding obligation to settle any dues as soon as possible.
setup fee – Generally for the administration cost of setting up the mortgage.
base rate Interest rate set by the Bank of England. This is the rate banks are charged for lending to the Bank of England. The base rate and how it may change in the future has a direct impact on the interest rate a bank can charge a consumer on a loan or mortgage.
business loan A loan specifically to a business and generally based on the past and likely future performance of the businesses.
car loan – Loan exclusively for the purchase of a car.
Consumer Credit Association (CCA) – Represents the majority of businesses in the consumer lending industry. Government, local authorities, financial bodies, finance-oriented media and consumer groups are all members. Members sign a constitution and must follow a code of practice and professional conduct.
County Court Judgment (CCJ) – A CCJ can be issued by a county court to a person who has failed to settle outstanding debts. A CCJ will adversely affect a person’s credit record and could potentially lead to them being denied credit. A CCJ will remain on the credit record for 6 years. It is possible to avoid this huge negative stain on your credit record by settling the CCJ in full within a month of receiving it, in which case no details of the CCJ will be stored on your credit record.
credit crunch A situation where lenders simultaneously cut back on their lending, typically because of a shared fear that borrowers will not be able to repay their loans.
credit file Information stored by credit reference agencies, such as Experian, Equifax and CallCredit, on an individual’s credit and lending arrangements. Credit files are checked when lenders consider credit applications.
credit reference agencies – Companies that keep records of individuals’ loans and borrowing arrangements, amounts outstanding, to whom and payments made, including any defaults, CCJs, arrears, etc.
credit search – General searches done by the lender with credit reference agencies.
debt consolidation – Transfer of multiple loans into a single loan through a loan or credit card.
default When a regular loan repayment is missed. A default will be recorded in an individual’s credit record and will adversely affect the chances of success of any future credit applications.
data Protection Act – An Act of Parliament in 1998 and the main legislation governing the use of personal data in the UK. Lenders are not allowed to share personal data of an individual directly with other institutions or companies.
early redemption fee – Fee charged by lenders if a borrower prepays his loan before the end of the agreed term of the loan.
equity – The value of the property exceeds any debt, mortgage or other encumbrances placed on it. The amount a person would receive if he sells his property and repays the loan on the property in full.
Financial Conduct Authority (FCA) A government-appointed body responsible for regulating the financial markets.
first charge – Mortgage on a property. A lender that has first charge on a property will have priority to pay off its mortgage or loan with the money available after the sale of the property.
fixed rate An interest rate that will not change.
home owner loan Also commonly known as secured loans. Homeowner loan is available only to those individuals who own their own house. The loan will be secured against the value of the property, usually in the form of a second charge on the property.
installment loan – Multiple loan repayments spread over a period. There can be flexibility in their repayment amount and schedule depending on the lender.
joint application – A loan or other credit application made by a couple rather than as an individual such as husband and wife.
lender Loan or mortgage company.
Purpose of Loan The purpose for which the loan was obtained.
loan term – The period of time during which the loan will be repaid.
loan to value (LTV) – Usually attached to a mortgage and takes the form of a percentage. This is the loan amount in relation to the full value of the property. For example, a person may be offered a 90% LTV mortgage on a property worth £100,000. In this case the offer would be £90,000.
monthly repayment Monthly payment made to settle a loan along with interest.
mortgage In most cases, a loan taken to finance the purchase of a property is specifically for buying a house. The asset is offered as security to the lender.
online loan Although most of the loans are available online. The Internet has allowed for the development of technology that allows for faster processing of loan applications than with traditional methods. In some cases it can take 15 minutes or less for a loan application, contract and funds to appear in your account.
payday loan – Short term cash advance up to 31 days repayable on your next payday. Payday loans come with a higher APR due to the shorter loan term.
Payment Protection Insurance (PPI) Insurance to cover loan repayment if the borrower is unable to maintain his repayments for any reason including redundancy, illness or accident.
personal loan A general loan for any purpose and in varying amounts that can be granted to a person based on their credit history.
value to risk Lenders now have a range of interest rates to choose from based on an individual’s credit score. A person with a poor credit score is considered high risk and will likely be offered a higher interest rate as the lender factors in the likelihood of them defaulting on repayment. Conversely, a person with a high credit score and good credit history is considered a low risk and will be offered a lower interest rate.
eligibility criteria – Eligibility requirements as required by the lender. The most basic criteria required to qualify for a loan in UK are; Permanent UK residency, aged 18 or over and a regular income. Many lenders may also include additional loan terms.
regulated – financial ‘products’ that are supervised by the Financial Conduct Authority (FCA). Lenders must follow a code of conduct and individuals are protected by the Financial Services Compensation Scheme (FSCS).
repayment schedule – Time period during which the loan will be repaid and details of the loan repayment amount.
second charge A second loan, in addition to any other loan, that is secured by a person’s property.
secured loan Also commonly known as home owner loan. A secured loan is only available to home owners. The loan amount is secured against the value of the property. The lender has the right to repossess your property if you fail to maintain loan repayments.
shared ownership An agreement in which one person owns only one percent of the property. The remaining percentage is owned by a third party, often a housing association. The person may have a mortgage on the part of the property he owns and pay rent on the part of the property he does not own.
total amount payable – The total loan amount plus interest and any applicable charges.
typical apr – Advertised interest rate offered to at least 66% of successful loan applicants.
underwriting – Process to verify the data and sanction the loan.
didn’t match – Not covered and regulated by the Financial Conduct Authority (FCA).
unsecured loan – A loan that does not require collateral and is granted on ‘good faith’. Under the lender’s belief that you can repay the loan based on your credit score, credit history and financial position among other factors.
variable rate – An interest rate that will change during the loan repayment period.