Banking Terminology: Essential Financial Terms to Know

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Every industry has its own unique language, and that’s certainly true in banking. Although managing money is a primary concern for everyone, not everyone is fluent in financial terminology. This puts you at a real disadvantage when you are talking to financial advisors or trying to make critical decisions about household budgeting, savings, investments, and retirement.

To help lower the financial language barrier, we wanted to explain 50 common financial terms that you will likely encounter at some point. If you find any of these confusing, you can always ask one of the financial experts at iQ Credit Union for help. These banking, business, credit, and investment terms should prove useful to both individuals and business owners: 

Banking Terms

Asset—Something of commercial value that is owned by a business, institution, or individual, such as savings, stocks, bonds, or property.

Certificate of deposit (certificate of deposit)A CD is a form of timed savings deposit. Often called a share certificate by credit unions, a CD is a lump sum deposited for a specified period of time in exchange for a higher interest rate of return. There are penalties for early withdrawal.

Credit Union National Association (CUNA)CUNA is the trade association that advocates for both state and federal credit unions nationwide.

Compound InterestCompound interest is interest that is calculated on the original amount of a savings account or deposit, as well as all accumulated interest of previous periods, so you are getting interest on interest, which means your money grows faster than it does with simple interest. Compound interest can be charged for loans as well. 

Equity—Equity represents part ownership in a company and is sometimes used interchangeably with stock. Equity is also the perceived liquid value of an asset. In the case of a home, for example, the equity is the value of the home minus the amount owed on the property.

Fixed expensesFixed expenses do not change but are fixed at a specific amount that needs to be paid each month. Common examples of fixed expenses would include rent, loan payments, insurance, and leases.

InterestInterest is the extra percentage that is charged when you borrow money, or the returns paid when you agree to leave your money on deposit. There is simple interest and compound interest, usually expressed as an annual percentage rate (APR).

Money market account (MMA)—A money market account is similar to a savings account, but it also allows you to write a limited number of checks against the account each month.

NCUA (National Credit Union Administration)—The NCUA is the regulatory body that oversees credit unions and protects credit unions, members, and members’ assets.

SEC—The Securities Exchange Commission is the government agency responsible for protecting investors by overseeing the securities market. 

Share—The term share is a more specific term than stock and represents partial ownership or a share in an investment or company. 

Share account—At a credit union, a share account is an interest-bearing account that pays dividends to the credit union’s members.

Trustee—A trustee can be a bank, credit union, person, or entity that holds assets in trust for safekeeping. Trustees often have other duties as well, such as investment management.

Variable expenses—Expenses that are less predictable and vary from month to month are variable expenses. Common household variable expenses would be electricity, water, telephone services—any bill based on consumption or a per-use rate. 

Withdrawal—Sometimes referred to as a distribution, a withdrawal means taking funds from an account, or liquidating earnings in an investment, IRA, CD, or some other financial vehicle and converting it to cash. 

Business Terms

Accounts payable—In business finance, accounts payable is the obligation to pay debts or lenders money that is owed.

Accounts receivable—Every business has accounts receivable, which is the money that’s owed to that business for services rendered or goods sold.

Balance sheet—An essential tool for any business, the balance sheet provides a thumbnail of a company’s worth at any given time, comparing assets to liabilities.

Capital—The total market value of a company, including cash, assets, and investments. Capital can be physical, such as cash or a building, or it can be intangible, such as intellectual property.

Cash flow—The amount of money that flows through a company to pay for operating expenses. It’s especially important for a fledgling company to manage cash flow, ensuring that more money is available for operations until it can build the business and generate more capital.

Federal Deposit Insurance Corporation (FDIC)—The FDIC is an independent organization that Congress created to oversee financial institutions and insure bank deposits. It does not regulate credit unions; CUNA does.

Fixed asset—A fixed asset is a tangible, long-term asset owned by a business that is not expected to be used for collateral or to generate cash in the foreseeable future, such as office furnishings, computer equipment, or real estate.

Gross profit—Gross profit is the amount of money a company takes in before deducting expenses.

Liability—Liabilities are the opposite of assets and represent the debt and financial obligations owed by a company, such as bank loans, credit card debt, and money owed to suppliers.

Net profit—Net profit is the amount of true profit that a business earns and represents the amount of money taken in minus expenses.

Profit-and-loss statement—A profit-and-loss statement or P&L is a financial report that shows how well a business is doing by reporting how much it has earned over a period of time, i.e., profits minus expenses.

Credit Terms

Annual percentage rate (APR)APR is the annual percentage rate charged for money borrowed, such as through a loan or credit card. It is also the annual percentage rate paid for an investment, savings account, or other interest-bearing account.

Basis point—A basis point is one-hundredth of 1 percent, e.g., 10 basis points would be 0.10%. Basis points are often used to express interest rates and can have a large impact when deciding on a home loan. 

Collateral—Collateral is any asset (money, property, etc.) pledged to secure or guarantee the repayment of a loan.

Credit limit—A credit limit is the maximum amount that you can spend using a credit card or line of credit.  

Credit report—A credit report is used by lenders to determine creditworthiness. Credit reports are maintained by the three credit bureaus (TransUnion, Equifax, and Experian) and reflects your history of paying past debts and your current credit situation.  

Credit score—Your credit score is used by lenders to assess your creditworthiness. Your credit score is reported by the three credit bureaus, Experian, TransUnion, and Equifax, and is determined by a number of factors including your credit history, the amount of credit you have available, and the amount of debt you’re carrying.

Credit risk—This is the risk that a lender takes when they lend money to an individual or business that may default or fail to pay back a loan.

Conventional loan—A conventional loan is a type of mortgage that is backed by private lenders rather than the government, for which the loan insurance is paid by the borrower.

Debt consolidation—Debt consolidation is a strategy by which you take on various high-interest risks, such as credit cards, and consolidate them into a personal loan or some other vehicle at a lower interest rate. Although this strategy doesn’t eliminate debt, it can make repayment easier and saves money over the life of the loan because the interest paid is less.

FICO score—Another type of credit score used by some lenders to determine a loan applicant’s credit worthiness. The ranking was created by the company previously known as the Fair Isaac Corporation (now just FICO), which is why it is called a FICO score.

Finance charge—When you borrow money, have a credit card, or maintain a bank account, the finance charge is a fee you pay to use that money or service, and it is separate from any interest paid. 

Fixed rate loan—A fixed rate loan is a loan wherein the interest rate is fixed for the life of the loan and does not change.

Installment loan—An installment loan is any loan that has to be repaid as a series of scheduled payments or installments over time.

Loan-to-value—Loan-to-value or LTV is the fair market value of an asset, such as real estate, against the amount of the loan used to fund that asset. A financial institution will not lend more money than the actual value of what is being purchased. 

Microloan—A microloan is typically less than $50,000 and is made through a nonprofit institution.

Principal—Any loan is made up of principal, interest, and fees. The principal is the amount of the original loan to be repaid, minus any interest or fees. 

Revolving credit—Revolving credit is common with credit cards and certain types of lines of credit for which you can borrow money, and as soon as that money is repaid, you can borrow it again.

Secured loan—A secured loan is a loan that is guaranteed by collateral or financial assets, such as a bank account or property, which ensures the lender that they will be repaid. 

Unsecured loan—An unsecured loan, also called a signature loan, is a loan made on your personal pledge to repay any money borrowed rather than being guaranteed by assets or collateral. 

Variable-rate loan—A variable-rate loan is a loan wherein the interest rate charged fluctuates with the market. As interest rates climb, loan interest rates climb accordingly, and as interest rates drop, the interest charged on the loan balance drops as well.

Investment Terms

Annual rate of return—The annual rate of an investment’s or an account’s gains or losses expressed as a percentage. 

Annuity—An insurance contract with a life insurance company designed to provide income at regular intervals over the course of your life.

Appreciation—The value that an investment or property gains over time.

Broker—Someone who acts as an intermediary between buyer and seller. When discussing personal finance, the broker is responsible for handling the purchase and sale of stocks, bonds, mutual funds, and other investments, usually taking a percentage of the transaction as a commission fee.

Capital gain—An increase in the value of an investment or property from the purchase price.

Capital loss—A decrease in the value of an investment or property from the purchase price.

Common stock—An investment for which you purchase shares in a publicly owned company.

Depreciation—Depreciation is the loss in value of an investment or property over time. Automobiles, for example, depreciate quickly, which can affect how much you can borrow to buy a car.

Individual retirement account (IRA)—An IRA is an investment account used to put tax-deferred money away for retirement. A traditional IRA allows you to deduct a portion of your income and put it away for use when you retire. A Roth IRA is a more specific type of IRA for which taxes are paid upon deposit so that there is no income tax liability when the Roth IRA matures.

Liquidity—The term liquidity refers to the ability to easily convert an asset, such as stocks, savings, or property, into cash.

Mutual fund—A mutual fund is a form of investment by which you purchase shares in a pool of money that represents a mix of stocks, bonds, money market accounts, and other types of investments. The return on a mutual fund is based on the cumulative performance of these various financial instruments.

P/E ratio—The price-to-earnings ratio reflects the price per share of a stock divided by the stock’s earnings. For example, if a stock sells for $20 and the reported earnings per share is $2, then the P/E ratio is $20/$2, or $10. P/E is typically used to calculate the value of a stock.

Portfolio—A portfolio is a collection of investments owned by an individual organization or investment fund.

Rate of return—The rate of return reflects how much an investment or savings account earns over time. It is usually expressed as an annual percentage.

Risk tolerance—This is an expression of an investor’s comfort with the risk of losing some or all of his or her investments in exchange for higher returns. 

Rule of 72—When investing, the Rule of 72 is a simple formula used to determine approximately how long it will take to double your money at a specific annual rate of return. The formula is: years to double = 72/rate of return on investment.

Simple interestSimple interest is paid on a deposit or charged against a loan as a flat rate represented as a percentage of the original amount deposited or borrowed, so you pay or earn only on the principal.

Yield—The earnings you receive from an investment in the form of interest or dividends is called yield and is usually expressed as a percentage of the price of the investment.

These are just some of the financial terms you are sure to encounter at some point in your financial adventures. Terms such as these shouldn’t be intimidating, although they can sometimes be confusing in the context of financial transactions. Never enter into any financial arrangement in which the terms are unclear.

If you need financial advice offered in everyday English, without buzzwords, you can always come to iQ Credit Union for simple answers to your financial questions. We are here to help.

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