Financial Jargon Buster

Is financial jargon sending your head into a spin? Here we explain commonly-used phrases across the banking, loans and insurance sectors.

Banks and building societies offer bank accounts that will hold your money for you. Current accounts are for money to be paid into and taken out of frequently, while deposit accounts are for your savings.

Accrued interest
This is the interest that has accumulated on a credit since inception or the last repayment. Accrued Interest on a deposit is the accumulated interest over a period of time.

The ‘Annual Equivalent Rate’ is a standard formula that tells you what the interest rate would be if the interest earned by your savings was to be added to your savings at the end of every year. The higher the AER, the more interest your savings will earn.

The Annual Percentage Rate tells you the annual rate for borrowing on a loan or credit card stated as a percentage. It includes any fees and additional costs you’ll pay in respect of the transaction. As the credit on a credit card is revolving, the APR on a credit card is only an indication if an amount is borrowed across a while year. Generally speaking, the lower the APR, the less the credit will cost.

This is a legal term for a debt or payment which has been missed and is overdue. This is a breach of the agreed contract or payment schedule.

Bankruptcy (Known as Sequestration in Scotland)
This is one way of dealing with debts when you are not capable of paying them off. You can be declared bankrupt by your creditors or you can file a petition to declare yourself bankrupt. If you are declared bankrupt, any assets you have may be sold to pay off your creditors. Bankruptcy can negatively affect your credit rating and the way financial companies see you.

Banker’s draft
This is a cheque provided by the Bank that is guaranteed. The amount is deducted from your account when you purchase a banker’s draft. They are sometimes used when you need to pay for large amounts but are less common now that electronic payments have been made faster.

Bounced cheque
A cheque that bounces is one that can’t be processed because the person who wrote it doesn’t have enough money in their account or an overdraft to cover the payment. When a cheque bounces, banks often charge a fee.

Building society
This is a financial organisation owned by the people who pay into and borrow from it –they are known as its members.


Clearing describes the activities from the time a transaction is created until it is settled. Clearing of payments is necessary to turn the commitment of payment, such as a cheque or electronic payment request, into the actual movement of money.

Compound interest

For a savings product, interest is added onto the accumulated interest earned. For a credit facility, it works in the same way so that interest is added onto the interest charged.

Consolidation loan
A consolidation loan combines some or all of your other debts.This means you would make one monthly payment rather than separate payments for each debt.

Credit limit

This is the most that a financial company will lend you. If you go over this, you may be charged a fee and have to pay a higher interest rate. Credit limit also refers to the maximum amount a credit card company will allow someone to borrow on a single card.

Credit report
A credit report will show how long you have lived at your current address, whether you are on the electoral register, details of previous borrowing and whether repayments were made on time or missed. It will also contain information about County Court Judgements and insolvencies and whether they are still outstanding or have been satisfactorily settled.

Credit Score
A credit score is made up of points and plays a part in determining how well-placed you are to make financial commitments. Each lender has their own criteria for credit scoring but in general most lenders will score similar features such as your personal circumstances and stability, your credit report and your financial history to decide whether or not to lend you money.

This is the failure to meet the legal obligations and conditions of a loan. This essentially can mean that a person has not paid back a debt that they were required to pay.

Direct Debit
This is an arrangement made with your bank that allows a third party to automatically take money from your account. For example, an electricity company may set up a Direct Debit to cover your utility bill.

Exit fee
This is the amount of money you may have to pay to close an account or investment before the agreed close date.

Index linked
If an investment is index-linked, it will be linked to an inflation index, meaning your return stays in line with any increases and decreases that take place within that index.

A percentage or proportion of money added to the original amount. In the case of savings, your saved amount will become higher if you earn interest on it. In the case of debt, the amount you owe will increase as it attracts interest.

Interest rate
The interest rate is the percentage rate charged on a loan or paid on savings. A higher interest rate on a savings account will reward you with more interest (money) than a lower interest rate. If you take out a loan, one with a higher interest rate will cost you more than one with a lower interest rate.

An ISA – or individual savings account – is an account that pays tax-free interest, as opposed to savings accounts where the taxman can take a chunk of the interest you earn.

This is the misrepresentation of a product or service by a company or salesperson. This can mean that the customer was given unsuitable advice, the risks were not explained, or they were not given the correct information and therefore ended up purchasing a product that was not right for them.

Net pay
For employees, this is the amount of money you take home after tax, National Insurance and any other deductions have been taken away from your pay check.

An arranged overdraft is a set limit that you agree with your bank. That limit then lets you spend more than you actually have in your current account. An unarranged overdraft is where you spend more money than you have in your account but have not arranged an overdraft limit beforehand and you may receive a charge for this.

Packaged Bank Account
A ‘packaged bank account’ (sometimes called a fee-paid account or bundle account) is a current account where you pay a monthly fee to get access to a variety of extras. For example, many packaged bank accounts come with mobile phone insurance, breakdown cover or travel insurance.

Payment Protection Insurance
This is an insurance product that covers the repayment of loans if the borrower dies, becomes ill or disabled, loses a job, or faces other circumstances that may prevent them from earning income to cover the repayments themselves.

Secured loan
Money borrowed that is secured against your home (or another of your assets). If you don’t make repayments, your creditor may take possession of your home (or asset) to cover the cost of the loan.

Simple interest
Unlike compound interest where interest is added onto interest, simple interest is used to calculate the interest charged where interest is only applied to the original credit amount.

Standing order
This is a regular payment that you can set up to pay other people, organisations or your other bank accounts. Unlike Direct Debits, which are set up by the company you are paying, you set up standing orders yourself.

Unsecured debt (also unsecured loans)
Loans or credit that is not secured by your property or assets, meaning you are not at risk of losing your home or assets as a direct result of failing to make repayments. Instead, the lender can sue you for payment if you default on the contracted agreement. As this type of loan is considered more of a risk for lenders than a secured loan, the interest rate tends to be higher on unsecured loans.

Voluntary excess
This is the amount you pay if you make a claim on your insurance (in addition to any compulsory excess), the insurance company will then pay the rest. In some cases you can choose to have a higher voluntary excess, meaning you will pay more if you make a claim, in order to pay cheaper premiums.