Tax exemptions. Exchange-traded funds. Amortization.
When talking about finance, it’s easy to get lost in the lingo, especially since most of us never had a personal finance class in school.
That’s probably why a recent FINRA study found that two in three Americans can’t pass a financial literacy test.
If you’d like to join the conversation, you first have to master the language. Here are five terms you might be using wrong and what they actually mean in the world of finance.
1. Student loan refinancing and consolidation
What people think it means: People often use these terms interchangeably, but they don’t necessarily mean the same thing. It’s important to understand the difference so you make the right choice with your student debt.
What it actually means: Student loan refinancing refers to the process of taking out a new loan with a private lender, in the amount of some or all of your current student debt.
You’ll still owe the same amount of money after refinancing, but you might qualify for lower interest rates. Plus, you can choose new repayment terms.
Federal student loan consolidation, on the other hand, is the process of taking out a Direct Consolidation Loan from the Office of Student Aid. When you take out a consolidation loan, you merge your federal loans into one new one.
This process will simplify your monthly payments, and it could make you eligible for new repayment plans. But it leaves you with a similar interest rate — the average of your previous rates rounded up to the nearest one-eighth of a percent.
Student loan refinancing is usually best for people looking to lower their interest rate, while consolidating is more about simplifying your payments and extending the terms on your loans.
2. Interest rate, annual percentage rate, and annual percentage yield
What people think it means: Interest rates, annual percentage rate (APR), and annual percentage yield (APY) are a few other financial terms that people mix up. But these terms don’t share the same meaning.
What it actually means: All these terms indicate how interest accrues on your debt or adds on to your savings. But APR is a more comprehensive term than interest rate, and APY is the most comprehensive of all.
An account’s interest rate refers to how much interest adds up on your loan or savings account, and it’s expressed as a percentage of your balance. APR is also a percentage, but it includes both the interest rate and all the fees that accrue over the course of a year.
APY goes a step further by indicating how that interest compounds, whether on a daily, weekly, or monthly basis. Because APY takes compounding interest into account, it’s usually a higher number than APR and interest rate.
Although your account’s interest rate, APR, and APY might not differ much, it’s important to understand what you’re looking at so you can compare multiple offers on an apples-to-apples basis.
3. Credit score
What people think it means: The one number all lenders and creditors use to evaluate you.
What it actually means: Far from having one single credit score, all of us actually have several.
A number of companies assess credit scores, and each has a slightly different proprietary formula. One of the most trusted scores is the FICO score, but Vantage 3.0 is a popular model, too.
A single formula could produce three different scores, depending on whether it’s using information from TransUnion, Equifax, or Experian. And you can never tell exactly what score a lender will look at when you apply for a loan or mortgage.
Finally, different lenders use different types of scores to evaluate you. A car loan lender, for instance, might look at your FICO Auto Score, while a credit card company would likely consider your FICO Bankcard Score.
Since there are so many score types, it’s a good idea to track multiple credit scores, whether through a free service like Credit Karma or via your credit card accounts.
And don’t panic if one score is lower than another. They might never match up exactly, but by keeping up with debt payments and using credit responsibly, you can make sure all of your various credit scores go up.
4. Tax exemption, tax deduction, and tax credit
What people think it means: These terms get mixed up a lot, but they affect your taxes in different ways. Knowing what they mean will help you save the most money on your returns.
What it actually means: Tax exemptions and deductions reduce your amount of taxable income, while a tax credit actually lowers your tax bill.
Everyone can claim a personal exemption. For 2017, the amount is $4,050. Plus, you can claim exemptions for members in your household.
Deductions work similarly, but they’re often for more specific reasons. The standard deduction has to do with whether you’re single, married, or head of household. Itemized deductions let you reduce your taxable income if you spent money on mortgage interest, medical bills, or other qualifying expenses.
Tax credits, on the other hand, lower your tax bill for reasons such as paying college tuition or child adoption fees.
Tax credits are often your best option, since they reduce your taxes dollar for dollar. Exemptions and deductions, on the other hand, only adjust your taxable adjusted gross income (AGI).
By understanding the difference between exemptions, deductions, and credits, you can choose the best one for your situation and keep more cash in your pocket.
5. Financial advisor
What people think it means: You might think a financial advisor can help you with all things related to money, but most are a lot more specialized than that.
What it actually means: Not all financial advisors are created equal, and some are a lot more knowledgeable — and more legitimate — than others. One financial advisor might specialize in investment strategy, while another could help you with estate planning or insurance.
Before consulting a financial advisor, figure out exactly what kind of help you’re looking for. You should also make sure the financial planner is reputable, and not just charging you for advice you could easily find for free online.
The Certified Financial Planner Board is a great resource for finding a CFP-certified financial advisor who meets your needs.
Empower yourself with financial knowledge
Whether you’re paying off student loans or applying for your first mortgage, it’s easy to get overwhelmed with financial jargon.
By learning the true definitions of important terms, you can make smart decisions with your money. Your future finances will thank you later.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|