5 Common Financial Terms That Often Get Misunderstood

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Even when throwing around common financial terms, 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 2 in 3 Americans can’t pass a financial literacy test, according to the Financial Industry Regulatory Authority.

Common financial terms, it turns out, are commonly misunderstood. Here are five basic financial terms you might be using wrong, plus what they actually mean.

1. Student loan refinancing and consolidation
2. Interest rate, annual percentage rate and annual percentage yield
3. Credit score
4. Tax exemption, tax deduction and tax credit
5. Financial advisor

1. Student loan refinancing and consolidation

What people think it means: People often use these common financial 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 or a lower monthly payment. Plus, you can choose a new repayment term.

Federal student loan consolidation, on the other hand, is the process of taking out a direct consolidation loan. 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.

The bottom line: 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 term 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 to know that people mix up. But these terms don’t share the same meaning.

What it actually means: All these basic financial 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 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.

The bottom line: 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 VantageScore 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 — the three major credit bureaus. And you can never tell exactly what score a lender will look at when you apply for a loan or mortgage.

Also, 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.

The bottom line: Since there are so many score types, it’s a good idea to track multiple credit scores, whether through a free service like My LendingTree 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 are headed in the right direction.

4. Tax exemption, tax deduction and tax credit

What people think it means: This list of financial terms gets mixed up a lot, but each affects your taxes in different ways. Knowing what they mean will help you save the most money on your annual tax returns.

What it actually means: Tax exemptions and deductions reduce your amount of taxable income, while a tax credit actually lowers your tax bill.

  • Exemptions are less important to consider, because the once-popular personal exemption was eliminated via the Tax Cuts and Jobs Act.
  • Deductions are accessible in specific situations. The standard deduction has to do with whether you’re single, married or the head of a household. Itemized deductions let you reduce your taxable income if you spent money on mortgage interest, medical bills or other qualifying expenses.
  • Credits lower your tax bill for reasons such as paying college tuition or child adoption fees.

The bottom line: 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 of these basic financial terms — exemptions, deductions and credits — you can make the most of your taxes and keep more cash in your pocket.

Deductions and credits for education costs:
Student loan interest deduction
Lifetime Learning Credit
American Opportunity Tax Credit

5. Financial advisor

What people think it means: You might think a financial advisor can help you with all things related to money — and understand every item on the list of financial terms — but most advisors 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.

The Certified Financial Planner Board is a great resource for finding a CFP-certified financial advisor who meets your needs.

If your needs are more specific to student loans, consider other advisors, including

The bottom line: 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.

Andrew Pentis contributed to this report.

Interested in refinancing student loans?

Here are the top 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.99% – 5.64%1Undergrad
& Graduate

Visit Earnest

1.89% – 5.90%2Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.09%3Undergrad
& Graduate

Visit SoFi

1.89% – 6.77%4Undergrad
& Graduate

Visit Splash

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

1.99% – 5.41%5Undergrad
& Graduate

Visit CommonBond

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.

Earnest Disclosures

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 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% 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 July 31, 2020, 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 7/31/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 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

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, 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.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of September 9, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.