Many of us glaze over when we hear conversations about compound interest, prime lending rates or third party payments, but it’s worth understanding these terms as it can directly affect your wallet.
Many commonly used banking terms are misunderstood and this can lead to some costly mistakes. This guide will help to explain some banking terminology and make the language of banking easier to understand:
Many commonly used banking terms are misunderstood and this can lead to some costly mistakes. This guide will help to explain some banking terminology and make the language of banking easier to understand:
Annual Percentage Rate (APR) - Annual percentage rates provide an indication of how much interest you will be charged on a loan. Usually, the higher the APR on a loan, the more interest you'll have to pay (assuming that all other things are equal). You can compare APR rates between different banks to get an indication of which is more expensive. If you are looking around for a loan, you usually want as low an APR rate as possible. However, you should also be on the lookout for other costs, such as administration fees, legal fees or penalties should you decide to settle the loan early.
Assets - Assets are everything you own that has any monetary value, plus any money you are owed. Assets include property, vehicles, equipment, savings, investments, the value of your life insurance policy and any personal items that you own. When you calculate your net worth, you subtract the amount you owe other people, or your liabilities, from your assets.
Annual Percentage Yield (APY) – This is the amount you earn on an interest-bearing investment in a year, expressed as a percentage. For example, if you earn R60 on a R1, 000 investment between January 1 and December 31, your APY is 6%. When the APY is the same as the interest rate on an investment, you are earning simple interest. But when the APY is higher than the interest rate, the interest is being compounded, which means you are earning interest on your accumulating interest – a good way to make your money grow even faster.
Account Balance - Your account balance is the amount of money you have left in your bank account after all deposits, withdrawals, interest and bank charges have been taken into consideration, this will be your net balance.
Available Balance – The account balance may be different from the balance that is available to the account holder for spending, withdrawal or transfer. If a cheque has been deposited, but not cleared by the issuing bank, the funds will not be available to the account holder even though they may show up in the account's stated total balance. For example if your total balance is R5000, but only R4500 is available to you, then R500 is waiting to be cleared. The transaction is still in progress at the time that you requested a balance enquiry.
Cheque Account – Also known as a transmission or transactional account, a cheque account is a bank account that is used to deposit and withdraw money. Money can be added or removed from the account by visiting the bank branch, using an ATM or Internet banking or in the old-fashioned way, by writing a cheque. These days a debit card is usually issued to withdraw funds or make purchases from a cheque account. Some banks may require a minimum balance to open or maintain the account.
Compound Interest - Compound interest is calculated, not just on the original amount, but also on the interest that has already been earned. Compound interest can be frightening if you owe money as you’re being charged interest not just on the debt, but also the interest you owe. If you’re saving, it can be a tremendously powerful tool, as you earn interest on your savings as well as on all the interest you’ve earned. Without compounding, you earn simple interest, and your investment doesn't grow as quickly.
For example, if you earn 10% compound interest on R100 every year for 5 years, you'll have R110 after one year, R121 after 2 years, R133.10 after 3 years and R161.05 after 5 years - for total growth of 61.1% on your investment. With simple interest, you would have earned R10 a year for 5 years, for R150, or 50% growth. The R11.05 difference is the effect of compounding. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can be calculated annually, monthly or daily.
Credit - Credit is the promise to pay back the value of something purchased without initial full payment. A contract or credit agreement is drawn up to describe the agreed terms for paying back the money borrowed, including time to pay, monthly payment date, interest rates and possible fees. A formal evaluation of your credit history is checked before credit is granted to you by a financial services provider.
Credit Card - A credit card is a plastic card, with a magnetic strip or an embedded microchip, connected to a credit account and used to buy goods or services with a promise to pay later. As this is considered a possible risk to credit lenders, an interest rate is charged on top of the amount you are paying for the goods or service. With a credit card, you will receive the item immediately after the cashier has swiped the card and the transaction has been successfully processed, but the merchant will only receive payment from the issuing credit card company within 30 days of the purchase. At this time, you will also receive a statement from the bank, indicating the amount owed. You will need to make at least a partial payment towards paying off the debt, and will be charged interest on the amount you do not repay. A major benefit of a credit card is that it allows you to make a purchase even when you do not have the full amount available in cash.
Credit Rating - Your credit rating is a formal evaluation of your ability to pay interest and repay borrowed money, as published by a credit rating agency or service.
Credit Check - A credit check is a review of your credit history made by a lender or other financial services provider when you make a credit application. The result of a credit check (i.e. it shows whether you are a good or bad credit risk) will affect the decision of the lender. For example, if the credit check shows that you are a bad risk, any loan you are offered will probably involve a smaller loan amount and a higher interest rate.
Debit Card - A plastic card linked to a bank account. The card, like a credit card, can be swiped at a tillpoint to pay for a purchase or used to withdraw cash from an ATM machine. When cash is withdrawn or a purchase made, the money is immediately deducted from the cardholder's account, so it requires funds to be available in the account. Most banks charge bank fees each time the card is swiped at a retail outlet or when money gets drawn at an ATM.
Fixed-rate Loan – A loan with a set rate of interest that either does not vary for the entire life of the loan or is fixed for a specified period. This can be particularly useful if interest rates are increasing, as you can set the interest rate you pay regardless of what happens to interest rates during the period of the loan.
Floating / Variable-rate Loan - A variable-rate loan means that the interest rate you are charged will change according to the increasing and decreasing movement of interest rates. The advantage of a variable-rate loan is that when interest rates are low your repayments will be low. If interest rates rise however, your repayments will too. In the case of a variable-rate loan it’s wise to make sure you don’t borrow more than you could afford to pay if the rate were to rise.
Interest - Interest is the amount paid or charged on money over time. If you borrow money, interest will be charged on the loan. If you invest money, interest will be paid to you (where appropriate to the investment). Interest rates are expressed in percentage terms.
Prime Rate - A benchmark interest rate which banks use to calculate the rate at which to lend money to creditworthy clients. As a general rule, the higher the client’s risk, the higher the interest rate the banks will charge above prime. It’s one of the reasons why it’s worth maintaining a good credit record.
Overdraft - A prearranged facility that allows bank accountholders to have a negative balance on their bank accounts – thereby effectively borrowing money from the bank. Generally, you will be charged a set fee for the provision of an overdraft facility. This fee is often calculated as a fairly high percentage of the total value of the overdraft.
Savings Account - A bank account where you can put away money for later use, either in a lump sum or on a monthly basis and there are 2 options: fixed-term or flexible savings accounts. Savings accounts are useful for building up funds for unforeseen expenses, such as car repairs, or for a particular goal, such as tertiary education or an overseas holiday. They can also be used to accumulate money for an investment that requires a larger sum which you do not yet have.
Fixed-term Savings Account – Also known as a fixed deposit, this is an account in which the deposit is held for a fixed-term or in which withdrawals can be made only after giving notice. Most banks would offer a higher interest rate for leaving the money untouched for a longer period.
Flexible Savings Account – This account has the option for you to withdraw funds whenever you need it, but earns a slightly lower rate of interest for the flexibility.
Debit Order - An arrangement whereby you give a third party permission to regularly debit your account, for example to pay a cellphone contract. The amount may vary each month and the debit order lasts as long as there is a contract between you and the company debiting your account. Debit orders can only be used if the company is authorised by the bank to use the debit order system. A debit order must be amended or cancelled on request from the third party who is debiting the client’s account.
Stop Order - An arrangement between you and the bank to pay a third party a fixed amount every month, at specified intervals for a certain period as stated by the client for example rent payments to a landlord. Stop orders cost more than debit orders to set up because the bank has to do more administrative work. However, because you are in control of the order, it is a safer route as the third party has no control and cannot increase your payments without warning. A stop order must be amended or cancelled on request from the client’s bank.
Third Party Payment (Transfers) - Technically, both stop orders and debit orders are ways to make third party payments, but nowadays the term is mainly used to describe making payments via the Internet or at an ATM. The person or company you are paying is called the beneficiary. Most Internet banking sites allow you to load beneficiaries yourself, either as a once-off or regular payment. Paying beneficiaries online is more cost-effective than using a stop or debit order and gives you more control over your finances.
Assets - Assets are everything you own that has any monetary value, plus any money you are owed. Assets include property, vehicles, equipment, savings, investments, the value of your life insurance policy and any personal items that you own. When you calculate your net worth, you subtract the amount you owe other people, or your liabilities, from your assets.
Annual Percentage Yield (APY) – This is the amount you earn on an interest-bearing investment in a year, expressed as a percentage. For example, if you earn R60 on a R1, 000 investment between January 1 and December 31, your APY is 6%. When the APY is the same as the interest rate on an investment, you are earning simple interest. But when the APY is higher than the interest rate, the interest is being compounded, which means you are earning interest on your accumulating interest – a good way to make your money grow even faster.
Account Balance - Your account balance is the amount of money you have left in your bank account after all deposits, withdrawals, interest and bank charges have been taken into consideration, this will be your net balance.
Available Balance – The account balance may be different from the balance that is available to the account holder for spending, withdrawal or transfer. If a cheque has been deposited, but not cleared by the issuing bank, the funds will not be available to the account holder even though they may show up in the account's stated total balance. For example if your total balance is R5000, but only R4500 is available to you, then R500 is waiting to be cleared. The transaction is still in progress at the time that you requested a balance enquiry.
Cheque Account – Also known as a transmission or transactional account, a cheque account is a bank account that is used to deposit and withdraw money. Money can be added or removed from the account by visiting the bank branch, using an ATM or Internet banking or in the old-fashioned way, by writing a cheque. These days a debit card is usually issued to withdraw funds or make purchases from a cheque account. Some banks may require a minimum balance to open or maintain the account.
Compound Interest - Compound interest is calculated, not just on the original amount, but also on the interest that has already been earned. Compound interest can be frightening if you owe money as you’re being charged interest not just on the debt, but also the interest you owe. If you’re saving, it can be a tremendously powerful tool, as you earn interest on your savings as well as on all the interest you’ve earned. Without compounding, you earn simple interest, and your investment doesn't grow as quickly.
For example, if you earn 10% compound interest on R100 every year for 5 years, you'll have R110 after one year, R121 after 2 years, R133.10 after 3 years and R161.05 after 5 years - for total growth of 61.1% on your investment. With simple interest, you would have earned R10 a year for 5 years, for R150, or 50% growth. The R11.05 difference is the effect of compounding. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can be calculated annually, monthly or daily.
Credit - Credit is the promise to pay back the value of something purchased without initial full payment. A contract or credit agreement is drawn up to describe the agreed terms for paying back the money borrowed, including time to pay, monthly payment date, interest rates and possible fees. A formal evaluation of your credit history is checked before credit is granted to you by a financial services provider.
Credit Card - A credit card is a plastic card, with a magnetic strip or an embedded microchip, connected to a credit account and used to buy goods or services with a promise to pay later. As this is considered a possible risk to credit lenders, an interest rate is charged on top of the amount you are paying for the goods or service. With a credit card, you will receive the item immediately after the cashier has swiped the card and the transaction has been successfully processed, but the merchant will only receive payment from the issuing credit card company within 30 days of the purchase. At this time, you will also receive a statement from the bank, indicating the amount owed. You will need to make at least a partial payment towards paying off the debt, and will be charged interest on the amount you do not repay. A major benefit of a credit card is that it allows you to make a purchase even when you do not have the full amount available in cash.
Credit Rating - Your credit rating is a formal evaluation of your ability to pay interest and repay borrowed money, as published by a credit rating agency or service.
Credit Check - A credit check is a review of your credit history made by a lender or other financial services provider when you make a credit application. The result of a credit check (i.e. it shows whether you are a good or bad credit risk) will affect the decision of the lender. For example, if the credit check shows that you are a bad risk, any loan you are offered will probably involve a smaller loan amount and a higher interest rate.
Debit Card - A plastic card linked to a bank account. The card, like a credit card, can be swiped at a tillpoint to pay for a purchase or used to withdraw cash from an ATM machine. When cash is withdrawn or a purchase made, the money is immediately deducted from the cardholder's account, so it requires funds to be available in the account. Most banks charge bank fees each time the card is swiped at a retail outlet or when money gets drawn at an ATM.
Fixed-rate Loan – A loan with a set rate of interest that either does not vary for the entire life of the loan or is fixed for a specified period. This can be particularly useful if interest rates are increasing, as you can set the interest rate you pay regardless of what happens to interest rates during the period of the loan.
Floating / Variable-rate Loan - A variable-rate loan means that the interest rate you are charged will change according to the increasing and decreasing movement of interest rates. The advantage of a variable-rate loan is that when interest rates are low your repayments will be low. If interest rates rise however, your repayments will too. In the case of a variable-rate loan it’s wise to make sure you don’t borrow more than you could afford to pay if the rate were to rise.
Interest - Interest is the amount paid or charged on money over time. If you borrow money, interest will be charged on the loan. If you invest money, interest will be paid to you (where appropriate to the investment). Interest rates are expressed in percentage terms.
Prime Rate - A benchmark interest rate which banks use to calculate the rate at which to lend money to creditworthy clients. As a general rule, the higher the client’s risk, the higher the interest rate the banks will charge above prime. It’s one of the reasons why it’s worth maintaining a good credit record.
Overdraft - A prearranged facility that allows bank accountholders to have a negative balance on their bank accounts – thereby effectively borrowing money from the bank. Generally, you will be charged a set fee for the provision of an overdraft facility. This fee is often calculated as a fairly high percentage of the total value of the overdraft.
Savings Account - A bank account where you can put away money for later use, either in a lump sum or on a monthly basis and there are 2 options: fixed-term or flexible savings accounts. Savings accounts are useful for building up funds for unforeseen expenses, such as car repairs, or for a particular goal, such as tertiary education or an overseas holiday. They can also be used to accumulate money for an investment that requires a larger sum which you do not yet have.
Fixed-term Savings Account – Also known as a fixed deposit, this is an account in which the deposit is held for a fixed-term or in which withdrawals can be made only after giving notice. Most banks would offer a higher interest rate for leaving the money untouched for a longer period.
Flexible Savings Account – This account has the option for you to withdraw funds whenever you need it, but earns a slightly lower rate of interest for the flexibility.
Debit Order - An arrangement whereby you give a third party permission to regularly debit your account, for example to pay a cellphone contract. The amount may vary each month and the debit order lasts as long as there is a contract between you and the company debiting your account. Debit orders can only be used if the company is authorised by the bank to use the debit order system. A debit order must be amended or cancelled on request from the third party who is debiting the client’s account.
Stop Order - An arrangement between you and the bank to pay a third party a fixed amount every month, at specified intervals for a certain period as stated by the client for example rent payments to a landlord. Stop orders cost more than debit orders to set up because the bank has to do more administrative work. However, because you are in control of the order, it is a safer route as the third party has no control and cannot increase your payments without warning. A stop order must be amended or cancelled on request from the client’s bank.
Third Party Payment (Transfers) - Technically, both stop orders and debit orders are ways to make third party payments, but nowadays the term is mainly used to describe making payments via the Internet or at an ATM. The person or company you are paying is called the beneficiary. Most Internet banking sites allow you to load beneficiaries yourself, either as a once-off or regular payment. Paying beneficiaries online is more cost-effective than using a stop or debit order and gives you more control over your finances.
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