Bookkeeping
Words to Know for the Financially Savvy
Kathleen Gurr
Let's be honest: it's tough to catch on to financial jargon. The lingo
can be confusing and, since many frequently-used terms sound alike, today's
consumers end up signing on the dotted line when they really don't have a clue
what's going on. The picture gets blurry and financial terms start to
sound like gobbledygook. If this sounds familiar, rest assured that you're
not slow in the head; you're perfectly normal.
Next time, you don't have to stare blankly at your lenders as they explain
terms and conditions. Think of this article as a magnifying glass for the
fine print, clarifying some common misconceptions. Here is a list of
common terms in the credit card and auto-financing industries to help you become
an even better, more informed consumer.
Add-On Interest
Most common with automobile loans, this interest is computed at the beginning
of the loan, then added to the principal balance. No matter what, all this
interest must be repaid, whether the loan is paid off early or not.
Average Daily Balance
This is determined by adding each day's balance together and dividing that
sum by the number of days in the billing cycle. Then the creditor takes
the average daily balance and multiplies it by your monthly periodic rate (your
annual percentage rate divided by 12). This is how most credit cards
calculate your monthly finance charges and the minimum payment. For
example, a credit card with a 15 percent annual percentage rate
has a monthly periodic rate of 1.25 percent. If this card had an
average daily balance of $1500, the finance charge for that billing cycle would
be $18.75.
Often referred to as APR, this is a yearly rate of interest including all
fees associated with obtaining the loan or line of credit. By law,
creditors are required to disclose the APR to you. Lenders calculate your
APR-based finance charges by taking the average compound interest rate over the
length of the loan.
This is how much a car costs, including standard equipment and the
manufacturer's warranty, but without any options. This price is printed on
the Monroney Sticker.
Blue Book
This term refers to the Kelley Blue Book, which is a guide that dealers use
when estimating retail and wholesale pricing for vehicles. There are
countless different guides to pricing that people reference when giving a
"blue book price" but the Kelley Blue Book is the official industry
guide.
Cash-Advance Fee
A finance fee charged by the lender for using a credit card to obtain cash.
It can either be a flat fee per transaction or a percentage of the amount of
cash taken out. Obtaining cash using a credit card is generally more
expensive because of this fee and a higher APR associated with cash advances.
Additionally, there is rarely a grace period, so interest
begins accruing the day of the transaction.
The fee for transporting the vehicle to the dealer from either the port of
entry or the manufacturer. This fee is first paid by the dealer, then
should be passed on to the buyer without a markup.
Extended Warranty
A contract covering repairs or problems with a vehicle after the
manufacturer's warranty expires. For new cars, the extended warranty
generally needs to be purchased by the end of the first year of ownership.
You can buy extended warranties from dealers, manufacturers or a bunch of other
companies that operate independently.
The time a lender allows between the transaction date and the billing date
without charging interest. This period is usually between 20 and 30 days
long, but it only applies to people who do not carry a balance on their credit
cards. If you carry a balance, you generally do not have a grace period
and finance charges begin to accrue immediately.
Invoice Price
What the manufacturer charges the dealer. This price does not always
reflect the actual cost to dealer because they sometimes receive incentives or
rebates from the manufacturer. The invoice price always includes the destination
charge.
Named after Mike Monroney, a Congressman from Oklahoma who penned the
Automobile Information Disclosure Act, this is a sticker on the car window that
lists the base price, the destination
charge, the installed options with the manufacturer's suggested retail price
and the vehicle's gas mileage. The Monroney sticker is sometimes called
the dealer sticker and is required by law. It can only be removed when the
vehicle is sold by the purchaser.
Pre-Approved
This means that the potential customer passed a preliminary screening that
determines credit-worthiness. It does not guarantee approval for a credit
card, and the creditor still has the option to revoke the offer if the
applicant's credit is deemed unsatisfactory.
Secured Card
This type of credit card is tied to a savings deposit in case the cardholder
defaults on payments. This is commonly used by people who are either just
starting to establish credit, or those who are trying to rebuild their credit
rating after bankruptcy or a poor credit history.
Trade-In Value
The amount a dealership will credit you for your old vehicle as partial
payment for another vehicle. The amount they give you credit for is
generally 5 percent below the wholesale value of your car.
Variable Interest Rate
As the borrower, this is the percentage you pay for the use of money.
The rate varies periodically based on changes in the prime interest rate and is
never guaranteed to stay the same.
And that's just a start. For a more comprehensive list of common
financial terms made simple, try www.investorwords.com
or www.finance-glossary.com.
With these frequently-used terms clarified, you can approach your next vehicle
purchase or loan with a little more confidence as you compare your options.
Bookkeeping Services Offered
