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Some terms used in banking can be confusing when you hear them for the first time. If you’re planning to pursue a career in finance, you’ll need to become familiar with common concepts. These five banking terms are just a few of the many that you’ll learn as you study.
Prime Rate
The prime rate represents the rate given on loans to an institution’s best qualified customers and is used as a standard to set rates for many different kinds of financial products. Also called the prime interest rate or prime lending rate, this amount is based on the percentage charged when banks lend money to each other overnight. This federal funds rate is subject to change, and the prime rate shifts with these changes. A bank’s prime rate dictates how much interest is charged on mortgages, lines of credit, bank-issued credit cards, personal loans and business loans.
Interest Rate
Interest rates can be described as either a reward that you are paid for saving money or a penalty you’re charged for borrowing it. Expressed as a percentage, interest rates on savings accounts, interest checking accounts, CDs and other forms of savings shows how much extra income your money will accumulate when you leave it in the bank for a given period. Rates on loans of all kinds represent the amount you have to pay back over and above what was initially borrowed. In general, bank customers are looking for the highest percentages on savings and the lowest on payments.
Annual Percentage Rate (APR)
Comparing the total cost of borrowing money would be difficult without some kind of benchmark. The APR of a loan or mortgage provides that standard in the form of a percentage that includes the interest rate and any associated fees. Bank customers may need help understanding the APR of the loan they want to take out, and as a financial professional, it will be your job to help them. Using this figure, you can work out exactly how much borrowing a given amount of money will cost per year. This is useful for planning a budget that includes regular payments.
Collateral
When you take out a loan, the bank wants assurance that you can pay it back. That’s where collateral comes in. Collateral is any physical thing that you put up as security against the amount borrowed. In the event that you miss too many payments or fail to pay the balance of a loan entirely, the bank can take possession of the collateral, sell it and use the money to make up the difference. Common forms of collateral include business property, land that you own, homes and cars, although anything with a large monetary value may be used.
Overdraft
If more money is taken out of a bank account than it available in the account, the amount in excess of the account balance is known as overdraft. Banks consider this to be a form of borrowing and charge fees for it. Some have overdraft accounts that work in ways similar to lines of credit. Businesses often use these to continue operating when funds are short. Although the interest rate on an overdraft account may be lower than that on a traditional credit card, the cost of borrowing money this way can add up fast.
Gaining a better understanding of these terms will allow you to clearly convey their meanings to future clients, customers or investors. You’ll appear more professional and have an easier time helping people when you can explain common terms in language anyone can understand.
