Interest rate

The price of time. It is what it costs to have a sum now rather than later, expressed as a percentage per year. The same mechanism makes you pay when you borrow and earn when you lend.

1,000 borrowed at 10% per year: after one year, 100 of interest has been added.

Compound interest

Interest that itself produces interest. It turns a small difference in rate into an enormous gap over several years, and it works both ways: for savings, and against a debt left to run.

1,000 at 10% per year: 1,100 after one year, 1,210 after two, 2,594 after ten. The second year brings 110 and not 100, because last year’s 100 is working too.

Rule of 72

A mental shortcut for how long a sum takes to double: divide 72 by the annual rate. It is not exact, it is an order of magnitude, and that is what makes it useful in the middle of a conversation.

At 6% per year, a sum doubles in about twelve years, since 72 divided by 6 is 12.

Principal

The sum itself, without the interest. On a loan, it is what you still owe; on savings, it is what you have paid in.

On a monthly payment of 200 of which 40 is interest, 160 reduces the principal owed.

Monthly payment

What you pay each month. It always mixes two things: a share of principal, which reduces your debt, and a share of interest, which does not. A low monthly payment can hide a high total cost.

Two loans of 5,000: one over 24 months, the other over 60. The second has the gentler monthly payment and the heavier total cost.

Amortisation

The way your debt goes down as the payments are made. At the start, most of the monthly payment pays the interest; at the end, most of it reduces the principal. That is why repaying early gains far more than repaying late.

12,000 borrowed over ten years at 5%: the first monthly payment contains 50 of interest, the last one less than 1. The sum paid each month does not change; what it is made of turns over completely.

Total cost

Everything you hand back, less what you received. It is the only figure that compares two offers honestly, and it is the one to ask for when it is not written down.

5,000 borrowed, 5,900 handed back in the end: the total cost is 900, whatever monthly payment is advertised.

All-in rate

The rate that includes the interest and the compulsory fees, and therefore the only one comparable from one offer to the next. Its official name changes from country to country, but the question is everywhere the same: does this percentage contain everything?

An advertised rate of 4% with 300 of compulsory fees on 5,000 is not a rate of 4%.

Arrangement fee

What you are made to pay for the act of lending to you or selling to you. Often taken at the start, sometimes added to the amount borrowed, which makes it produce interest in its turn.

300 of fees added to a loan of 5,000: you pay interest on 5,300.

Fixed rate, variable rate

A fixed rate does not change for the whole term: you know what you are committing to. A variable rate follows an index: your monthly payment can rise after you sign, sometimes a great deal.

On 10,000 borrowed, a rate that moves from 3% to 5% adds around 200 of interest in the first year.

Overdraft

A loan that does not present itself as a loan: the bank advances money when the account goes below zero, and charges for it. It is paid in flat fees more than in a rate, and flat fees on a small amount over a few days cost a great deal in proportion.

Four fees of 8 in the same month on an overdraft of 50: that month, the money advanced cost more than half its value.

Late payment penalty

An amount added when a payment arrives late. It turns a small delay into lasting debt, because it often applies before you have seen the problem.

A bill of 30 paid ten days late can cost 40 with the penalty.

Debt

A sum you have to hand back, on an agreed date. A debt is not a fault: it is a dated commitment, and what matters is knowing exactly how much, to whom, and when.

Three debts of 40 a month are a commitment of 120 a month, not three small payments.

Over-indebtedness

The point where all your due payments can no longer be met out of your income, whatever you do. It is a recognised situation, with procedures that differ from country to country, and the sooner it is said, the more options remain.

1,200 of income, 500 of housing, 700 of due payments: the charges absorb the income exactly, and nothing is left to eat with. A disposable income of zero leaves nothing to save on: the first unexpected expense will be paid with a new debt.

Disposable income

What remains once everything compulsory is paid. It is the only line that says whether a budget holds, and it is for you to work it out.

1,500 of income, 1,100 of fixed charges: 400 for everything else, that is about 13 a day.

Emergency savings

Money available right away, set aside for the unexpected. Its job is not to earn, it is to avoid borrowing in an emergency, with no way to compare and no time to wait.

A reserve of one month of spending avoids an overdraft of 300 when an appliance breaks down.

Inflation

The general rise in prices. It reduces what your money buys, even if the number in the account does not move. A savings rate below inflation loses purchasing power, slowly and surely.

With prices rising 3% a year, 100 kept without interest buys the equivalent of 97 a year later.

Return

What an investment brings in, as a percentage of the sum invested. A past return is not a promise, and a return announced without a named risk is incomplete information.

A return of 5% per month means around 80% per year, which has nothing to do with 5% per year.

Risk

The possibility of losing part of what you put in. Risk is not an opinion: it is the other side of every high return, and it is written in the product document, not in the advertising.

100 that loses 20% falls to 80, and it then takes a 25% gain to get back to 100. A loss is not made up by a gain of the same percentage.

Excess

The share of the loss that always stays on you. A low premium often hides a high excess, and that is exactly what gets discovered on the day of the claim.

Loss of 500, excess of 150: the insurer pays 350.

Cover cap

The most the insurer will pay, whatever happens. Above it, everything stays on you, even if the contract speaks of full cover elsewhere.

Loss of 2,000, cap of 1,000: the insurer pays 1,000, and the missing 1,000 stays on you.

Depreciation

The deduction applied for the age and wear of the item. It is what explains why a replaced object is only partly reimbursed, and the calculation applies before the excess.

An appliance worth 600 with 30% depreciation: the base becomes 420, then the excess comes off as well.

Exclusion

A case the contract does not cover at all. Exclusions are not a detail: they are what decides whether you receive something or nothing.

Theft without a break-in is excluded by many contracts: the loss is real, the payout is zero.

Premium

What you pay to be insured, whatever happens with claims. Comparing two premiums without comparing the excesses, the caps and the exclusions compares nothing.

A premium lower by 5 a month, that is 60 a year, with an excess higher by 200: the calculation depends on how many claims you expect.

Guarantor

A person who commits to paying if you do not. It is not a formality: the debt becomes theirs, with the same amounts and the same delays. Beware of the confusion with a deposit: a deposit is a sum handed over as security when moving into a home, and the exposure stops at that sum, whereas a guarantor is exposed to the whole debt.

A guarantor for a rent of 500 commits to 6,000 a year, plus any arrears.

Direct debit

A standing authorisation given to someone to take money from your account. Convenient, and invisible: this is where forgotten subscriptions carry on living.

Three forgotten subscriptions at 10 a month: 360 over a year.

Legal tender

The fact that a currency has to be accepted as payment in a country. A cryptocurrency is legal tender only where a country’s law makes it so: failing that, nobody is obliged to accept it, and no institution guarantees its value.

A shopkeeper can refuse a payment in cryptocurrency without giving a reason.

How to use this glossary

Open it beside the document you are reading, and look first for the four words that decide everything: total cost, all-in rate, excess, exclusion. If a document does not let you answer those four, it is not complete, and that can be asked for in writing.

The worked examples are deliberately round and carry no currency: they are there to explain a mechanism, not to quote an offer. For your real figures, the calculators do the work on your own device.