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Glossary of Financial Terms

 

Adverse/impaired credit

Any existing or previous credit commitment within the last 6 years which has not been repaid as per the agreement is considered adverse or impaired credit and will have a negative impact on your credit score. Adverse credit history will indicate to a lender that you may not be reliable in repaying the borrowing.

APR - Annual Percentage Rate

All lenders are required to disclose the APR to show the total cost of borrowing for a year. It is the interest rate but also includes any additional costs, such as fees. This is to make it easier for consumers to compare different finance products as looking at the interest rates alone does not always give a fair comparison.

Arrears

If a contractual payment is not made by the due date, the account is then 'in arrears'. The arrears figure is the amount of money which is overdue. Most credit commitments are repaid on a monthly basis and lenders report to the credit reference agencies monthly, so if a payment is missed one month then this will have an adverse affect on your credit report.

Assets

An asset is any property, piece of equipment, machinery, vehicle, stock, materials, furniture, trademark, brand name, etc that is owned by a company or business and has a monetary value.

Asset Turnover

The asset turnover is a term used to illustrate the measure of operational efficiency which is the amount of revenue generated when compared to the cost of the assets.

BACS Payment

A BACS payment (Bankers Automated Clearing Services) is an electronic system for transferring money directly from one bank account to another, also widely known as a ‘bank transfer’. There is no fee charged, however, it can take 3-5 working days for the transaction to be processed.

Bankruptcy

If you are unable to repay your debts, you can be declared bankrupt by the courts. The proceedings can be initiated by yourself, by your creditors or by an insolvency practitioner. Going bankrupt has serious financial consequences, for usually a year a court official known as an official receiver will take control of your money and any assets you may have may be sold to repay the debts. Usually any debt remaining at the end of the year is written off, but the bankruptcy will still show on your credit file for 6 years.

Bridging loan

A bridging loan is a short term loan facility that is secured on property and can be used to provide large sums of money. Bridging loans can be put in place quickly and used to provide finance when funds are only required for the short term, ie from just 1 day to 18 months. This type of loan should however only be used to provide short term finance. As a short term finance facility bridging loans can often be the cheapest option for borrowing money, but if used as a long term facility they can prove to be a very expensive option.

Bridging loan calculator

A bridging loan calculator works out the monthly interest charges for a bridging loan amount. The KIS bridging loan calculator also has a facility to add in fees because most lenders include these as a percentage of the bridging loan amount. We just like to keep things as simple as possible!

Certificate of Good Standing (Certificate of existence)

A certificate issued by Companies House to confirm that a company exists and is not currently being taken off the companies register. The document will only be issued if the company's annual return and accounts are all up to date.

Commercial bridging loan

Commercial bridging loans are used by businesses that require a short term lending facility. These facilities are classed as unregulated so do not offer consumers the protection that a regulated agreement does. If a bridging loan uses a borrower’s home as security, then it has to be regulated. If the loan is secured against a property not used as the borrower’s residence, then it will be unregulated. There are many more bridging loan providers offering unregulated loans than there are lenders who offer regulated, and regulated lenders will usually provide both types. It is very important to read and understand the terms and conditions on all agreements, and these will vary from one lender to the next. Businesses will use bridging loans to provide cash injections to pay urgent bills, fund orders, buy property, expand or improve business premises or to bridge a gap whilst waiting for bills to be paid or proceeds from another finance facility to arrive.

County Court Judgement (CCJ)

A CCJ is issued by a county court for failure to repay a debt. The court will contact you before issuing the CCJ and give you 14 days to respond. CCJs stay on your credit file for 6 years and have an adverse affect on your credit rating.

Credit Rating

Each lender will have their own way of determining your credit rating after conducting a credit search based on their lending criteria. Your credit rating helps to make their decision regarding whether or not to lend to you, based on your previous repayment history, how you manage your current credit, whether you have any CCJs or have been bankrupt. Other factors can have a bearing on your credit rating such as if you are on the voters roll.

Credit Reference Agency

There are three credit reference agencies who provide lenders with the facility to conduct credit searches – Experian, Equifax and CallCredit. Lenders report back each month to a credit reference agency so that your credit history is kept up to date.

Credit search

A check made by lenders using one of the credit reference agencies as part of their decision making process prior to accepting or declining an application for credit. The lender may do this to check your credit score or view your credit report. A report will show details of existing credit that you already have and whether or not the payments have been kept up to date. It will also show any adverse credit history including County Court Judgements (CCJs), defaults, voluntary arrangements and bankruptcy orders. This information is kept for at least 6 years.

Current assets

Current assets takes account of any equipment, vehicles, machinery, property, trademark, stock, etc that can be turned into money within a 12 month period. To total current asset figure would be the total worth of all assets owned by the company that could be sold within a year.

Debt Consolidation

Debt consolidation is a term used when a loan application is made with the intention of using the funds to repay other debts. The purpose of this could be to secure a lower interest rate or if the borrower is struggling to keep up with their current commitments, they may want to spread repaying the borrowing over more time to make the monthly repayment more manageable. Care should be taken with this however as generally the longer the term of the loan, the more interest is payable over the total duration.

Development Finance

Development finance is similar to bridging in that it is short term, usually for periods of between 12 and 36 months. It is a specialist facility used to fund development projects, and is useful because funds are released in stages as the project progresses. Development finance makes use of the developing security, for example as the project progresses it becomes more valuable, even though it is not finished. Money is released to the borrower to fund the development as the stages are completed.

Early Repayment Charge (ERC)

An early repayment charge may be payable if you wish to repay the loan early.

Faster Payments

This was introduced in 2008 - it is an electronic payment that can be made online, over the phone, in a bank branch, or a self-service kiosk. In most cases the transaction will be instant, otherwise it could take up to 2 hours. Both participating banks (the bank account from which the money is being sent and also the bank account where the money is being received) must be a part of the faster payments service, otherwise a CHAPS or BACS payment will be used instead (however, nearly all banks now use this service). There is no charge for a faster payment transaction, however, there is a limit to how much you can transfer which varies between banks and accounts, but is typically from £5,000 up to £250,000.

Goodwill

Goodwill is the term given to any money that is paid in order to purchase a company that is in excess of the value of the net tangible assets.

Guarantor Loans

A guarantor loan is an unsecured loan and requires another person to act as a guarantor for you. The guarantor would need to be willing and able to make your monthly payments if you were unable to do so.

Income Multiples

This will vary depending on the mortgage lender; however some lenders will determine how much they would be willing to lend you based on a multiple of your annual income.

Indemnity Policy

An insurance policy to cover a property against any costs that may arise as a result of a specific defect stated in the property's title. It is usually a legal defect that is unlikely to become a problem in the future or cause any financial loss – however there is potential that if it did become an issue then the costs of rectifying it would be large. For example, some older properties have a covenant stating that there can be no further developments without the express permission of the builder, but it may not be possible to track down the builder 100 years later, so building work goes ahead. In theory the builder's descendants could then raise an objection and the work may need to be undone – It would seem unlikely that this would happen but it is well worth taking out the policy to cover the cost. It is always better to have the defect in the property title removed where possible so that it no longer exists but sometimes this is not possible as in the example given, then it is necessary to take out an indemnity policy. These types of policies are usually paid for as a one off premium and the cover will be in place perpetuity (forever) regardless how many times the property changes hands, although if the value of the property changes you will need to amend the limits on the cover and a premium may be payable for the changes.

Mezzanine finance

Mezzanine finance is a form of funding used mainly by property developers. This type of funding is usually used in addition to funds provided by the main lender, and is normally taken out to fund a gap in finances. For example if a development project requires a total of £1 million and the developer has £200k to put in, then can only raise £600k through his principal development finance provider, the £200k shortfall maybe provided through the use of mezzanine finance.

NHBC – National House Building Council

The UK's largest provider of new home warranties. Their aim is to improve building standards of new build properties so homebuyers can be confident that a home with NHBC buildmark cover will have been built by builders who are registered with the NHBC and adhere to their standards.

NHBC Certificate

This is a document to show that the new property is covered for the first 10 years against any damage or fault to the building which you would not expect to happen had the building been built in line with the standards set by the NHBC. Full cover details and any limitations and exclusions will be given in the policy document.

Offshore company

A company which is registered outside the UK and operates from another country. An offshore company is sometimes incorporated to enable a business to benefit financially – it is usually set up in a country seen as a 'Tax Haven' where the company will not be liable to as heavy taxation as in the owner's home country and in countries where legal regulation is lighter. Offshore companies are also a way to protect assets that may otherwise be at risk.

Personal Loan

A personal loan is not secured on your home or any other asset. Generally, you can borrow up to around £25,000 without any form of security.

Prohibition Notice

Usually served by a Local Authority on a property where it is believed the condition causes a serious risk of serious personal injury. The advantage of this type of order is that it can have immediate effect.

Secured loan

A secured loan is a finance facility where the lender takes a charge over property. The added security means reduced risk for lenders, which tends to mean increased loan amounts, reduced interest rates, longer loan terms and more flexible lending criteria. Failure to keep up repayments will most probably lead to litigation and this could result in the property being used as security being repossessed.

Self Invested Personal Pension (SIPP)

Government approved pension plan that allows you to choose where the money that you pay in is invested. All the investment products available are approved by HM Revenue and Customs. There are limits on how much you can pay in each year and there is a requirement to purchase an annuity before the age of 75.

What is a Soft Search?

A soft credit search can be done to enable a lender to give a quotation. This type of search does not leave a footprint on your credit file and cannot be seen by other lenders. If you make several applications for credit to try and find the best deal, several credit searches will be done which can reduce your chances of getting credit as it may look like you are trying to get too much credit or it could look like a fraudster is using your details. If you are shopping around, it is best to ask lenders for a quotation only rather than making more than one application.

Telegraphic Transfer / CHAPS Payment

A telegraphic transfer, also known as CHAPS (Clearing House Automated Payment System), is an electronic form of transferring of money. It is commonly used for property transactions as the money is guaranteed to be transferred within the same day, provided that the instructions are received before 3pm. There is no limit to the amount of money that can be sent. The average cost is £20-£50 depending on the bank.

 

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