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Articles by Tony Levene

Financial jargon

Plain English campaigners have achieved much in finance – insurance policies, once notorious for archaic language now feature “what is included” and “what is excluded” listings.

Nevertheless, the Money Advice Service, a free to use government sponsored organisation which explains the basics of personal finance, calculates that every adult loses £428 a year because they fail to understand financial jargon. That totals around £1.3 billion.

The financial world has some arcane vocabulary.

An absolute return funds has no absolute anything. Distressed securities are insecure (although they can leave holders distressed). Cable is not something that connects a laptop to printer but the Sterling-Dollar exchange rate. And a Coco has nothing to do with a chocolate drink but stands for – courtesy of the Financial Times Lexicon - “Contingent convertibles”, a fixed rate corporate investment “which converts into shares "contingent" on a specified event, such as the stock price of the company exceeding a particular level for a certain period of time.”

Quotation MarksThe same word can have many meanings or contexts.Quotation Marks

People involved in these specialised investments can presumably take care of themselves. The MAS figure comes from a failure to understand the fine print on everyday loans, mortgages, credit cards, savings, pensions and Individual Savings Accounts.

One difficulty is that the same word can have many meanings or contexts.

Budget” is understood by many to mean the occasion each spring when the Chancellor tells us how much tax we have to pay. But it is also often used to mean personal income and expenditure – confusing one in three, according to MAS – when the phrases “how much do you have coming in” and “what do you spend it on” could be easier to understand.

Bond” is even worse. According to context it could mean a prize draw where you can't lose your ticket money, as in Premium Bonds, or stock market traded loan instruments, as in Government Bonds or corporate bonds, or a complex investment for those in a particular tax bracket, as in insurance bonds. “Premium” can also mean the amount you pay cover on your home, car, pets and holidays.

Few with a home loan, or even estate agents and finance workers, know the difference between mortgagor and mortgagee – the borrower is the first and the bank or building society the second.

Here's another trio commonly used and commonly confused.

APR stands for Annual Percentage Rate – it can be 4 per cent on a mortgage and 6,000 per cent on a payday loan. It includes all upfront fees on the loan, divided up over the period of the borrowing. All loans have fees attached in one way or another. A payday loan may be repaid in a few weeks so the costs are spread over that period while a mortgage is often for 25 years so fees will be divided over those 300 months.

APR offers little help if rates change. And many organisations use “representative APR” - this is the rate which at least 51 per cent of accepted loan or credit card applicants pay. The others will pay a higher, unspecified, rate – while a third group will fail to get the loan at any price.

AER is Annual Equivalent rate. It's used on savings accounts, where it takes the number of interest payments each year into consideration. It assumes you leave interest to grow. A 10.3 per cent rate paid once a year is 10.3 per cent AER. That would appear better than a 10 per cent rate but if this was paid quarterly, it would add up to a 10.38 per cent APR. It is all to do with compound interest, a concept which only half of all adults understand.

EAR sounds similar. But it is not. It stands for Equivalent Annual Rate. It is applied on loans but while it takes compounding into effect – how often you repay makes a difference – it does not include fees or other charges.

And don't mistake any of these for TER – that's the Total Expenses Ratio formula used in unit trusts. It shows all the costs fund holders incur, going beyond annual management fees to include trading expenses, legal and audit fees, and other expenses.

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