Financial Jargon Buster: Common Terms You Need To Know
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Trying to get a grip on your finances, but scratching your head trying to figure out all the financial jargon out there? Financial institutions (and personal finance websites) often throw out acronyms and terms that are hard to understand.
Worry no more, here are common terms you’ll run into – and what they actually mean.
- Simple interest is calculated on the principal (or original) amount of the loan or deposit.
- Compound interest is calculated based on the principal amount of the loan/deposit plus any interest previously earned or charged during your tenure. For example, if you earned interest in Month 1, the interest you will earn in Month 2 is calculated based on the sum of the principal amount plus interest earned in Month 1. In other words, you are getting interest on interest. This is great if you’re earning interest, but not so great if you’re paying it.
Ever wonder how banks set your interest rates when you take out a loan or when you place a deposit?
- Your interest rates are dependent on a Base Rate (BR) which is influenced by the Overnight Policy Rate (OPR).
- The OPR is a rate set by Bank Negara Malaysia – banks refer to this rate when borrowing funds from each other. Yes, banks may borrow funds from each other from time to time in order to balance any surplus or shortage of funds for the day due to loans, withdrawals, and deposits made by customers.
- When you apply for a loan, banks use the debt service ratio (DSR) to see if you can handle your loan commitments. The DSR is a ratio of your income versus debts such as credit card bills, car loans, personal loans, etc. This ratio is to determine your repayment ability.
- If your DSR is too high, your bank may either offer you a lower maximum loan amount, or not lend to you at all. It never feels good to get rejected, but this is actually doing you a favour by helping you avoid piling on too much debt.
- Banks will generally not lend you money if your DSR is at 60% to 70%. This means that if you are earning RM5,000 a month, you’ll have trouble getting a loan if you already have debt commitments of RM3,000 to RM3,500 a month.
- Did you know that every time you take out a loan, rack up a credit card balance, and make (or miss) a payment, they are recorded somewhere? It’s stored in a database called Central Credit Reference Information System (CCRIS). Credit reporting agencies like RAM Credit Information Sdn Bhd (RAMCI), CTOS, and the Credit Bureau Malaysia can access this information and come up with your credit score. In other words, your credit score is a rating of your credit health.
- A higher credit score = better = banks will love you more, and will be more likely to lend you money.
What’s next?
Now that you are (hopefully) familiar with some of these financial jargon, check out our other guides! Click here for an easy-to-read explanation of credit card interest rates, and click here for terms you’ll encounter when you apply for a home loan.
Find out where you stand financially! Get your credit score report and tips on how to improve your financial health from Hong Leong Bank and iMoney today.
