Different Financial Terminologies and Their Significance

Last Updated : July 31, 2020, 5:32 p.m.

While taking tips to manage your finances, you may come across some common terminologies that you find a bit difficult to understand. These terms can be related to a loan, investment, or insurance. And whether you know it or not, these terms possess a great significance to the financial products you come across. But when you aren’t able to understand them fully, you cannot understand the gravity of their significance. There are several terminologies that banks and financial institutions use in the features related to their products whether it is a credit card, home loan , personal loan , life insurance policy, mutual fund investment, etc.

The most important thing about these financial terms is that when you look at them for the first time, you may feel they are a bit complex. And that’s why you never try to understand them properly. This ignorance can hurt you in the future. So, to save yourself from any such things, we will be explaining a few common financial terms that you come across these financial products. We will also be telling the significance of these terms so that you keep an eye on them while enjoying the benefits of these products. This article will cover such financial terminologies one after another. So, without any further delay, let’s start reading!

What are Some of the Commonly Used Financial Terminologies?

There are several financial terminologies used in different products that hold a special significance on their own. Some of them are FOIR, LTV, NAV, SIP, Zero-cost EMI, Revolving Credit, Existing Obligations, Waiting Period, etc. You can look at each of them below to know the significance of them.

Fixed Obligations to Income Ratio (FOIR)

The first term that we would like to talk about is Fixed Obligations to Income Ratio, commonly known as FOIR . You must have come across this term while availing different kinds of loans. So, what does this term represent? Well, if we were to put it simply, the FOIR denotes an individual’s income to debt ratio. Here, fixed obligations represent all kinds of debts that an individual has at a point in his or her financial life. These obligations can be Loan EMIs or Credit Card Bills that an individual has been paying. So, according to the monthly income, the lender calculates an individual’s FOIR.

In an ideal situation, lenders demand that an individual should not spend more than 50% of his or her monthly income on paying different kinds of debts. FOIR is one of the important aspects that lenders check before providing you any kind of loan amount. This helps lenders in estimating the repayment capacity of an individual. A lot of borrowers don’t check their FOIR before applying and face rejection due to the insufficient FOIR. Any lender feels risk in providing credit to an individual with a higher FOIR.

The most important thing that FOIR affects is your loan eligibility. If a person has a higher FOIR, it simply means that the person has many existing obligations and has thus reduced his/her repayment capacity. When you have NIL to a few existing obligations, you will naturally have a large portion of your monthly income with which you can repay your loan. Other than this, you will also have better chances of loan approval with low FOIR and a high credit score.

Loan to Value Ratio (LTV)

Loan to Value (LTV) Ratio is also one of the other important financial terminologies when it comes to secured loans. As you know the secured loans (home loan, gold loan, loan against FD, loan against Life Insurance Policy ) are generally taken against security or collateral. If we were to put it simply, the LTV ratio is just a number that helps lenders assess the risk they are taking when they provide secured loans.

The more loan amount lenders provide borrowers, the more risk they face. And an LTV ratio helps in the evaluation of that involved risk. We can also say that the primary purpose of the LTV ratio is to make sure that a lender does not provide a loan amount higher than the value of the collateral.

So, how can you calculate the LTV Ratio? Well, you only need to divide the loan amount by the value of your asset (collateral) and then multiply the value by 100. You will get the LTV ratio instantly. Let’s understand this through an example.

Let’s say you are buying a home worth INR 30 lakh, and the loan amount provided by the lender is INR 24 lakh, your LTV ratio will be (24/30)*100 which will be equal to 80. So, your LTV ratio will be 80%.

An LTV ratio helps lenders in deciding the suitable loan amount for an individual according to the asset value. You also need to remember that the LTV ratio tends to change from one loan type to another and from one lender to another. The LTV ratio for home loans generally varies from 75% to 90% of the property value while it ranges from 65% to 90% of the overall gold value in the case of Gold Loans.

Net Asset Value (NAV)

You must have seen people around you talking about mutual funds and throwing NAV in between those conversations. If you ever feel alienated during those conversations, you must understand the concept of Net Asset Value (NAV) so that you feel more attached to these conversations. It will also help you in your mutual fund investments. The concept of NAV is one of the most misunderstood concepts among the people who invest.

So what is Net Asset Value exactly? As you can see from its name, it denotes the overall worth of any mutual fund. If a mutual fund has lower NAV, you can get more units of that fund as compared to a fund with higher NAV. But does this mean that a fund with low NAV has a better performance? Well, not. The performance of a fund does not solely depend on the NAV. There are several things related to the fund’s portfolio that determines the performance of that particular fund. So, it would not be advised to make your investment decisions based on the NAV of any mutual fund.

Systematic Investment Plan (SIP)

You can see around yourself how everybody has started to talk about investment these days. But when it comes to investing, several people find themselves confused about the overall process of investing. That’s where the Systematic Investment Plan (SIP) comes into the picture. It is an efficient investment tool that makes the investment process easier than before.

With an SIP, you can invest a fixed amount for a fixed period at regular intervals. This amount can be as low as INR 500 and you can choose this amount according to your investment goals and monthly income. The best thing about an SIP is you can also choose the interval at which you want to invest this fixed amount – weekly, monthly, quarterly, half-yearly, or even annually.

There are several benefits of investing in SIPs. With SIP investments, you can earn a huge return over time with your mutual fund due to the ‘Power of Compounding’ feature. Like, when you start an SIP, you start to make a habit of investing an amount every month, which ultimately brings discipline into your overall finances.

In the past few years, SIP has become one of the preferred investment tools among investors. It helps people in achieving their financial goals without any stress.

Waiting Period

Everyone knows the importance of having insurance. It can be of different types such as Health, Life, Accidental, liability, etc. But more than this, it is important to know the basic terms related to insurance. One of such important one is the Waiting Period on your Insurance Policy.

So what does a waiting period mean? The waiting period is a fixed number of years that insurance companies keep in their hands before the customers can enjoy the certain benefits of the insurance policy. It starts after you buy a particular policy. In short, you can call this a ‘Hibernation Period’ during which you cannot make any claims regarding the policy. This period generally ranges from a period of 1 year to 4 years.

The waiting period tends to change from one company to another and also from one customer to another. As soon as the waiting period completes, you are allowed to get those restricted benefits. Most of the time, the waiting period depends on the health-based profile of the customers. So, if you opt for insurance at a young age, the waiting period could be shorter as the chances of being healthier are higher.

Surrender Value of the Policy

Surrender value, also known as Cash value or Policyholder’s Equity, is another important financial terminology related to the traditional Life Insurance Policy. Every policy has a fixed maturity period. It means after this maturity period, you will get the total maturity value. Let’s say an individual wants to discontinue the policy before the maturity, will he or she get the full maturity amount? The answer to this question will be a No. In case a policyholder decides to exit before the fixed maturity date, the surrender value of the policy will be given to the customer.

You also need to remember that a policy only acquired surrender value when you have paid the premium for at least three years, except for some Unit Linked Insurance Policies. So, the surrender value of a policy will be low during the initial years of the policy. The role of surrender value becomes crucial when you want to opt for a Loan Against Life Insurance Policy.

As several people believe that the loan amount in this facility depends on the overall value of the policy which is not true. Lenders provide the loan amount according to the Surrender Value of the policy that ranges from 85% to 90% of the surrender value.

Zero-Cost EMI

Zero-cost EMI is one of the most popular services among credit card users. If you use a credit card, you must have come across this term. If not, you must have seen this term on several online shopping websites/apps for different products such as appliances, Laptops, smartphones, etc. So what exactly does this financial terminology mean?

Well, to explain in simple terms, a Zero-cost EMI offers you a service through which you can buy a product with your credit card. You can pay the amount in easy monthly installments with zero interest on the amount. The lender may charge a certain one-time processing fee (plus GST charges) for this service. This fee will change from one lender to another. Let’s understand this with an example.

Let’s say you want to buy a smartphone worth IRN 54,999 with your HDFC Bank Credit Card . So, when you opt for a Zero-cost EMI plan, the bank will continue to charge interest on the plans as per the current rate of 15% per annum. However, you will be getting this interest to be charged as the upfront discount from the bank. So, if you are opting for a 6-month EMI plan, the interest amount of INR 2,328 will be your upfront discount. You will only need to pay INR 9,167 every month as the EMI amount on your credit card.

The Zero-cost EMI is perfect for those customers who cannot afford to purchase expensive goods and services by paying the full amount in one go. There are no hidden costs involved when you opt for Zero-Cost EMI. There are several platforms across different categories, such as Travel, Fashion, Health, Furniture, Education, etc.