11 Common Finance Terms Everyone Needs to Know


Sometimes managing finances become a frustrating job, especially when you don’t understand the financial jargons. We have compiled a list of 11 common finance terms, which will help you in taking the various type of financing decisions.

On Road Vs Ex-Showroom Price

When a person visits any showroom to purchase a two-wheeler or four-wheeler, the salesperson generally quotes two different prices i.e. Ex-Showroom Price & On Road Price.

Ex-Showroom Price is the procurement cost of the Dealer including dealers margin and transportation cost among others.

On the other hand, On Road Price is the final price payable by the customer to the dealer. In addition to Ex-Showroom Price, it includes road tax, registration fees, insurance charges and others. Generally, On Road Price of any vehicle is around 10%- 20% higher than Ex-showroom Price.

Pre-Payment Vs Part Payment

Full Pre-payment means the borrower is repaying his entire loan before completing loan tenure. When a borrower decides to prepay a loan, some banks levy prepayment charges considering type of loan, principal outstanding as well as number of EMIs paid by borrower.

If a borrower has some surplus money that is lesser than loan outstanding, then he/she can use it to repay loan partly. Part Payment reduces principal outstanding amount which in turn might either reduce loan tenure or lower EMI amount or both. Only significant amount of pre-payment would affect loan tenure or EMIs. The lender usually doesn’t charge a penalty for such transaction.

Loan Conversion Vs Loan Balance Transfer

Generally, all lenders have conversion scheme(s) that would allow loan borrowers to reduce applicable interest rates of their existing loans. If market lending rates have reduced, then by paying a small conversion fee to your existing lender, you can do so. This process is known as loan conversion

In loan balance transfer, a borrower can transfer entire loan outstanding to a new financier at lower interest rate. Before balance transfer, the borrower has to again do all documentation related work with new lender and pay processing fee. Hence, a borrower needs to do cost benefit analysis before transferring loan.

Non-­Performing Asset Vs Written Off Asset

As per RBI Master Circular, Non-Performing Assets (NPA) are those assets, which don’t generate any income for the lender. The NPA is an advance or a loan, where:

The CIBIL report is comprised of 6 sections:

  1. 1. Interest and/or installment of the Principal amount is remaining overdue for a period of 90+ days in respect of Term Loans.
  2. 2. The account remains ‘out of order’ in Overdraft/Cash Credit.
  3. 3. Bill overdue for a period of 90+ days for Bills Purchased and Discounted.
  4. 4. For agriculture advances, the installment of principal or interest remains unpaid for 2 crop seasons for short duration crops or for 1 crop season for long duration crops.
  5. 5. The amount of liquidity facility remains outstanding for 90+ days for Securitisation transaction.

In banking and finance, the term “Write-Off” means the lender doesn’t count the money borrower owes to it. The financial statement of the lender will indicate that the written off loans are compensated through some other way. This is needed to cleanse the balance sheet of the bank. Cleaning of the balance sheet means bad assets are replaced.

There is no meaning that the borrower is pardoned or got exempted from payment. His debt will remain and recovery measures against him will continue. But on the balance sheet of the bank, a bad asset should remain bad forever.

Pledge Vs Hypothecation Vs Mortgage

Pledge is the arrangement, where the lender takes actual possession of assets. Borrower needs to provide lenders with assets worth the amount of loan taken or more. In case of default, the lender has a legal right to sell the pledged asset to recover dues. Example: Loan Against Gold or Jewelry, Loan Against NSC/KVP etc.

Hypothecation arrangement is frequently used in movable assets such as vehicles. Here, ownership of asset stays with borrower but in case of default, the lender has a right to sell the hypothecated asset such as car, bike and recover outstanding amount from the borrower.

The mortgage is applicable to the immovable assets such as land, buildings etc. Housing loan is the best example of mortgage. In home loans, house is mortgaged in the favour of lender but remains in possession of borrower. In case of default, the legal ownership transfers to the lender

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