Your personal finance glossary: 13 common financial terms you need to know

Figuring out how to handle your money can be stressful enough without personal finance jargon getting in your way.

Knowing the definitions behind words such as “amortization,” “deductible,” or “mutual fund” will give you a better grasp of how important financial tools such as mortgages, insurance policies and investments work. And while you’ll never understand everything, having a grasp on a few basic concepts can help you ask better questions and hone in on better answers.

So if you’d like to know the difference between stocks and bonds or how an insurance deductible works, you’ve come to the right place.

Below, CNBC Select defines common personal finance terms that will help better navigate your own money matters.

Amortization

Amortization is the repayment of a loan with fixed payments over the life of the loan. There are two main types of amortized loans: fully amortized loans and partially amortized loans.

A fully amortized loan is completely paid off at the end of the loan term and the payment never changes. Most mortgages, auto loans and personal loans, are fully amortized loans. A partially amortized loan isn’t paid off by the regular monthly payments and requires a large lump-sum payment (balloon payment) at the end to repay the loan balance. Partially amortized loans are more common in business or commercial lending.

Regardless of your loan’s amortization schedule, it’s important to shop around for the best deal. This is especially true when you’re looking for a mortgage. Be sure to compare both the interest rate and the fees. You may find the best deal with a lender that charges fewer fees, like Ally. Ally doesn’t charge application fees, origination fees, processing fees or underwriting fees, which can save you on your upfront closing costs.

Bonds

A bond is a type of investment issued by governments and corporations. When you buy a bond you’re loaning money to these entities in exchange for a fixed rate of return. Historically, bonds have lower returns than stocks but are considered safer investments.

Capital gains taxes

You pay capital gains taxes when you sell an investment or asset for a profit. If you bought a stock for $100 and sold it for $150, then the $50 profit is subject to capital gains tax. Keep in mind that if you sell an asset at a loss, you may be able to deduct a certain amount of the loss from your taxable income.

There are two types of capital gains taxes: short-term and long-term taxes. Short-term capital gains taxes are typically higher than long-term capital gains taxes.

How long you owned the asset before selling it determines what type of capital gains tax you pay. If you owned an asset for more than a year, you’ll pay long-term capital gains tax. If you owned an asset for a year or less, you’ll pay short-term capital gains tax.

Credit score

Your credit score is a number lenders use to determine how likely you are to repay a debt. A borrower with a higher credit score is considered less risky and typically will have an easier time getting approved for a loan that will have favorable terms, such as a lower interest rate.

Your credit score is based on the information collected by the three major credit reporting bureaus — TransUnion, Equifax and Experian — which then appears on your credit report. The most popular credit scoring model is FICO®, but there are others (most notably VantageScore).

Deductible

An insurance deductible is an amount you pay out of pocket before the insurance coverage kicks in. Depending on the type of insurance, you could pay a deductible per incident or per year.

Homeowners insurance and car insurance typically have a set deductible you pay every time you make a claim. The deductible for health insurance is usually based on what you pay in total throughout the calendar year.

Index fund

An index fund is a passive type of investment fund tied to the returns of a particular stock market index, such as the S&P 500 or Nasdaq 100. When you purchase a share of an index fund you are investing in a large group of stocks all at once. This way your investment is more diversified, which exposes you to less risk than buying stock from an individual company.

Inflation

Inflation is the rise in prices that happens over time. Because of inflation, every dollar loses purchasing power over time.

Insurance premium

An insurance premium is what you pay to be covered by an insurance policy. You may pay your premium every month, once a year or something in between, depending on the policy and the options the insurance company offers. In some cases, you may get a discount for paying for a full year upfront instead of opting for monthly payments.

Interest

Interest is the ongoing fee a lender charges a borrower for giving them a loan. It’s typically expressed as a percentage of the money that is borrowed.

When you take out a loan, you pay the bank interest. But when you deposit money at the bank (as long as it’s an interest-bearing account) you earn interest (because the bank will use those deposits to fund its own investments, essentially making you the “lender” in the relationship). When you earn interest it’s also called a yield. So a 4% yield on a certificate of deposit (CD) means you earned 4% in interest.

Right now is a great time to reevaluate where you’re keeping your savings because interest rates are high. The best high-yield savings accounts have yields of well over 4%, like the LendingClub High-Yield Savings account, which is offering a 4.25% interest rate and has no monthly fees or minimum balance requirement.

Mutual fund

A mutual fund is an investment fund that is typically actively managed, which means investments within the fund are bought and sold in an attempt to outperform the markets. Mutual funds and index funds are similar because you are investing in a variety of stocks or other assets. However, because they are actively managed, mutual funds typically charge you higher fees.

Secured loan

A secured loan is a type of loan that is backed by an asset the borrower owns, which is known as collateral. If the borrower stops paying the loan, the lender can take ownership of the asset to recoup their losses.

Common types of secured loans are auto loans and home loans. Secured loans are less risky for the lender than unsecured loans and typically have lower interest rates.

Stocks

Stocks are a type of investment that gives you partial ownership in a company. Stocks increase or decrease in price based on market factors. Some stocks pay dividends, which is a share of the company’s profits that is paid to stockholders. By owning a stock, you may also have the ability to vote on certain company decisions, like the board of directors election or company mergers and acquisitions.

Unsecured loan

An unsecured loan is a type of loan that isn’t backed by any of the borrower’s assets. Unsecured loans are riskier for lenders because there is no collateral the lender can claim if the borrower stops making payments, so these types of loans tend to have higher interest rates. Common unsecured loans include credit cards, personal loans and student loans.

Understanding fundamental personal finance terms can go a long way toward helping you make informed decisions with your money. By understanding the difference between a secured and unsecured loan (for example), you increase your chances of finding the best type of loan to help you achieve your goals. And knowing the differences between index funds and mutual funds increases your chances of picking a better long-term investment.