Category: Finance Cheat Sheet

Top Fintech Jargons: Decoding the Language of Financial Technology

In the fast-paced world of finance, staying on top of the latest trends and technologies is crucial. One of the most dynamic areas in finance today is Fintech, short for Financial Technology. Fintech has revolutionized the way we manage money, invest, and transact. However, it comes with its own set of jargons that can be perplexing for the uninitiated. In this article, we’ll decode the top Fintech jargons/Buzzwords, making it easier for you to navigate this exciting field.

Table of Contents

1. Introduction
2. Blockchain: The Foundation of Fintech
3. Cryptocurrency: Digital Money
4. Neobanks: The Future of Banking
5. Peer-to-Peer (P2P) Lending: Revolutionizing Loans
6. Robo-Advisors: Automated Investment Management
7. Regtech: Regulatory Technology
8. Insurtech: Transforming Insurance
9. Artificial Intelligence (AI) and Machine Learning (ML)
10. Tokenization: Digitizing Assets
11. Decentralized Finance (DeFi): Financial Freedom on the Blockchain
12. Initial Coin Offering (ICO) and Security Token Offering (STO)
13. Smart Contracts: Self-Executing Contracts
14. Biometrics: Enhanced Security
15. Conclusion
16. FAQs

Introduction

Fintech, a fusion of finance and technology, has disrupted traditional financial services. To understand this realm better, let’s delve into some key Fintech Jargons/Buzzwords:

Blockchain: The Foundation of Fintech

Blockchain is the cornerstone of many Fintech innovations. It’s a distributed ledger technology that ensures secure and transparent transactions. Imagine it as a digital ledger shared among a network of computers. Each transaction is recorded in a “block,” creating a chain of transactions. Blockchain’s decentralization and cryptographic security make it resistant to fraud.

Cryptocurrency: Digital Money

Cryptocurrency is a digital or virtual form of currency that uses cryptography for security. Bitcoin, Ethereum, and Ripple are well-known examples. These digital coins can be used for online transactions, investments, or even as a store of value.

Neobanks: The Future of Banking

Neobanks are digital-only banks that operate exclusively online. They offer services like checking accounts, savings accounts, and payments without the need for physical branches. With user-friendly apps and competitive rates, neobanks are changing the way people bank.

Peer-to-Peer (P2P) Lending: Revolutionizing Loans

P2P lending platforms connect borrowers directly with individual investors. By cutting out traditional banks, borrowers often get better rates, while investors earn attractive returns. It’s a win-win for both parties.

Robo-Advisors: Automated Investment Management

Robo-advisors use algorithms and AI to provide automated, low-cost investment advice. They create and manage diversified portfolios based on an individual’s risk tolerance and financial goals, making investing accessible to all.

Regtech: Regulatory Technology

Regtech uses technology to help financial institutions comply with regulations efficiently. It streamlines tasks like risk management, reporting, and compliance, reducing the burden of red tape.

Insurtech: Transforming Insurance

Insurtech leverages technology to enhance the insurance industry. It includes innovations like usage-based insurance, AI-powered claims processing, and digital policy management, making insurance more accessible and affordable.

Artificial Intelligence (AI) and Machine Learning (ML)

AI and ML are integral to Fintech. AI algorithms analyze vast amounts of data to detect fraud, predict market trends, and personalize financial services. ML allows systems to learn from data and improve over time.

Tokenization: Digitizing Assets

Tokenization converts assets like real estate, art, or stocks into digital tokens on a blockchain. It facilitates fractional ownership, liquidity, and easier transfer of traditionally illiquid assets.

Decentralized Finance (DeFi): Financial Freedom on the Blockchain

DeFi aims to recreate traditional financial services using blockchain technology. It offers decentralized lending, borrowing, trading, and more, reducing the need for intermediaries like banks.

Initial Coin Offering (ICO) and Security Token Offering (STO)

ICO and STO are methods of raising capital in the crypto space. ICOs issue tokens that represent a stake in a project, while STOs offer tokens backed by real assets, providing greater investor protection.

Smart Contracts: Self-Executing Contracts

Smart contracts are self-executing agreements with the terms of the contract directly written into code. They automate processes and eliminate the need for intermediaries, enhancing trust and efficiency.

Biometrics: Enhanced Security

Biometrics, such as fingerprint or facial recognition, is used for authentication and security in Fintech. It ensures that only authorized individuals can access sensitive financial information.

Conclusion

The world of Fintech is rapidly evolving, and understanding these jargons is essential for anyone looking to navigate the financial landscape of tomorrow. From blockchain to smart contracts, these technologies are shaping the future of finance.

FAQs

1. What is the difference between Bitcoin and Ethereum? Bitcoin is primarily a digital currency, while Ethereum is a platform for building decentralized applications (DApps).
2. How can I invest in cryptocurrencies? You can invest in cryptocurrencies through cryptocurrency exchanges or investment platforms.
3. Are neobanks safe to use? Neobanks prioritize security and are regulated like traditional banks, making them a safe choice.
4. What is the advantage of using robo-advisors? Robo-advisors offer low-cost, automated investment management with personalized strategies.
5. How can tokenization benefit real estate investments? Tokenization allows for fractional ownership, making real estate investments more accessible and liquid.

Unlock the potential of Fintech by understanding these jargons and stay tuned for the latest innovations.

A credit score is a three-digit number that lenders use to assess your creditworthiness. It ranges from 300 to 900, with a higher score indicating a lower risk to lenders.

There are five main factors that are used to calculate your credit score:

1. Repayment history (IMPACT – High): This is the most important factor, and it accounts for 35% of your credit score. Lenders want to see that you have a history of making your payments on time.
2. Credit utilization report (IMPACT – High): This is the percentage of your available credit that you are using. A low credit utilization, typically below 30%, is considered good.
3. Credit history length (IMPACT – Medium): Lenders prefer borrowers with a longer credit history. This shows that you have been managing credit responsibly for a longer period of time.
4. Credit mix (IMPACT – Low): Lenders want to see that you have a variety of credit accounts, such as credit cards, loans, and lines of credit. This shows that you can manage different types of credit.
5. Recent credit inquiries (IMPACT – Low): Lenders may be concerned if you have a lot of recent inquiries on your credit report. This could indicate that you are applying for a lot of credit, which could be a sign of financial trouble.

By understanding the factors that affect your credit score, you can take steps to improve it. Here are some tips:

• Pay your bills on time. This is the most important thing you can do to improve your credit score.
• Keep your credit utilization low. Aim to keep your credit utilization below 30%.
• Avoid opening new accounts too often. Opening a lot of new accounts in a short period of time can hurt your credit score.
• Pay down debt. The less debt you have, the better your credit score will be.
• Request a copy of your credit report and review it for errors. If you find any errors, dispute them immediately.

By following these tips, you can improve your credit score and get the best possible terms on loans and credit cards.

Free CIBIL Score Checker

Loan terminology is the language used to describe the different aspects of a loan, such as the interest rate, fees, repayment terms, and collateral. It is important to understand loan terminology before you apply for a loan so that you can make an informed decision.

Some of the most common loan terminology terms include:

• Fixed obligation to income ratio (FOIR)
• What Are: Daily Reducing, Monthly Reducing And Yearly Reducing?
• Prepayment penalty or foreclosure charges on your loan
• What is a Top-Up Home Loan?
• What is Balance Transfer?
• What is Debt-to-Income Ratio?
• What is Pre-EMI Interest?
• What is Amortisation?
• Calculation of Amortization Schedule?
• What is Loan to Value Ratio?
• What is a Fixed Rate of Interest?
• What is the Base Rate and BPLR?
• What is a Floating Rate of Interest?
• What is an EMI? How is it calculated?
• What is a Down payment or Own Contribution?
• Home Insurance Vs Home Loan Insurance

Source: https://www.care2earn.in/

Are you familiar with “The Golden Rule” that lenders employ to assess your Expense-to-Income Ratio during a bank statement analysis?

What is a debt-to-income ratio?

DTI stands for debt-to-income ratio. It is a measure of how much debt you have compared to your income. Lenders use your DTI to assess your ability to repay a loan. A higher DTI means that you have less disposable income to make loan payments, which can make it more difficult to qualify for a loan.

It’s frequently advised that only 50% of your earnings should be allocated to expenses.

However, how can we establish a prudent level of debt?

The 28/36 Rule in lending refers to a widely used guideline that helps financial institutions assess the financial stability of loan applicants.

1. Housing Ratio (28%): According to this rule, a maximum of 28% of the borrower’s gross monthly income should be allocated to housing-related expenses. These expenses may include rent or mortgage payments, property taxes, homeowners insurance, and sometimes even homeowner association fees.
2. Total Debt Ratio (36%): The rule also specifies that the borrower’s total monthly debt payments, including housing costs as well as other debts like car loans, student loans, and credit card payments, should not exceed 36% of their gross monthly income.

By adhering to the 28/36 Rule, lenders aim to ensure that borrowers have a reasonable balance between their income and financial obligations. This guideline helps prevent borrowers from taking on more debt than they can comfortably manage, promoting responsible borrowing practices and reducing the risk of default.

What is good DTI ratio?

Debt-to-income ratio of 36% or less

With a DTI ratio of 36% or less, you probably have a healthy amount of income each month to put towards investments or savings. Most lenders will see you as a safe bet to afford monthly payments for a new loan or line of credit.

This principle guarantees a well-rounded approach to financial commitments and aligns with the overarching objective of maintaining a robust Expense-to-Income Ratio for borrowers.

A personal loan is a type of loan that is not secured by collateral. This means that the lender does not have any assets that they can seize if the borrower defaults on the loan. Personal loans are typically used for consolidating debt, paying for major expenses, or making home improvements.

Here are some of the important terms that you need to know about personal loans:

• Annual Percentage Rate (APR): The APR is the total cost of a loan expressed as a yearly percentage. It includes the interest rate, fees, and other charges.
• Application fee: A fee charged by a lender to cover the costs of processing a loan application.
• Automatic Payment: It is one of the repayment options for your personal loan. By choosing automatic payment facility, your monthly EMIs will be deduced directly from your bank account on a particular day each month and you won’t have to do it manually each time.
• Balloon payment: A large final payment that is due at the end of a loan term.
• Borrower: A borrower is someone who takes a loan from a lender.
• Collateral: An asset that is pledged to a lender as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral.
• Credit score: A number that lenders use to assess a borrower’s creditworthiness. It is based on a borrower’s payment history, debt-to-income ratio, and other factors.
• Credit Agency: They are organisations that review your credit information and create credit reports that can be checked by lenders to determine your eligibility for a personal loan.
• Credit History: It is a record of all the borrowing and repayment transaction an individual has undertaken. It is one of the most crucial factors that determine an individual’s eligibility for a personal loan.
• Credit Report: It is a report generated by a certified credit rating agency showing an individual’s credit history.
• Debt-to-income ratio: The percentage of a borrower’s monthly income that is used to repay debt. Lenders typically want borrowers to have a debt-to-income ratio of no more than 40%.
• Debt Consolidation Loan: These are loans that can be taken to combine all your debts into one. These loans come with lower interest rates and are ideal if you have multiple loans to repay in addition to credit card dues to clear. They club all your debts under a single umbrella, thereby effectively ensuring that you have only one loan to clear.
• Default: In case a borrower does not meet the legal obligations of a loan, he/she is said to be defaulting on the loan.
• EMI: The equated monthly installment (EMI) is the amount of money that a borrower must pay each month to repay a loan. It is calculated by dividing the principal amount of the loan by the loan term and the interest rate.
• Fixed Interest Rates: Interest rates that remain unchanged over the tenure of the loan are called fixed interest rates.
• Floating Interest Rates: As opposed to the working mechanism of fixed interest rates, floating interest rates are those that keep changing over the tenure of the loan.
• Grace period: A period of time after the due date of a loan payment during which the borrower does not have to pay any interest or penalties.
• Interest rate: The percentage of the principal amount of a loan that is charged by the lender as interest.
• Late Payment: When you delay your monthly EMI payments, it is called late payment and lenders usually charge a late payment fee to customers who do not make their payments on time.
• Lender: A lender is usually a bank or a financial institution that lends money to borrowers.
• Line of Credit: Lines of credit are essentially loans that do not require any kind of security or collateral and are usually offered at variable interest rates.
• Loan agreement: A legal document that outlines the terms and conditions of a loan, such as the amount of the loan, the interest rate, the repayment period, and the fees.
• Loan term: The length of time that a borrower has to repay a loan.
• Payday Loans: These loans are unsecured personal loans that can be availed based on your job. They are ideal for financial emergencies. In case you run short of money towards the end of the month, payday loans can be taken for a few days and the repayment can be done once your salary is credited to your account.
• Prepayment penalty: A fee that a borrower may have to pay if they repay a loan early.
• Prepayment Fees: In case you wish to repay your loan ahead of schedule, you will be charged a prepayment fee. Not all lenders charge this fee, but those that do levy a charge in order to recover some of the money they were expecting to collect as interest on the loan.
• Principal Amount: The principal amount of a loan is the amount you borrow, exclusive of fees or interest.
• Processing fee: A fee charged by a lender to cover the costs of processing a loan application.
• Secured loan: A loan that is backed by collateral. If the borrower defaults on the loan, the lender can seize the collateral.
• Term: It is the tenure of the loan – the time frame given to you to repay the amount borrowed.
• Unsecured loan: A loan that is not backed by collateral. If the borrower defaults on the loan, the lender cannot seize any assets.

These are just some of the most common terms used in lending in India. It is important to understand these terms before you apply for a loan.

The six basic C’s of lending are:

• Character: The borrower’s willingness and ability to repay the loan.
• Capacity: The borrower’s income and expenses.
• Capital: The borrower’s assets and net worth.
• Collateral: The security that the borrower pledges to the lender.
• Conditions: The economic and market conditions.
• Credit score: The borrower’s credit history.

Lenders will consider all of these factors when making a lending decision.