Gain a Financial Edge by Understanding these Basic Banking Terms

With the wide variety of banking tools now available online, managing your finances has never been easier. You might not realize it, but there are basic banking products that can help you make the most of your money, and you can access them conveniently from the comfort of your home.

If you’d like to increase your savings potential, first you’ll need to understand these basic banking terms and offerings. This guide will teach you more about basic banking, as well as help you discover ways to be proactive about your financial future. After all, no one knows your personal finances better than you, and the more informed you are about banking terms and products, the further you can grow your savings.

In addition to saving options that can offer you higher yield returns on your money, there are plenty of lower-cost lending and refinancing solutions that allow you to borrow the money you need for major purchases. By understanding the following basic banking terms and banking products, you can optimize your finances in order to earn more on what you save, and pay less on what you borrow.

Borrowing terms and products - Annual percentage rate (APR) refers to the amount of money that you are charged each year for the use of a loan or line of credit. Bankrate.com, an objective source that provides free financial information to consumers, defines APR as, "a yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans." This percentage is usually based on credit worthiness and the terms of agreement for the loan or line of credit you are seeking. Essentially, a loan with a low APR is ideal.

Home equity loan - With a home equity loan, typically you can borrow as much as your equity position will allow. For example, if the value of your home is $250,000, and you still owe $150,000 on your mortgage, you may not borrow more than the difference of $100,000. Some lenders do not offer 100 percent LTV (loan to value), too, so check with your financial institution for specific details. A lump-sum home equity loan may be best suited for major purchases, to consolidate your bills or re-organize your finances.

Home equity line of credit - In addition to a home equity loan, a trustworthy credit history can qualify you for a home equity line of credit, or HELOC. You may use the credit line that is extended to you for purchases entirely up to your discretion, such as financing an education, making home improvements or paying for car repairs. Rather than a lump-sum loan as you would receive with a home equity loan, a home equity line of credit is a revolving line of credit similar to that of a credit card.

Deposit terms and products to know - Annual percentage yield (APY) refers to the percentage of your funds that you receive as a return for keeping it in the bank. An APY can allow you to earn more on what you save. Generally speaking, the higher the APY, the more savings you will accrue over time.

Checking account - A checking account is a central account from which you can frequently deduct or deposit your funds, and can be a great way to manage your day-to-day expenses. In addition to providing access in person or by phone, mail and ATM, most major banks offer free Internet banking, which allows you to your account 24/7 online. In most cases, you can view your account history, and sign up for convenient features, such as automatic bill pay, too.

Savings account - A savings account may require a low daily minimum balance, and usually offers you a lower APY on your money when compared to other deposit products. This type of account is ideal if you have funds that you would like to simply set aside and allow to accrue interest over time, but might need to access occasionally.

Certificates of deposit - This type of savings account requires that you agree to a set term length for the account. You cannot access your money for the duration of the term. If you do, you may pay a penalty for early withdrawal. With a higher minimum balance than you would need for a traditional savings account, this option is great if you would like to set aside funds for an occasion or purchase a few years down the road, and would like it to accrue interest in the meantime.

Money market account - Also known as a money market deposit account, a money market account is a savings account that is on the fast track to acquiring additional savings. This account requires a larger minimum opening and daily balance, but typically yields a higher return on your money than a traditional savings or checking account, and there is no required term length. This is a great account if you have a larger sum of money that you would like to earn interest on quickly and can afford to set aside, but still want to retain access to in case of an emergency. In addition, a money market deposit account is FDIC-insured up to $250,000 per depositor, and not at risk of losing its principal value. As a reminder, On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2013

Now that you are ready to begin utilizing the variety of banking products available to help you manage your money, you’ll need to find an online bank that can offer you convenient features to fit your lifestyle. Look for a financial institution that takes the time to get to know you, and tailors products to meet your specific needs, such as a

By Mary Malbasa Published: 7/21/2009