Many of us glaze over when we hear conversations about compound interest, prime lending rates or third-party payments, but it’s worth understanding these terms that can directly affect your wallet.

Annual Percentage Rate (APR)
Annual percentage rates provide an indication of how much interest you will be charged on a loan. Usually, the higher the APR on a loan, the more you'll have to pay in interest (assuming that all other things are equal). You can compare APR rates between different banks to get an indication of which is more expensive. If you are looking around for a loan, you usually want as low an APR rate as possible. However, you should also be on the lookout for other costs, such as administration fees, legal fees or penalties should you decide to settle the loan early.

Annual Percentage Yield (APY)
Annual percentage yield is the amount you earn on an interest-bearing investment in a year, expressed as a percentage. For example, if you earn R60 on a R1000 investment between January 1 and December 31, your APY is six percent. When the APY is the same as the interest rate on an investment, you are earning simple interest. But when the APY is higher than the interest rate, the interest is being compounded, which means you are earning interest on your accumulating interest – a good way to make your money grow even faster.

Compound Interest
Compound interest is calculated not just on the original amount but also on the interest that has already been earned. Compound interest can be frightening if you owe money as you’re being charged interest not just on the debt, but also the interest you owe. If you’re saving, it can be a tremendously powerful tool, as you earn interest on your savings as well as on all the interest you’ve earned. Without compounding, you earn simple interest, and your investment doesn't grow as quickly.

For example: If you earn 10 percent compound interest on R100 every year for five years, you'll have R110 after one year, R121 after two years, R133.10 after three years, and R161.05 after five years for total growth of 61.1% on your investment. With simple interest, you would have earned R10 a year for five years, for R150, or 50% growth. The R11.05 difference is the effect of compounding. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can be calculated annually, monthly or daily.

Fixed-Rate Loan
A fixed-rate loan is a loan with a set rate of interest that either does not vary for the entire life of the loan or is set or ‘fixed’ for a specified period (months or years). This can be particularly useful if interest rates are increasing, as you can set the interest rate you pay regardless of what happens to interest rates during the period of the loan.

Floating or Variable-Rate Loan
A variable-rate loan means that the interest rate you are charged will change according to the increasing and decreasing movement of interest rates. The advantage of a variable-rate loan is that when interest rates are low your repayments will be low. If interest rates rise however, your repayments will too. In the case of a variable-rate loan it’s wise to make sure you don’t borrow more than you could afford to pay if the rate were to rise.

Prime Rate
The prime rate is a benchmark interest rate which banks use to calculate the rate at which to lend money to creditworthy clients. As a general rule the higher the client’s risk, the higher the interest rate the banks will charge above prime. It’s one of the reasons why it’s worth maintaining a good credit record.

A Fixed Interest Rate
Will not change during the fixed period. During the fixed period the borrower knows their repayments will remain the same.

A Variable Interest Rate
Is a rate that varies depending on changes in a particular measure or index and should move up and down, or fluctuate, with the market interest rates.

Fixed-Term Savings Account (or fixed deposit)
A fixed-term savings account is an account in which the deposit is held for a fixed-term or in which withdrawals can be made only after giving notice. Most banks would offer a higher interest rate for leaving the money untouched for a longer period.

Third-Party Payment (Transfers)
Technically, both stop orders and debit orders are ways to make third-party payments, but nowadays the term is mainly used to describe making payments via the Internet or ATM. The person or company you are paying is called the beneficiary. Most Internet banking sites allow you to load beneficiaries yourself, either as a once-off or regular payment. Paying beneficiaries online is more cost-effective than using a stop or debit order and gives you more control over your finances.

This information is from Capitec Bank.