There are so many words in the personal finance lexicon that it can sometimes feel impossible to keep up. That said, welcome to The Wealth Edit’s “Weekly Words,” where we introduce you to increasingly complex personal finance vocabulary words so your vernacular grows along with your personal finance knowledge. If you have any questions about any of these terms, reach out!
Escrow
- Though probably most associated with real estate transactions, escrow can apply to any situation where funds will pass from one party to another.
- It is a legal concept describing a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction.
- The third party holds the funds until both parties have fulfilled their contractual requirements.
- With real estate, escrow can be used when purchasing a home, but also for the life of the mortgage.
Interest Rate
- The interest rate is the amount a lender charges a borrower and is a percentage of the principal (the amount loaned).
- The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate, or APR.
- An interest rate also applies to the amount earned at a bank or credit union from a deposit account.
- A borrower that is considered low risk by the lender will have a lower interest rate. A loan that is considered high risk will have a higher interest rate.
- Interest rates apply to most lending or borrowing transactions.
Supply Chain
- A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer.
- The network includes different activities, people, entities, information, and resources.
- The supply chain represents the steps it takes to get the product or service from its original state to the customer.
- Companies develop supply chains so they can reduce their costs and remain competitive in the business landscape.
- Key steps in a supply chain include
- Planning the inventory and manufacturing processes to ensure supply and demand are adequately balanced.
- Manufacturing or sourcing materials needed to create the final product.
- Assembling parts and testing the product.
- Packaging the product for shipment (or holding inventory until a later date).
- Transporting and delivering the finished product to the distributor, retailer, or consumer.
- Providing customer service support for the returned items.
Thanks as always to our friends at Investopedia for helping us clarify these sometimes confusing terms. Stay tuned for more Weekly Words next week!
