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Introduction to credit > 2 - Credit products and services > Flashcards

2 - Credit products and services Flashcards

1
Q

What is the original form of lending?

A

Overdrafts

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2
Q

What is an overdraft?

A

A negative balance on an account

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3
Q

How are overdrafts governed?

A

By a limit sanctioned by the account manager

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4
Q

What are system driven limits?

A

Automatically set to agreed parameters and are dependent on account behaviours over a period of time

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5
Q

How is interest charged on overdrafts?

A

Only on outstanding daily balance amd the rate fluctuates - normally tied to base rate.

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6
Q

If an overdraft has been agreed for longer than a year how often should it be reviewed?

A

Annually

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7
Q

The regulated agreement criteria for personal loans is set out in?

A

The credit consumber act 1974 and 2006

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8
Q

What is revovling credit?

A

Allows the customer to draw on funds set up to a fixed limit - while repaying monthly

Similar to a credit card

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9
Q

Who are revolving credit accounts aimed at?

A

Professional type of customer with good income

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10
Q

What is the minimum payment on credit cards?

A

£5 or 5% - Whichever is larger.

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11
Q

When you withdraw cash on a credit card it is know as ?

A

A cash advance on which interest is charged.

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12
Q

How many days interest free can a customer obtain using a credit card?

A

56 days

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13
Q

Why are lenders prepared to lend large amounts on house purchases?

A

A restriction on the amount of the mortgage would reduce opportunities for young people. It would also have an adverse impact on the construction sector.

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14
Q

What are the benefits of having a deposit?

A

Reduces overall risk
Customer able to show that they can budget for savings

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15
Q

What are the main ways of repaying a house purchase?

A

Capital and interest loan
Interest only

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16
Q

What are the benefits of capital and interest loan (mortgage)?

A

Easier for customers to understand

Repayments may be less that interest only

Customer can reduce the amount outstanding

The loan paid off in full at the end of the term

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17
Q

What repayment vehicles are used to repay an interest only loan (mortgage)?

A

Endowment policy
Personal pension plan
ISA

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18
Q

What is the main problem with Interest only mortgages?

A

That there is no guarantee that there will be enough money to make the repayment in full

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19
Q

If an endowment policy is being used to repay a interest only mortgage and the stock market is performing a lower level, what will policyholders be advised to do?

A

Increase the level of premiums they pay

Arrange to set aside additional funds to meet shortfall

Extend the term of the loan

Convert all or part of the loan into capital and repayment.

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20
Q

Why are ISA mortgages attractive form of saving?

A

Tax free, all gains are exempt from capital gains tax

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21
Q

What percentage tax reduction do dividends receive if paid into a ISA or pension?

A

10%

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22
Q

From what age can a person withdraw from their pension?

A

55

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23
Q

What are disadvantages of a personal pension mortgage?

A

No guarantee of the final sum paid.

May be expensive to fund both mortgage interest and personal pension

May be difficult to understand

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24
Q

What is a positive about variable rate home loans?

A

If the interest rates fall and you are able to maintain current levels of repayments you will be repaid sooner.

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25
Q

What is a positive of fixed interest rates?

A

Customer can budget their money as the interest and repayments are set for a period of time. Also will gain if interest rates rise above their fix.

26
Q

What is a negative of fixed interest rates?

A

Customer could lose out on period of falling interest rates

27
Q

Capped interest rates- What are they?

A

Maximum level of interest is set, the variable rate can not rise above this. The advantage to the borrower is that they know the maximum amount of their repayments.

28
Q

What are discounted interest rates?

A

Variable rated but reduced for the early part of the loan - i.e discount of 2% for 2 years then back to the normal variable rate.

29
Q

What are flexible mortgages?

A

Allows the borrower to suspend payments temporarily or reduce level of repayments such as to cover a shortfall in income.

30
Q

What is a current account mortgage?

A

Customers loan and current account are amalgamated into one.

31
Q

What are the advantages of a current account mortgage?

A

Each month’s salary credited into the account will reduce the total amount outstanding. Therefore, the interest accruing on the balance is lower. The customer may be able to repay their mortgage sooner.

32
Q

What are home purchase plans?

A

Sharia compliant mortgages - Based on Ijara and Murabaha methods.

33
Q

What is the Ijara method?

A

The bank purchase the property.

The property is then sold to the customer at the original price with payments spread over the agreed period of time.

During the repayment period the customer also pays rent to the bank for use of the property.

Once the customer has repaid the property the ownership is then transferred to them.

34
Q

What is the Murabaha method?

A

The bank purchases the house for the customer at a price and then sells it to the customer for a higher price.

The amount of the higher price is determined by the value of the property and the number of years which the bank allows the amount to be repaid.

35
Q

When is bridging finance required?

A

When a major purchase precedes a major sale. The timing difference means there is a large deficit in funds for a short period of time.

36
Q

In Scotland, What security is taken for a bridging loan?

A

An irrevocable mandate which is a letter from the customer addressed to their solicitor requesting that the free proceeds of the sale of the old home are sent to the lender.

37
Q

In England and Wales, what security is taken for a bridging loan?

A

Letter of undertaking is issued by the customers solicitors, addressed to the lender stating that they will remit the free sale proceeds.

38
Q

What is open bridging?

A

Covers situations where the date of the sale of the asset that is to repay the bridging loan has not been agreed. I.e brought a new property but not yet sold the current property.

39
Q

What is closed bridging?

A

When a date of the sale of the asset that is to repay the bridging loan has been confirmed.

40
Q

Other than property what else can a bridging loan be used for?

A

Purchase a car based on the proceeds of shares.
These can also be covered by overdrafts.

41
Q

What are term loans used for?

A

Purchase of an asset where the term of the loan is tied into the useful life of the asset.

42
Q

How does a hire purchase work?

A

The lender owns the asset on behalf of the customer and after providing an initial deposit the customer pays up the balance including interest - after final payment the asset becomes the customers.

43
Q

How does a leasing agreement work?

A

Ownership of the asset does not pass from the leasing company to the customer. it is a rental scheme.

44
Q

Why are lease agreements cheaper than hire purchases?

A

Lease agreements get tax relief which the leasing company receives on the capital expenditure and is passed onto the customer in the leasing charge.

45
Q

With self builds what potential funding options are there?

A
  • In arrears on confirmation of stage completion (most common).
  • In advance dependent on individual proposition, such as LTV.
46
Q

What type of loan is a self build?

A

An overdraft - not a mortgage.

47
Q

Self build - when the house is completed what happens with the funding?

A

a mortgage is drawn to repay the overdraft.

48
Q

What two valuations are required when dealing with a self build?

A
  • At the start - A current and projected end valuation.
  • At the end - A revaluation - prior to mortgage being drawn down.
49
Q

What are the normal stages in a self build project?

A
  • Completion of the foundations
    -Delivary of kit
    -Erection of kit
    -Wind and water tight
  • Formation of rooms to plasterboard
    -Final stage
50
Q

With self builds, at the completion of each stage a formal certificate is required from who?

A

-Qualified architect
-NHBC solo inspector
- A structural engineer
-Some other suitably qualified pro i.e quantity surveyor.

51
Q

The maximum and minimum amounts for an overdraft are?

A

There are no minimum and maximum amounts.

52
Q

If an overdraft does not swing into credit from time to time this is called?

A

Hard core borrowing

53
Q

By careful timing of purchases, a credit card customer may obtain interest-free credit up to a maximum of:

A

56 Days

54
Q

If a maximum rate of interest is set for a loan, this is referred to as?

A

A capped rate

55
Q

What is the maximum tax-free cash lump sum that can be withdrawn from a personal pension?

A

25%

56
Q

The security taken for a bridging loan is?

A

A letter of undertaking/irrevocable mandate.

57
Q

2.1 The original form of bank lending is:
a) a personal loan
b) an overdraft
c) a mortgage
d) revolving credit

A

b) an overdraft

58
Q

A credit facility that allows the customer to draw up to a set limit which is related to a fixed payment into the account is called:
a) a personal loan
b) an overdraft
c) revolving credit
d) rotating credit

A

c) revolving credit

59
Q

With a capital and interest mortgage the lender will normally look for the customer to provide some kind of life assurance to guarantee the repayment of the loan in the event of the customer’s death. Such a policy is called a:
a) low cost endowment policy
b) family protection policy
c) paid up policy
d) mortgage protection policy

A

d) mortgage protection policy

60
Q

The type of bridging loan where the date of the sale of the asset intended to clear the loan has not been agreed is:
a) open bridging
b) closed bridging
c) confirmed bridging
d) unconfirmed bridging

A

a) open bridging

61
Q

Normally, how many valuations are required when dealing with a self-build?
a) Two
b) Three
c) Four
d) One

A

a) Two

Introduction to credit (7 decks)

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