A4- Borrowing

Question 1

OVERDRAFT

Adv & Disadv

Answer 1

An overdraft is the facility to overspend on a current account up to an agreed sum. A good way to fund short-term cash shortages.
Advantages:
Interest is charged only in the amount outstanding. Can be paid off without penalties (punishments). Provides short term solution to cash flow problems.
Disadvantages:
When used, interest charges are high. Additional penalty charges for going over a prearranged limit. Could encourage overspending.

Question 2

PERSONAL LOANS

Adv & Disadv

Answer 2

A set amount of money provided to an individual/ couple for a specific purpose to be repaid with interest over a set period of time. May be secured against an asset. Interest rate can vary upon the amount of risk placed on the loan. Suitable for buying expensive items.
Advantages:
Makes budgeting easier. Gives opportunity to individuals to prove that they can make repayments. Useful for Car, Home improvement.
Disadvantages:
Asset can be taken if there’s no repayment. Not suitable for short term loans.

Question 3

HIRE PURCHASE

Adv & Disadv

Answer 3

When spreading the cost over a pre agreed period of time. The consumer gets to have the item straight away and pays in monthly instalments. The item is technically owned by the seller until al instalments have been paid.
Advantages:
Immediate use of item. So spreads the cost over a period of time. Fixed instalments.
Disadvantages:
Interest rates may be higher than other traditional loans. Ownership of the asset may be legally kept by the seller until the final payment is made.

Question 4

MORTGAGE

Adv & Disadv

Answer 4

A long-term loan to fund the purchase of an expensive item. Most common method when buying house. Payments are made over long time, 25yrs.
Advantages:
Allows customer to spread cost over long time. Interest rate is often fixed which reduced the risk of fluctuations.
Disadvantages:
Interest rate CAN vary, which affects the borrower’s ability to repay or meet other expenses. Failure to meet repayments may lead to loss of house. Penalties can be applied to early repayments.

Question 5

PAYDAY LOANS

Adv & Disadv

Answer 5

A short-term lone for relatively small amount of money to be repaid upon receipt of lenders next wage. Eases short term cash flow problems such as inability to pay rent.
Advantages:
Help solve immoderate short term cash flow problems. Relatively easy to secure.
Disadvantages:
Interest rates are VERY high and the amount to be paid back can quickly spiral out of control.

Question 6

CREDIT CARD

Answer 6

A way I’d borrowing money from lender such as a bank