A4 managing personal finance Flashcards
what are the different types of borrowing?
-overdraft
-personal loan
-hire purchase
-mortgage
-credit card
-payday loan
Explain an overdraft
-allows you to withdraw money that you do not have from a current account
-can be suitable for meeting short term needs
explain a personal loan
-Gives you the ability to borrow a set amount of money, normally for a specific purpose to be repaid in regular installments with interest
-may be suitable to fund the purchase of high price items such as cars
explain hire purchase
-Allows you use an item immediately but pay for it in regular installments
-item remains the property of the seller until all installments are made
-suitable for infrequent purchases e.g TV, car
Explain mortgage
-Long term loan to fund the purchase of assets (house) paid back over 25 years.
-suitable for assets that will maintain value for a long time and cannot normallly be paid for outright
explain credit card
-goods are paid for by card and can be paid for at the end of a set period (normally a month when a statement is issued) or over time with a card provider stating a minimum payment each month.
-suitable when buying high price goods or services or at times like Christmas when expenses are higher to spread the cost of spending.
-convenient and safe
explain payday loan
-short term source of finance used to bridge the gap between now and the next recieving wage.
-normally relitavely small amounts at very high rates
what are advantages of overdrafts?
-Interest only charged on the amount outstanding
-can be paid off without penalties
-can be prearranged and only used if needed
-provides short term solutions for cash flow problems
what are disadvantages of an overdraft?
-Interest charges are often high
-additional penalty charges for going over the pre-arranged limit are often high
-not the cheapest form of borrowing
-could encourage overspending
what are advantages of personal loans?
-regular, pre-agreed payments make planning and budgeting easier
-only issued to individuals with good credit ratings who can prove their ability to make repayments
-useful when looking to purchase higher value items
what are disadvantages of personal loans?
-may be secured against an asset so if payments are missed the asset may be taken to cover debt
-not suitable for short term loans
what are advantages of hire purchase?
-Spreads cost of an expensive item over a period of time
-credit secured against a specific item
-allows customers to afford something now that they could not otherwise afford
what are disadvantages of hire purchase?
-interest charges may be higher than other traditional loans
-Ownership of the asset may legally be kept by the seller until final payment is made
-agreements can be manipulated to make a purchase seem deceptively appealing
what are advantages of mortgages?
-allows the customer to spread the cost of an expensive asset over a long period of time
-interest rates (depending on the deal) can sometimes be fixed or tracked against standard rate of interest reducing risk of fluctuations.
what are disadvantages of mortgages?
-interest payments can be fixed or vary affecting borrowers ability to repay or meet other expenses
failure to meet payments may lead to a loss of a home or affect an individuals credit rating
-penalties may be applied to early repayment
