A4: Managing Personal Finance

Question 1

What do banks and building societies offer?

Answer 1

Banks building societies and other providers of financial services offer a range of products to match the needs of different individuals. Financial services include borrowing

Question 2

What are all the different types of borrowing?

Answer 2

•overdrafts, • personal loan, •hire purchase, •mortgage, •credit card, •payday loan

Question 3

What is an overdraft?

Answer 3

This allows you to withdraw money that you don’t have from a current account.
It may be suitable to meet short term needs e.g shortage of cash before payday.

Question 4

Is an overdraft a short-term or long-term source of borrowing?

Answer 4

Short term

Question 5

What are the advantages of overdrafts?

Answer 5

• interest is charged only on the amount outstanding
• can be paid off without penalties
• an overdraft facility can be prearranged and only used if needed.
• provides a short term solution to cash flow problems

Question 6

What are the disadvantages of an overdraft?

Answer 6

• when used, interest charges are often high
• additional penalty charges for going over a prearranged limit are often high
• Not the cheapest form of borrowing
• could encourage overspending

Question 7

What is a personal loan?

Answer 7

Gives you the ability to borrow a set amount of money, normally for a specific purpose, to be paid back in regular instalments with interest

Question 8

When is a personal loan suitable?

Answer 8

To fund the purchase of a high price item such as a car or to make house improvements

Question 9

What are the advantages of a personal loan?

Answer 9

• regular pre agreed payments make planning and budgeting easy
• as a general rule personal loans can only be issued to individuals who can prove their ability to make the repayments
• useful when looking to purchase a specific item of medium to high value e.gg a car

Question 10

What are the disadvantages of personal loans?

Answer 10

• may have to be secured against an asset which means if payments are missed the asset may be taken to cover the outstanding debt.
• not really suitable for short term loans.

Question 11

What is a hire purchase?

Answer 11

This allows you to have a use of an item immediately but pay for it in regular instalments. The item remains the property of the seller until all instalments have been made.

Question 12

When is it suitable to use a hire purchase?

Answer 12

For one-off or infrequent purchases e.g. a TV, fridge freezer

Question 13

What are the advantages of hire purchase?

Answer 13

• spreads the cost of an expensive item over a period of time.
• credit is secured against a specific item
• often allows customers to afford something now that they could not otherwise afford, e.g. four years imterest free on furniture.

Question 14

What are the disadvantages of hire purchases?

Answer 14

• interest charges may be higher than other traditional loans
• ownership of the asset may legally be kept by the seller until the final payment is made
• agreements can be manipulated to make a purchase seem deceptively appealing

Question 15

What is a mortgage?

Answer 15

It is a long term loan to fund the purchase of assets, normally paid back over a long time e.g. 25 years. It is secured against an item e.g a house.

Question 16

When is it suitable to get a mortgage?

Answer 16

It is suitable for assets that will maintain value for a long time and cannot normally be paid for outright.

Question 17

What are the advantages of a mortgage?

Answer 17

• allows the customer to spread the cost of expensive items over a long period of time e.g the purchase of a house is often spread over 25 years

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