A4: Managing Personal Finance Flashcards
Overdraft definition
the facility to overspend on a current account up to an agreed sum
personal loans definition
a set amount of money provided for a specific purpose, to be repaid with interest over a set period of time
hire purchase definition
allows an individual to have use of an item immediately but pay for it in regular instalments. the property is only owned by the individual when the final instalment has been paid.
mortgages definition
a long term loan to fund the purchase of a property and is repaid over a long period of time e.g. 25 years.
credit cards definition
allows an individual to pay for goods or services on a card with with a statement issued at the end of each month. the balance can be paid in full without incurring interests or in smaller amounts with interest charge
payday loans definition
a short term source of finance that can help to bridge the gap between the present moment in time and receiving a wage
advantages of overdraft
Interest is charged only on the amount outstanding
Can be paid off without penalties
Can be prearranged and only used if needed
Provides a short-term solution to cash flow problems
Don’t lose ownership of the business
Easy to get
advantages of personal loans
Pay over a large period of time
Can budget as it’s the same amount every time
Don’t have to ask family or friends
Don’t lose ownership
advantages of hire purchase
Spreads the cost of an expensive item over a long period of time
Credit is secured against a specific item
Allows the customer to afford something that they wouldn’t otherwise be able to
Own the product once the final instalment has been paid
Don’t lose ownership of the business
advantages of mortgages
Allows the customer to spread the cost of an expensive property over a long period of time
Interest rates may be fixed depending on the mortgage deal
advantages of credit cards
If repaid quickly can avoid or reduce interest
Can be used for items of multiple sizes and value, to a limit, without need to secure against
advantages of payday loans
Help secure immediate short term cash flow problems
Relatively easy to secure
disadvantages of overdraft
Interest is often high
High Penalties for going over prearranged limit
Could encourage overspending
disadvantages of personal loans
Interest charged
If not paid can lead to poor credit rating
disadvantages of hire purchase
Interest charged
Ownership of the product is the sellers until final payment is made
disadvantages of mortgages
Payments can fluctuate
May not be accepted if have poor credit rating
Requires a substantial deposit e.g. 20%
Risk of repossession if payments aren’t met
disadvantages of credit cards
Can encourage overspending
Higher interest rates than on other sources of finance
disadvantages of payday loans
Very high interest rates
Individual Savings Accounts (ISAs) definition
a tax-free way to save or invest
Deposit and savings accounts definition
an account where interest is paid on the balance
Premium bonds definition
a government scheme that allows individuals to save, up to a set amount, in bonds. no interest is earned but the bond is placed into a regular draw for cash prizes
Bonds and gilts definition
these are fixed term securities where the individual lends money to companies and governments in return for interest payments
Shares definition
investments in business in return for equity. the shareholder becomes a part owner of the business
Pensions definition
long term savings plans where individuals make regular contributions through their working life. this is then repaid upon retirement, either as a lump sum or in regular payments
advantages of Individual Savings Accounts (ISAs)
no tax charged on interest
interest rates can be higher than standard savings accounts
advantages of Deposit and savings accounts
interest earned on positive balances
Accounts sometimes require regular deposits of a set amount forcing the saver to follow a savings plan
advantages of Premium bonds
Chance of winning large amounts of money
advantages of Bonds and gilts
Regular fixed returns
spread risks across range of markets
advantages of Shares
Share prices fluctuate offering potential high reward
can get payed in dividends
advantages of Pensions
Encourages individuals to save throughout their working life
Depending on policy individuals’ savings can be boosted by employer’s contribution
disadvantages of Individual Savings Accounts (ISAs)
Notice may be required to make a withdrawal
Can be a limit of number of withdrawals per year if not obeyed penalty’s my come into place
limit set on annual amount you can put in every year
disadvantages of Deposit and savings accounts
Interest earned is taxed
The percentage rate on savings is likely to be lowered than interest to be paid on borrowing, therefore the benefits of savings are lost if the customer is borrowing at the same time
disadvantages of Premium bonds
No guaranteed return on investment
can only get interest if you win
disadvantages of Bonds and gilts
Risk of losing value of investment if value falls
Interest payments may not be paid if unable to make payment
disadvantages of Shares
share prices fluctuate leading to potential high risk
no guarantee of reward
disadvantages of Pensions
movement between jobs can lead to different policies stopping and starting
If compulsory payments are deducted it can affect living standards
types of insurance
Car, Home and contents, life assurance and insurance, travel, pet, health
car insurance definition
to cover both theft and accidents - there is a legal requirement to insure any car that is on the road and this protects the driver, passengers and other road users
Home and contents insurance definition
Home - covers the physical building against events like a fire or flood damage
contents - covers the physical items inside the house and when they are used away from home.
life assurance and insurance definition
Life assurance - an ongoing policy to pay a lump sum upon death
life insurance - a policy for a set period of time (e.g. mortgage term) to pay a lump sum if you die within that period
travel insurance definition
protects individuals or groups while abroad. cover usually includes illness, loss or theft of property, cancellation and emergencies up to predetermined limits
pet insurance definition
protects the owners of pets against some or all of the expenses associated with treating an injured or sick animal e.g. vet fees
health insurance definition
covers individuals, families or employees against medical expenses including assessments, treatments and loss of earnings. in the uk, this can pay for private treatment or payment plans for routine visits e.g. to the dentist
6 Types of borrowing
Overdraft Personal loans Hire purchase Mortgage Credit card Payday loans
Net current assets
Current assets - current liabilities
Current assets
Things a business owns which can be turned into cash quickly/easily
Current liabilities
Things a business owes which have to be paid quickly
Examples of current liabilities
Overdraft, trade credit, trade payables
risks of saving
Low or zero risk as money saved is guaranteed to be available in the future
Inflation can reduce the spending power of money saved
risk of investment
Investments can go wrong and all or some of the value may be lost
No guarantee of return
rewards of saving
Interest payments
Financial security/peace of mind
rewards of investment
If successful, there is a potential for high financial return
Can be exciting
car insurance advantages
Meets legal requirement
Depending on cover can protect form damage to your vehicle, third party vehicle fire and theft
car insurance disadvantages
Premiums can be high depending on an assumed level of risk, premium is always higher for younger drivers.
Normally there is an excess e.g. first £500 has to be payed by you and rest is covered by insurance company
home and contents insurance advantages
Protects against damage that may be expensive to repair if something did happen
Contents are protected both inside and outside of the home
home and contents insurance disadvantages
Premiums are an additional expense to owning a home
some items cant be replaced due to a value beyond wealth (if their sentimental) such as inherited jewellery
life assurance and insurance advantages
Provides a peace of mind to family following the bereavement of a homeowner
life assurance and insurance disadvantages
If the homeowner doesn’t die in the period of life insurance no payment is made
travel insurance advantages
Provides protection for belongings
Covers medical costs when on holiday
Protects against cancellation
travel insurance disadvantages
The person suffering is likely to have to pay upfront costs to replace items or cover medical costs
pet insurance advantages
Avoids expensive vet fees
If fees are too high, they may have no choice but to put the pet down, insurance can prevent this
pet insurance disadvantages
An additional monthly expense to protect them against the unexpected
health insurance advantages
Provides some compensation to ill patients allowing them to focus on recovering rather than having the burden of their finances on their mind.
Some people can even have private healthcare which often results in better facilities and quicker treatment
health insurance disadvantages
Paying for something that you hope you won’t have to use
Premiums can be expensive and it won’t cover pre known conditions
