A4 Managing Personal Finance - different types of borrowing . Flashcards
what is the definition of borrowing ?
Most people will need to borrow money , for a student loan , a car , or to pay for a first home.
borrowing means you are able to pay for expenses, when you do not have cash in your bank account.
what are 6 different typed of borrowing ?
Overdraft , Personal loans , Hire purchase, Mortgages , Credit cards , Payday loans.
what is the definition of an overdraft ?
It lets you borrow money through your current account by taking out more money than you have in the account.
There is usually a charge for an overdraft, you can ask your bank for an overdraft ,
overdraft is a type of borrowing.
what is a personal loan ?
a personal loan lets you borrow a fixed amount of money over a fixed term, usually at a fixed rate of interest.
what is a Hire purchase ?
A Hire Purchase is a way 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.
what is a mortgage ?
It is a long term loan to fund the purchase of assets , normally paid back over a long time.
A Mortgage is secured against an item for example a house.
A Mortgage is suitable for assets that will maintain value for a long time and cannot normally be paid for outright.
what is a credit card ?
Goods are paid by a credit card.
Credit cards can be paid off in full at the end of month or a part payment can be made. Interest is charged on the outstanding balance.
A credit card is suitable for paying high price goods and services.
what is a payday loan ?
Payday Loans are small, unsecured loans that are lent to a high rate of interest over a short period of time.
Payday Loans are a short term source of finance used to bridge the gap between now and next receiving a wage.
They are designed for Emergency use only , and should never be used to try and solve a long term money problem.
what are the advantages of an overdraft ?
- 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.
what are the disadvantages of an overdraft ?
- interest charges are often high.
- additional penalty charges for going over a prearranged limit.
- not the cheapest form of borrowing.
- could encourage overspending.
what are advantages of personal loans ?
- fixed monthly repayments.
- quick approval usually within 24 hours.
- builds credit score.
what are the disadvantages of Personal Loans ?
- high interest rates
- lack of payments flexibility.
- high fees and penalties
- increased debt load.
what are the advantages of a Hire Purchase ?
- immediate use of assets without paying the entire amount.
- spreading the cost of expensive items over time.
- Fixed rental apartments for easier budgeting.
- potential ownership of newer , better equipment.
- no taxes charged on a hire purchase agreement.
what are the disadvantages of a Hire Purchase ?
- higher overall cost due to interest rates.
- ownership is not all transferred until all payments are made.
- repossession risk if payments are not made.
- limited flexibility.
what are the advantages of Mortgages ?
- makes owning a home possible by spreading the cost over many years.
- flexibility
- government support.
- lower monthly payments.
