A.4 (part a) Borrowing Methods Flashcards
Name the six different borrowing methods
- Overdrafts
- Personal loans
- Hire purchase
- Mortgages
- Credit cards
- Payday Loans
What is an overdraft?
A borrowing facility which allows you to borrow money through your current account. There are two types of overdraft: arranged and unarranged.
Give two advantages of an overdraft
- Flexible
- Quick to arrange
- Not normally a charge for paying off the overdraft earlier than expected
Give two disadvantages of an overdraft
- If you had to extend it, you would usually have to pay an arrangement fee
- Your bank could charge you if you exceeded your limit without authorisation
- The bank has the right to ask for repayment of your overdraft amount at any time
- The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs
What is a personal loan?
Personal loans are loans that a bank or other lender makes that are not secured against any asset such as your home. They’re also known as unsecured loans.
Give two advantages of a personal loan
- They usually charge a lower rate of interest when compared to a credit card on larger balances
- Your loan repayments will also usually be a fixed amount each month, which can make it easier to budget
- The interest rate you pay on a personal loan is usually fixed
- You can choose how long you’d like to take to repay the loan
Give two disadvantages of a personal loan
- They have higher rates of interest than other forms of borrowing, particularly if you want to borrow a smaller amount
- Because the interest rate might reduce the more you borrow, you might be tempted to take out a bigger loan than you need
- Most banks won’t lend less than £1000 or for shorter than 12 months, so you might end up borrowing more than you need, or can afford
What is hire purchase?
A way to finance buying a new or used large item e.g. fridge freezer. You usually pay a deposit and pay off the value of the item in monthly instalments, with the loan secured against the car. The longer the term, more interest you will pay.
Give two advantages of hire purchase
- Flexible repayment terms (from one to five years) to help fit in with your monthly budget
- Relatively low deposit required (normally 10% of the item)
- Fixed interest rates so you know exactly what you’re paying every month for the length of the term
- Once you’ve paid half the cost of the item, you might be able to return it and not have to make any more payments
Give two disadvantages of hire purchase
- You don’t own the item until you’ve made your final payment, which means if you get into financial difficulties the finance company could take it away
- You can’t sell or modify the item over the contract term without getting permission first
- Until you’ve paid a third of the total amount payable , the lender can repossess the car without a court order
- It can be an expensive route if you only want a short term agreement
What is a mortgage?
A loan taken out in order to buy property or land. Most run for 25 years but the term can be shorter or longer. The loan is secured against the value of your home until it’s paid off.
Give two advantages of a mortgage
- Mortgage is given for a long period of time
2. Large amounts of finance can be raised quickly
Give two disadvantages of a mortgage
- Interest is charged on the loan
2. Property can be lost to the mortgage lender if repayments are missed
What is a credit card?
A small plastic card issued by a bank allowing the holder to purchase goods or buy services on credit (unlimited amount)
Give two advantages of a credit card
- Saves carrying cash around as it is unlimited
2. More secure, unlikely to be stolen
