A4 - Types of Borrowing

Question 1

Explain and evaluate use of overdraft.

Answer 1

It’s a short-term loan that lets you borrow extra money through your current account that you don’t have.

+ Interest is only charged on what’s borrowed & can be pre-arranged and meet short-term cash flow problems
- High interest & penalty charges if you go over the set limit

Question 2

Explan and evaluate use of a personal loan.

Answer 2

It’s the borrowing of a fixed amount of money that’s paid back in instalments at a fixed rate of interest over a period of time.

+ Budgeting of expenditure is easier because of the pre-agreed payment plan
- Not suitable for those with a bad credit rating & failure of repayment may result in losing the asset the loan is secured against

Question 3

Explain and evaluate use of hire purchase.

Answer 3

It’s purchasing an item in regular instalments where the item remains property of the seller until all payments are made but still being able to use it.

+ Spreads expenses over time & item can be used even before everything is repaid
- It’s a fixed contract where you could lose the asset if payment isn’t met & likely to pay more for the asset than if it was paid upfront

Question 4

Explain and evaluate use of mortgage.

Answer 4

It’s a long term loan where the loan is secured against an asset, typically a property.

+ Spreads expenses over a long-term period & fixed or tracked mortgage rates can help make payments affordable
- Increase in interest rates may affect ability to pay back the mortgage & if repayments are not made, it can be repossessed

Question 5

Explain and evaluate use of a credit card.

Answer 5

It’s a loan where the money you spend is borrowed from the card provider and the money goes into the credit card, not your bank account, with a credit limit set by the lender. And at the end of each month, you receive a statement showing how much you owe.

+ If you pay the full amount each month, you will pay no interest & provides some protection on purchases
- If you pay the minimum amount show on the statement, interest will be charged & the interest is higher than a personal loan

Question 6

Explain and evaluate use of a payday loan.

Answer 6

A short-term source of finance that helps bridge the gap between paydays with charged fees.

+ Fast source of money & can help with short-time cash-flow problems
- Very high interest/fees charged & can only be used for short-term