Borrowing

Question 1

Overdraft

Answer 1

• allows you to withdraw money you do not have from a current account
• short term e.g a shortage of cash just before payday

Question 2

Advantage of an overdraft

Answer 2

• interest is charged only on the amount outstanding
• can be paid off without penalties
• provide a short term solution to cash flow problems

Question 3

Disadvantages of an overdraft

Answer 3

• interest charges are often high
• not the grapes form of borrowing
• the ease with which could be obtained could encourage overspending

Question 4

Personal loans

Answer 4

• gives you the ability to borrow set amount of money normally for a specific purpose, to be paid for regular instalments with interest
• suitable to find the purchase of a high price items such as car or to make home improvements

Question 5

Advantage of a personal loan

Answer 5

• monthly instalments allows you to plan your expenditure

* useful when looking to purchase a medium to high value e.g. a car or home improvement

Question 6

Disadvantage of personal loans

Answer 6

•not really suitable for short term loans

•may be arranged fee which add to the cost
Not paying it could lead to losing personal assest

Question 7

Hire purchase

Answer 7

• allows you to have items immediately but pay for it regular instalments
• the item remains the property of the seller until all instalments has been made
• suitable for one-off or infrequent purchase such as TV or a Fridge

Question 8

Advantages of hire purchase

Answer 8

• spread the cost of an expensive item over a long period of time
• credit is secured against a specific item

Question 9

Disadvantage of hire purchase

Answer 9

• interest charge may be higher than other traditional loan

* ownership of the asset may legally be kept by the seller until the final payment is made

Question 10

Payday loans

Answer 10

• Short term source of finance used to bridge the gap between now and next receiving a wage
• suitable in an emergency to meet cash shortage

Question 11

Advantage of payday loan

Answer 11

• help solve immediate short term cash flow problems

* relatively easy to secure

Question 12

Disadvantages of payday loan

Answer 12

•interest rates are often high and the cumulative amount to be repaid can quickly spiral out of control

Question 13

Advantages of Credit card

Answer 13

•if you pay the full amount each month, you will pay no interest

Question 14

Disadvantage of credit card

Answer 14

• interest rate are often higher than on a personal loan

* can encourage overspending which can lead to debts problem

Question 15

Mortgage

Answer 15

• long term loan to fund the purchase of assest, paid back over a long time e.g. 25 years such as a house
• suitable for assets that will remain value for a long period of time

Question 16

Advantage of mortgage

Answer 16

• allows customers to spread the cost of expensive items over a long period of time
• interest rates, depending upon the mortgage deal

Question 17

Disadvantage of mortgage

Answer 17

• failure to meet repayments may lead to a loss of a home and seriously affect an individual’s future credit rating
• penalty may be applied to early repayment