Borrowing Products

Question 1

Why do people borrow money?

Answer 1

To buy goods or services now that they cannot afford out of their current income

Question 2

What is secure borrowing?

Answer 2

Where the provider lends money to buy a specific item (eg house), and this item or another asset is used as security for if the borrower is unable to repay the debt on time

Question 3

What are unsecured borrowing products?

Answer 3

The provider doesn’t have the right over any of the borrower’s goods if the borrower cannot repay the debt.
(However the provider can go to court to reclaim outstanding debt)

Question 4

What is the age required to be able to borrow money from a provider?

Answer 4

18

Question 5

What must people consider when choosing how to borrow money?

Answer 5

What they can afford to repay
Costs / risks of different borrowing methods
How long they need to borrow for
How they apply for / manage the debt

Question 6

What do providers need to take into account when deciding whether to make a product available to a potential borrower?

Answer 6

Type of borrowing
Personal financial circumstances of the borrower
Their history of repaying previous borrowing products

Question 7

Can people who take out credit cards or personal loans cancel the agreement?

Answer 7

The agreement can be cancelled within the first 14 days.

This has no consequences

Question 8

What is meant by the ‘cost of borrowing’ and how must providers quote this cost?

Answer 8

Cost of borrowing = interest rate / fees the providers charge borrowers.
Quoted as an annual percentage rate (APR) for credit card borrowing / personal loans

Question 9

What is APR?

Answer 9

Annual percentage rate.
A standard measure that includes the interest rate and certain charges to show the true cost of borrowing for at least 51% of customers

Question 10

How are overdraft costs presented?

Answer 10

As an interest rate only = equivalent annual rate (EAR).
The fees a charges are listed separately -> providers charge different fees depending if the overdraft was planned or not

Question 11

What are overdrafts?

Answer 11

Allow people to borrow money from their current account provider by withdrawing more money than they have paid in.
Overdrafts only apply to current accounts.

Question 12

How long are overdrafts designed to be used for?

Answer 12

A few days / weeks

Question 13

What situation are overdrafts likely to be used in?

Answer 13

For unexpected payments.
If holder made a mistake about how much money was in the account.
If holder’s salary doesn’t cover all monthly expenses.

Question 14

What is the range of the costs for an authorised/un overdraft?

Answer 14

Authorised -> zero-19.94% EAR and possibly fees

Unauthorised -> much higher EAR and or additional fees

Question 15

What would the fee be for using an authorised overdraft?

Answer 15

A fixed, one off fee eg £10.
And or a fee per day up to a maximum amount in the statement period e.g. £1 per day up to max £20 a month.
-> max charge of £30 plus EAR on amount borrowed

Question 16

What would the fee be for using an unauthorised overdraft?

Answer 16

A fixed, one off fee eg £20.
And or a fee per day up to a maximum in the statement period e.g. £5 per day up to max £100 a month.
-> max charge of £120 plus EAR on the amount borrowed

Question 17

What would the unpaid transaction fee be?

Answer 17

Providers can return transactions e.g. cheques, standing orders, direct debits to the payee’s bank unpaid and a charge per item.
Eg £8 per item up to max of £40 per day

Question 18

What would the paid transaction fee be?

Answer 18

Providers must honour certain transactions eg debit card payments, even though the account has insufficient funds to cover the.
Eg a fee of £8 per item, up to max £40 a day

Question 19

How can current account holders avoid unauthorised overdraft costs for if they make a mistake about their balance?

Answer 19

• Sign up for an alert service from their bank that sends a text when the account balance is below a set amount or a large transaction has been received for payment.
• Check their account balance regularly.
• Agree a small overdraft.
• Choose a basic bank account (don’t offer overdraft)

Question 20

Which providers offer credit cards?

Answer 20

Banks
Building societies
Finance companies

Question 21

How do credit cards work?

Answer 21

Instead of paying the transaction amount from the account holder’s own funds, people use credit cards to borrow the transaction amount from their credit card provider

Question 22

How are credit card payments made? Who is involved?

Answer 22

• Merchant (shop/seller) passes transaction details to its merchant bank (acquirer).
• Acquirer pays the merchant the transaction value.
• Acquirer sends transaction details to cardholder’s bank (issuer).
• Issuer pays acquirer for the transaction.
• Issuer records transaction on the cardholder’s statement.
• Cardholder receives their statement and must repay the transaction amount.

Question 23

How do people use credit cards as a way of delaying payment? How long can the payment be delayed for?

Answer 23

Payments can be delayed for a few weeks / months.
Payments don’t need to be made until cardholder has received their statement with the due date for when the minimum amount must be paid.
The cardholder doesn’t have to pay for the transaction all at once. There will be a late payment fee if don’t pay min by due date.

Question 24

What are the costs of using a credit card?

Answer 24

The APR (annual percentage rate) on the amount borrowed.
Any fees that apply.

Question 25

What are balance transfers?

Answer 25

When credit card holders move their debt from one credit card to another

Question 26

Is the APR on credit cards the same for purchases, balance transfers and cash withdrawals? Which has higher APR and why?

Answer 26

No.
Cash withdrawals have much higher APR to start with + interest is charged from the day the withdrawal is made -> the day of repayment

Question 27

What are the fees that can be charged on a credit card account?

Answer 27

Annual subscription fee for holding the account.
Late payment fees when repayment isn’t made by due date on statements.
Over-limit fees when cardholder makes transactions that take the total amount borrowed over their credit limit.
Cash advance fee when cash is withdrawn on the card.

Question 28

Name the different types of credit cards

Answer 28

Low APR cards
Cash back cards
Reward cards
Charity donation cards
First credit cards
Cards with low costs for foreign transactions
Gold, platinum and black credit cards
Store cards
Charge cards

Question 29

Why do people take out personal loans?

Answer 29

To be able to pay for more expensive items now and spread the cost of repayment over years.
Allow people to borrow a fixed amount of money over a fixed amount of time at a fixed APR -> fixed repayments every month

Question 30

Why are personal loans ‘more straightforward’ than overdrafts or on a credit card?

Answer 30

Because the repayments are a set amount each month

Question 31

What is credit history?

Answer 31

Someone’s record of borrowing and repaying money.

• > credit that people have applied for
• > amounts they have borrowed over past 6 years
• > how often they were late making payments
• > defaults
• > county court judgements made against them for not paying debts
• > bankruptcies

Question 32

What should people consider when choosing borrowing products?

Answer 32

How much they wish to borrow
What they can afford to repay
When they plan to repay
What the different borrowing options are
What the costs of different options are
What the other consequences of borrowing are