Chapter 10: Other Financial Products Flashcards
What is an authorised overdraft?
One that has been approved with the bank.
How does a secured loan and an unsecured loan differ?
A secured loan is one with collateral, usually property. Whereas an unsecured loan has no collateral.
What are unsecured loans conventionally used for?
Purchasing consumer goods.
What can an unsecured lender do to reinforce payment?
Start legal proceedings.
What is the difference between the quoted interest rate and the effective annual rate?
Depending on how often a quoted interest rate is charged, the effective rate will increase. Say that you are charged twice a year on a 12% loan. Your interest rate would be 1.06^2 (12.36%), rather than 12%.
What is the formula for working out effective rate?
((interest rate / times per year) + 1)^(times per year)
What is the loan to value ratio?
The size of the loan relative to the value of the property, e.g. a 90k loan on a 100k property is a 0.9. Lower the better.
What is a variable-rate mortgage?
The borrower pays interest that varies with the BoE interest rates - usually with a slight premium.
What is a fixed-rate mortage?
A mortgage where the interest rate is set, usually for an initial period.
What is a capped rate mortgage?
Interest rates are capped at a certain amount.
What is a tracker rate mortgage?
Follows a tracker, e.g. BoE interest rate with a fixed premium on top.
What is a repayment mortgage?
Borrower makes monthly payments to lender, consisting of interest and capital.
What is an interest-only mortgage?
Borrower only pays the interest on the mortgage, and pays off the capital at the end of the mortgage. Borrower hopes to make their own investments.
What is an offset mortgage?
You only pay interest on the amount borrowed - savings. For example if you take a loan for £100k and have 10k in savings you only pay interest on £90k.
What is a life policy?
Insurance policy paid out in the event of death.
