Chapter 10: Other Financial Products Flashcards
What is an overdraft?
when an individual draws out more money than they hold in their current account
what are the different types of overdrafts?
authorised: when the amount overdrawn is within a limit pre-agreed limit with the bank (lower interest rate)
unauthorised: when the overdraft hasn’t been previously agreed (very expensive)
how does a credit card work?
the retailer is paid by the credit card company for the goods sold, the credit card company charges the retailer a fee and this enables stores to sell to customers using the credit card
what is the difference between secured and unsecured loans?
unsecured loans are used to purchase consumer goods where the loan isn’t linked to the item that is purchased whereas with secured loans, they are linked to the specific property which was the security for the loan e.g., property
how is the ffective annual rate derived?
taking the quoted annual rate and dividing by 4 (to represent the quarters in a year) and this is the rate that is applied to the amount borrowed on a quarterly basis. alternatively, can take the quoted rate and divide it by the appropriate frequency (4 for quarter, 2 for bi-annually, 12 for annually) and express the result as a decimal. the result will then be multiplied by 100
what is a mortgage
secured loan with the property forming the security. provided to finance the purchase of a property and taken out over a long term
what are applicant to a mortgage assesed on?
income and security of employment, existing outgoings, future problems, size of the loan in relation to the value of the property being purchased.
what are the different types of interest rates charged on mortgages?
variable, fixed, capped, tracker
what is a variable rate on a mortgage?
the borrower pays an interest rate that varies with prevailing interest rates. increase or decrease reflects changes in the BoE rate
what is a fixed rate mortgage?
borrowers interest rate is set for an initial period. fixed rate can be cancelled if a redemption penalty is paid
what is a capped rate mortgage?
the interest rate is capped from rates rising above a particular rate
what is a tracker rate mortgage?
linked to another interest rate such as BoE rate. will be set at a percentage above the base rate, and alter based on the base rates alterations
what is a repayment mortgage?
where the borrower will make monthly payments to the lender comprising of both interest and capital owed
what is an interest only mortgage?
where the borrower makes interest payments throughout the mortgage, and they put money aside each month so that at the end of the mortgage they have enough to pay back the capital borrowed in full
what is an offset mortgage?
where savings or any other assets are used to offset against the mortgage payment and the calculation and charging of any interest
