Chapter 10 - Other Financial Products Flashcards
What is an overdraft?
What does the terms “Authorized” and “Unauthorized” mean?
When an individual withdraws more than they have.
Authorized = amount withdrawn is previously agreed with the bank
Unauthorized = amount has not been agreed with bank/exceeds agree limit
What does an unsecured loan mean and secured loan mean?
Unsecured = it is not linked to the items purchased. This means that if default, legal proceeding take place.
Secured = If secured loans are not paid, the lender can reposes the specific property.
What is a commercial loan?
Used when businesses need to fund long-term borrowing which companies cant meet.
what is the difference between quoted interest, and effective annual rate?
Quoted = the rate which you are told when borrowing, basic percentage and doesn’t include how often interest is added to loan.
EAR = true cost of borrowing, includes compound interest
How do you calculate the effective annual rate of borrowing?
1) take quoted rate, divide by frequency, then = decimal
2) add 1 to the decimal, then multiply by itself by frequency, then minus 1 then x 100
What are applicants accessed on when taking out a mortgage?
- income and security of employment
- future problems
- size of loan in relation to value of property (loan-to-value property)
what are the different interest rate methods?
Fixed-rate - interest set for initial period - borrowers protected from rising interest rates, but interest rates can fall.
Variable rate - pays interest at a rate which changes based on BoE
Capped - protects borrowers from high interest
Tracker - linked to anther rate, such as BoE
What is a repayment mortgage?
Borrowers make monthly payments which comprises interest and capital.
adv - ability to pay off mortgage
disadv - interest rates fluctuate, property can be repossessed
What s an interest-only mortgage?
Interest is paid to lender, and borrower invests
adv - mortgage can be paid back with accumulating investment
disadv - interest rates fluctuate, investment fund may not grow
what is an offset mortgage?
The borrowers savings/current account balances are linked to mortgage.
Adv - higher-rate tax payer can not pay tax on savings
Adv - interest being paid on slightly lower mortgage provides flexibility to manage finances.
What is a life policy and its features?
Insurance for death.
Individual pays premiums in exchange for life cover
This is paid as a lump which is payable upon death
What is Whole-of-life Assurance? the three types
Provides permanent cover - sum assured will be paid whenever death occurs. Provides protection + insurance.
Non-Profit - for a guaranteed sum only
With-profit - pays garenteed amount, including profits made during policy taken out and death.
Unit linked - related to performance of investment
What is Term Assurance?
Pays out a lump sum in event of death within specified period.
It is different to Whole as it only covers for a specified time.
Individual selects duration, how much, if cover is level, increasing/decreasing.
Individuals also get it if they get a terminal illness.
