Chapter 3, Banking Flashcards
How does a bank generate surplus?
The interest on deposits is less than the interest it demands on loans
What are commercial banks?
All banks that take deposits and grant loans
What are retail banks?
Banks that specialise in taking deposits and providing loans to INDIVIDUALS
What are corporate banks?
Banks that specialise in taking deposits and proving loans to BUSINESSES
What are examples of banks that cater to both retail and corporate clients?
Bank of America, Lloyds, Barclays, HSBC
What are the most common forms of borrowing for a retail customer from banks?
Loans, mortgages, overdrafts
What are mortgages typically?
- For a set period
- At a variable rate of interest
- With a defined repayment schedule
- Secured on the property the loan is used to buy
What are bank overdrafts generally?
- Flexible, able to be drawn, repaid, drawn up again to the overdraft limit
- At a variable rate of interest (an arrangement fee may also be payable)
- Unsecured and repayable on demand
What is a more flexible form of borrowing than an overdraft?
Credit cards
How are credit cards obtained?
Through banks, specialist providers (Visa and Mastercard), supermarkets, football clubs and charities
How do credit cards work?
- Individual applies for a card
- Card used up to a credit limit
- Card must be paid of monthly
- If not paid off monthly, interest is demanded (often around 20% pa)
What are characteristics of credit cards?
- Flexible (used up to a credit limit)
- Variable rate of interest (expensive)
- Repayments required at a minimum amount monthly
How do you obtain a pawnbroker loan?
By giving something of value (wedding ring, watch) to a pawnbroker to provide them with security in their loan, until they are paid back
What is a payday loan?
Loans that enable the borrower to get hold of cash before the next time they are payed
Why are payday loans not ideal?
They are very expensive
In summery, pawnbroker and payday loans are…
- Easily available (immediate effect)
- Very expensive (in comparison)
- PAWNBROKER items are repossess when they are paid back
- PAYDAY loans are to be repaid on the next pay day
What is the maximum interest a payday lender can charge per day?
0.8%
Why are student loans good?
- Low interest rates
- Don’t need to be payed back until they are earning a wage above a pre-determined level
What is the effective annual rate?
Takes the quoted rate and adjusts it to take into account the frequency of interest charges
Whta is compound interest also known as?
The effective annual rate
What happens when interest is charged more frequently?
The effective annual rate will be greater than the quoted rate
What is ‘taking security’?
When a lender has the right to take something that belongs to the borrower if the borrower fails to meet the terms of the loan
What do a companies assets include?
Land and buildings
Why are unsecured loans more expensive than secured?
Unsecured loans pose a greater risk to the lender
