Different types of borrowing

Question 1

Overdraft

Answer 1

This allows you to withdraw money that you do not have from a current account

It may be suitable for short term needs, for example a shortage of cash just before payday

Question 2

Personal loans

Answer 2

This gives you the ability to borrow a set amount of money, normally for a specific purpose, to be paid in regular instalments with interest

It may be suitable to fund the purchase of a high price item such as a car or to make home improvements

Question 3

Hire Purchase

Answer 3

This allows you to have use of an item immediately but pay for it in regular instalments

The item remains the property of the seller until all instalments have been made

it may be suitable for one-off or infrequent purchase, for example a TV or fridge freezer.

Question 4

Mortgages

Answer 4

This is a long term loan to fund a purchase of assets, normally paid back over a long time, for example 25 years. It is secured against an item, for example a house. it can also be taken out for land as well.

It is suitable for assets that will maintain value for a long time and cannot normally be paid for outright

Question 5

Credit cards

Answer 5

Goods are paid for by card and can be paid for either at the end of a set period, normally a month, when a statement is issued or over time with the card provider stating a minimum payment each month

The minimum payment will be a percentage of the balance on the credit card.

Question 6

Payday loans

Answer 6

This is a short term source of finance used to bridge the gap between now and next receiving a wage.

It will normally be available for relatively small amounts at very high interest rates

It may be suitable in an emergency to meet cash shortages