(Dis)Advantages - Borrowing

Question 1

Overdraft Advantages

Answer 1

• Interest is charged only on the amount outstanding
• Can be paid off without penalties
• An overdraft facility can be prearranged and only used if needed
• Provides a short term solution to cash flow problems

Question 2

Overdraft Disadvantages

Answer 2

• When used, interest charges are often high
• Additional penalty charges for going over a pre-arranged limit are often very high
• Not the cheapest form of borrowing
• The ease with which these can be obtained could encourage overspending

Question 3

Personal loans Advantages

Answer 3

• Regular, pre-agreed payments make planning and budgeting easy
• As a general rule these would only be issued to individuals who can prove their ability to make the repayments
• Useful when looking to purchase a specific item of medium to high vale e.g a car or home improvement.

Question 4

Personal loans disadvantages

Answer 4

• May have to be secured against an set which means if payments are missed the asset may be taken to cover the outstanding debt
• Not really suitable for short term loans.

Question 5

Hire Purchase Advantages

Answer 5

• Spreads the cost of an expensive item over a period of time
• Credit is secured against a specific item.
• Often allows a customer to afford something now that they could not otherwise afford

Question 6

Hire Purchase Disadvantages

Answer 6

• Interest charges may be higher than other traditional loans.
• Ownership of the asset may legally be kept by the seller until the final payment is made
• Agreements can be manipulated to make a purchase seem deceptively appealing

Question 7

Mortgages Advantages

Answer 7

• Allows the customer to spread the cost of expensive items over a long period of time
• Interest rates depending upon the mortgage deal can sometimes be fixed or tracked against a standard rate of interest reducing the risk of fluctuations

Question 8

Mortgages Disadvantages

Answer 8

• Interest payments, although sometimes fixed for a short period of time can vary - this seriously affects the borrowers ability to repay or meet other expenses
• Failure to meet repayments may lead to a loss of a home and seriously affects an individuals future credit rating
• Penalties may be applied to early repayment

Question 9

Credit cards Advantages

Answer 9

• The credit card holder can pay above the minimum rate if they wish and hence speed up the rate of repayment and reduce interest incurred
• Can be used for items of multiple sizes and value to a limit without the need to secure against an asset
• Provides some protection on purchases

Question 10

Credit card Disadvantages

Answer 10

• Can encourage overspending sometimes on unnecessary purchases and can lead to debt problems
• Interest rates are often higher that on a personal loan

Question 11

Payday loans advantages

Answer 11

• Help solve immediate short term cash flow problems
• Relatively easy to secure

Question 12

Payday loans disadvantages

Answer 12

Interest rates are very high and the cumulative amount to be repaid can quickly spiral out of control