Managing personal finance

Question 1

What is an overdraft

Answer 1

Ability to overspend past available balance on a current account up to an agreed amount

Question 2

Advantages of overdrafts

Answer 2

Allows flexibility if borrowed when needed
Only pay for the money borrowed
Quick and easy to arrange
No charges for paying off the overdraft

Question 3

Disadvantages of overdrafts

Answer 3

Bank can call it in at anytime
Only available from current bank account
Interest payments tend to be variable making budgeting difficult
Overdraft may be secured on an asset

Question 4

What is a personal loan

Answer 4

Set amount of money provided for a specific purpose that is repaid with interest over a set period of time(interest rates vary depending on the risk of the loan). Loans can be secured against an asset. Personal loans are suitable for expensive items paid over a long time.

Question 5

Advantages of a personal loan

Answer 5

Quick and easy to secure
Fixed interest rates once discussed which allows for budgeting
Immediate/large cash injection due to receiving the loan

Question 6

Disadvantages of a personal loan

Answer 6

Interest must be paid regardless of financial situation
Bank normally secures against an asset
Interest payments can be high/vary over time
Can be charged a penalty for early repayment

Question 7

What is hire purchase

Answer 7

Spreading cost over a pre agreed period of time(monthly payments) but still having access to the item(seller technically owns item until all instalments are paid)

Question 8

Advantages of hire purchase

Answer 8

Immediate access to item without having to save
Spreads cost over a period of time
Fixed instalments

Question 9

Disadvantages of hire purchase

Answer 9

Additional costs incurred(high interest payments)

Item is repossessed if payments are missed

Question 10

What is a mortgage

Answer 10

Long term loan to fund the purchase of an expensive item that will hold value for a long time

Question 11

Advantages of a mortgage

Answer 11

Makes it possible to buy expensive items
Spreads costs over a long period of time
Changes can be made depending on mortgage type to find the best deal(semi regular basis)

Question 12

Disadvantages of a mortgage

Answer 12

Payments change if interest rates change
May not receive a mortgage
Substantial deposit required(e.g 20% of house value)
Risk of repossession if payments are missed

Question 13

What is a credit card

Answer 13

Cards that allow customers to make purchases and pay them back at a later date or over a period of time

Question 14

Advantages of a credit card

Answer 14

Receive goods immediately but pay them back at a later date
Normally no interest charge if paid back on time each month which makes it a good short term source of finance
Additional benefits e.g cash back

Question 15

Disadvantages of credit cards

Answer 15

Spending restricted to credit limit agreed on with financial institution
Interest charged on any outstanding balances

Question 16

What is a payday loan

Answer 16

Short term loan that offers a small amount of money paid back upon the persons next income

Question 17

Advantages of a payday loan

Answer 17

Solves short term cash flow problems

Quick access to funds

Question 18

Disadvantages of payday loans

Answer 18

High rates of interest
Needs to be repaid quickly
Can escalate out of control if not repaid quickly

Question 19

What is an Individual Savings Account(ISA)

Answer 19

Savings/investment account that does not charge tax on interest earned which is an incentive to save.
There may be conditions attached such as set amounts have to be paid each month or you have to notify before you withdraw savings

Question 20

What is a Deposit and Savings account

Answer 20

Accounts held with banks or building societies where interest is paid on positive balances
Penalises savers if they take money out early
Notice has to be given
Pays a higher rate of interest than current accounts
Interest paid is subject to income tax

Question 21

What are premium bonds

Answer 21

Government incentive to save sold by the National savings and investment bank.
Savings are entered into a monthly prize draw
Each person is limited to holding £50,000 in bonds
Can be cashed in with no penalties

Question 22

What are bonds and gilts

Answer 22

Individuals or companies lend money to the government in return for an IOU
Fixed rate of interest is paid on the loan
Initial sum is repaid in full at a set point in the future.

Question 23

What are shares

Answer 23

Investments made into organisations which make individuals part owners of a business. Shareholders objective is to receive income in the form of dividends.
Share prices can move in both directions.

Question 24

What are pensions

Answer 24

Saving plan where an individual makes regular contributions to a pension policy.
Pensions can be private or company pensions(company also contributes)
Value of pensions can fall based on the value of the pot available at the time of taking the pension

Question 25

Risk of saving

Answer 25

Return on the money is low(limited to rates offered by financial institution)

Question 26

Reward from saving

Answer 26

Safer route
Allows you to have a plan(how much to save per month)
Interest rates are made clear from the start
Easily accesible

Question 27

Risk of investing

Answer 27

Investments can decrease in value over time

Can delay your end goal

Question 28

Reward from investing

Answer 28

Higher returns than saving

May lead to investing less the next month due to high returns