Managing personal finance Flashcards
What is an overdraft
Ability to overspend past available balance on a current account up to an agreed amount
Advantages of overdrafts
Allows flexibility if borrowed when needed
Only pay for the money borrowed
Quick and easy to arrange
No charges for paying off the overdraft
Disadvantages of overdrafts
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
What is a personal loan
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.
Advantages of a personal loan
Quick and easy to secure
Fixed interest rates once discussed which allows for budgeting
Immediate/large cash injection due to receiving the loan
Disadvantages of a personal loan
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
What is hire purchase
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)
Advantages of hire purchase
Immediate access to item without having to save
Spreads cost over a period of time
Fixed instalments
Disadvantages of hire purchase
Additional costs incurred(high interest payments)
Item is repossessed if payments are missed
What is a mortgage
Long term loan to fund the purchase of an expensive item that will hold value for a long time
Advantages of a mortgage
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)
Disadvantages of a mortgage
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
What is a credit card
Cards that allow customers to make purchases and pay them back at a later date or over a period of time
Advantages of a credit card
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
Disadvantages of credit cards
Spending restricted to credit limit agreed on with financial institution
Interest charged on any outstanding balances
What is a payday loan
Short term loan that offers a small amount of money paid back upon the persons next income
Advantages of a payday loan
Solves short term cash flow problems
Quick access to funds
Disadvantages of payday loans
High rates of interest
Needs to be repaid quickly
Can escalate out of control if not repaid quickly
What is an Individual Savings Account(ISA)
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
What is a Deposit and Savings account
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
What are premium bonds
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
What are bonds and gilts
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.
What are shares
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.
What are pensions
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
Risk of saving
Return on the money is low(limited to rates offered by financial institution)
Reward from saving
Safer route
Allows you to have a plan(how much to save per month)
Interest rates are made clear from the start
Easily accesible
Risk of investing
Investments can decrease in value over time
Can delay your end goal
Reward from investing
Higher returns than saving
May lead to investing less the next month due to high returns
