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LIBF Unit 1 > Topic 6 - Borrowing Products > Flashcards

Topic 6 - Borrowing Products Flashcards

1
Q

Ways of borrowing

A
  • Credit card
  • personal loans
  • overdraft
  • pay day loans (to be avoided if possible)
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2
Q

Why do ppl borrow money?

A
  • to buy goods or services they can’t afford out of their current income (helps improve standard of living)
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3
Q

Considerations before borrowing

A
  • what can they afford to repay
  • the costs + risks of diff. borrowing methods
  • how long they need to borrow for
  • how they apply for + manage the debt
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4
Q

Cost of borrowing

A
  • the interest rate + fees providers charge borrowers
  • providers must quote the APR (shows true cost of borrowing money for most customers)
  • APR offered depending on customers:
    • credit history
    • how much/long they want to borrow
    • bank rate
    • what competitors charge
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5
Q

Overdrafts - ‘going into the red’

A
  • enables ppl to borrow from current account provider by withdrawing more money from account than they have
  • presented as AER
  • only applies to current accounts
  • designed to use for a few days/weeks at a time
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6
Q

Overdraft costs

A
  • authorised overdraft = lower charges than unauthorised overdraft
  • interest rate for agreed overdrafts vary ‘subject to status’
  • calculated on a daily basis (only pay interest on amount + time they’ve borrowed for)
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7
Q

Ways to avoid getting charges from an unauthorised account

A
  • sign up for a txt alert from bank
  • check account regularly
  • agree a small overdraft
  • choose a basic bank account (doesn’t allow overdraft)
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8
Q

What do you use credit cards for?

A
  • face to face transactions
  • online transactions
  • over the telephone
  • best deals
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9
Q

Using credit cards (payment process)

A
  • cardholder makes transaction w credit card
  • merchant (retailer) passes details to its bank (acquirer)
  • acquirer pays merchant value of transaction
  • acquirer sends details to customers bank (issuer)
  • issuer pays acquirer for transaction
  • issuer records transaction on customers statement + cardholder pays issuer for transaction
  • Visa + MasterCard are 2 diff payment organisations that run computer networks connecting issuers + acquirers
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10
Q

Credit card security measures

A
  • asked for CVV: to avoid fraud(3 numbers on back of card)
  • merchants floor limit: merchants must get issuers’ permission to accept transaction above a certain value
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11
Q

Credit card advantages

A
  • protection for goods or services between £100 + £30,000
  • faulty goods = claim their money back
  • way of delaying payments for a few weeks/spreading costs over a few months
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12
Q

Credit card costs

A
  • APR + applied fees (changes w bank rate + issuer’s assessment of risk about cardholder)
  • may have diff. APRs for purchases, balance transfers + cash withdrawals: highest APR (cash advance fees)
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13
Q

Fees that can be charged on a credit card account

A
  • annual subscription fees
  • late payment fees
  • over-limit fees
  • cash advance fees
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14
Q

What is payment allocation

A
  • order card issuer uses repayments to pay off transactions + fees
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15
Q

How to reduce credit card charges

A
  • cardholder pays off credit card bill in full each month
  • cardholder pays more interest for making min. payment each month
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16
Q

Different types of credit cards

A
  • low APR cards
  • 0% introductory APR + handling fee on balance transfers
  • cashback cards
  • reward cards
  • charity donation cards
  • first credit cards
  • cards w low costs for foreign transactions
  • gold, platinum + black credit cards
17
Q

Low APR cards

A
  • offers long-term low APR
  • offered to ppl w certain level of income/good history of repaying borrowing on time
18
Q

0% introductory APR + handling fee on balance transfers

A
  • balance transferred to new card (0% interest for period of time) = easier to repay debt
  • new card issuer usually charges handling fee
19
Q

Cashback cards

A
  • gives cardholder back a % of all transactions made from a card in cash (1/yr)
  • may charge annual fee
  • attractive to ppl repaying credit card borrowing in full every month
20
Q

Reward cards

A
  • offer reward schemes (e.g. points) to get discounts/gift vouchers
21
Q

Charity donation cards

A
  • used to donate to a particular charity
22
Q

First credit cards

A
  • likely offered higher APR + lower credit limit (due to risk of not repaying on time)
23
Q

Cards w low cost for foreign transactions

A
  • abroad = issuers may charge a foreign transaction fee
24
Q

Gold, platinum + black credit cards

A
  • for ppl on higher incomes + have high credit limits
  • offers benefits (e.g. travel insurance)
  • usually charge high annual fee
  • APRs charged on credit cards > on a loan (more risky)
25
Q

Store card

A
  • credit cards used only in their own store
  • APRs usually > other credit cards
  • may provide free gifts/special offers
26
Q

Charge cards

A
  • must repay in full every month
  • doesn’t charge interest rate or have APR
  • issuers charge fees (e.g. service fees, cash advance fees + annual fees)
27
Q

Personal loans

A
  • pays for expensive items now + spreads cost of repayment over years
  • fixed repayments every month
  • amount borrowed = principle (between £1,000 - £10,000)
  • time borrower repays loan = term (between 1-7yrs)
  • APR fixed for term of loan
  • personal loans more straightforward + designed for larger sums of money
28
Q

Factors determining value of APR for personal loans

A
  • borrows ability to repay
  • inc. amounts of money over dec. period of time = dec. APR
  • APR for cash withdrawals from credit card > APR for purchases
29
Q

Payday loans

A
  • short-term, high-cost credit: helps ppl meet commitments until next payday
  • provides same day access to funds
  • extremely high interest rates
30
Q

Credit history

A
  • record of borrowing + repaying money
  • credit agencies record credit ppl apply for, amounts borrowed over last 6yrs + how often they made late payments
  • customers w/o credit history may be refused loans/charged higher rates
31
Q

Choosing products considerations

A
  • how much they wish to borrow
  • what they can afford to repay 
  • when they plan to repay
  • what the diff. options are
  • what are the costs of the options
  • what are the consequences of borrowing

LIBF Unit 1 (12 decks)

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