Topic 6 - Borrowing Products Flashcards
1
Q
Ways of borrowing
A
- Credit card
- personal loans
- overdraft
- pay day loans (to be avoided if possible)
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)
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
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
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
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)
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)
8
Q
What do you use credit cards for?
A
- face to face transactions
- online transactions
- over the telephone
- best deals
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
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
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
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)
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
14
Q
What is payment allocation
A
- order card issuer uses repayments to pay off transactions + fees
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
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
