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LIBF Unit 1 > Topic 6 - Borrowing Products > Flashcards

Topic 6 - Borrowing Products Flashcards

1
Q

what are the 4 different ways of borrowing?

A
  • credit cards
  • personal loans
  • overdraft
  • payday loans
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2
Q

why do people borrow money?

A

to buy goods or services that they can’t afford out of their current income
- helps improve people’s standard of living
e.g borrowing to buy a car would help an individual to find work

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3
Q

What is the cost of borrowing?

A

The interest and charges that the borrower has to pay back when repaying the loan.

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4
Q

How is the cost of borrowing quoted by a provider?

A

As an APR for credit card and borrowing or personal loans

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5
Q

What does APR stand for?

A

Annual Percentage Rate

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6
Q

what is the APR?

A

measure that includes the interest rate and certain charges to show the true cost of borrowing for most customers

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7
Q

what determines what the APR is?

A
  • customers credit history
  • how much they want to borrow
  • how long they want to borrow for
  • what competitors charge (base rate)

If the provider thinks the customer is higher risk they will charge a higher interest rate

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8
Q

what is the bank rate?

A
  • Rate of Interest set by the bank of england
  • currently very low at 5.25%
  • rate of interest high street banks base their interests on
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9
Q

what is an Unsecured Loan?

A
  • doesn’t have any collateral
    however providers can go to court to reclaim outstanding debt
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10
Q

what is collateral?

A

something that is pledged as a security for repayment of a loan, to be forfeited in the event of a default.

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11
Q

what is an overdraft?

A

allows individuals to take out more money than they have up to an agreed limit just

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12
Q

what does EAR stand for?

A

Equivalent annual rate

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13
Q

how are overdraft costs presented?

A

as interest rates only which is called EAR

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14
Q

where do overdrafts apply?

A

in current accounts

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15
Q

what’s the difference between an authorised and unauthorised overdraft?

A

authorised - one agreed by the provider
unauthorised - not agreed by provider, account holder goes into red without realising
- the charge on this type of overdraft are higher

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16
Q

how are overdraft costs calculated?

A

on a daily basis, only paying interest on the amount they have borrowed and for the time they have borrowed it for.

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17
Q

what is an unpaid transaction fee?

A

Providers can return transactions such as cheques standing orders and direct debits to the payees bank unpaid and charge a fee per item.

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18
Q

what is a paid transaction fee?

A

providers must honour certain transactions such as a debit card payments, even though the account has insufficient funds to cover them.

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19
Q

how can current account holders avoid the costs of an overdrafts higher interest rate?

A
  • sign up for an alert service from their banks mobile banking app to receive an alert when the account goes below a certain amount
  • check balance regularly
  • choose a basic bank account as their current account thus does not have an overdraft facility
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20
Q

When do customers use credit cards?

A
  • face to face transactions
  • online transactions
  • over the phone
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21
Q

when using a credit card what are the 4 parties involved?

A
  • the cardholder
  • the merchant
  • the merchants bank or acquirer
  • the card holders bank or issuer
22
Q

what is the process of credit card payment?

A
  1. cardholder makes a transaction with the credit card
  2. the merchant passes the details onto the acquirer
  3. the acquirer then sends the details to the issuer
  4. the issuer then pays the enquirer for the transaction
  5. the issuer records the transaction on the cardholders statement and the cardholder settles the debt by paying the issuer
23
Q

what are Visa and MasterCard?

A

two different payment organisations that run computer networks connecting issuers and acquirers

24
Q

What is required during credit card transactions?

A

the last three digits on the back or CVV

25
Q

What does CVV stand for?

A

Card Verification Value

26
Q

Why is the CVV required during credit card transactions?

A

to avoid fraud

27
Q

When is interest charged?

A

only after the due date of the payment.
- no interest is charged for the period of time between making the card transactions and the due date

28
Q

What are 2 advantages of credit cards?

A
  • give more rights to the customer, protection provided for goods priced between £100 and £30,000
  • customers buying goods with a credit card that are faulty can claim their money back.
29
Q

what are the different costs of credit cards?

A
  • APR
  • Charges made for balance transfers, purchases
  • cash advance fees, cash withdrawals from a credit card (have a high charge)
30
Q

how can you reduce credit card charges?

A
  • paying off the credit card bill in full each month
  • cardholder will pay more interest if they just make the minimum payment each month
31
Q

What are the 10 different types of credit cards?

A
  • low APR cards
  • 0% introductory APR and handling fee on balance transfers
  • cash back cards
  • charge cards
  • charity donation cards
  • foreign transaction cards
  • first credit cards
  • gold platinum and black credit cards
  • rewards cards
  • store cards
32
Q

what is a low APR card?

A
  • credit card that offers long term low APR
  • usually only available to people with a certain level of income or good history of repaying borrowing on time
33
Q

What is a 0% introductory APR and handling fee on balance transfers?

A
  • card holders who have a large balance can transfer the amount they owe from one card to another, usually with a different provider
  • usually a new card issuer usually charges a handling fee to make the transfer (usually 3%)
34
Q

What are cash back cards?

A

Cards that give back a percentage of all transactions made on the cards
- the percentage varies from card to card
- the cash reward is usually credited to the account and deducted from the total owed by the cardholder.
- some cards charge an annual fee while others have no fee

35
Q

what is a reward card?

A

some cards offer rewards schemes such as points that cardholders can collect and use to get discounts of things.

36
Q

what is a Charity donation card?

A

the charity linked to ones card will receive a certain amount of money when it is opened and then for example 25p for every £100 spent.
- charity supporters are likely to apply for and use the card, so benefiting the bank and the charity receiving a donation when the card is used

37
Q

what is a first credit card?

A

usually has a higher APR and lower credit limit because they don’t hav a history of repaying debt on time
- this is because the issuer does not know how new credit holders will manage their borrowing

38
Q

What are cards with low costs for foreign transactions?

A
  • when people use cards abroad some issuers charge a foreign transaction.
  • A card that charges no foreign transaction free allows people to stay within one’s holiday budhet
39
Q

What are gold platinum and black credit cards?

A

-premium cards offered to people on higher incomes and have high credit limits
- offer benefits such as travel insurance or exclusive airport lounges
- another benefit could be a Personal Assistant service

40
Q

what is a store card?

A

retailers offer credit cards that can only be used in their stores.
-APR on store cards tend to be higher than other credit cards
- may provide free gifts and a range of special offers for cardholders

41
Q

what is a Charge card?

A

credit card that must be repaid in full every month
- cardholders cannot borrow money beyond the interest-free period.
- don’t have interest or APR
- do charge service fees

42
Q

What 6 things should be considered when choosing borrowing products?

A
  • how much they wish to borrow
  • what they can afford to repay
  • what they plan to repay
  • what the different borrowing options are
  • what the costs of the different options are
  • what the other consequences of borrowing are
43
Q

What is credit history?

A

A persons previous record for borrowing and repaying money
- providers check the credit history of customers before agreeing the loan
- credit agencies record the credit people have applied for, the amount they hav borrowed over a 6 year period and how often they were making late payments
- they also record defaults, county court judgements - made for bankruptcies and debts
- customers without a credit history may be refused loans or charged higher rates

44
Q

what are payday loans?

A

A form of short term, high cost credit designed to help a person meet their commitments until their next payday.
- provide same day access to funds

45
Q

why are payday loans bad?

A

they hav extremely high interest rates.
- the amount worked can add up very quickly causing people to get into serious debt

46
Q

what is a personal loan?

A

a loan that is used to pay for expensive items now and spread the cost of repayment over years

47
Q

how much do personal loans tend to be?

A

Around £1k to £10k

48
Q

what is the amount borrowed in a personal loan knows as?

A

the principle

49
Q

what is the cooling of period on a personal loan

A

14 days

50
Q

what factors determine the value of the APR?

A
  • If it is a cash withdrawal from a credit card it will be higher
  • The amount of money being borrrowed
  • how long the period of time it is being borrowed for

(- borrowing larger amounts of money over a shorter period time pay a lower APR
- if you borrow smaller amounts of money over a longer period of time the APR will be higher
- APR for cash with drawals made from a credit card is higher than for APR purchases ) - extra info not memorise

LIBF Unit 1 (13 decks)

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