Topic 6: Borrowing products

Question 1

APR

Answer 1

Annual percentage rate – the total cost of borrowing over one year, including the interest charged and any fees.

Question 2

ATM

Answer 2

Automated teller machine, also known as a cash machine.

Question 3

Bank rate

Answer 3

The interest rate that the Bank of England uses when it lends money to other banks. Financial services providers take account of the Bank rate when they decide how to set interest rates on their own products.

Question 4

Balance transfer

Answer 4

Moving the balance (total amount owed) on a card from one card provider to another

Question 5

Basic bank account

Answer 5

A current account that allows people to store their money as an electronic balance and make payments by direct debit, standing
order, prepaid cash card or by withdrawing cash. There is no debit card, cheque book or overdraft facility on this type of
account.

Question 6

Cashback card

Answer 6

A type of card that gives back to the cardholder a percentage of
the value of transactions made with the card, in the form of cash.

Question 6

Card verification value (CVV)

Answer 6

Three numbers on the back of a credit or debit card. This is a security measure designed to prevent fraudulent use of the card
by someone other than the cardholder.

Question 7

Charge card

Answer 7

A credit card that must be repaid in full every month.

Question 8

Cheque

Answer 8

A written instruction to the provider (eg the bank or building society) to pay a specified amount to a specified person or
organisation.

Question 9

Consumer credit

Answer 9

This is another term used for borrowing. It is important to understand that ‘taking credit’ or ‘buying on credit’ refers to borrowing. However, a credit into a bank account means paying money in.

Question 10

Cost of borrowing

Answer 10

Also called ‘cost of credit’. This is the total amount that the borrower will be charged including interest and any fees. For
personal loans and credit card borrowing the cost over a 12-month period must be quoted – the annual percentage rate (APR)

Question 11

Credit agreement

Answer 11

The formal agreement between a provider and a borrower setting out the amount borrowed, the interest charged, the arrangements for repayment and any other terms and
conditions.

Question 12

Credit card

Answer 12

A card that allows the holder to make purchases face to face, online or over the phone, and to withdraw cash from an ATM.
Unlike a debit card, where the money is taken from the holder’s own account, transactions are paid by the card provider. The
card holder repays the amount owed to the provider either in one payment or in instalments. The provider charges interest on
cash withdrawals from the time the withdrawal is made and on purchases after a certain period.

Question 13

Credit history

Answer 13

A record of money borrowed and repaid by an individual. These records are held by credit reference agencies and providers will
check the individual’s credit history when a prospective customer applies for a borrowing product.

Question 14

Credit union

Answer 14

A mutual organisation (that is, owned by its members) that provides a range of financial products to members, eg savings
accounts and personal loans. Members of a credit union must share a common bond, eg all work for the same employer or all
work in the same district.

Question 15

Current account

Answer 15

A bank or building society account where people can store their money in the form of an electronic balance and withdraw it to
make payments

Question 16

Debit card

Answer 16

A card that can be used to withdraw cash, to make face-to-face transactions in, for example, shops, and to make payments online or over the phone.

Question 17

Direct credit

Answer 17

An electronic payment into an account, for example a salary or benefit payment.

Question 18

Direct debit

Answer 18

An electronic payment out of an account. The amount and frequency of a direct debit payment can vary.

Question 19

EAR

Answer 19

Equivalent annual rate – the cost of borrowing using an overdraft

Question 20

Interest

Answer 20

Money either paid to an account holder by the provider, or charged to the account holder by the provider. Interest is paid on savings accounts and some current accounts and charged on borrowing, eg an overdraft. Each provider decides the rate of interest it will pay or charge, depending on the type of account
and, in some cases, the credit history of the individual account holder.

Question 21

Interest rate

Answer 21

The amount, expressed as a percentage, that a financial services provider pays to a saver, or charges a borrower when it lends money.

Question 22

Mortgage

Answer 22

A loan taken out to pay for a property, usually over a long term such as 25 years.

Question 23

Overdraft

Answer 23

A facility that allows an account holder to withdraw more money than they actually have in their account.

Question 24

Payday loan

Answer 24

A loan designed to be taken out for only a very short period, which charges a very high APR

Question 25

Payment allocation

Answer 25

The order in which a card provider uses money paid into an account to pay off the amount outstanding.

Question 26

Personal loan

Answer 26

A product that allows someone to borrow a fixed amount over a fixed period at a fixed rate of interest

Question 27

Standing order

Answer 27

An electronic payment out of an account. Standing orders are used to make regular payments of the same amount.

Question 28

Store card

Answer 28

A card issued by a retailer that the holder can use to make purchases within that store or group of stores. As with a credit
card, the amount owing is paid off at a later date, either in one payment or in instalments, and interest is charged on the
amount owed.