Types of borrowing Flashcards
what is an overdraft
borrowing extra money through your current account, paid back with interest
give 2 advantages of an overdraft
Interest is only charged on what’s borrowed
Can be pre-arranged and meet short-term cash flow problems
free to set up
give 2 disadvantages of an overdraft
high interest rates
penalty charges(if you go over limit) can be high
can encourage overspending
what is a personal loan
long term form of borrowing that allows you to borrow money for a specific purpose like improving home or buying a car(usually for higher priced items)
give 2 advantages of a personal loan
Budgeting is easier because of the pre-agreed payment plan
Useful for a specific item
monthly instalments allow you to plan your expenditure
give 2 disadvantages of a personal loan
High interest rates, unsecure loan
Not suitable for those with a bad credit rating
arrangement fees which can add to the cost
can loose the asset if payments are not made
what is hire purchase
arrangement where customers agree to a contract to buy an asset by paying off the amount in regular instalments plus interest
give 2 advantages of hire purchase
Spreads expenses overtime
Credit is secured against the purchased item
allows you to buy an expensive item at an amount you can afford
give 2 disadvantages of hire purchase
It’s a fixed contract, you could lose the asset if payment isn’t met
Likely to pay more for the asset overall
while you are paying you cant sell it as you don’t own it. if you fail with payments the owner may repossess the asset
what is mortgage
a long term loan to fund the purchase of asset eg 25years
give 2 advantages of mortgage
Spreads expenses over a long time period
interest rates are lower than for other types of borrowing
give 2 disadvantages of mortgage
Enormous debt carried over a long time period
Assets can be repossessed if payment isn’t made
increase in interest rates may affect your ability to pay back
what are credit cards
allows an individual to pay for goods or services using a card with a statement issues at the end of each month
give 2 advantages of credit cards
Allows a period of interest-free credit
Provides some protection on purchases
if you pay the full amount each month, you will pay no interest
give 2 disadvantages of credit cards
Can encourage overspending
High interest rates if the balance isn’t cleared
