Types of borrowing

Question 1

Overdraft

Answer 1

An overdraft lets you borrow extra money though your current account. An arranged overdraft could help you to manage your money if you have to cover short term expenses such as an unexpcted bill

Question 2

Overdraft pro’s and con’s

Answer 2

Pro’s - can be paid off without penalties, can be prearranged, helps cover short term expenses
Con’s - not the cheapest form of borrowing, encourages overspending, a longer overdraft will have higher repayment

Question 3

Personal loans

Answer 3

Allows you to borrow money for a specific purpose such as improving your home of buying a car. They need to be repaid in regular instalments with interest

Question 4

Personal loans pro’s and con’s

Answer 4

Pro’s - can be prearranged, helps with budgeting, if a loan is approved it can help to support you getting a better credit score.
Con’s - to secure a loan it has to be secured with assets/personal possession and if payments are missed the assets may be taken, not suitable for short term loans

Question 5

Hire purchase

Answer 5

An agreement where a customer agrees to a contract to buy an assets by paying off the amount in regular instalments. The item remains property of the seller until all instalments have been made

Question 6

Hire purchase pro’s and con’s

Answer 6

Pro’s - spreads the cost over a period of time, allows the customer to afford something now which they cant otherwise afford.
Con’s - interest rates may be higher then traditional loans, ownership of assets may legally be kept by seller until final payment is made

Question 7

Mortgage

Answer 7

This a long term loan to fund the purchase of assets, normally paid back over a long time e.g. 25 years. It is secured against an item such as a house.

Question 8

Mortgage pro’s and con’s

Answer 8

Pro’s - allows customer to spread the cost of expensive items over a long period of time, interest rates can be fixed for up to 5 years.
Con’s - if not fixed interest it can change which affects borrowers ability to repay or meet other expenses, failure to meet repayments may lead to a loss of home and a poor credit score.

Question 9

Credit cards

Answer 9

money you spend is actually borrowed from the card provider. Your legal tender will set a credit limit and you will pay back some or all of your balance each month.

Question 10

Credit card pro’s and con’s

Answer 10

Pro’s - can be used for any item you want to purchase, provides protection on purchases, don’t have to make full re-payments every month.
Con’s - can encourage overspending, sometimes on unnecessary purchases, interest rates often higher than a personal loan.

Question 11

Payday loans

Answer 11

Short term source of finance that is avaliable over a very short period of time with very high amounts of interest, used in emergency in between pay days.

Question 12

Payday loans pro’s and con’s

Answer 12

Pro’s - helps with short term finance issues, easy to secure, no credit check.
Con’s - interest rates are very high, encourage you to take out more loans