Different Types Of Borrowing Flashcards
What is an Overdraft?
A short term borrowing, allowing someone to withdraw money they don’t have from a current account.
Advantages of Overdrafts?
- Quick and easy to arrange
- Interest is charged only on the amount outstanding
- No charges for paying off the overdraft
- Short term solution to cash flow problems
- Flexible as you can borrow what you need at the time, making it cheaper than a loan
Disadvantages of Overdrafts?
- Will be charged if you want to extend your overdraft
- The bank can ask for the money back at anytime
- Interest payments are variable which makes it difficult to budget
- High additional penalty charges if you go over your overdraft limit
- Not the cheapest form of borrowing
- Could encourage overspending
What is a Personal Loan?
The ability to borrow a set amount of money for a specific purpose and is to be repaid in regular instalments with interest.
Advantages of Personal Loans?
- Regular, pre-agreed payments and fixed interest rates makes planning and budgeting easier
- Quick and easy to secure and minimal documentation is needed
- Lower interest rate than an overdraft or credit card
- Improves cash flow
- Useful when looking to purchase a specific item such as a car
Disadvantages of Personal Loans?
- May have to be secured against as asset which means if payments are missed, the asset may be take to cover the outstanding debt
- Not suitable for short term loans
- Interest is charged on any money borrowed
- Can be charged a penalty for early payment
need to have good credit rating to be approved
What is a Hire Purchase?
Allows someone to have use of an item immediately but must be paid back in regular instalments.
Advantages of Hire Purchases?
- Spreads the cost of an expensive item over a period of time
- Credit is secured against a specific item
- Allows a customer to afford something new that they could not otherwise afford
- Fixed rate of interest
Disadvantages of Hire Purchases?
- Additional costs such as interest will be higher than any other traditional loans
- Ownership of the asset is legally kept by the seller until the final payment is made and if payments are not made, item will be repossessed
- Agreements can be manipulated, making the purchase seem deceptively appealing
What is a Mortgage?
A long term loan to fund the purchase of assets, paid back over a long time.
Advantages of Mortgages?
- Allows the customer to spread the cost of an expensive item over a long period of time
- Makes it possible to own a house which would not be feasible otherwise
- Depending on the mortgage deal, interest rates can be fixed or tracked against a standard rate of interest, reducing the risk of fluctuations
Disadvantages of Mortgages?
- Although interest payments may sometimes be fixed for a short period of time, this can vary and potentially affect the borrowers ability to repay or meet other expenses
- Failure to meet repayments may lead to a loss of home and affect the individuals future credit rating
- Penalities for early repayment
- Requires a 20% of the house value deposit
What is a Payday Loan?
Short term of finance used to bridge the gap between now and next receiving a wage.
Advantages of Payday Loans?
- Helps solve short term cash flow problems
- Quick to access funds
- Easy to secure
- Available to anyone over the age of 18 regardless of credit history
- Easy to extend the length of loan
Disadvantages of Payday Loans?
- Interest rates are very high
- Can escalate out of control if not repaid quickly
- Can be difficult to obtain if a person doesn’t have a fixed wage/salary
- Can only lend small amounts of money
