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LIBF Unit 1 > 6. Borrowing Products > Flashcards

6. Borrowing Products Flashcards

1
Q

How does borrowing work?

A
  • providers ‘sell’ money to borrowers
  • borrows pay back the money from the income that they will earn in the future
  • repayments cover the original amount borrowed and the cost of borrowing - that is the interest the providers charges and any additional fees
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2
Q

What are unsecured borrowing products?

A
  • the provider doesn’t have rights over any of the borrower’s goods if the borrower can not repay the debt
  • however, providers can go to court to reclaim outstanding debt
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3
Q

What is informal borrowing?

A

Between family members or friends

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4
Q

What is formal borrowing?

A

Part of an agreement with a bank, building society or credit union

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5
Q

What is borrowing money also know as?

A
  • taking credit
  • consumer credit
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6
Q

Who can borrow money from a provider?

A
  • only people aged 18 +
  • under UK law, people need to be at least 18 years old to enter into a contract
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7
Q

What is the contract called for borrowing money?

A
  • a credit agreement
  • the terms and conditions of this agreement must be provided to the borrower in writing
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8
Q

What must people consider when choosing how to borrow money?

A
  • what they can afford to repay
  • the costs and risks of different borrowing methods
  • how long they need to borrow for
  • how they apply for and manage the debt
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9
Q

What do providers take in to account when making product available to a borrower?

A
  • the type of borrowing
  • the personal financial circumstances of the borrower
  • their history of repaying previous borrowing products
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10
Q

What happens when a person takes out a credit card or loan?

A
  • they have a 14-day cooling off period when they can change their minds, cancel the agreement and return the loan or credit card without any penalties
  • the cooling off period starts from the date the loan agreement was signed or the date that the customer received a copy of the agreement - whichever is later
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11
Q

What is the cost of borrowing?

A
  • interest rate
  • fees that providers charge
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12
Q

How must providers present the costs?

A
  • they must quote the cost as an annual percentage rate (APR) for credit card borrowing or personal loans
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13
Q

What is the APR?

A

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

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14
Q

What do regulations that implement the Consumer Credit Directive 2008 require providers to do?

A
  • to quote an APR in adverts for borrowing products - this allows people to compare the relative costs of different products on a ‘like to like’ basis
  • to fulfil these requirements of the regulations of advertising, providers must give a representative example, which is defined as the APR that will be offered to at least 51% of customers as a result of seeing the advert
  • this means 49% are likely to be offered a higher APR based on their personal circumstances and how much they want to borrow and how long
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15
Q

When are APRs fixed?

A
  • full period of the borrowing product
  • e.g. personal loans are usually fixed
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16
Q

When are APRs not fixed?

A
  • products such as credit cards have APRs that are variable - the provider may raise or lower the rate
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17
Q

How are APRs set?

A
  • in relation to the Bank Rate
  • risk of customers not repaying the loan
  • what other providers charge
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18
Q

What are overdrafts?

A
  • enable people to borrow from their current account provider by withdrawing more money from the account than they have paid in
  • overdrafts only apply to current accounts
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19
Q

what’s borrowing by overdraft sometimes called?

A
  • ‘going into the red’
  • in the days of handwritten ledgers, bank clerks wrote negative balances in red ink
  • having a positive balance is know as ‘being in the black’ because positive balances were written in black ink
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20
Q

The use of an overdraft

A
  • an overdraft allows individuals to take out more money than they have up to an agreed limit
  • the borrowing allows the account holder to bridge the time difference between making a payment and receiving enough income to cover it
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21
Q

Why might people need an overdraft?

A
  • unexpected payments
  • account holder’s monthly salary does not cover all that month’s expenses
  • makes a mistake about how much money is in that account
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22
Q

Cost of an overdraft

A
  • the cost of an authorised overdraft (planned or arranged) can vary from 0% to 40% APR up to an agreed limit
  • unauthorised overdrafts used to be charged at a much higher rate but since 2020 this is not allowed
  • providers often alter APR in line with changes in the Bank Rate
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23
Q

Why does the interest rate offered for agreed overdrafts vary?

A
  • depends on the personal circumstances and credit history of the borrower
  • providers may decide certain borrowers present a greater risk of not repaying the overdraft - therefore are charged a higher APR
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24
Q

When are overdraft costs calculated?

A
  • everyday
  • advantage for account holders because they only pay interest on the amount they borrowed that day and for the time they have borrowed it for
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25
Q

What fees may providers charge?

A
  • unpaid transaction fee
  • paid transaction fee
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26
Q

How could current account holders avoid the cost of an overdraft’s high interest rate?

A
  • sign up for an alert service from their bank
  • check their account balance regularly
  • use a basic bank account
27
Q

How do credit cards work?

A

Instead of paying the transaction amount from their own funds (debit card), people use credit cards to borrow the transaction amount from their credit card provider

28
Q

Do all sellers accept credit cards?

A
  • accepted by most but not all
  • sellers are collectively known as merchants + they display the brands of credit cards they accept at the point of sale
29
Q

Main brands for credit cards?

A

Visa and MasterCard

30
Q

What parties are involved when people use a credit card?

A
  • the cardholder
  • the merchant
  • the merchant’s bank - called the acquirer
  • the cardholder’s bank - called the issuer
31
Q

The cycle of the parties with a credit card

A
  • cardholder makes transaction on a credit card
  • the merchant passes the transaction details to its bank (the acquirer)
  • the acquirer pays the merchant the value of the transaction
  • the acquirer then sends the transaction details to the cardholders bank (the issuer)
  • the issuer pays the acquirer for the transaction
  • the issuer records the transaction on the cardholder’s statement
  • when the cardholder pays the issuer for the transaction, cycle is complete
32
Q

What happens when a cardholder uses their credit card online or over telephone?

A
  • they are asked to give the last three digits on the back of the card
  • this is the CVV - card verification value
  • the provider may also send a one time security code to the phone number associated with the card
  • this is to avoid fraud
33
Q

Advantages of a credit card?

A
  • the use of a credit card gives the customer more rights - provides protection for goods priced between £100 and £30,000
  • customer buying goods with a credit card that are faulty can claim their money back
  • using a credit card delays payments for a few weeks or spreads cost over a number of months
34
Q

Costs of credit cards

A
  • the APR (annual percentage rate) on the amount borrowed + any fees that apply
  • issuers offer an individual a specific APR and credit limit based on their personal financial status
35
Q

Why can the APRs change?

A

It can change with the bank rate and the issuer’s assessment of risk about the cardholder

36
Q

When are charges made?

A
  • purchases
  • balance transfers
  • cash withdrawals
37
Q

What are the fees that could be charged on a credit card account?

A
  • annual subscription fees
  • late payment fees
  • over-limit fees
  • cash advance fees - when cash is withdrawn on card
38
Q

What is payment allocation?

A

The order in which the card issuer uses repayments to pay off transactions and fees - can affect the cost of borrowing

39
Q

How to reduce credit card charges?

A
  • the cardholder should pay off the credit card bill in full each month
  • the cardholder will pay more interest if they just make the minimum payment each month
40
Q

What are the different types of credit cards?

A
  • Low APR cards
  • 0% introductory APR and handling fee on balance transfer
  • cash back cards
  • reward cards
  • charity donation cards
  • first credit cards
  • cards with low costs for foreign transactions
  • gold, platinum and black credit cards
  • store cards
  • charge cards
41
Q

What are low APR cards?

A
  • credit cards that offer a long term low APR
  • usually only available to people with low income or good history of repaying borrowing on time
  • attractive to people who want to borrow and spread the cost of repayment over several months, as interest costs are low
  • some issuers charge an annual fee
42
Q

What is 0% introductory APR and handling fee on balances

A
  • cardholders who have a large balance can transfer the amount they owe from one credit card to another, usually with a different provider
  • there is a 0% interest for a period of time (e.g. 6, 12, 18 months) - cardholder will find it easier to repay debt as it isn’t increasing with interest
  • balance transfer usually carry a 3% handling fee
43
Q

What are cashback cards?

A
  • a percentage of the value of all transactions is given to cardholder in cash
  • percentage varies from card to card and may be subject to certain rules
  • attractive for cardholders who repay their credit card borrowing in full every month due to no interest
44
Q

What are reward cards?

A
  • credit cards that offer rewards schemes
  • collect points that can be exchanged for vouchers to spend on goods and services
45
Q

What are charity donation cards?

A
  • can be used to donate to a particular charity - e.g. 25p is donated for every £100 spent
46
Q

What are first credit cards?

A
  • offered a higher APR and lower credit limit as the issuer doesn’t know how the holder will manage their borrowings
47
Q

What are cards with low costs for foreign transactions?

A
  • when people use credit cards abroad some issuers charge a foreign transaction fee
  • a card that has no foreign transaction fees allows people to stay in their holiday budget
48
Q

What are Gold, Platinum and Black cards?

A
  • ‘premium’ cards offered to those of high income and have higher credit limits
  • offer benefits - e.g. travel insurance, entry into exclusive airport lounges
  • personal assistance service - cardholders can ask for restaurant bookings and purchases to be made on their behalf
  • high annual fees + higher APRs
49
Q

What are store cards?

A
  • retailers offer credit cards that can only be used in their stores
  • branded with store name only and are not part of visa or Mastercard payment systems
  • APRs tend to be higher
  • benefits: free gifts, special offers
50
Q

What are charge cards?

A
  • credit cards that must be repaid in full every month
  • don’t charge interest and no APR
  • charge fees such as service fees, cash advance fees and charges, and annual fees
51
Q

Why do people take personal loans?

A
  • to be able to pay for expensive items now and spread the cost of repayment over years
  • items such as cars, home improvements, large electrical goods such as ovens
52
Q

How do personal loans work?

A
  • allow people to borrow a fixed amount over a fixed amount of time at a fixed APR
  • borrowed pay fixed repayments each month, making it easier for them to budget
  • the APR is determined by the borrowers ability to repay
53
Q

What is the principle?

A
  • the amount borrowed in a personal loan
  • tends to be between £1,000 and £10,000
54
Q

What is the term?

A
  • the period of time over which the borrower will repay the loan
  • tends to be between one and seven years
55
Q

What factors determine the value of APR? (Term lengths)

A
  • if you borrow larger amounts of money over a shorter period of time you will tend to pay a lower APR
  • if you borrow a smaller amount over a longer period of time the APR will be higher
  • the APR for cash withdrawals made from a credit card is higher than the APR for purchases
56
Q

What does the provider do when offering a personal loan?

A
  • opens a separate loan account for the borrower
  • provider pays the merchant direct for the goods or the provider will deposit the the funds in the borrowers account to make payment directly
57
Q

Difference between borrowing by overdraft and a personal loan?

A
  • personal loans are more straightforward - repayments are a set amount each month
  • loans are designed to be a larger amount of money over a longer period of time
  • overdrafts and credit cards offer borrowers more flexibility
58
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
  • tend to be for smaller amounts, hundreds not thousands - to help people meet emergency expenses before the end of the month
59
Q

Negatives of payday loans?

A
  • extremely high interest rates
  • the amount owed quickly adds up
60
Q

What is credit history?

A

A person’s previous record for borrowing and repaying money

61
Q

How is credit history used by providers?

A
  • providers check the credit history of customers before agreeing the loan
  • determines the APR, EAR, credit limit and repayment term
62
Q

How are credit histories built?

A

credit agencies record:
- the credit people have applied for
- the amounts they have borrowed over the last six years
- how often they were making late payments
- they also record defaults, country court judgments - made for bankruptcies and debts

63
Q

What may happen to customers without a credit history?

A
  • refused loans
  • charged higher rates
64
Q

What should people consider when choosing borrowing products?

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

LIBF Unit 1 (14 decks)

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