Types Of Borrowing Flashcards
Overdraft
This allows you to withdraw money that you do not have from a current account
+ Suitable for short term needs
+ Interest is charged only on the amount outstanding
- Interest charges are often high
Personal Loan
This gives you the ability to borrow a set amount of money, normally for a specific purpose, to be repaid in regular instalments with interest
+ Suitable for high price items e.g. a car or home improvements
+ Regular pre-agreed payments make planning and budgeting easy
- May have to be secured against an asset
Hire Purchase
This allows you to have use of an item immediately but pay for it in regular instalments. The item remains the property of the seller until all instalments have been made
+ Suitable for one-off / infrequent purchases
+ Spreads the cost of an expensive item over a period of time
- Ownership of the asset may legally be kept by the seller until final payment is made
Mortgage
A long-term loan to fund the purchase of assets to be paid back over a long time e.g. 25 years
+ Suitable for assets that will maintain value for a long time
+ Interest rates can sometimes be fixed reducing risk of fluctuations
- Failure to meet repayments may lead to a loss of a home and affect an individual’s future credit rating
Credit Card
Goods are paid for by card and can be paid for either at the end of a set period or over time
+ Suitable for high price goods/services e.g. a holiday to spread cost of spending
+ The credit card holder could pay above the minimum rate and speed up rate of repayment and reduce interest incurred
- Can encourage overspending, sometimes on unnecessary purchases
Payday Loan
Short term source of finance used to bridge gap between now and next receiving a wage
+ May be suitable in an emergency to meet cash shortages
+ Easy to secure
- Interest rates are very high and the cumulative amount to be repaid can quickly spiral out of control
