A4 Flashcards
What are the different types of borrowing?
Bank overdraft Short/medium term personal loan Hire purchase Mortgages Credit cards Payday loans
What is a bank overdraft?
- An agreement with the bank to overspend on the account up to an agreed limit
- Good to cover a short term cash flow problem
What are the advantages of a bank overdraft?
Businesses and individuals are able to borrow what they need to over short falls in cash flow.
What are the disadvantages of a bank overdraft?
Interest is charged according to the amount overdrawn and the time involved this is a very expensive form of finance
What is a short/medium term personal loan?
A specific sum of money is borrowed for a fixed period. Typically 3 to 10 years.
It may be used to buy something expensive like a car, sofa or house improvements
What are the advantages of a personal loan?
Financial planning is made easier as repayments are made in regular instalments.
What are the disadvantages of a personal loan?
Interest has to be payed on the loan. The interest rate tends to be higher for short compared to medium term loans.
What is a mortgage?
These are loans for the purchase of land or buildings. They are usually for vast sums of money and are paid back over 20 - 35 years
What are the advantages of a mortgage?
The loan allows the company to purchase land or buildings. The business has no longer to pay back the loan. The land or buildings are the security for the loan.
What are the disadvantages of a mortgage?
Loans are usually only given when large sums of money are needed. Interest has to be paid on the loan.
What is a credit card?
- Issued by financial institutions not necessarily banks
- They allow customers to delay payments for goods and services
What are the advantages of a credit card?
- Allows a period of credit that is interest free
- Most are widely accepted
- Suitable for online transactions
- Offers a degree of protection on purchases
What are the disadvantages of a credit card?
- Interest is charged on balances not paid within one month
- Interest is paid on cash withdrawals typically 2.5%
- Can encourage a customer to overspend and get into debt
What is a payday loan?
This is a short term source of finance used to bridge the gap between now and your next pay check.
What are the advantages of a payday loan?
- They help meet cash shortages and temporary cash flow problems.
- They are easy to apply for and get
What are the disadvantages of a payday loan?
- Interest rates are high some can be up to 1000%
- If you can’t repay it straight away the amount to be repaid can spiral out of control
What are the different types of saving or investment?
Individual savings accounts Deposits and savings accounts Premium bonds Bonds or gilts Shares Pensions
What is an individual savings account?
This type of savings account does not charge tax on the interest received
What are the advantages of an ISAs?
- Tax is not charged on the interest earned so the saver benefits
- Interest rates in these accounts are slightly higher than other types of saving accounts.
What are the disadvantages of an ISAs?
- There is a limit set on the amount you can deposit into an ISAs over a year
- There can be a limit on how many withdrawals you can do per month.
What are deposits and savings accounts?
These are accounts where interest is paid to the account holder on the balance.
What are the advantages of deposits and saving accounts?
- Interest is paid on positive balances.
- Accounts can sometimes require regular amounts to be deposited forcing the saver to follow a savings plan
What are the disadvantages of deposits and savings accounts?
- Interest earned is taxed
- The rate of interest paid on savings is lower than the rate of interest charged on borrowing.
What are premium bonds?
It is a government scheme that allows people to save a set amount of premium bonds. The holder does not get interest but has the chance to win big cash prizes every month.
