Different Types Of Borrowing Flashcards Preview

Business Unit 3: Personal Business And Finance > Different Types Of Borrowing > Flashcards

Flashcards in Different Types Of Borrowing Deck (15):

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