Loans And APR

Question 1

What is a loan?

Answer 1

The borrowing of a sum of money to be paid back with interest. If not paid back you may lose possessions such as your home or car.

Question 2

Why do people take out loans?

Answer 2

At times in life when we are likely to spend more than we earn, e.g when you buy property or beginning/investing in a business

Question 3

What are the 6 types of loan?

Answer 3

• credit card
• bank loan
• overdraft
• payday loans
• mortgage
• student loan

Question 4

Describe credit card loan

Answer 4

Good for short term borrowing but not long term, you must pay back what you owe as soon as possible to prevent debt growing due to high interest rates (20-30%)

Question 5

Describe bank loans

Answer 5

Good for borrowing larger amounts of money, for longer terms. Achieved through assessment, mainly given for business start ups and cars. Rates are smaller than credit cards (7-8%)

Question 6

Describe overdraft loans

Answer 6

Approved borrowing with your current bank, if you spend more money than you have you go into overdraft.
Very high daily interest rates (20-40%)

Question 7

Describe payday loans

Answer 7

Best avoided, extremely high interest (1000-2000%). Intended for short term (few days) used to get individuals to their paydays.

Question 8

Describe mortgage loans

Answer 8

Loans to buy a house, long term loans, large sums of money, small interest rates (5%)

Question 9

Describe student loans

Answer 9

Covers tuition and living costs at university, payments are determined by parents income. Interest rates low (13%)

Question 10

How do we compare loans?

Answer 10

Loans are difficult to compare due to the different types and associated fees.
APR is used to compare different loans, (annual percentage rate). APR calculates the interest you pay on a loan in a year.