Types of borrowing - Lecture notes 1 PDF

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Types of borrowing (Money)...

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1.

Overdraft - Overdrafts can be arranged or unarranged. Look carefully at the fees. Some providers offer a 0% overdraft, others will charge you for going into your arranged overdraft. Short-term borrowing, emergencies, unforeseen costs  Advantages: Flexibility. An overdraft is only used when you need it, therefore potentially being cheaper than a loan.  Disadvantages: You may have to pay for an extended overdraft. Some companies have a large fee if you go over the pre-arranged overdraft limit. Some companies can demand for the money to be repaid right away.

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Personal loans - Choose a licensed provider. Check early repayment charges. Usually repayable in fixed monthly instalments. Larger amounts of money for specific purchases such as a new car  Advantages: Can be used for a variety of things. Quick availability, usually within 25hr you get the money. Minimal documentation only a few documents required, such as identification and a payslip or such.  Disadvantages: Loans usually have high interest rates. Loans are usually only given to people with good credit rating, as a way of having a guarantee that they will get their money back.

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Hire purchases - Hire purchase is a way to finance buying a new or used product. You (usually) pay a deposit and pay off the value of the item in monthly instalments, with the loan secured against the item. This means you don’t own the product until the last payment is made.  Advantages: Customers can have a newer product than if they would buy it outright. The cost is paid in monthly instalments, making it easy to manage. You own the product once the final instalment has been paid. No VAT on monthly payments.  Disadvantages: Product can be repossessed if the payments aren’t made. It can affect you credit rating. The finance company are the owners of the product until the final instalment

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Mortgages - A mortgage is a loan secured against your home. Remember that your home may be at risk if you do not keep up payments. House purchase, mortgaging for better terms/interest rate, a further advance (additional secured loan) on your original mortgage  Advantages: Cost effective as the interest rates of borrowing are usually lower than other types of borrowing. The government introduced initiatives to help choosing and paying a mortgage. The mortgage is easy to repay, usually being lower monthly than rent in most areas.  Disadvantages: Commitment to pay a lot of money back. Even over 25 year, you’re paying back a lot more than you borrowed. Your house can be repossessed if you don’t keep up with payments.

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Credit cards - Loyalty schemes available. 0% interest and balance transfer offers are often available. Keep up with the minimum monthly payments (or clear your debts each month to avoid interest). Check the small print. Compare similar products. If borrowing a large amount a personal loan may be a more cost-efficient option. Short-term borrowing, security of online purchases (store cards are also a type of credit card)  

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Advantages: Provides protection on purchases. User can pay in advance if he chooses to. Can be used for a variety of items. Disadvantages: Can encourage overspending. Interest rates higher than a personal loan.

Payday loans - Payday loans are a form of short term borrowing, often with very high interest rates. Payday loans may not be suitable for long term borrowing. Short-term cash loans until you next get paid  

Advantages: Easy to secure. Helps to solve immediate short term cash flow problems. Disadvantages: The interest rates is very high. The amount to be paid can quickly spiral out of control....