Understanding Overdraft vs Personal Loans

Study Notes

Overdraft

Interest is only charged on the outstanding amount
Can be paid off without penalties
Can be prearranged and only used when needed
Provides a short term solution for cash flow issues
Interest charges are often high
Additional charges for going over a pre-arranged limit are high
Not the cheapest form of borrowing
Ease of access could encourage overspending

Personal Loans

Regular, pre-agreed payments make budgeting easier
Generally only issued to individuals who can prove their ability to make repayments
Useful for purchasing medium to high-value items, like a car or home improvement
May be secured against an asset, leading to potential loss of the asset if repayments are missed
Not suitable for short-term loans

Hire Purchase

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 now that they might not be able to afford otherwise
Interest charges may be higher than other traditional loans
Ownership of the asset may be kept by the seller until the final payment is made
Agreements can be manipulated to make a purchase seem deceptively appealing

Mortgages

Spreads the cost of expensive items over a long period of time, like a house over 25 years
Interest rates can be fixed or tracked, reducing the risk of fluctuations
Interest payments can vary, affecting a borrower's ability to repay or meet other expenses
Failure to meet repayments can lead to a loss of a home and affect a person's credit rating
Penalties may be applied to early repayment

Credit Cards

Credit card holders can pay above the minimum rate to speed up repayment and reduce interest
Can be used for items of multiple sizes and value to a limit without needing to secure against an asset
Provides some protection on purchases
Can encourage overspending, sometimes on unnecessary purchases, and can lead to debt problems
Interest rates are often higher than on a personal loan

Payday Loans

Help solve immediate short term cash flow problems
Relatively easy to secure
Interest rates are very high and the cumulative amount to be repaid can quickly spiral out of control

Description

This quiz explores various financial options such as overdrafts, personal loans, and hire purchase agreements. Learn the benefits and drawbacks of each type of credit and how they can affect your financial situation. Test your knowledge on the appropriate use and implications of these borrowing methods.