A4
- Created by: Megantopping
- Created on: 13-11-19 09:25
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- A4 - Managing Personal Finance
- Borrowing
- Overdraft
- An agreement with the bank where businesses can make payments from their bank account exceeding the available cash balance.
- Interest is only charged on the amount borrowed An overdraft can be pre-arranged and used to meet short-term cash flow problems
- If the overdraft has not been pre-arranged, the penalty charges are usually very high Can encourage overspending due to the ease at which these can be obtained
- An agreement with the bank where businesses can make payments from their bank account exceeding the available cash balance.
- Personal loans
- Allows an individual to borrow a set amount of money which is to be repaid in regular instalments, with interest
- Budgeting is easier as the payment plan will be pre-agreed and involve regular set payments Useful when looking to purchase a specific item of medium to high value e.g. car
- Likely to be an unsecured loan and therefore interest rates are going to be highNot suitable for everyone as a good credit rating and credit history is required to be eligible
- Allows an individual to borrow a set amount of money which is to be repaid in regular instalments, with interest
- Hire Purchase
- Allows an individual to have use of an item immediately but pay for it regular instalments the property is only owned by the individual when the final instalment has been paid
- Spreads the cost of an expensive item over timeCredit is secured against the specific item being purchased
- It is a fixed contract. If your circumstances change during this and repayments cannot be made, you could lose the assetLikely to pay more for the asset compared to using cash due to interest change
- Allows an individual to have use of an item immediately but pay for it regular instalments the property is only owned by the individual when the final instalment has been paid
- Mortgaes
- A long-term loan to fund the purchase of assets e.g. property and will be repaid over a long period e.g. 25 years
- Enables an individual to spread the cost of an expensive item over a long period of timeInterest rates can be fixed or tracked against the standard variable rate which reduces the risk of fluctuations and helps to make budgeting easier
- It is an enormous debt carried over a long period of timeThe asset (home) can be repossessed if regular repayments are not made
- A long-term loan to fund the purchase of assets e.g. property and will be repaid over a long period e.g. 25 years
- Credit cards
- Allows an individual to pay for goods or services on card with a statement issued at the end of each month. The balance can be paid in full without incurring or in smaller amounts with interest charged
- UntAllows a period of interest free credit (usually 1 month) providing the balance is repaid in fullProvides some protection on purchasesitled
- Can encourage individuals to overspend High interest rates are charged if the balance is not cleared at the end of each month
- Allows an individual to pay for goods or services on card with a statement issued at the end of each month. The balance can be paid in full without incurring or in smaller amounts with interest charged
- Payday Loans
- A short-term source of finance that can help to bridge the gap between the present moment in time and receiving a wage
- A fast source of cash in a financial emergencyDo not require a credit report and therefore eligibility for this type of loan is likely to be guaranteed
- The loan is for a short period onlyInvolve both fees and high interest payments - the charges are significantly higher than with a standard bank loan.
- A short-term source of finance that can help to bridge the gap between the present moment in time and receiving a wage
- Overdraft
- Insurance
- Car
- To cover both theft and accidents - there is a legal requirement to insure any car that is on the road and this protects the driver, passengers and other road users
- Final outcome and value of the pension is difficult to predict If individuals move jobs it may mean that a number of policies are held, reducing the cumulative value of savings
- Ensures legal requirements are satisfied Protects against theft or damage
- To cover both theft and accidents - there is a legal requirement to insure any car that is on the road and this protects the driver, passengers and other road users
- Home and contents
- Home - covers the physical building against events like a fire or flood damage. Contents - covers the physical items inside the house & when they are used away from home
- Protects against damage that may be too expensive to repair and would result in the loss of a home Contents are protected both inside and outside of the home
- Premiums are an additional expense to home ownership Some items cannot be replaced due to the value beyond their financial worth e.g. photographs, jewellery
- Home - covers the physical building against events like a fire or flood damage. Contents - covers the physical items inside the house & when they are used away from home
- Life assurance and insurance
- Life assurance - an ongoing policy to pay a lump sum upon death. Life insurance - a policy for a set period of time to pay a lump sum if you die within that period
- If the life assured survives the term, there will be no pay out Cover taken on a whole life basis ‘assurance’ is much more expensive
- Provides peace of mind to family following the bereavement of a homeowner Cost of cover is relatively low as life expectancy has risen
- Life assurance - an ongoing policy to pay a lump sum upon death. Life insurance - a policy for a set period of time to pay a lump sum if you die within that period
- Travel
- Protects individuals or groups while abroad. Cover usually includes illness, loss or theft of property, cancellation and emergencies up to predetermined limits
- Provides protection to personal belongings when away from home Covers medical costs when on holiday
- An additional cost when travelling abroad that may be utilised The person suffering the loss is likely to have to pay costs upfront and then claim back later
- Protects individuals or groups while abroad. Cover usually includes illness, loss or theft of property, cancellation and emergencies up to predetermined limits
- Pet
- Protects the owners of pets against some or all of the expenses associated with treating an injured or sick animal e.g. vet fees
- Avoids excessive vet feesInsurance can avoid having to make difficult decisions about treatment on the basis of affordability
- An additional expense to protect against the unexpected May never recover the true value of the policy if the pet is fit and well
- Protects the owners of pets against some or all of the expenses associated with treating an injured or sick animal e.g. vet fees
- Health
- Covers individuals, families or employees against medical expenses including assessments, treatments and loss
- Premiums can be expensive depending on the level of cover required A further expense on something that you hope you will not use
- Used for private healthcare often means treatment can be quicker and with access to better facilities Some compensation is provided when ill which can reduce the financial burden and stres
- Covers individuals, families or employees against medical expenses including assessments, treatments and loss
- Car
- Saving and investment
- Individual savings account (ISA)
- A tax-free way to save or invest
- Income tax is not charged on the interest earned allowing the saver to keep all of the rewards Interest rates can be slightly higher than in an alternative savings accounts
- There is a limit on the amount that can be placed in an ISANotice is often required to make withdrawals and there is often a limit on the number of withdrawals made
- A tax-free way to save or invest
- Deposit and savings account
- An account where interest is paid on the balance
- Interest is earned on positive balances Setting up a regular deposit amount can encourage good financial habits
- Interest earned is taxed Interest earned will be less than the interest paid on borrowing, therefore any benefits are lost if the individual has borrowing to repay
- An account where interest is paid on the balance
- Premium bonds
- A government scheme that allows individuals to save, up to a set amount, in bonds. No interest is earned but the bond is placed into a regular draw for cash prizes
- Can be easily withdrawn with no loss or penalty A chance to win substantially more than could be earned in interest
- No guaranteed return on investment The amount invested, assuming zero or low returns, loses value due to inflation
- A government scheme that allows individuals to save, up to a set amount, in bonds. No interest is earned but the bond is placed into a regular draw for cash prizes
- Bonds and Gilts
- These are fixed term securities where the individual lends money to companies and governments in return for interest payments
- Regular fixed returns Spread risk across a range of markets
- Risk of losing some, or all of the value of the investment if the bond or gilt value fallsInterest payments may not be received if the issuer is unable to make payments
- These are fixed term securities where the individual lends money to companies and governments in return for interest payments
- Shares
- Investments in business in return for equity. The shareholder becomes a part owner of the business
- Share prices fluctuate giving the potential for a high rewardAdditional benefits for being a shareholder e.g. discounts and special offers
- Share prices fluctuate offering a potential high risk There is no guarantee of a return on the investment
- Investments in business in return for equity. The shareholder becomes a part owner of the business
- Pensions
- Long term savings plans where individuals make regular contributions through their working life. This is then repaid upon retirement, either as a lump sum or regular payments.
- Encourages individuals to save throughout their working life for retirement Some policies are boosted by employer contributions which increases the final value of savings
- Final outcome and value of the pension is difficult to predict If individual move jobs it may mean that a number of policies are held, reducing the cumulative value of savings
- Long term savings plans where individuals make regular contributions through their working life. This is then repaid upon retirement, either as a lump sum or regular payments.
- Individual savings account (ISA)
- Borrowing
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