Providers will ‘sell’ you money that you can use to buy things now and use/enjoy now when you cannot afford to buy them with cash. This is also called ‘taking credit’.
You repay the amount of money that you borrowed, plus interest.
When you borrow money, you sign a legal contract.
Only people aged 18 and over are responsible for the contracts that they sign under UK law. So only people aged 18 and over can borrow money.
Borrowing Interest Rate
Quoted as an annual percentage rate (APR).
These rates include some fees and charges, as well as the price for borrowing the money. roviders must calculate APRs using a standard formula. This means that borrowers can use the APR to compare the cost of borrowing on a ‘like for like’ basis.
Except overdrafts, which are quoted as an equivalent annual rate (EAR).
A flexible way of borrowing, overdrafts allow you to take more money from your current account than you have paid in. Overdrafts are intended for short-term borrowing such as for a few days before your pay arrives. You are charged only for the money that you borrow and for the length of time that you borrow it. Interest rates are variable.
There can be a big difference in the interest rate charged for authorised overdrafts and unauthorised overdrafts.
In addition to interest rates, providers may make penalty charges.
Usually for terms of between three and five years. The interest rate is usually fxed. It is usually a lower APR than an overdraft. People use personal loans for buying items such as cars and for making home improvements.
These loans are cheaper than long-term credit card borrowing. So borrowers who have owed a lot of money for a long time on their credit cards may be better off getting a personal loan.
Loans that help borrowers to buy property, such as a house or a flat. Mortgages are secured on the property. This means that if the borrower does not repay the mortgage (if they default), the provider can sell the property to get back its money.
Interest rates on mortgages can be fixed or variable.
Credit and other payment cards
Credit cards are a flexible way of borrowing money in the short term, up to a credit limit set by the provider. Interest rates on credit cards are variable and tend to be high, so delaying repayment means that the debt grows quickly.There are other types of payment card that involve taking credit.
Charge cards let the cardholder borrow until the next statement. But the amount borrowed must be repaid in full at that time.
Store cards are credit cards that you can use only in that shop. These tend to be very expensive.
Used by stores to offer ‘in-store credit’ to buy, for example, a freezer, camera or furniture. The money is lent by a finance company. The instalments on hire purchase tend to be fixed for the term of the credit, often three years.
do not own the goods that they buy through hire purchase until they have paid the last instalment. If they miss payments, the finance company can ‘repossess’ the goods, subject to certain rules.
Current accounts are products that meet the needs to:
• keep money safely; and
• make and receive payments (known as ‘transaction needs’).
The Financial Services Compensation Scheme (FSCS) guarantees up to £85,000 held in one person’s accounts with one provider.
Note that a particular account may have only some of the following features.
- Cash card
- Debit card
- Standing orders
- Direct debits
- Online payments
Protection against the financial consequences of risks that might occur, for example fire, theft, accident
All insurance, except motor insurance, is voluntary. People will buy it only if they think that the risk of something happening makes it worthwhile paying the cost of the protection.
They are buying ‘peace of mind’.
The price of the insurance policy. The more likely a risk is to occur, and the larger the amount of money needed to protect against it, the higher the premium.The insurance company puts all of the premiums that are paid for a certain type
of policy into a pool.
Policyholders who suffer the risk, such as theft, are paid from the pool. Policyholders who do not suffer the risk receive nothing.
Covers the cost of repairing or rebuilding a property if it is damaged or destroyed, for example in a fire or if a tree falls on it.
Policyholders may be able to add accidental damage for an extra premium.
Covers someone’s home contents, such as carpets, furniture, equipment and personal belongings kept at home. The risks covered are usually loss or damage from such things as fire, flood or theft. Policyholders can pay extra and receive cover for accidental damage or loss.
Some policies cover personal belongings when they are taken out of the home for short periods of time.
Life insurance policies with a large element of savings. They pay out at the end of the term of the policy or if the insured person dies within the term.
Policyholders may withdraw the investment part of the policy before the end of the term.
Illness and Disability
• Permanent health insurance (PHI)
Pays an income if the insured person is unable to work because of illness.
These policies will pay out only after a certain number of weeks of the
illness. They usually pay between 60 and 75 per cent of the person’s usual
- Critical illness cover (CIC)
Pays a lump sum (a one-off payment) when the insured person is
diagnosed with a certain type of illness such as cancer, stroke or heart
attack. The payment is made whether someone is able to work or not.
- Private medical insurance (PMI)
Covers certain private medical bills for the insured person.
Income Replacement Insurance
Accident, sickness and unemployment (ASU)
Cover that pays a set amount of income if someone has an accident or
illness that prevents them from working. These policies also provide a
stated income if the insured person loses their job.
• Family income benefit policies (FIBs)
Term insurance that pays regular amounts, usually monthly, to the family of
the insured person who has died.
• Mortgage payment protection insurance
Pays the insured person’s monthly mortgage repayments if they cannot due
to accident, illness or redundancy.
When the insured person dies, the insurance policy
amount (the sum assured) is paid to their dependants.
Some life cover is for ‘whole-of-life’. This means that, as long as the
policyholder keeps paying the premiums, the policy will cover them for the rest
of their life. This is called life assurance because the person who is covered will definitely die at some point.Term insurance is life cover that lasts for a specific length of time (the term).
The person covered may not die within this term, so this protection is called
insurance. Term insurance is often taken out by people who borrow money on a
mortgage. The term of the insurance matches the term of the mortgage so that the debt is repaid if they die.
Motor Insurance (mandatory)
A certain level of motor insurance is compulsory under UK law for people who drive. They must be covered so they can pay other people if they hurt them or damage their car or other property.
This is called ‘third-party’ cover.
The basic policy is called ‘third-party, fire and theft’. Drivers who want a higher level of cover can buy ‘comprehensive’ policies instead. Comprehensive covercosts more.
Covers the costs of medical treatment when on holiday and the cost of replacing luggage or belongings that are lost or stolen or damaged.
These policies often cover the costs of having a delay in your journey too, eg having to stay in a hotel for extra nights.