H/W TOPIC 6 4/11/19

Activity 6.1

1.High interest payments

When you borrow a money, you are obviously required to repay the original, or principal amount
back and in nearly all cases you pay more than that because of the added on interest.

2.Credit damage

Each time you decide to borrow money, you risk damaging your credit score if you don’t pay as
agreed.

3.Strained relationships

While you’re more likely to get a better deal from a friend or family member, taking a loan from
them lead to a number of awkward situations.

4.Feeling stuck

Taking money from a lender requires signing an agreement and making a commitment to pay a
certain amount back each month.

5.Less flexible budget

Lastly owing money to a lender will impact cash flow limitations on your future income.

Activity 6.2

Advantages:

 Credit Improvements: one of the advantages of borrowing money is that, depending on your
debt situation, you can actually improve your credit in the process of taking a loan from a
bank. If you take out a long term loan from a bank and make all of your payments on time,
your credit score will improve over the life of the loan. In case you finish paying off the
entire loan on time without any missed payments, your credit score will actually improve.
 Bank Loans Are Flexible: Bank loans involve a lot of different variables, including the term of
the loan, the fees that apply to the loan, the requirements for application, the interest rates,
and so on. These will be different from one bank to the next and are typically negotiable,
allowing you to go for the terms that favour you the most. With the ability to shop around
from one bank to another and to negotiate for better terms, it’s very easy to get a good deal
with a bank loan.

Disadvantages:

 Guarantee Secured: If the loan is secured by guarantee, then it means that someone else has
co-signed on the loan and it is their personal assets or the assets of their business that are
on the line. If you don’t repay the loan, you will be putting someone else at risk. If the bank
takes over your business, it is up to them to figure out how to recover their money from
your business, which might involve selling it as a whole or disbanding and liquidating it
altogether. That can be devastating for many business owners.
 High-Interest Rates: When you take a loan from a bank, there is always the chance that
interest rates could go up over time, especially if you’ve taken a loan with variable interest
terms. That could potentially make the loan very difficult to repay. There is also the
 possibility that the terms of the loan can change during the life of the loan, making it
unfavourable for your business. Many banks have been known to make stricter demands
and harsher terms for loans given to businesses when those businesses undergo a period of
failure.
 It Could Ruin Your Credit: Your credit history is an important factor that the bank will
consider when deliberating on whether to give you a loan or not. You don’t have to worry
about your credit rating when you’re exploring other sources of funding, such as equity
financing, but it is one of the most important factors in debt financing.
If you have a good credit rating, then you can look forward to better chances of getting your
loan application approved and getting favourable terms. On the other hand, bad credit will
make you unattractive to most banks and make it very hard for you to get a loan.

Activity 6.3

Tom can reduce the amount he pays for an overdraft better by looking at different providers that
give cheaper deals or deals that suite him better. Tom knows that he only needs this overdraft for
three days and some current-account providers have deals where there is a buffer you pay for along
with a daily charge which would be cheaper than the total interest which Tom is paying for

Activity 6.4

Advantages of using Credit card:

 A credit card is safer than carrying cash. While there’s only a small chance of having lost or
stolen cash returned, a credit card can quickly be cancelled if you lose your wallet. Most
financial institutions also have security processes in place to protect you if your card has
been lost or stolen or if you suspect your account has been used for a fraudulent
transaction.
 A credit card can build your credit rating. Your credit card account repayment history makes
up a key part of your credit file. If you keep your account in good standing, this information
will help you build up a good credit score, which could increase your chances of approval for
other products such as car loans or a mortgage.
 You can get interest-free days. If you pay your balance in full before the statement period
ends, you can be rewarded with interest-free days on future purchases for a set period.

Disadvantages of using credit card:

 Paying high rates of interest. If you carry a balance from month-to-month, you’ll pay interest
charges. Purchase and cash advance interest rates can be as high as 22% p.a., so you can end
up paying hundreds or thousands more than you initially charged in interest if you’re unable
to make repayments each month.
 Credit damage. Missed credit card repayments and ongoing debts are recorded on your
credit file and can impact your chances of getting a loan down the track. See our guide on
how to improve your credit file for some tips.
 Credit card fraud. There are a range of fraud schemes that target credit cards. While you can
be compensated for illegal transactions on your account, dealing with credit card fraud can
still be a time-consuming and stressful experience.
Activity 6.5

People may take out a personal loan rather than using a credit card because they might find a
personal loan more fitting for their situation in which they are spending. Personal loans are for long
term borrowing, therefore they have cheaper interest than credit cards which you get charged
interest daily and have 1 month to pay back.

Activity 6.6

I think the companies who are giving these payday loans should be responsible for the people who
are getting into debt because they are taking advantage over these people knowing that they aren’t
able to pay back the money they are borrowing and adding interest for their own benefit

I think if a friend was going to borrow a payday loan and I thought that this wasn’t suitable for him I
would suggest using a credit card or overdraft.

Activity 6.7

 His income is to low and it may suggest that he would suffer in taking a loan because he
would have to pay for car insurance and road tax as well as petrol and it would be difficult to
pay back the loan as well.
 To improve his chances of getting a loan he should work more hours to get a higher rate of
income

Activity 6.8

Some of the factors she should consider when choosing a borrowing product is whether it is a short
term or long term borrowing product. She should consider the amount of interest being charged as
well.

Activity 6.9

The lender would have to consider whether Alwyn has a suitable credit score to take out this loan
and her income.

Activity 6.10

APR = Annual Percentage Rate

Authorise Overdraft = are arranged in advance, so they’re also known as ‘arranged’ overdrafts. You
agree a borrowing limit with your bank, and you can spend money up to that limit through all the
normal payment methods.

Card verification value (credit card) = is a combination of features used in credit, debit and
automated teller machine (ATM) cards for the purpose of establishing the owner's identity and
minimizing the risk of fraud.

County court judgement = is a legal declaration of liability made by County Courts setting out how
much is owed to a claimant, how much should be paid to them and over what period.

EAR = a representative interest rate that shows the rate you would pay if you remained overdrawn
on your current account for a year. Depends on the simple rate of interest, how often it is charged,
and the effect of compound interest. EAR does not take into account overdraft fees.
Early repayment penalty (personal loan) = term of a mortgage contract where the customer has a
product that includes a fixed, capped or discounted interest rate.

Minimum payment (credit card) = minimum you have to repay on your credit card each month.

Unauthorised overdraft = Exceeding your arranged overdraft limit, or going into the red when the
bank has not agreed an overdraft, is known as an unarranged or unauthorised overdraft.

Unsecured borrowing = An unsecured loan is money that you borrow without using collateral. Due
to the lack of collateral, the lender faces a higher level of risk. Because of this, the interest rate may
be higher and the borrowing limit may be lower. Common examples of unsecured loans include
credit cards and personal lines of credit.