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Types of borrowing (Overdraft (Advantages (Paid of without penalties, Can…
Types of borrowing
Overdraft
Advantages
Paid of without penalties
Can be prearranged and only used if needed
Short term solution for cash flow problems
Interest is charged only on the amount outstanding
Disadvantages
Interest charges often high
additional penalties charge for going over prearranged limit
Not cheap form of borrowing
Encourage overspending
Personal loans
Advantages
pre agreed payments which makes budgeting easier
Only issued to individuals who can pay the money back
Useful for when purchasing a specific item of medium to high value
Disadvantages
May have to be secured against an asset
not really suitable for short term loans
Hire purchase
Advantage
Spreads cost of expensive items
Credit secured over specific item
Often allows the customer to afford now that they could not afford otherwise
Disadvantage
Interest charges may be high
Ownership of assets may legally be kept
Agreements can be manipulated
Mortgages
Advantages
Allows the customer to spend the costs of expensive items over a long period of time
Interest rates depending upon mortgage deal which sometimes can be fixed
Disadvantages
Interest payments can vary which affects the borrows ability to pay
Failure to meet payments may lead to loss of home
penalties may apply to early repayments
Credit cards
advantages
Credit card holder can pay above the minimum rate if they wish
can be used for multiple sizes and values to a limit
Disadvantages
Can encourage overspending lead to debt
interests rates often higher than a personal loan
Payday Loans
Advantages
Help solve immediate short term cash flow problems
Disadvantages
Interest rates are very high