8 Low cost and high cost borrowing

You’ve looked at several different ways of borrowing in this session. Now see how much you have learned about these debt products.

Image is a close up of a debit or credit card, focusing on the embedded chip.
Figure 9 The chip in the card makes it easy and quick to make payments

Activity 4 Match the debt product to its features

Allow approximately 5 minutes for this activity

Set out in the table below are six different ways of borrowing money.

Underneath the table are nine statements which apply to at least one of these ways of borrowing.

Applying what you have learned during this session select, for each way of borrowing, the three statements that apply to them.

In the boxes in the right-hand column, type in the letters (A–I) for the three comments that apply.

Ways to borrow Features or consequences of this method of borrowing (A–I)
Mortgage
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Bank Loan
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Overdraft
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Credit card
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Store card
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Payday loan
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Features normally associated with the method of borrowing

  1. Low cost interest rate (relative to the average cost of the six ways of borrowing listed)
  2. High cost interest rate (relative to the average cost of the six ways of borrowing listed) if not on a promotional rate – e.g. 0% rate for an introductory period
  3. You risk having an asset (e.g. your home) repossessed if you don’t keep up repayments
  4. Can be interest-free for a time (e.g. introductory 0% rates for balance transfers)
  5. They can often get you price discount the first time you use them to buy goods in a shop
  6. If this facility has been prior arranged, then you can use it to borrow immediately without having to notify your bank
  7. The lender will need a valuation of the asset you are buying before lending money
  8. You have discretion about what you spend the borrowed money on
  9. Borrowing in this way might impair your credit score

Answer

Ways to borrow Features or consequences of this method of borrowing
Mortgage A, C, G
Bank Loan A, F, H
Overdraft B, F, H
Credit card B, D, H
Store card B, E, H
Payday loan B, H, I

Well done – you have nearly completed the session.

It’s now time for the end-of-session quiz. After that the session will be rounded off, and you’ll be provided with some tips if you do experience problems managing the repayments of the money you have borrowed.

OpenLearn - MSE’s Academy of Money
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