A4 Different Types of Borrowing
Consider this: You buy a TV for $500 using borrowed money and pay 30% interest on that borrowing. How much did that TV actually cost you?
A overdraft is a feature of a bank account that lets you continue to withdraw cash and make electronic payments after the balance of your account reaches zero. This may help you have some flexibility in your spending or allow you to make purchases before you receive your salary. Overdrafts do have high interest.
Personal loans are amounts of money that you can borrow from a bank or other lender. You will receive the money in one lump sum but pay it back over multiple smaller installments including interest. For example you may decide to take out a loan to make some home improvements and pay it back over 2 years, rather than saving for two years and having to wait to improve your home.
Hire purchase is a way of purchasing a large item by paying in installments while you are using it and owning the item on the last installment. For example, you may need a car but do not have such a large amount of money to buy one. You can make a hire purchase arrangement with a car seller, start using the car straight away while making payments each month. However, until the final payment is made, the car is still technically owned by the seller and they can take it back if you miss a payment.
Credit cards are plastic cards that you can carry in your wallet or purse and can use to buy products and services in shops or online. The money spent does not come from your bank account, rather you are borrowing it fro the credit card company. You will need to make at least one payment a month but you can choose if you want to make a minimum payment or the full balance. However, credit card companies charge high interest so it is important that you consider this.
A payday loan is a short term loan that a lender with issue with the agreement that you will pay them back with your next wage or salary payment. They charge very high interest and are often targeted at people who struggle to get overdrafts or credit cards due to poor credit rating. Due to high interest rates, you should always fully consider whether you can afford to pay this back before taking one out.
