External sources of finance

• Personal finance


  Understanding why money is important and how managing your money can help prevent future financial difficulties
• You will make important financial decisions throughout your life
• The choices you make will not be without some risk and need to be taken very carefully
• This unit will help you understand how to manage your personal finances and make informed decisions to help prevent future financial difficulties
• Functions of money


  • Unit of account
  • Means of exchange
  • Store of value
  • Legal tender
• Role of money


  • Personal attitudes
  • Life stages
  • Culture
  • Life events
  • External influences
  • Interest rates
• Financial needs and implications at different life stages


  • Childhood
  • Adolescence
  • Young adult
  • Middle age
  • Old age
• Common principles in planning personal finance

  • Avoid getting into debt
  • Control costs
  • Avoid legal action and/or repossession
  • Remain solvent
  • Maintain a good credit rating
  • Avoid bankruptcy
  • Manage money to fund purchases
  • Generate income and savings
  • Set financial targets and goals
  • Provide insurance against loss or illness
  • Counter the effects of inflation
• Methods of payment


  • Cash
  • Debit card
  • Credit card
  • Cheque
• Cash


  Notes and coins in a wide range of denominations
• Debit card


  Issued by banks with payments for goods and services being deducted directly from a current account
• Credit card


  Issued by financial institutions allowing customers to delay payments for goods and services
• Cheque


  A written order to a bank to make a payment for a specific amount of money from one person's account to another account
• Current account


  An account with a bank or building society designed for frequent use, e.g. regular deposits and withdrawals
• Overdraft


  The ability to withdraw money that you do not have from a current account
• Features of a current account

  • Rate of interest paid on any positive balance
  • Rate of interest charged on a negative balance
  • Overdraft limit
  • Charges on unauthorised overdrafts
  • Additional incentives
• Banks will try to attract customers by changing the features of their current accounts
• Types of current account

  • Standard
  • Packaged, premium
  • Basic
  • Student
• Standard account


  • Includes standard features such as the ability to pay and withdraw money, cheque book, debit card, interest payments on positive balances and a pre-agreed overdraft limit
• Packaged, premium account


  • Offers additional features to a standard account, for example car and house insurance, credit card protection, breakdown cover and cash back on certain transactions
• Basic account


  • Offers only limited features designed for those customers who may otherwise find it difficult to open a bank account due to poor credit ratings. A basic account will not offer an overdraft and will not pay interest on positive balances
• Student account


  • Designed specifically to meet the needs of learners. Common features include an agreed overdraft limit and incentives to join the bank, for example free rail cards or cash
• Few businesses have just one product. They have a range of products to meet the needs of different customers
• Different types of borrowing

  • Overdraft
  • Personal loan
  • Hire purchase
  • Mortgage
  • Credit card
  • Payday loan
• Overdraft


  Allows you to withdraw money that you do not have from a current account
• Personal loan


  Gives you the ability to borrow a set amount of money, normally for a specific purpose, to be repaid in regular instalments with interest
• Hire purchase


  Allows you to have use of an item immediately but pay for it in regular instalments. The item remains the property of the seller until all instalments have been made
• Mortgage


  A long-term loan to fund the purchase of assets, normally paid back over a long time, for example 25 years. It is secured against an item, for example a house
• Credit card


  Goods are paid for by card and can be paid for either at the end of a set period, normally a month, when a statement is issued or over time with the card provider stating a minimum payment each month
• Payday loan


  A short term source of finance used to bridge the gap between now and next receiving a wage. It will normally only available for relatively small amounts at very high rates
• Advantages and drawbacks of different types of borrowing

  • Overdraft
  • Personal loan
  • Hire purchase
  • Mortgage
  • Credit card
  • Payday loan
• Credit card


  Goods are paid for by card and can be paid for either at the end of a set period, normally a month, when a statement is issued or over time with the card provider stating a minimum payment each month. The minimum payment will be a percentage of the balance on the credit card.
• Credit card


  It may be suitable when buying high price goods or services, for example a holiday, or at times when expenses are higher than usual, for example Christmas, to spread the costs of spending.
• Credit card


  It may also just be used for convenience and safety as an alternative to using cash.
• Payday loan


  This is a short term source of finance used to bridge the gap between now and next receiving a wage. It will normally only available for relatively small amounts at very high rates.
• Payday loan


  It may be suitable in an emergency to meet cash shortages.
• Types of borrowing


  • Overdraft
  • Personal loans
  • Hire purchase
  • Mortgages
  • Credit cards
  • Payday loans
• Overdraft


  • Interest is charged only on the amount outstanding
  • Can be paid off without penalties
  • An overdraft facility can be prearranged and only used if needed
  • Provides a short term solution to cash flow problems
• Overdraft


  • When used, interest charges are often high
  • Additional penalty charges for going over a pre-arranged limit are often very high
  • Not the cheapest form of borrowing
  • The ease with which these can be obtained could encourage overspending
• Personal loans


  • Regular, pre-agreed payments make planning and budgeting easy
  • Useful when looking to purchase a specific item of medium to high value, e.g. a car or home improvement