BTEC Business: Personal Finance

Personal finance questions are built around the gap between what a product is called and what it actually does. Someone who will be two hundred pounds short for four days does not need a five-year loan, however attractive its interest rate looks next to an overdraft's. Someone buying a car on hire purchase is not the owner while the payments are running, whatever it feels like from the driving seat. And the annual percentage rate exists to let two products be compared on the same footing, which is exactly what a lower monthly repayment does not tell you. Three questions here are calculations, each worked line by line: simple interest, where the trap is answering with the closing balance instead of the interest; compound interest, where the answer is not twice the first year's interest, because the second year earns interest on the first year's too; and a monthly budget where the variable spending is easy to leave out. The rest cover which insurance replaces an income, what a lender is actually looking at in a credit record, why a higher expected return is the price of accepting risk, and the difference between spending money you have and borrowing money you do not. Every person and product here is invented, and nothing in it is advice. Zestly is an independent study tool. It is not affiliated with any exam board and it is not an exam centre.

• Match a borrowing product to the length and size of the need, not to its headline rate
• State when ownership passes under a hire purchase agreement
• Say what APR makes comparable, and what a monthly repayment does not show
• Calculate simple interest, and tell the interest apart from the closing balance
• Calculate compound interest and explain why it exceeds the simple equivalent
• Work out a monthly surplus using both fixed and variable spending
• Identify the product that replaces an income during illness
• Say what harms a credit record, and why a higher expected return accompanies higher risk

One thousand pounds is left for two years at 5 per cent a year, with the interest added to the account each year. — 102 pounds 50. After year one the balance is 1 050, and 5 per cent of 1 050 is 52 pounds 50, so the total is 50 plus 52 pounds 50.