Unit 3 BTEC Personal and Business Finance: Personal Finance Revision

Comprehensive practice flashcards covering Part A (Personal Finance) for the BTEC Unit 3 Personal and Business Finance exam, including the roles and functions of money, payment methods, current accounts, borrowing, saving, insurance, financial institutions, and consumer protection.

How long is the Unit 3 exam, and what are the recommended timings for Part A and Part B?

The exam is $2\text{ hours}$ long. It is recommended to spend $45\text{ minutes}$ on Part A (Personal Finance) and $1\text{ hour and } 15\text{ minutes}$ on Part B (Business Finance).

What are the four main functions of money?

The four functions are: unit of account, means of exchange, store of value, and legal tender.

How does money function as a 'unit of account'?

Money is used to place a value or price on goods and services, allowing an equivalent value to be exchanged. In the UK, it is expressed in pounds and pence.

How does money function as a 'means of exchange'?

Money enables people to buy, sell, or trade goods and services directly, eliminating the need to swap or barter products.

What does it mean that money is a 'store of value'?

Money holds its value over time and can be saved or kept (for example, in a bank) to be used for purchasing goods or services in the future.

What is meant by money being 'legal tender'?

Legal tender is the official national currency of a country and serves as the officially recognized legal method of payment for goods and services.

What six factors influence an individual's personal view of money?

The six factors are: personal attitudes, life stages, culture, life events, external influences, and interest rates.

How do interest rates affect borrowers and savers differently?

Low interest rates benefit borrowers by reducing borrowing costs, but disadvantage savers by yielding lower returns on savings. High interest rates have the opposite effect.

What are key reasons for planning personal expenditure?

Reasons include controlling costs, avoiding legal action or repossession, maintaining solvency and a good credit rating, avoiding bankruptcy, funding future purchases, generating savings, achieving financial goals, protecting against loss or illness, countering inflation, and avoiding debt.

What is the key functional difference between a debit card and a credit card?

A debit card deducts money directly from funds available in a bank account at the time of purchase, whereas a credit card allows purchases up to an agreed credit limit using funds borrowed from the card issuer.

What is the difference between a direct debit and a standing order?

A direct debit gives authority to a third party to collect varying amounts directly from an account on set dates, while a standing order is an instruction set up by the account holder to pay a fixed amount to a specific recipient on regular dates.

What is a prepaid credit card, and who is it primarily beneficial for?

It is a card loaded with a set amount of money in advance that can be spent like a credit card up to that loaded balance. It is especially useful for individuals under the age of $18$ or those with a poor credit rating who cannot qualify for a standard credit card.

What are the features of a charge card such as American Express?

A charge card allows users to make purchases on short-term credit, but requires the balance to be paid back in full typically within $28\text{ days}$, rather than allowing a rolling balance with interest.

How does a CHAPS transfer differ from standard electronic bank transfers?

CHAPS (Clearing House Automated Payment System) guarantees same-day electronic payment transfer provided instructions are received by the bank by a specified cut-off time, but it often incurs an administrative fee.

What are the four main types of current accounts offered by banks?

The four types are standard current accounts, packaged/premium current accounts, basic current accounts, and student current accounts.

What features are typical of a packaged or premium current account?

They charge a regular monthly fee and provide additional bundled benefits such as travel insurance, mobile phone insurance, interest on positive balances, or cashback on bills for customers with good credit ratings.

Who is a basic current account designed for, and what limitations does it have?

It is designed for individuals with poor credit ratings. It offers standard banking without extra facilities, typically excluding overdrafts, credit cards, or premium perks.

What is an overdraft, and what cost is associated with using it?

An overdraft is a facility agreed with a bank allowing an account holder to withdraw or spend beyond a zero balance up to an agreed limit. The bank charges interest on the overdrawn amount.

What is the legal minimum age to borrow money or access credit in the UK?

An individual must be at least $18$ years of age to enter the credit or borrowing market in the UK.

What are the main characteristics of a personal loan?

A personal loan provides a lump sum upfront at a fixed interest rate, which is repaid over an agreed fixed term (typically $3\text{ to } 5\text{ years}$) through regular monthly installments.

How does a hire purchase (HP) agreement work?

HP allows a buyer to spread payments for an asset (commonly a car) over time with regular payments and interest. The customer does not own the asset until the final payment is made, and the item can be repossessed if payments are defaulted.

What is a mortgage?

A mortgage is a long-term loan specifically secured against real property (such as a house or flat), typically repaid over an extended period such as $25\text{ years}$.

What is a payday loan, and why is it considered a high-risk form of borrowing?

A payday loan is a short-term loan intended to cover cash shortages until an individual's next payday. It charges extortionate rates of interest, making it the most expensive and risky borrowing option.

What is the major tax advantage of an Individual Savings Account (ISA)?

All interest or returns earned on savings within an ISA are completely tax-free up to an annual government investment threshold (approximately $£20{,}000$ per financial year).

How do Premium Bonds work as a method of saving?

Government-backed bonds where capital does not earn interest; instead, each bond entry is placed into a monthly prize draw with chances to win cash prizes ranging up to $£1{,}000{,}000$.

What is the difference between corporate bonds and gilts?

Corporate bonds are fixed-interest debt securities issued by companies to raise finance, whereas gilts are fixed-interest securities issued by the UK government.

What are the rewards and risks associated with investing in company shares?

Rewards include capital growth if share prices rise and regular dividend payments from corporate profits. The risk is that share values can decline, potentially resulting in the loss of original invested capital.

What is the primary purpose of a pension?

A pension is a long-term savings plan designed to provide income during retirement, which can often be taken as a tax-free lump-sum payment alongside ongoing regular monthly disbursements.

What is insurance and how does it operate?

Insurance is a financial agreement where an individual or organization pays a regular fee (premium) to an insurer, who in turn agrees to compensate the policyholder against specific financial losses or damages.

Which personal insurance product is a legal requirement in the UK?

Motor/car insurance is a mandatory legal requirement for driving on UK roads.

What happens to pet insurance premiums as the insured animal ages?

Premiums increase progressively each year because older animals face a substantially higher likelihood of illness and requiring veterinary treatments.

What is the primary role of the Bank of England in the UK financial system?

The Bank of England is the UK's central bank; it regulates and supervises financial institutions (banks, building societies, credit unions), ensures monetary stability, and sets the official UK interest rate.

How does the ownership structure of a building society differ from that of a commercial bank?

Commercial banks are owned by external shareholders, whereas building societies are mutual organizations owned by their members (account holders and borrowers).

What is a credit union?

A credit union is a non-profit financial cooperative owned and controlled by its members that provides financial products like savings accounts and affordable loans, often repaid directly via payroll deductions.

What is National Savings and Investments (NS&I)?

A state-owned savings organization backed by the UK government that uses funds invested by the public (such as Premium Bonds and ISAs) to support and finance government activities.

How does pawnbroking work as a form of borrowing?

Borrowers pledge a valuable personal asset (such as jewelry) as collateral for an immediate cash loan. The borrower typically has up to $6\text{ months}$ to repay the loan plus interest to redeem the asset, or else the pawnbroker sells it.

What is the function of the Financial Conduct Authority (FCA)?

The FCA is the regulatory body in the UK responsible for supervising and regulating the conduct of financial services firms to ensure market integrity and fair treatment of consumers.

What is the role of the Financial Ombudsman Service (FOS)?

The FOS is an independent statutory organization that resolves unresolved disputes and complaints between individual consumers and financial services businesses.

What is the Financial Services Compensation Scheme (FSCS)?

The FSCS is a statutory compensation fund of last resort that protects customers' deposits and investments up to authorized limits if an authorized financial firm fails or goes bust.

What service does Citizens Advice provide for personal finance issues?

It is a charitable organization that provides free, confidential, and impartial guidance on a wide range of debt, money management, legal, and consumer matters.

What is an Individual Voluntary Arrangement (IVA)?

An IVA is a formal, legally binding agreement negotiated between an insolvent individual and their creditors to repay all or part of outstanding debts at a reduced rate over an agreed schedule.

What is bankruptcy, and how does it resolve personal insolvency?

Bankruptcy is a formal legal status declared when an individual is unable to meet their debts; their assets are liquidated or managed to settle creditor claims, freeing them from overwhelming liabilities once discharged.