Savings & Loans (WJEC GCSE Maths & Numeracy (Double Award)): Revision Note

Savings & Loans

What are savings?

• Savings are money you put aside over a period of time

• You might save for something specific

  • E.g. Saving a regular amount each month to buy a car in two years' time

• You might save in anticipation of unexpected costs

  • E.g. If your washing machine breaks

• Savings usually earn interest, helping to increase their value

  • Read the revision notes on Simple Interest, Compound Interest and AER to find out how interest works

  • The interest rate may be fixed or it may change over time (variable)

• Banks provide both current accounts and savings accounts

  • Current accounts are designed for your everyday spending using a debit card

  • Savings accounts offer better interest rates than current accounts but may have stricter rules

    • You might have to pay in a minimum amount each month

    • You may only be allowed to withdraw money a few times each year

    • Some accounts are more flexible and do not have as many rules, but will typically have a lower interest rate

  • Some accounts will pay interest annually (each year) whilst others will pay monthly or quarterly (every 3 months)

What are investments?

• Investments are when money is used to buy something because you expect its value to increase, therefore making a profit

  • This could be a physical object, like a house or gold

  • Or it could be a financial product, like stocks or shares in a business

• The key difference between investments and savings is that the value of investments may go down as well as up

• The potential returns may be higher than a savings account, but there is also a risk you could lose money overall

What is a pension?

• A pension is a type of long-term investment to help you save for retirement

• The goal is to provide an income after you stop working

• You pay money regularly into a pension fund while you are working

• The money is invested to help it grow over time

• When you retire, you get regular payments (or a lump sum) from the pension fund

What are finance schemes?

• A finance scheme is a way of borrowing money to pay for something

• All types of borrowing are types of debt

• Examples of finance schemes include:

  • Overdrafts

  • Credit cards

  • Loans

  • Mortgages

  • Crowdfunding

What is an overdraft?

• An overdraft lets you spend more money than you have in your current account, up to an agreed limit

• An overdraft is a short-term borrowing option from your bank

• You must repay the borrowed amount and usually pay interest on it

• As it is unplanned, the interest rate is usually high or there may be a fixed fee

• Sometimes there may be rules such as no interest charged if you repay within 24 hours

What is a credit card?

• A credit card lets you borrow money from the card provider to pay for goods and services, up to an agreed limit

• You repay this money later, usually each month

• If it is not fully repaid, you are charged interest on the remaining balance

  • There may be other rules about when you are charged interest

    • e.g. If you withdraw cash using a credit card

• There will be a minimum monthly payment you have to make

  • If you only pay the minimum, you will be charged interest on the remaining balance

• Interest rates may change over time

  • They may start with a lower "introductory" rate, which then increases later

• Read the revision note APR to understand more about comparing interest rates of credit cards

What are loans?

• A loan is money that you borrow from a lender, like a bank

• It must be repaid over time, and interest is charged

  • Different loans will have different rates of interest

  • Read the revision note APR to understand more about comparing interest rates of loans

• Loans can be short-term or long-term, depending on the purpose

  • For example, you might pay for a new gas boiler over 12 months

  • Or you might pay for a car with a longer term loan, over say 4 years

• You pay a fixed agreed amount each month (instalments)

  • This can make budgeting easier

  • If you don't pay the agreed amount, you are usually charged extra interest or a fee

• The amount paid each month depends on the:

  • Amount borrowed

    • E.g. when buying a car, if you make a bigger payment upfront (initial lump sum) this will reduce the amount you need to borrow

    • This would reduce the monthly payments

  • Term (how long you borrow for)

    • Spreading payments out longer will reduce the monthly payments

    • However, over the entire term you will have paid more overall, due to interest

  • Interest rate

    • Shopping around for a lower interest rate (APR) can reduce your monthly payments

What are mortgages?

• A mortgage is a long-term loan used to buy property

• The property is used as security

  • This means if you don’t repay, the lender can take ownership of the property to settle the debt

• Mortgages are repaid in monthly instalments over many years

  • A 25 to 30 year mortgage term is relatively common

• The amount paid up front for a property is the deposit

  • A mortgage then makes up the rest of the price of the house

  • E.g. For a house costing £300 000, a deposit of 10% might be agreed

    • This means a £30 000 deposit, plus a mortgage of £270 000

• Mortgages often have fixed interest rate periods for a set number of years (usually 2, 5, or 10 years)

  • Fixed rates make budgeting simpler

  • When the fixed period ends you can shop around for another fixed rate

  • Or you can change to a variable interest rate

    • This rate changes over time depending on wider economic factors like the Bank of England's "base rate"

What does crowdfunding mean?

• Crowdfunding is a way of raising money by asking a large number of people to each contribute a small amount of money

• Crowdfunding is usually done online

• The business owner creates a campaign, explaining their idea and how much money they need

• Members of the public can then choose to invest or donate

  • People may donate, with no expectation of a return

  • There may be rewards, where people receive something in return like an early version of the product

  • It may be a form of investment, where people receive shares in the business