Study notes

Bank Loans and Overdrafts (GCSE)

  • Levels: GCSE
  • Exam boards: AQA, Edexcel, OCR, IB

A bank overdraft is a limit on borrowing on a bank current account. With an overdraft the amount of borrowing may vary on a daily basis.

A bank loan is a fixed amount for a fixed term with regular fixed repayments. The interest on a loan tends to be lower than an overdraft.

Example of a loan:

A business borrows £12,000 from a bank over 3 years at an interest rate of 5%. The approximate repayments on this loan would be £392 a month for 36 months (£14,112).

A fixed term means how many months or years before the loan has to be repaid in full.

Normally a fixed term loan will be for a greater amount than an overdraft.

Overdrafts

Loans

Advantages

Flexibility – can change the amount borrowed within limits

Interest is only paid on amounts borrowed

Larger amounts can be borrowed

Lower interest rates than overdrafts

Regular repayments help plan cash flow

Disadvantages

Cannot be used for large borrowing

Rates of interest higher than loans

Bank can change limit at any time or ask for money to be paid back sooner than expected

Less flexible than an overdraft

Have to pay back in stated time or risk further financial problems


Debentures

A debenture is a long term loan which is usually secured against a specific asset (e.g. the factory) or the overall assets of a business. A debenture is repayable at a fixed date and has a fixed rate of interest.

Debentures are different from ordinary shares because:

The lender has no voting rights in the company.

The loan attracts interests – whereas holders of ordinary shares get dividends.

The providers of loans are paid out before ordinary shareholders in the event that the business fails (assuming there is some cash left).

Job board

Teacher of Business and Economics 9 days left to apply

King Edward VII School, Sheffield

New

Join the tutor2u community

With a tutor2u account you can access extra features to support your teaching & learning.

Subscribe to the daily digest

Curate your own content

Track your training schedule

Manage your resource library

Receive job alerts

Join the community

Already joined? Sign in now ›

More From the Digital Store

A full set of practice exam papers (including marks schemes) for the three AQA A Level Business exams at the end of the linear AQA course.

£75.00 (+VAT)

AQA A Level Business Practice Exam Papers (Vol 1)

A comprehensive collection of editable calculation practice sheets for the new 2017 Edexcel GCSE Business specification.

£50.00 (+VAT)

Edexcel GCSE Business Calculation Practice Sheets Vol1 (2017 Spec)

Editable worksheets that that enable students to practice all elements of the quantitative and data analysis skills required by the AQA A Level Business Year 1 (AS) teaching content.

£50.00 (+VAT)

AQA A Level Business Year 1 (AS) Calculation Practice Sheets

Recruitment

Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u