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When an individual wishes to raise some additional finance the method used often depends on whether the finance is needed to assist with cash flow in the shorter term or whether it is required for a specific purpose, such as purchasing an asset. If finance is needed for the purpose of assisting with a temporary lack of funds then an individual is likely to make a request to his or her bank for the grant of an overdraft An overdraft is an arrangement under which a bank allows the holder of a bank current account to take more money out of the account than is held in it. When this happens the account is described as being in the as opposed to being in the black.

If a bank allows an account holder to overdraw his or her bank account the terms and conditions of the overdraft will be set out in a formal overdraft agreement. This is a legally-binding contract between the bank and the account holder. It will include such information as the overdraft limit that is being agreed and the rate of interest that is to be charged. Interest is usually charged on the daily outstanding. lf the account holder goes over, in other words the agreed limit then the overdraft agreement will usually state that interest will be charged at a higher rate. This is known as the overdraft rate. It is usually a condition of an overdraft agreement that the account holder makes regular payments into his or her bank account.

An alternative option for raising finance is for an individual to make an application to a loan. This is more appropriate where the finance is needed for a specific purchase. The criteria that must be satisfied before a loan application will be , in other words agreed to, are generally more extensive than they are for an overdraft. The reason for this is that the level of finance required is usually much higher than the amount requested under an overdraft. A loan agreement will include the amount of the loan itself which is referred to as the principal sum, together with the interest that is to be charged on it. The interest is usually calculated at an agreed fixed rate for the whole period of the loan and added to the amount of the loan, to give the total amount that is being borrowed. That total amount is then divided into equal monthly repayments, known as which are to be repaid over the term of the loan. For example, if the total amount being borrowed is £6000, and the term of the loan is five years (60 months), each monthly repayment would be £1OO.

A loan agreement will also set out the rights of the bender if the borrower falls into with his or her loan repayments. This will include provision for interest to , or accumulate, on any amounts that are due but unpaid, usually at a higher rate than that applied to the loan. The agreement will also specify the situations in which the borrower will be considered to be in , in other words when the lender will consider that the borrower is in breach of the loan agreement, together with the actions that the lender is entitled to take in this event. This is likely to include the right to terminate the loan agreement immediately and to demand payment in full of the total amount outstanding.