2Y: Borrowing Flashcards
What is Borrowing?
Borrowing is receiving the money we need now (from a person or a financial institution) and agreeing to repay that money plus interest at a specific time period in the future.
What questions should you ask yourself before borrowing? (4)
- Do I really need the item?
- Can I get the money another way? (saving)
- What is the total cost of borrowing?
- Can I afford the repayments? Your income must be sufficient to repay the installments.
What is interest?
Interest is the financial cost of borrowing money.
What is an instalment?
An instalment is a fixed sum of money due as one of a number of payments spread over an agreed period of time.
What are some reason for borrowing?
- To pay for very expensive items - house, car…etc.
- To deal with short term deficits - temporary cash shortfalls…christmas, back to school
- Emergencies - car repairs, medical costs.
What is the Matching Principle?
The Matching Principle suggests that short, medium and long term needs should be financed using appropriate short, medium or long term sources of finance.
Name 2 Short Term Sources of Finance?
- Bank Overdraft
- Credit Card
Name 3 Medium Term Sources of Finance?
- Medium Term Loan - fixed repayments on a monthly basis.
- Leasing - involves renting of an asset (e.g. vehicle). You never own the asset.
- Hire Purchase - pay a deposit and pay the balance over a period of time. You do not become a legal owner until last payment is made.
Who are the 3 parties in a Hire Purchase?
- The buyer of the goods.
- The seller of the goods.
- The finance company/bank.
What must all HP agreements show? (8)
- Name and address of buyer.
- Name and address of seller.
- Cash price.
- Full HP price.
- APR
- Deposit Amouint
- Number and amount of each installment.
- Optional Final Payment.
NOTE: Buyer has the right to withdraw from the agreement within 10 days of receiving it (cooling off period).
What is the ‘Half Rule’ when returning goods?
The buyer has the right to terminate the agreement and return the goods if;
- Half the price has been paid.
- If less then half has been paid, you must pay the difference
What is the ‘Third Rule’ in a HP agreement?
- If the buyer stops paying the installments, the HP company has the right to take back the goods.
- If the buyer has a thrid or more of the HP price paid, the HP company cannot take back the goods without a court order.
What are Pros(4) and Cons(4) of a PCP?
A PCP is a Personal Contract Plan.
Pros:
- Low monthly repayments.
- Small deposit.
- A choice of what to do at the end of the repayment terms.
- Quick and easy to arrange.
Cons:
- Mileage and condition of car affects the costs.
- Total amount paid may be more than the hire purchase.
- Have to pay the outstanding balance to keep the car.
- You dont own the car until the final repayment is made.
Name a Long term Source of Finance?
- Households and individuals generally use a special long-term loan caled a mortgage for buying property.
- Mortages are available from commercial banks and building societies.
- Under the terms of the agreement, the property is used as security or collateral for the loan. This means the property may be repossesed if the borrower fails to repay the loan.
What is Credit Worthiness?
Credit Worthiness is an estimate of the ability of a person to pay off a loan based on their savings and borrowing history with financial institutions.
Your Credit Worthiness can be proved from:
- Your bank statements
- By a report from the Irish Credit Bureau (ICB)
How to calculate APR?
See Image.
