5.2 - The Costs of Borrowings Flashcards
Key features you need to look at when borrowing money:
- How much interest
- Any extra costs involved
- How much other lenders are charging
What is interest measured in?
APR
Other costs involved with borrowing:
- Personal Protection Insurance
- Delayed repayment
- Quick Repayment Fee
Why is there an opportunity cost when borrowing money?
Because until all debts are paid the borrower will have less disposable income to spend on discretionary needs
Why do mortgages offer the lowest interest rates?
Because they are secured on the property
What is hardcore debt?
An amount of money that a borrower will never be able to pay off
What happens if a loan is secured on an asset and the borrower stops meeting the repayments?
The borrower will lose the asset
What happens if the borrowing is in the form of a hire purchase agreement and the borrower stops meeting the repayments?
The borrower will lose the goods and will not be able to recoup payments already made.
What happens if the loan is unsecured and the borrower stops meeting the repayments?
The defaulter will obtain a bad financial footprint so will be unable to get credit again.
