Borrowing For Households And Individuals Flashcards
What is borrowing?
Borrowing means receiving money from a person or financial institution, in exchange for a promise to pay back the money, with interest at an agreed time in the future
What is interest
Interest is the additional cost on top of the money you borrow that you must pay if you are borrowing money from a financial institution - it’s the financial institutions reward for lending you the money
What are the factors to consider before borrowing ?
- Do I really need the item
- Can I get the money any other way , without having to borrow ?
- How much will it cost ?
- Can I afford the repayments ?
What are the 5 reasons for borrowing money ?
To pay for an expensive item e.g a house, a car
To deal with a short term deficit ( when a person / household cannot afford to pay their bills on time )
For emergencies e.g an emergency operation
For unplanned expenditure e.g repairs to a house
To pay for college fees
Instalment
A fixed sum of money due on the same date for a specified period of time until the loan plus interest is repaid
Asset
Anything owned by an individual , household or business that is worth money e.g a house , a car , machinery
Creditworthiness
An estimate of someone’s ability to pay off a loan based on their saving and borrowing history
Guarantor
A person who has a good credit rating who agrees to pay your loan for you if you are unable to do so
Guarantor
A person who has good credit rating who agrees to pay your. Loan for you if you are unable to do so
Collateral
Collaterall is something usually an asset , used for security for repayments of a loan e.g the deeds to a house . If you cannot repay the loan the financial institution can take the asset to pay the loan
Insolvent
When a person is unable to pay their debts of ass they need to
Responsible borrowing
Means that you do not borrow more than you are able to pay back
Medium term loan
This is a loan that is paid back,
with interest, between 2-5 years.
E.g get a new kitchen in your house
Hire purchase
A person pays monthly instalments to
a hire purchase company for a
fixed period of time. They do not own
the item until the last instalment is
paid.e.g to buy a new car
Leasing
A person rents an asset from a
leasing company. They pay to use the
asset for a set period of time but they
never own the asset.
PCP personal contract plans
A person pays a small deposit & small
monthly repayments to the
company for a set period of time.
When that time is up, the buyer can
pay the outstanding balance, trade the
item in for a newer model and begin
the process all over again (but never
owning the item) or return the item to
the shop and no longer have use of the
item.
Usually used for buying a new car
Mortgage
A mortgage is
a special type of long-
term loan that is taken
out to buy a property.
They can be paid off
between 15-35 years
Used to buy a house
What information does a financial institution need from you when you are applying for a loan ?
- Personal details e.g name , date of birth
- Employment details
- Savings record
- Borrowing history
- Reason for the loan
Annual percentage rate ( APR )
APR is a calculation of the overall cost of a loan and represents the actual yearly cost of the amount borrowed
Declining principal
Is the amount you still owe at any point during the loan . It is going down each moth because of the repayments.
Cost of credit
Is the difference between the amount you borrow and the total you repay
