Borrowing for Households & Individuals Flashcards
What is Borrowin
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.
● 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 is the financial institution’s reward for lending you the money.
● Do not confuse it with interest you earn when you save money in a financial institution. There are two meanings for interest
Factors to Consider Before Borrowing
The following questions should be considered before deciding to borrow money:
1. Do I really need the item?
2. Can I get the money any other way, without having to
borrow?
3. How much will it cost? Think about the interest you must
pay.
4. Can I afford the repayments?
Reasons for Borrowing Money
- To pay for an expensive item e.g a house, a car
Notes Copy - 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
is a fixed sum of money due on the same date for a specified period of time until the loan plus interest is repaid.
Asset
is anything owned by an individual, household or business that is worth money e.g a house, a car, machinery
Creditworthiness
is an estimate of someone’s ability to pay off a loan based on their saving and borrowing history.
Guarantor
is a person who has a good credit rating who agrees to pay your loan for you if you are unable to do so
Collateral
is something, usually an asset, used for security for repayment 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
means when a person is unable to pay their debts off as they need to
Responsible borrowing
means that you do not borrow more than you are able to pay back
Short Term Sources of Finance:
Bank Overdraft
A person is given permission to withdraw more money from their bank account than they have in it.
Credit card
A credit card holder can buy items now and pay for them at a later date (usually 30 days later).
Medium term source of income
Medium-Term Loan
This is a loan that is paid back, with interest, between 2-5 years.
Hire Purchase (H.P)
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.
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
Personal Contract Plans (P.C.P)
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
Long term sources of finance
Mortgage
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.
Applying for a loan
A financial institution will look for the following information when you apply for a loan:
1. Personal Details e.g name, date of birth
2. Employment Details
3. Savings Record
4. Borrowing History
5. Purpose (Reason) for the Loan
Annual Percentage Rate (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 month because of the repayments.
Cost of credit
is the difference between the amount you borrow and the total you repay
