Borrowing For Households & Investing 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
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 is the financial institution’s reward for lending you the money
What 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? Think about the interest you must
pay. - 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 a fixed sum of money due on the same date for a specified period of time until the loan plus interest is repaid.
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.
Types of borrowing needs
Short term, medium term and long term
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 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 contact 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 th
Mortgage
Copy
Name of Long- Term Source of Finance:
Definition:
Reason You Might Use This Type of Finance:
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.
Moneylenders
Are individuals or companies (excluding banks, building societies and credit unions) whose main business is to lend money
Applying for a loan
- Personal Details e.g name, date of birth
- Employment Details
- Savings Record
- Borrowing History
- Purpose (Reason) for the Loan
Annual percentage rate (APR) per
is a calculation of the overall cost of a loan and represents the actual yearly cost of the amount
Declining principal
is the amount you still owe at any point during the loan. It is going down each month because of the repayme
Cost of credit
is the difference between the amount you borrow and the total you repay.
