Borrowing For Households & Investing

Question 1

What is borrowing

Answer 1

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

Question 2

Interest

Answer 2

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

Question 3

What to consider before borrowing

Answer 3

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?

Question 4

Reasons for borrowing money

Answer 4

1. To pay for an expensive item e.g a house, a car
   Notes Copy
2. To deal with a short-term deficit (when a person / household cannot afford to pay their bills on time)
3. For emergencies e.g an emergency operation
4. For unplanned expenditure e.g repairs to a house
5. To pay for college fees

Question 5

Instalment

Answer 5

is a fixed sum of money due on the same date for a specified period of time until the loan plus interest is repaid.

Question 6

Asset

Answer 6

is a fixed sum of money due on the same date for a specified period of time until the loan plus interest is repaid.

Question 7

Creditworthiness

Answer 7

is an estimate of someone’s ability to pay off a loan based on their saving and borrowing history.

Question 8

Guarantor

Answer 8

is a person who has a good credit rating who agrees to pay your loan for you if you are unable to do so.

Question 9

Collateral

Answer 9

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

Question 10

Insolvent

Answer 10

means when a person is unable to pay their debts off as they need to

Question 11

Responsible borrowing

Answer 11

means that you do not borrow more than you are able to pay back.

Question 12

Types of borrowing needs

Answer 12

Short term, medium term and long term

Question 13

Bank overdraft

Answer 13

A person is given permission to withdraw more money from their bank account than they have in it.

Question 14

Credit card

Answer 14

A credit card holder can buy items now and pay for them at a later date (usually 30 days later).

Question 15

Medium term loan

Answer 15

This is a loan that is paid back, with interest, between 2-5 years.

Question 16

Hire purchase (H.P)

Answer 16

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.

Question 17

Leasing

Answer 17

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.

Question 18

Personal contact plans (P.C.P)

Answer 18

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

Question 19

Mortgage

Answer 19

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.

Question 20

Moneylenders

Answer 20

Are individuals or companies (excluding banks, building societies and credit unions) whose main business is to lend money

Question 21

Applying for a loan

Answer 21

1. Personal Details e.g name, date of birth
2. Employment Details
3. Savings Record
4. Borrowing History
5. Purpose (Reason) for the Loan

Question 22

Annual percentage rate (APR) per

Answer 22

is a calculation of the overall cost of a loan and represents the actual yearly cost of the amount

Question 23

Declining principal

Answer 23

is the amount you still owe at any point during the loan. It is going down each month because of the repayme

Question 24

Cost of credit

Answer 24

is the difference between the amount you borrow and the total you repay.