Borrowing for Individuals and Households Flashcards
What is Borrowing?
Borrowing means receiving money from a person of financial institution, in exchange for a promise to pay back the money, with interest at an agreed time in the future.
What is Interest in relation to borrowing money?
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 institutions reward for lending you the money.)
What should be considered before deciding to borrow money? (4)
- 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?
What is an Instalment?
It is a fixed sum of money due in the same date for a specified period of time until the loan plus interest is repaid.
What is an Asset?
Is anything owned by an individual, household or business that is worth money e.g. a house, a car, machinery.
What is Creditworthiness?
Is an estimate of someone’s ability to pay off a loan based on their saving and borrowing history.
What is a 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.
What is Collateral?
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.
What is Insolvent?
Insolvent means a person is unable to pay their debts off as they need to.
What is Responsible Borrowing?
Means that you don’t borrow more than you are able to pay back.
What are common reasons for borrowing money? (5)
- To pay for an expensive item e.g. a house, a car
- To deal with a short term deficit (when a person/household can not 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
What are the three types of borrowing terms for households?
Short-term (within 1 year), medium-term (1-5 years), long-term (5+ years).
Explain two examples of Short-term sources of finance. Give reasons why these examples might be used.
Bank Overdraft:
A person is given permission to withdraw more money from their bank account than they have in it.
Reason: To pay a household bill e.g. electricity bill
Credit Card:
A credit card holder can buy items now and pay for them at a later date (usually 30 days later).
Reason: To buy a present for a birthday.
Explain three examples of Medium-term sources of finance. Give reasons why these examples might be used.
Medium-term loan
This is a loan that is paid back with interest between 2-5 years.
Reason: To get a new kitchen fitted in your house
Hire Purchase
A person pays monthly instalments to a hire purchase company for a fixed period of time. They don’t own the item until the last instalment is paid.
Reason: To buy a 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.
Reason: To use a piece of machinery to make repairs to your home e.g. digger.
Explain an example of a Long-term source of finance. Give a reason why this example might be used.
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.
Reason: To buy a house.
