Borrowing Money

Question 1

Reasons for borrowing money?

Answer 1

• Immediate satisfaction
• Convenience (not having to carry cash)
• Possible savings (taking advantage of sales or offers)
• Emergencies
• Improving quality of life
• Forced ‘saving’ (you have to put money aside to meet regular payments)

Question 2

Reasons against borrowing money?

Answer 2

• Interest charges are usually high
• Allows impulse buying
• Additional costs (merchant fee costs)
• Loss of control (due to over-committing yourself)
• Inability to repay (lower quality of life)
• False sense of security

Question 3

What are the steps to getting a loan?

Answer 3

1. Decide how much you need to borrow.
2. Decide if you have enough savings for a deposit
3. Decide if your income is sufficient to meet repayments
4. Shop around for the best deal - perhaps use a finance broker

Question 4

What is interest?

Answer 4

A payment made for the use of money that has been borrowed.

Question 5

What is the amount you borrow called?

Answer 5

The principle

Question 6

What are financial institutions that lend money?

Answer 6

Finance companies, Building societies, Credit unions, Private money lenders, Banks

Question 7

Identify the different loan options.

Answer 7

Personal loans, mortgage loans, bank overdraft, credit card, store credit, payday loans

Question 8

Explain the types of personal loans.

Answer 8

Secured loan: Something deposited as a guarantee to fulfill the payment of a loan (collateral such as car loan, mortgage)
Unsecured loan: Nothing is deposited as a guarantee to fulfill the payment (e.g. credit cards, student loans)

Question 9

Explain a mortgage loan.

Answer 9

A loan for goods or property - has to be repaid later. The security on this loan is the property itself - the bank has the right to take it back if it is not repaid in the correct time frame.

Question 10

What is bank overdraft?

Answer 10

Writing cheques greater than the amount in the account. (a business with cashflow issues that need to pay off their supplier)

Question 11

Explain credit card loans

Answer 11

A credit card loan often has a credit limit- a specified level the card holder is allowed to spend.

Question 12

What is store credit and how is this different from normal credit cards?

Answer 12

Allows you to purchase goods on credit a their stores but they charge a higher interest rate.

Question 13

What are payday loans and how might they be a problem?

Answer 13

They are a cash advance against the next pay slip - they could be a problem because they normally a for a few hundred dollars but usually must be paid within two to four weeks - the interest is incredibly high.

Question 14

What are the 3 Cs of Credit rating

Answer 14

Character, capacity, collateral

Question 15

Explain these 3 Cs:

Answer 15

Character: person’s reputation for honesty and reliability in paying debt
Capacity: ability to pay the debt (measured by income and the number of existing debt)
Collateral: the assets used as security for the payment of the loan (will be forfeited if the borrower is unable to pay back)

Question 16

What does ‘going guarantor’ mean?

Answer 16

You would have to guarantee to pay the money back if the borrower does not. This could be risky because a friend or relative may fall ill and be unable to pay the debt or the borrower may be unreliable.

Question 17

What are some factors that will affect your ability to get a loan?

Answer 17

• A stable job (frequently changing jobs = dodgy)
• Employment history
• Address history
• Income details
• Previous credit history
• List of assets
• List of liabilities

Question 18

What are the 5 steps to budgeting.

Answer 18

1) Calculate total income.
2) Record your expenses
3) Total your expenses
4) Compare your total income with your total expenditure
5) Assess your financial position

Question 19

What are the different types of insurance?

Answer 19

Life, travel, income, health, car and home insurance.

Question 20

What is life insurance?

Answer 20

Money put aside for family in case of death.

Question 21

What is travel insurance

Answer 21

Money put aside in case of needing medical assistance overseas, loss of luggage or holiday cancellation

Question 22

Income protection?

Answer 22

In the case of not being able to work due to illness or accident - ensuring that some income would come through.

Question 23

Health insurance?

Answer 23

Money put aside for medical expenses in the case of an emergency or sickness.

Question 24

Car insurance

Answer 24

In the case of an accident, money put aside in order to pay for damage done to the car and other people.

Question 25

Home insurance?

Answer 25

In the case of a fire, flood or natural disaster, money put aside to cover the cost of repair.

Question 26

What is a premium?

Answer 26

The amount of money to be paid to receive insurance cover.