Chapter 11~Borrowing

Question 1

What factors should we consider before deciding to borrow money?

Answer 1

➰do we really need the item?
➰do we need the item now, or can we wait until we have eared the money ourselves
➰can we raise the money without borrowing e.g. Overtime
➰if we decide to borrow can we afford the monthly repayments?

Question 2

What financial institutions lend money to there customers?

Answer 2

➰commercial banks (AIB, Bank of Ireland, Ulster Bank)
➰building societies (the EBS)
➰credit unions (Dundrum credit union)

Question 3

What is interest?

Answer 3

The price we pay for borrowed money

Question 4

How is interest calculated?

Answer 4

As a percentage of the interest

Question 5

How do you choose what loan you need?

Answer 5

➰what you want the money for

➰how long you want the money for

Question 6

What is a bank overdraft?

Answer 6

A bank overdraft is where you get permission from your bank to overdraw the amount in your current account. This means that you can withdraw more money than is in your current account
➰there is a limited amount of money you can overdraft
➰you must repay your overdraft by the end if each year

Question 7

How long do you have to repay your overdraft?

Answer 7

By the end of the year

Question 8

Why do people bank overdraft?

Answer 8

If they are short of money temporarily for reasons such as:
➰in a month where the are a lot of bills
➰at Christmastime

Question 9

Explain the advantages of a bank overdraft?

Answer 9

➰you only pay interest on the amount of the overdraft you use
➰once you get an overdraft, you can use it whenever you like and as often as you like provided of course that you dont spend more than the limit agreed

Question 10

What is a term loan?

Answer 10

A term loan is a loan taken out. The loan and the interest must be paid back on a regular basis.

Question 11

What is the normal maximum time a term loan can be taken out for?

Answer 11

5yrs

Question 12

What purposes are term loans available for?

Answer 12

New cars, new furniture, college fees

Question 13

What documents should the borrower bring to the bank when applying for a term loan?

Answer 13

➰a copy of their household budget

➰a copy of their analysed cash book showing clearly that they can afford to meet the monthly repayments

Question 14

What are the advantages to a term loan?

Answer 14

➰you know exactly how much you have to pay each month, as the repayments stay the same for the life of the loan
➰ the interest rate is lower than on a bank overdraft

Question 15

What is a long term loan or a mortgage?

Answer 15

A long term loan is a loan taken out for for a period of more than 5 years. These loans are usually taken out to help us purchase something very expensive eg. A new house

Question 16

How are long term loans/mortgages usually pid back?

Answer 16

Monthly instalments with interest over the lifetime of the loan

Question 17

What is a mortgage?

Answer 17

When someone takes out a long term loan and are in the process pf paying it back, the deeds of their house are given to the lender until the loan is paid back. This offers safety to the lender. If the loan is failed to pay back the lender can sell the house with the deeds (ownership documents)

Question 18

Advantages of a long term loan/mortgage?

Answer 18

➰You can purchase evexpensive acids such as a new house by spreading the payments over a long period of time

➰You get a reduction on your tax bill on any interest you pay on a morgage for the first 7 years

Question 19

What is a credit union loan?

Answer 19

Members of a credit union who have been saving regularly over a period of time may apply to their credit union for a loan

Question 20

How much can you take a loan from a credit union out for?

Answer 20

It depends on how much you’ve saved with them

Question 21

Why are credit union loans taken out?

Answer 21

➰cars, holidays, home improvements, furniture

Question 22

Who is a moneylender?

Answer 22

A moneylender is a person with a licence who gives a loan to someone who for one reason or another cannot borrow money from the bank

Question 23

Do moneylenders lend at high rates of interest?

Answer 23

Yes

Question 24

What factors should you consider once you have decided to take out a loan?

Answer 24

➰how much money do we need to borrow?
➰how long do we need the money for?
➰where can we get the lowest interest rates?
➰how much can we afford to pay back each month?
➰would we still be able to afford the monthly payments if rates were to rise in the future

Question 25

Before deciding to give a loan what factors will the lender ask?

Answer 25

➰does the borrower have a secure job?
➰has the borrower been saving regularly?
➰what does the borrower want the loan for?
➰does the borrower have any security to offer the lender?
➰how much does the borrower spend and earn each month?

Question 26

What are the rights of a borrower?

Answer 26

1) to be told the annual percentage rate (APR) of interest
2) to be told the total cost of the loan
3) must be told the number of instalments they have to pay each year
4) they have the right to cancel the loan within 14 days of the agreement

Question 27

What are the responsibilities of a borrower?

Answer 27

1) budgeting properly so that he always has enough money to repay the loan
2) the borrower must make sure the loan is fully repaid in time
3) the borrower must tell the truth when filling out the loan application
4) the borrower must use the money for whatever reason it was taken out

Question 28

What is flat rate interest?

Answer 28

The flat rate interest is based n the original amount borrowed. It odes not take into account that the amount we owe is going down down each year as we repay the loan

Question 29

What is annual percentage rate (APR) interest?

Answer 29

This is the actual rate of interest charged on our loan each year. It takes into account that the amount we owe is going down each year.

Question 30

Name some security the financial institution might ask from a borrower?

Answer 30

➰the deeds of the premises
➰company shares
➰life assurance policies
➰personal guarantee from other people (your parents)

Question 31

What is a guarantor?

Answer 31

A guarantor is a person who agrees to repay the loan for another person if they are unable to make their repayments

Question 32

What is security?

Answer 32

Anything of value given by the borrower to the lender in exchange for a loan

Question 33

Name three ways you can borrow money?

Answer 33

➰overdraft
➰term loan
➰long term loan/mortgage 
➰credit union loan
➰moneylender

Question 34

What is a loan?

Answer 34

The extra money you borrow is a loan