Chapter 11 - Borrowing Flashcards
Define interest.
The price we pay for borrowed money.
Define loan.
A source of finance from a financial institution. Money that is borrowed is repayable with interest over an agreed period of time.
Define term loan.
A loan taken out for a fixed period of time, usually up to a maximum of five years. Both the loan and interest on it are paid back on a regular basis.
Define long-term loan.
A loan taken out for a period of more than 5 years. Both the loan and the interest on it are paid back on a regular basis.
Define money lender.
A person who gives a loan to another person who for one reason or another cannot borrow the money from a financial institution such as a bank. They carry a very high rate of interest.
Define APR.
Annual Percentage Rate. The actual/true rate of interest charged on a loan each year. Takes into account that the amount owed is going down each year as we pay back some of the loan. It also includes other bank fees and charges.
Define security/collateral.
Anything of value given by the borrower to the lender in exchange for a loan. If the borrower does not repay their loan the lender may take the security and sell it to get their money back. (e.g. deeds of a building, company shares, life assurance policies, guarantor.)
Define guarantor.
A person who agrees to pay the loan for another person if they are unable to make their repayments.
Define overdraft.
Permission granted to a current account holder, by their bank, to withdraw more money than they have in their account. Useful when a person is temporarily short of cash.
