Chapter 15- Borrowing for Households and Individuals

Question 1

What does borrowing mean?

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

What is 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 (2 meanings)

Question 3

What factors should you consider before borrowing? (4)

Answer 3

1. Do I really need the item/money?
2. Can I get the money another 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

Define instalment

Answer 4

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

Question 5

Define asset

Answer 5

Anything owned by an individual, household or business that is worth money EG a house, car, machinery

Question 6

Define creditworthiness

Answer 6

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

Question 7

Define guarantor

Answer 7

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

Question 8

Define collateral

Answer 8

Something, usually an asset, used for security for repayment of a loan (EG the deeds to a house). If you cannot repay the loan, the financial institution can take the asset to pay the loan

Question 9

Define insolvent

Answer 9

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

Question 10

Define responsible borrowing

Answer 10

Not borrowing more than you are able to pay back

Question 11

Reasons for borrowing? (5)

Answer 11

1. To pay for expensive item EG house
2. To deal with short term deficit (unable to pay bills on time)
3. For emergencies EG operation
4. For unplanned expenditure EG house repairs
5. To pay for college fees

Question 12

What are the 3 types of borrowing?

Answer 12

Short-term (1yr), medium-term (1-5yrs), long-term (5+ yrs)

Question 13

Short-term sources of finance (bank overdraft)

Answer 13

Definition: A person is given permission to withdraw more money from their bank account than is in it

Reason to Use: To pay a household (EG electricity) bill

Question 14

Short-term sources of finance (credit card)

Answer 14

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

Reason for Use: To buy a present for a birthday

Question 15

Medium-term sources of finance (medium-term loan)

Answer 15

Definition: A loan that is paid back, with interest, between 2-5 years

Reason for Use: New kitchen fitted

Question 16

Medium-term sources of finance (hire purchase)

Answer 16

Definition: 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 made.

Reason for Use: To buy a car

Question 17

Medium-term sources of finance (leasing)

Answer 17

Definition: 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 for Use: To use a piece of machinery for repair (digger)

Question 18

Long-term sources of finance (mortgage)

Answer 18

Definition: A mortgage is a special type of long-term loan that is taken out to buy a property. These can be paid off between 15-35 years

Reason for Use: To buy a house

Question 19

What information is needed when applying for a loan?

Answer 19

1. Personal details (name, DOB)
2. Employment details
3. Savings record
4. Borrowing history
5. Purpose for loan

Question 20

Define APR

Answer 20

Annual Percentage Rate:

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

Question 21

Define declining principal

Answer 21

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

Question 22

Define cost of credit

Answer 22

The difference between the amount you borrow and the total you repay

Question 23

How to calculate APR

Answer 23

Calculate the interest, add it to the original amount, and then take the original amount from this figure to get the cost of credit. Don’t forget about the declining principal