Topic 5 Flashcards
Q: What is borrowing used for in relation to income and expenditure?
A: Borrowing helps smooth out differences in timing between income and expenditure, such as when someone is short of funds at the end of the month
Q: What is a deficit in terms of personal finance?
A: A deficit occurs when spending exceeds monthly income, resulting in a negative bank balance
Q: Why might borrowing to cover a temporary deficit be sensible?
A: It is sensible if you know you will have extra money next month to repay it
Q: What risk is associated with borrowing to cover ongoing deficits?
A: The risk of accumulating rising debt that you may not be able to repay
Q: Name three common items people borrow money to buy.
A: A house, a car, and furniture
Q: What is a mortgage loan?
A: A loan taken out to buy a house, typically repaid over many years
Why do mortgage loans have lower interest rates compared to other loans?
A: Because the loan is secured against the property, reducing the lender’s risk.
Q: What happens if a borrower cannot maintain mortgage repayments?
A: The lender can sell the property to recover losses.
Q: What is ‘equity’ in the context of homeownership?
A: The difference between the amount owed on a mortgage and the market value of the house
Q: How can positive equity be used?
A: As security for loans to finance purchases, home improvements, life events, or emergencies
Q: Why would buying a home be impossible for most people without a mortgage?
A: Because it allows them to spread repayments over 25 years or more
Q: What happens to future income when someone borrows money?
A: Borrowers must repay the debt from future income, reducing the amount available for other spending
What is the opportunity cost of borrowing?
A: The value of the best alternative purchase that could have been made with the money used to repay the loan
What is the cost of borrowing called?
A: Interest
Why do lenders charge interest?
A: To compensate for the use of their money and the risk that the borrower might default
