Chapter 7 - Borrowing

Borrowing / Buying on credit

Getting a sum of money from a financial institution which must be paid back with interest by an agreed time in the future

Why people borrow money

To buy something it would take too long to save for e.g house

To pay for an unforeseen event e.g medical expenses

To pay college fees

To start a business

Factors to consider before borrowing

Do i really need this item now

Could i save the money instead

Exactly how much do i need to borrow

Can i afford the repayments

Sources of borrowing

Commercial banks

Credit unions

Building societies

Moneylenders

Loan

A sum of money that is borrowed from a financial institution and then paid back in installments with interest

Mid term loan

Paid back to the lender in installments over one to five years. It is repaid with interest.

Car

Long-term loan

Repaid over more than 5 years. It in repaid in installments, which include interest. e.g buying a house

They may require a collateral as they are for a large sum.

Another form of security is naming a guarantor

Collateral

Something of value that the borrower promises to give to the lender in the event of non-payment of the loan.

Guarantor

A person who has agreed to pay the loan if the applicant is unable to pay.

Mortgage

A long-term loan for a house or other property. The loan plus interest is repaid in installments over a long period of time e.g 20-30 years

Factors when applying for a loan

Income

Security

Existing loans

Credit history

Calculating the cost of a loan

Cost of loan = amount repaid - amount borrowed

APR

Annual percentage rate (APR) is the annual rate charged on a loan. Interest is only charged on the balance yet to be paid

Borrower’s rights

To know the APR

To know what the total cost of the loan will be

To cancel the loan within 14 days of signing. This is called the ‘cooling off’ period.

Borrower’s responsibilites

To be truthful when filling out the loan application.

To use the borrowed money for the purpose stated in the application

To ensure they can make the agreed repayments

Short term borrowing :  Bank Overdraft

Permission from the bank to withdraw more money from a current account than is in the account up to an agreed limit

Short term borrowing : Credit Card

If a credit card application is approved, the borrrower is given a credit card limit. E.g, if the credit card limit is 2000, the cardholder can make purchases with their credit card up to that value. The interest is between 13 and 23, making it a very expensive borrowing option

Short term borrowing : Moneylenders

A person with a poor credit history may not be able to borrow money from a financial institution. In these circumstances, they might consider borrowing from a moneylender.

Medium term borrowing options : Hire purchase

Hire purchase (HP) allowed a person to use a porduct while they are paying it off. A deposit is usually paid up front, followed by installments over a set period of time. The person only owns the item when the last installment is paid

Medium term borrowing options :Leasing (Renting)

When a person leases goods, they use them for a period of time without ever owning them

Arrears

If one or more repayments are late or go unpaid, the borrower’s account is said to be in arrears