11 Borrowing• Before deciding to borrow money we should ask: Do we really need the item? Could we wait until we have saved up the money we need? Could we raise the money in other ways? Can we afford the repayments?
11 Borrowing• People borrow money from: Banks Building Societies Credit Unions Moneylenders
Types of Borrowing SHORT TERM:• Bank Overdraft – Customer applies to their bank for permission to overdraw their current account. An overdraft is usually given up to a certain limit which means that they can overdraw up to that amount.• Credit Card – Buy goods on credit and pay back money later. E.g. Visa Card.
MEDIUM TERM:• Term Loan – you borrow money for a stated purpose and agree to make a fixed number of repayments at regular intervals. Interest is calculated on the sum borrowed. E.G. Buying a car
LONG TERM:• Mortgage – You borrow money for a long time (20 – 30 years) in order to buy a house. The deeds to the house are used as collateral. Interest is calculated on the sum outstanding.
11 Borrowing• Rights of a Borrower To be told the Annual Percentage Rate of interest (APR – True Rate). To be told the total cost of the loan.
11 Borrowing• Rights of a Borrower To be told the number of repayments and the amount of each repayment. To be told about any deposit or final payment. To be told they have the right to cancel the loan agreement within 14 days.
11 Borrowing• Responsibilities of a Borrower: To budget properly and so be able to repay the loan each month. To tell the truth when filling out the application form. To use the money for the correct purpose. To repay the loan in the agreed time.
11 Borrowing• Information required by the lender when applying for a loan includes: name and address of borrower employment details income details other borrowings present savings
Borrowing Interest:• If we want to borrow money from the bank or building society we also pay a price for this money. The price of borrowed money is called interest and is usually calculated as a percentage of the amount borrowed.• http://www.moneysense.ulsterbank.ie/schools/students/
• Flat Rate: this is the annual interest rate calculated as a percentage of the original sum borrowed, for example Mary borrowed €3,000 from AIB to be repaid over three years at 10% per year. Lets assume that one payment of €1000 + interest is made at the end of each year.
• Flat rate: €3,000 @ 10% = €300 Balance Repayment Interest Year 1 €3,000€1,300€300 Year 2 €2,000€1,300€300 Year 3 €1,000€1,300€300 Total interest €900 Total repayment €3,900
• Annual Percentage Rate (APR): This is the actual annual rate of interest charged on a loan. It takes into account the fact that the loan is reducing each year as repayments are made. Mary borrowed €3,000 from AIB to be repaid over three years at 10% per year. Lets assume that one payment of €1000 + interest is made at the end of each year.
APR: Balance Repayment Interest Year 1 €3,000€1,300€300 Year 2 €2,000€1,200€200 Year 3 €1,000€1,100€100 Total interest €600 Total repayment €3,600
11 BorrowingCalculating loan interest:•Martina Kelly wants to borrow €15,000 over threeyears which means she is able to repay €5,000 off theloan, plus any interest due, at the end of each year.•Gilroy Finance Ltd offered the money at a flat rateof 8% per annum.