Borrowing Money Flashcards
(26 cards)
Reasons for borrowing money?
- Immediate satisfaction
- Convenience (not having to carry cash)
- Possible savings (taking advantage of sales or offers)
- Emergencies
- Improving quality of life
- Forced ‘saving’ (you have to put money aside to meet regular payments)
Reasons against borrowing money?
- Interest charges are usually high
- Allows impulse buying
- Additional costs (merchant fee costs)
- Loss of control (due to over-committing yourself)
- Inability to repay (lower quality of life)
- False sense of security
What are the steps to getting a loan?
- Decide how much you need to borrow.
- Decide if you have enough savings for a deposit
- Decide if your income is sufficient to meet repayments
- Shop around for the best deal - perhaps use a finance broker
What is interest?
A payment made for the use of money that has been borrowed.
What is the amount you borrow called?
The principle
What are financial institutions that lend money?
Finance companies, Building societies, Credit unions, Private money lenders, Banks
Identify the different loan options.
Personal loans, mortgage loans, bank overdraft, credit card, store credit, payday loans
Explain the types of personal loans.
Secured loan: Something deposited as a guarantee to fulfill the payment of a loan (collateral such as car loan, mortgage)
Unsecured loan: Nothing is deposited as a guarantee to fulfill the payment (e.g. credit cards, student loans)
Explain a mortgage loan.
A loan for goods or property - has to be repaid later. The security on this loan is the property itself - the bank has the right to take it back if it is not repaid in the correct time frame.
What is bank overdraft?
Writing cheques greater than the amount in the account. (a business with cashflow issues that need to pay off their supplier)
Explain credit card loans
A credit card loan often has a credit limit- a specified level the card holder is allowed to spend.
What is store credit and how is this different from normal credit cards?
Allows you to purchase goods on credit a their stores but they charge a higher interest rate.
What are payday loans and how might they be a problem?
They are a cash advance against the next pay slip - they could be a problem because they normally a for a few hundred dollars but usually must be paid within two to four weeks - the interest is incredibly high.
What are the 3 Cs of Credit rating
Character, capacity, collateral
Explain these 3 Cs:
Character: person’s reputation for honesty and reliability in paying debt
Capacity: ability to pay the debt (measured by income and the number of existing debt)
Collateral: the assets used as security for the payment of the loan (will be forfeited if the borrower is unable to pay back)
What does ‘going guarantor’ mean?
You would have to guarantee to pay the money back if the borrower does not. This could be risky because a friend or relative may fall ill and be unable to pay the debt or the borrower may be unreliable.
What are some factors that will affect your ability to get a loan?
- A stable job (frequently changing jobs = dodgy)
- Employment history
- Address history
- Income details
- Previous credit history
- List of assets
- List of liabilities
What are the 5 steps to budgeting.
1) Calculate total income.
2) Record your expenses
3) Total your expenses
4) Compare your total income with your total expenditure
5) Assess your financial position
What are the different types of insurance?
Life, travel, income, health, car and home insurance.
What is life insurance?
Money put aside for family in case of death.
What is travel insurance
Money put aside in case of needing medical assistance overseas, loss of luggage or holiday cancellation
Income protection?
In the case of not being able to work due to illness or accident - ensuring that some income would come through.
Health insurance?
Money put aside for medical expenses in the case of an emergency or sickness.
Car insurance
In the case of an accident, money put aside in order to pay for damage done to the car and other people.
