Chapter 11 - Borrowing Flashcards
Where can we borrow from?
- Commercial banks
- Building societies
- Credit unions
- Family and friends
What is interest?
The price we pay for borrowing money
Who are bank overdrafts generally used by?
People who are temporarily short of cash
What are the advantages of bank overdraft?
~Only pay interest on the amount you use
~Use it whenever you like and as often as you like provided you don’t spend more than the limit agreed
Describe a term loan
- Usually 1-5 years
* Both loan and interest must be paid back on a regular basis
What documents should a borrower bring to the bank when applying for a term loan?
- Copy of household budget
- Copy of analysed cashbook
What must you consider when deciding to borrow?
- Do we really need the item
- Do we need it now?
- Can we raise the money with out borrowing?
- Can we afford the repayments?
What does it mean when you overdraw your account?
It means you get permission to withdraw more money than you have in your account
What are the advantages of a term loan?
~Know exactly how much you have to pay back each month as repayments stay the same for the life of the loan
~Interest is lower than on bank overdraft
Describe a term loan/ mortgage
- > 5 years
- Used to purchase something expensive
- Loan and interest must be paid back in equal amounts over the lifetime of the loan
Name two advantages of a term loan or mortgage
- You can purchase expensive assets by spreading payments out over a long period of time
- You can get tax relief on interest you pay on a mortgage for the first seven years
Describe a credit union loan
- Members can apply for loan having saved regularly over a period of time
- The amount that can be borrowed depends on the amount saved
Give the advantages of a credit union loan
- Interest is lower than a rate charged by other financial institutions
- Repayments can be arranged to suit the needs of the borrower
What are moneylenders?
A person who gives a loan to another person who cannot borrow from a financial institution such as a bank
Why would someone have to borrow from a moneylender?
Maybe the borrower is unemployed or possibly hasn’t paid back loans with other financial institutions and therefore has been refused by others
Give 1 disadvantage of moneylenders
The interest is very high
What should you ask yourself when taking out a loan?
- HOW MUCH do we need to borrow?
- HOW LONG do we need to borrow for?
- Where can we get the LOWEST INTEREST RATES?
- HOW MUCH CAN WE AFFORD to pay back each month?
- Would we still be able to afford the monthly repayments if INTEREST RATES WERE TO RISE?
Before giving a loan the lender will ask…
- Does borrower have a secure JOB?
- Has the borrower been SAVING REGULARLY?
- What does the borrower WANT THE LOAN FOR?
- Does the borrower have SECURITY?•Does the borrower have PREVIOUS LOANS? Were they PAID BACK ON TIME?
Why are your personal details required when taking out a loan?
Records
Why are the details of the borrowers account required when taking out a loan?
To check your financial position and your history of saving
Why are your residential details required when taking out a loan?
To see if you own or are renting your home and the size of that your existing mortgage
Why are your employment details required when taking out a loan?
To find out if you are working and what type of employment you are in
Why are your income details required when taking out a loan?
To see if you can afford repayments
Why are the details of your present savings required when taking out a loan?
To see how much you have saved
