2. 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?
3. 11 Borrowing
• People borrow money from:
Banks
Building Societies
Credit Unions
Moneylenders
4. 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.
5. 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
6. 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.
7. 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.
8. 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.
9. 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.
10. 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
11. 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/
12. • 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.
13. • 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
14. • 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.
15. 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
16. 11 Borrowing
Calculating loan interest:
•Martina Kelly wants to borrow €15,000 over three
years which means she is able to repay €5,000 off the
loan, plus any interest due, at the end of each year.
•Gilroy Finance Ltd offered the money at a flat rate
of 8% per annum.