1.5 Choosing to borrow money

Why borrow?• People’s spending needs change over their

personal life cycle so it is often necessary to borrow money by means of a loan to make large purchases which can be repaid from earnings over an agreed period of time (the term of a loan)

• Emergencies might crop up*** if there are not enough savings, borrowing

enables an essential item to be bought immediately***

Methods of Borrowing• Mortgage – a loan to finance the purchase of real

estate• Credit Card – cards that may be used to borrow money

to buy products and services up to a pre-arranged limited, each month you must pay at least the minimum repayment required of the outstanding balance.

• Store Card – similar to credit card but can only be used in the issuing store

• Personal Loan• Hire Purchase – instalment plan whereby the loan

company owns the item, but it becomes yours when the debt is fully paid off

• Overdraft – borrowing up to an agreed limit on a current account.

Interest Rate & APR

• APR = Annual Percentage Rate = the interest rate charged on loans and credit cards

• The interest rate is the COST of borrowing money.