borrowing

Borrowing

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

11

Types of Borrowing

SHORT TERM:

1.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.

2. Credit Card – Buy goods on credit and pay back money later. E.g. Visa Card.

MEDIUM TERM:

1.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:

1.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.

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

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/credit-worthy/borrowing-money/interest-and-apr

• 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 RepaymentInterest

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

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.

11

Borrowing

Solution (Loan Interest)

11

Borrowing

Solution (Loan Interest)

11

Borrowing

Solution (Loan Interest)

11

Borrowing

Solution (Loan Interest)

11

Borrowing

• Lynch Finance offered the money at 11% APR (True Rate).

Solution (Loan Interest)

11

Borrowing

• Lynch Finance offered the money at 11% APR (True Rate).

Solution (Loan Interest)

11

Borrowing

• Lynch Finance offered the money at 11% APR (True Rate).

Solution (Loan Interest)

11

Borrowing

• Lynch Finance offered the money at 11% APR (True Rate).

Solution (Loan Interest)

11