2Y: Borrowing

Question 1

What is Borrowing?

Answer 1

Borrowing is receiving the money we need now (from a person or a financial institution) and agreeing to repay that money plus interest at a specific time period in the future.

Question 2

What questions should you ask yourself before borrowing? (4)

Answer 2

1. Do I really need the item?
2. Can I get the money another way? (saving)
3. What is the total cost of borrowing?
4. Can I afford the repayments? Your income must be sufficient to repay the installments.

Question 3

What is interest?

Answer 3

Interest is the financial cost of borrowing money.

Question 4

What is an instalment?

Answer 4

An instalment is a fixed sum of money due as one of a number of payments spread over an agreed period of time.

Question 5

What are some reason for borrowing?

Answer 5

1. To pay for very expensive items - house, car…etc.
2. To deal with short term deficits - temporary cash shortfalls…christmas, back to school
3. Emergencies - car repairs, medical costs.

Question 6

What is the Matching Principle?

Answer 6

The Matching Principle suggests that short, medium and long term needs should be financed using appropriate short, medium or long term sources of finance.

Question 7

Name 2 Short Term Sources of Finance?

Answer 7

• Bank Overdraft
• Credit Card

Question 8

Name 3 Medium Term Sources of Finance?

Answer 8

• Medium Term Loan - fixed repayments on a monthly basis.
• Leasing - involves renting of an asset (e.g. vehicle). You never own the asset.
• Hire Purchase - pay a deposit and pay the balance over a period of time. You do not become a legal owner until last payment is made.

Question 9

Who are the 3 parties in a Hire Purchase?

Answer 9

1. The buyer of the goods.
2. The seller of the goods.
3. The finance company/bank.

Question 10

What must all HP agreements show? (8)

Answer 10

1. Name and address of buyer.
2. Name and address of seller.
3. Cash price.
4. Full HP price.
5. APR
6. Deposit Amouint
7. Number and amount of each installment.
8. Optional Final Payment.

NOTE: Buyer has the right to withdraw from the agreement within 10 days of receiving it (cooling off period).

Question 11

What is the ‘Half Rule’ when returning goods?

Answer 11

The buyer has the right to terminate the agreement and return the goods if;

• Half the price has been paid.
• If less then half has been paid, you must pay the difference

Question 12

What is the ‘Third Rule’ in a HP agreement?

Answer 12

• If the buyer stops paying the installments, the HP company has the right to take back the goods.
• If the buyer has a thrid or more of the HP price paid, the HP company cannot take back the goods without a court order.

Question 13

What are Pros(4) and Cons(4) of a PCP?

Answer 13

A PCP is a Personal Contract Plan.

Pros:

1. Low monthly repayments.
2. Small deposit.
3. A choice of what to do at the end of the repayment terms.
4. Quick and easy to arrange.

Cons:

1. Mileage and condition of car affects the costs.
2. Total amount paid may be more than the hire purchase.
3. Have to pay the outstanding balance to keep the car.
4. You dont own the car until the final repayment is made.

Question 14

Name a Long term Source of Finance?

Answer 14

• Households and individuals generally use a special long-term loan caled a mortgage for buying property.
• Mortages are available from commercial banks and building societies.
• Under the terms of the agreement, the property is used as security or collateral for the loan. This means the property may be repossesed if the borrower fails to repay the loan.

Question 15

What is Credit Worthiness?

Answer 15

Credit Worthiness is an estimate of the ability of a person to pay off a loan based on their savings and borrowing history with financial institutions.

Your Credit Worthiness can be proved from:

• Your bank statements
• By a report from the Irish Credit Bureau (ICB)

Question 16

What is a guarantor?

Answer 16

If the lender is unhappy with your credit worthiness or your ability to repay, you may be asked for a guarantor.

A guarantor is a person of good financial standing who agrees to replay a loan for you, should you be unable or unwilling to do so.

Question 17

What is collateral?

Answer 17

Collateral is used as security for repayments of a loan. If you cannot repay back the loan, the financial institution can take the asset e.g. the title deeds of the property and sell it to recover the money owed.

Question 18

What is a stress test?

Answer 18

Stress testing a loan application looks at the change to monthly repayments if interest rates were to increase.

If a high porportion of disposable income is committed to loan repayments, then lender may conclude that a smaller loan or longer time period is more appropriate.

Question 19

What is MABS?

Answer 19

MABS - Money Advice and Budgeting Service. MABS is the State’s money advice service, guiding people through dealing with problem debt and managing their money. MABS is free, confidential and independent.

Question 20

What is the Insolvency Service of Ireland (ISI)?

Answer 20

• The Insolvency Service of Ireland (ISI) is an independent statutory body.
• The Insolvency Service of Ireland (ISI) was set up under the Personal Insolvency Act 2012, which introduced 3 new debt settlement procedures and reduced the term of bankruptcy from 12 years to 3 years (now 1 year).
• The ISI is responsible for all matters concerning personal insolvency/bankruptcy.

Question 21

What are the rights of a borrower?

Answer 21

Consumers who borrow money are protected in legislation by the Consumer Credit Act 1995.

A borrower has the right to:

1. Get written details of the agreement.
2. Change their minds within 10 days (cooling off period).
3. Know the APR.
4. Know the Cash Price.
5. Know the Credit Price.
6. Know the number of instalments.
7. Know the amount of each instalment.
8. Pay off the loan earlier than agreed

Question 22

What is APR?

Answer 22

• Interest on loans in shown as an Annual Percentage Rate (APR)
• APR is the calculation of the overall cost of the amount borrowed, including any setup charges and the interest rate.
• Fees and charges are added before interest is calculated.
• The higher the APR, the more it will cost.
• APR is calculated each year on the declining principal, which is the amount you still owe.

Question 23

How to calculate APR?

Answer 23

See Image.