Chapter 11 - Borrowing

Question 1

Where can we borrow from?

Answer 1

• Commercial banks
• Building societies
• Credit unions
• Family and friends

Question 2

What is interest?

Answer 2

The price we pay for borrowing money

Question 3

Who are bank overdrafts generally used by?

Answer 3

People who are temporarily short of cash

Question 4

What are the advantages of bank overdraft?

Answer 4

~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

Question 5

Describe a term loan

Answer 5

• Usually 1-5 years

* Both loan and interest must be paid back on a regular basis

Question 6

What documents should a borrower bring to the bank when applying for a term loan?

Answer 6

• Copy of household budget

- Copy of analysed cashbook

Question 7

What must you consider when deciding to borrow?

Answer 7

• Do we really need the item
• Do we need it now?
• Can we raise the money with out borrowing?
• Can we afford the repayments?

Question 8

What does it mean when you overdraw your account?

Answer 8

It means you get permission to withdraw more money than you have in your account

Question 9

What are the advantages of a term loan?

Answer 9

~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

Question 10

Describe a term loan/ mortgage

Answer 10

• > 5 years
• Used to purchase something expensive
• Loan and interest must be paid back in equal amounts over the lifetime of the loan

Question 11

Name two advantages of a term loan or mortgage

Answer 11

• 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

Question 12

Describe a credit union loan

Answer 12

• Members can apply for loan having saved regularly over a period of time
• The amount that can be borrowed depends on the amount saved

Question 13

Give the advantages of a credit union loan

Answer 13

• Interest is lower than a rate charged by other financial institutions
• Repayments can be arranged to suit the needs of the borrower

Question 14

What are moneylenders?

Answer 14

A person who gives a loan to another person who cannot borrow from a financial institution such as a bank

Question 15

Why would someone have to borrow from a moneylender?

Answer 15

Maybe the borrower is unemployed or possibly hasn’t paid back loans with other financial institutions and therefore has been refused by others

Question 16

Give 1 disadvantage of moneylenders

Answer 16

The interest is very high

Question 17

What should you ask yourself when taking out a loan?

Answer 17

• 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?

Question 18

Before giving a loan the lender will ask…

Answer 18

• 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?

Question 19

Why are your personal details required when taking out a loan?

Answer 19

Records

Question 20

Why are the details of the borrowers account required when taking out a loan?

Answer 20

To check your financial position and your history of saving

Question 21

Why are your residential details required when taking out a loan?

Answer 21

To see if you own or are renting your home and the size of that your existing mortgage

Question 22

Why are your employment details required when taking out a loan?

Answer 22

To find out if you are working and what type of employment you are in

Question 23

Why are your income details required when taking out a loan?

Answer 23

To see if you can afford repayments

Question 24

Why are the details of your present savings required when taking out a loan?

Answer 24

To see how much you have saved

Question 25

Why are the details of your present borrowings/loans required when taking out a loan?

Answer 25

To see how much you currently owe

Question 26

What are the rights of a borrower?

Answer 26

➡️Must be told APR ➡️Must be told total cost of loan ➡️Must be told number of instalments and amount of each payment ➡️Must be told about any balloon payments ➡️Have the right to cancel loan within 14 days of signing loan agreement

Question 27

What are the responsibilities of a borrower?

Answer 27

💡Budgeting properly 💡Make sure loan is fully repaid in agreed time 💡Must tell truth when filling out loan application form 💡Must use money for intended purpose

Question 28

What is the flat rate of interest?

Answer 28

Interest based on the original amount of the loan

Question 29

What does APR stand for?

Answer 29

Annual Percentage Rate

Question 30

What is APR?

Answer 30

This is the actual rate of interest charged on a loan. It takes into account the amount owed is going down each year

Question 31

Give another name for APR

Answer 31

The true rate of interest

Question 32

What is security?

Answer 32

Anything of value given by the borrower to the lender in exchange for a loan

Question 33

Give examples of security

Answer 33

🔹Deeds 🔹Company shares 🔹Life assurance policies 🔹Personal guarantees

Question 34

What is a guarantor?

Answer 34

A guarantor is a person who agrees to repay a loan for another person if they are unable to make their repayments

Question 35

Describe a bank overdraft

Answer 35

* <1 year * You ask the bank to overdraw your current account * Usually given up to a certain limit * Must repay by the end of each year * Used by people who are temporarily short of cash