borrowing 1 st year mr. poole business studies. interest everytime we buy something in this world we...

Borrowing

1st year

Mr. Poole Business Studies

Interest • Everytime we buy something in this world we

have to pay a price. • If we want to Borrow money from a bank or

building society we also pay a price for this money.

• The price we pay for this money is called INTERST.

• The interest is usually a percentage of the money we have Borrowed.


Obtaining Goods

• Sometimes we want to buy goods without using our savings/cash.

• Therefore we will need to borrow extra money from a financial institution and repay it over an agreed period of time.

• We can:– Buy on credit– Borrow the money– Rent the goods– Use hire purchase


Borrowing

• Before borrowing we need to decide:

–Do we really need the goods–Do we need it now, or could we save

for it–Can we afford to meet the repayments–Have we no other alternatives


Where to BorrowMost financial institutions will lend to customers.

These include:◦ Commercial banks, such as AIB, Bank of Ireland, Ulster

Bank. These offer: Short term loans such as overdrafts Medium term loans such as a loan for a car Long term loan such as a mortgage

◦ Building societies, such as EBS. These offer: Short term loans such as a loan for repairs to house Long term loans such as a mortgage for a house

◦ Credit Unions, such as Finglas Credit Union. These offer: 0 to 5 year loans such as a loan for a car, furniture, repairs or

even holidays


Conditions of Borrowing

• In order to borrow a person must:– Be credit worthy: prove they can repay the loan– Have ability to repay: have a form of income, job.– Have a track record: have an account with the

lender.– Have collateral: have some sort of security that

the lender can take if the loan is not repaid.


Types of BorrowingCredit1.Credit purchase: this is when we use it first and

pay later. Example would be ESB, Eircom, or Bord Gáis as we use these today and pay 2 months later.

2.Credit cards: we can use this in a shop and have free credit for nearly 2 months before we pay for the goods.

3.Deferred Payments: this is when you buy something like a fridge or TV by paying a deposit and paying the rest with monthly instalments.


Types of BorrowingOverdraft1.The customer applies for permission to overdraw

their account.2.They are then given a limit they can overdraw to.3.These are short term loans and must be repaid

within one year.4.Used only for a temporary shortage of cash.5.Usually used to cover bills towards end of month

while waiting on wages or salary.


Types of BorrowingTerm loan1.These are loans given by both banks and building

societies.2.They are given with a stated period of time for

repayment, usually 2 to 5 years.3.Usually used to purchase a new car or furniture.4.Need to supply a statement of income to the

lender to show they can afford to repay the loan.


Types of Borrowing

Mortgage ( long term loan)1.This is a loan to buy a property.2.The deeds (ownership documents) are held

by the lender until final payment of the loan.3.If you fail to repay your mortgage the lender

can reclaim the property and sell it on to repay the money borrowed.


Types of Borrowing

Credit Union Loan1.Members of a credit union who regularly save

over a period of time can apply for a loan.2.The amount borrowed usually depends on the

amount already saved.3.Credit unions will consider loans for all

worthwhile purposes including cars, holidays, house repairs or improvements, education costs etc.


Types of Borrowing Long term loan1.This is a loan that is repaid over a period longer than 5

years.2.The loan and the interest must be repaid in equal amounts

over the life of the loan, e.g. Over 20 yearsMoneylenderThere are legal and illegal money lenders.1.legal money lenders must follow proper lending guidelines

and can charge up to 39% interest.2.Illegal money lenders break the law by lending money and

charging any amount of interest that they want. They even use bullying tactics to make people repay.


Applying for a loan When applying for a loan you must provide the lender with the

following:1. Name, address and age(with proof) of applicant.2. Employment: is job secure3. Income: can applicant repay the loan4. Track record with lender5. Collateral: what will lender take if applicant cannot repay6. Amount required: identify how much is being borrowed in relation

to cost of total required e.g. 80% of a mortgage might be borrowed7. Other loans: are there too many other commitments8. Purpose of the loan: make sure its a valid loan as not all loans are

worthwhile9. Length of loan: longer the loan lower the interest rate, usually


Proposal Form Example• Rhona King lives at 56 Banks Road, Cork in a house she purchased in 1995

with the help of a mortgage 0f €59,000 from the start up building society and to whom she repays €250 per month. She is single. Her telephone number is 021-134567. Rhona is employed as a legal secretary with Smart & Keane, Solicitors, Airport Road, Cork, where she started work in 1991. She earns a Gross Salary of €2,400 per month, out of which she pays income tax and PRSI totalling €826. Rhona wishes to buy a new car for her next birthday. She will be 35year old on 14th August 2005. In order to buy the car she needs to borrow €12,500 which she hopes to repay in monthly instalments of €290 over the next 4years. She is already paying the Cork Credit Union €64 per month for a loan which she obtained in 2004. She gets a Loan Application form from her local AIB branch.

• Complete Rhona’s Application Form


Rhona King Ms56 Banks Rd,Cork

15 Owner021-13456714/8/1970

€59,000€3,000Startup Building Society

Legal Secretary

Smart & Keane, Solicitors, Airport Rd.,Cork.

€157418 years

€12,500To Buy a car

4years€290

Cork Credit Union €1,000 €768Mr. Poole Business Studies

Guarantor

• If you have no regular income or are under 18 you may be required to get a guarantor.

• This is usually a relative who signs a document agreeing to pay the interest and the loan if you cannot.


Hire Purchase

• Hire Purchase is a system of buying goods on credit by paying an initial deposit and paying the balance by regular instalments over an agreed period.

• This offers immediate use and eventual ownership of the good.


Hire purchase

• When you buy on hire purchase you have the following rights:

• To a copy of the agreement, showing cash price, the HP price and the annual percentage rate (APR).

• To return goods if instalments cannot be repaid.• If more than one third of the HP price is paid

back the company cannot take the good back without the permission the courts.


Hire Purchase Worked Example

• The Hire Purchase of a TV requires a deposit of €60 and €15 per month for 2 years. Or a cash purchase of €400. Calculate which is cheapest.

• HP= €15 x 2years + €60 deposit• = €15 x 24 months +€60 deposit• =€360 + €60• = €420

• The cash purchase is €20 cheaper.Mr. Poole Business Studies

Annual Percentage Rate (APR)

• This is the real cost of a loan when interest and additional charges related to the loan are taken into account.

• To find the cheapest loan company we compare the APR’s


Bankruptcy

• This is when a person cannot payback all or part of their debts.

• When this happens the collateral is liquidated(sold) to pay the balance of the debts.

• If the collateral is not enough to cover the debt the person is declared bankrupt or insolvent.


What if you cannot get a loan

• Some people may not be able to get a loan. This would mean having to save for what we want. However there are some options open to us:

• Pawnbrokers• A pawnbroker will lend you money on the

security of something valuable e.g. Jewellery. If the loan is not repaid the security is sold.


Renting/Leasing

• When you rent/lease something you have the use of the item. E.g. Some people rent a television, car or video.

• With renting/leasing you get the use of the good but you will never own the good.

• Renting/leasing only makes sense if you need the good for a short period of time and have no ambition to own it.


borrowing 1 st year mr. poole business studies. interest everytime we buy something in this world we...

Documents

short term loans

overdraftsmedium term

houselong term loans

carlong term loan

year loans

extra money

free credit

credit worthy