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Understanding Borrowing for Individuals and Households

This chapter delves into the world of borrowing for households and individuals, exploring reasons for borrowing, different types of loans available, factors lenders consider, costs and consequences of borrowing, and the rights and responsibilities of borrowers. It discusses short-term, medium-term, and long-term sources of finance, such as bank overdrafts, credit cards, medium-term loans, leasing, hire purchase, and mortgages. Additionally, it covers the application process for loans, credit ratings, the role of guarantors, and how to calculate interest using the annual percentage rate (APR).

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Understanding Borrowing for Individuals and Households

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  1. Chapter 8: Borrowing for Households and Chapter 8: Borrowing for Households and Individuals Individuals

  2. Chapter 8 Learning intentions In this chapter you will learn to: › Explain the role of borrowing in both personal and household finance › Outline the reasons for borrowing › Compare the major sources of finance for households and individuals › Outline the different types of loan available to households and individuals › Explain the factors a lender will consider before agreeing to give out a loan › Examine the costs and consequences of borrowing › Outline the rights and responsibilities of borrowers. Textbook page reference: 80

  3. Chapter 8 Should we borrow money? Borrowing means getting money from a person or financial institution and agreeing to pay it back at a later stage. Textbook page reference: 81

  4. Chapter 8 The cost(s) of borrowing Interest is the financial cost of borrowing money. What do you think the opportunity cost might be? Textbook page reference: 81

  5. Chapter 8 Reasons for (household) borrowing To pay for very expensive items and household assets. Textbook page reference: 82

  6. Chapter 8 Borrowing for household and individuals An asset is something of value that you own. Textbook page reference: 82

  7. Chapter 8 Reasons for (household) borrowing To deal with short-term deficits. Textbook page reference: 82

  8. Chapter 8 Reasons for (household) borrowing For emergencies. Textbook page reference: 82

  9. Chapter 8 Borrowing money Responsible borrowing means that you do not borrow more than you are able to pay back. Textbook page reference: 83

  10. Chapter 8 The matching principle The matching principle ensures that short-, medium- and long- term needs are matched with suitable short-, medium- and long- term sources of finance. Textbook page reference: 83

  11. Chapter 8 Types of borrowing for households and individuals › Short-term sources of finance › Medium-term sources of finance › Long-term loan/mortgage Textbook page reference: 84

  12. Chapter 8 Short-term sources of finance › Bank overdraft: A current account holder with a bank overdraft has permission to withdraw more money from their account than they actually have in it. › Credit card: Cardholder can buy items now and pay for them at a later date. Textbook page reference: 84 – 85

  13. Chapter 8 Medium-term sources of finance › A medium-term loan is a source of finance available from a range of financial institutions. Borrowers make fixed monthly repayments over an agreed time period. › Leasing involves renting an asset. The lease agreement allows a household or individual to have immediate possession and use of the asset as long as they make fixed, regular payments to the leasing company. › Hire purchase is a source of finance used to purchase an asset. The purchaser pays a deposit followed by an agreed number of regular instalments. Ownership passes to buyer when last payment is made. Textbook page reference: 85

  14. Chapter 8 Medium-term sources of finance An instalment is a fixed sum of money due as one of a number of payments spread over an agreed period of time. Textbook page reference: 85

  15. Chapter 8 Medium-term sources of finance Collateral is something used as security for repayment of a loan. It can be sold by lender and used to cover unpaid debt. Textbook page reference: 85

  16. Chapter 8 Personal contract plans (PCP finance) PCP finance is a very popular option for financing vehicles and is often arranged through the motor dealer or their finance company. Textbook page reference: 86

  17. Chapter 8 Long-term borrowing Households and individuals generally use a special long-term loan called a mortgage for buying property. Textbook page reference: 87

  18. Chapter 8 Borrowing from moneylenders Moneylenders are individuals or companies (excluding banks, building societies and credit unions) whose main business is to lend money. They are an expensive source of finance and some are unlicensed/illegal. Textbook page reference: 88

  19. Chapter 8 Applying for a loan from a financial institution Money can be borrowed from the following financial institutions in Ireland: › Commercial banks › Credit unions › Building societies. Textbook page reference: 89

  20. Chapter 8 Applying for a loan from a financial institution › Personal details › Residential details › Employment details › Savings record › Borrowing history › Purpose of the loan Textbook page reference: 89

  21. Chapter 8 Credit rating › Before granting a loan, the financial institution will check your credit rating or creditworthiness. › Creditworthiness is an estimate of a person’s ability to pay off a loan, based on their saving and borrowing history with financial institutions. Textbook page reference: 89

  22. Chapter 8 A guarantor A guarantor is a person who agrees to repay a loan for you should you be unable or unwilling to do so. Textbook page reference: 90

  23. Chapter 8 How to calculate interest The annual percentage rate (APR) is a calculation of the overall cost of a loan and represents the actual yearly cost of the amount borrowed. The declining principal (or reducing balance) is the amount you still owe at any point during the loan. The cost of credit is the real cost of borrowing, i.e. the difference between the amount you borrow and the total you repay. Textbook page reference: 92—93

  24. Chapter 8 Rights of a borrower › Written details of agreement › A cooling-off period of ten days › Be informed of the Annual Percentage Rate (APR) › Know what the cash and total credit price are for the product › Know the number of instalments and the amount of each one › Be made aware of any fees or penalties for paying off the loan early. Textbook page reference: 94

  25. Chapter 8 Risks of borrowing › You may lose the item you used as collateral › You make be taken to court and risk a fine or prison sentence › Your creditworthiness will be affected, which will reduce your ability to get future loans. Textbook page reference: 95

  26. Chapter 8 Risks of borrowing Being insolvent means being unable to pay your debts as they fall due. Textbook page reference: 95

  27. Chapter 8 Review and Recap Can you: › Explain the role of borrowing in both personal and household finance? › Outline the reasons for borrowing? › Compare the major sources of finance for households and individuals? › Outline the different types of loan available to households and individuals? › Explain the factors a lender will consider before agreeing to give out a loan? › Examine the costs and consequences of borrowing? › Outline the rights and responsibilities of borrowers?

  28. Chapter 8 Credit slide › Shutterstock

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