UNIT 4 Banking, Saving and Borrowing


Sources of Finance Summary Short term (< 1 year)


Bank overdraft Credit cards


Medium term (1–5 years) Hire purchase Leasing


Medium-term loan


Just like households, organisations/businesses require sources of finance too (see Unit 9). Point of Information


Applying for a Loan


A loan is money borrowed that must be paid back with interest.


When applying to borrow money, the household/individual must satisfy some requirements from the financial institution:


1. Application form: The borrower will have to fill out an application form when applying for a loan. They must explain what they want the loan for and how they intend to repay the loan, along with other details such as borrowing history and personal details.


Long term (>5 years) Long-term loan Mortgage


Loan application.


2. Creditworthiness: The household/individual must be a person who is seen as creditworthy. This means they have a reliable source of income and can be trusted to repay the loan. Any previous loans they may have had will be checked to see if they were repaid (on time/in full).


3. Stress test: The financial institution will run different scenarios to see if the borrower can repay the loan if their circumstances were to change, e.g. losing their job or if interest rates were to increase.


4. Savings record: Financial institutions prefer borrowers who save over time, as they are deemed to be less risky to lend to.


5. Security: The household/individual should provide something of value – some form of security, also known as collateral – which the lender (financial institution) will accept in exchange for a loan. Often when buying a house with a mortgage, the house itself is the security. If the borrower is unable to repay the loan, the house will be repossessed (taken by the lender).


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