KEY TAKEAWAYS - CHAPTER 5 SUMMARY 9


Reasons to borrow


10


Costs of borrowing


11


Risks of borrowing


Short-term finance


12 0 - 1 years


Uses: Groceries, Petrol, Bills...


1. To buy something that cannot be afforded immediately. 2. To deal with emergency or unexpected costs. 3. To spread the cost of large purchases over time.


Interest and fees increase the total amount that must be repaid.


Loan repayments reduce disposable income available for other spending.


Missing repayments can damage a person’s credit rating.


Borrowing can cause financial stress if repayments become difficult to manage.


Short-term finance refers to money borrowed that is repaid within one year.


Bank overdraft – Allows a current account holder to withdraw more money than is available in their account up to an agreed limit.


Credit card – Allows consumers to buy goods or services now and pay for them later.


Medium-term finance


13 1 - 5 years


Uses: Buying a car, appliances, furniture...


Medium-term finance refers to money borrowed that is repaid within one to five years. Medium-term loan – A loan repaid in regular instalments over one to five years with interest charged. Leasing – Renting the use of an item for a period of time without owning it. Hire purchase – Buying an item in instalments with ownership transferring after the final payment. PCP (Personal Contract Plan)– Car finance where a deposit and monthly repayments are made with the option to buy the car at the end.


14


Long-term finance Over 5 years


Uses: Buying/ extending property


15


Calculating the cost of borrowing


Long-term finance refers to money borrowed that is repaid over a period longer than five years.


Long-term loan – A loan repaid over more than five years in regular instalments with interest charged.


Mortgage – A long-term loan used to buy property and usually repaid over 20–35 years.


Interest = Principal × Interest rate. Total cost of loan = Principal + Interest. Repayment amount = Total cost ÷ Number of repayments.


16


Savings Interest (AER): The reward for saving, shown as an Annual Equivalent Rate.


AER vs APR


Borrowing Interest (APR): The total cost of a loan, shown as an Annual Percentage Rate.


17 54 2 Collateral


Security that a lender can take (like a house) if a borrower defaults (stops paying) on a loan.


STRAND 1


CHAPTER 5: Saving and borrowing for a household


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