Borrowing 1 st 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. Mr. Poole Business Studies

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 Mr. Poole Business Studies

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 Mr. Poole Business Studies

Where to Borrow  Most 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 Mr. Poole Business Studies

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. Mr. Poole Business Studies

Types of Borrowing  Credit 1.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. Mr. Poole Business Studies

Types of Borrowing  Overdraft 1.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. Mr. Poole Business Studies

Types of Borrowing  Term loan 1.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. Mr. Poole Business Studies

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. Mr. Poole Business Studies

Types of Borrowing  Credit Union Loan 1.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. Mr. Poole Business Studies

Types of Borrowing  Long term loan 1.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 years  Moneylender There 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. Mr. Poole Business Studies

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 secure 3.Income: can applicant repay the loan 4.Track record with lender 5.Collateral: what will lender take if applicant cannot repay 6.Amount required: identify how much is being borrowed in relation to cost of total required e.g. 80% of a mortgage might be borrowed 7.Other loans: are there too many other commitments 8.Purpose of the loan: make sure its a valid loan as not all loans are worthwhile 9.Length of loan: longer the loan lower the interest rate, usually Mr. Poole Business Studies

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 Rhona is employed as a legal secretary with Smart & Keane, Solicitors, Airport Road, Cork, where she started work in 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 14 th August 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 She gets a Loan Application form from her local AIB branch. Complete Rhona’s Application Form Mr. Poole Business Studies

Rhona King Ms 56 Banks Rd, Cork 15Owner /8/1970 €59,000 €3,000 Startup Building Society Legal Secretary Smart & Keane, Solicitors, Airport Rd., Cork. € years €12,500 To Buy a car 4years €290 Cork Credit Union €1,000€768 Mr. 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. Mr. Poole Business Studies

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. Mr. Poole Business Studies Shop sets a cash price and HP price. Purchaser pays a deposit and agreed monthly instalments Hire purchase company pays for 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. Mr. Poole Business Studies

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 Mr. Poole Business Studies

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. Mr. Poole Business Studies

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. Mr. Poole Business Studies

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. Mr. Poole Business Studies