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Borrowing Money. Goods and services can be bought by: Cash Credit Borrowing CREDIT When we buy goods on credit, we get the goods immediately and pay for them at a later date.
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Goods and services can be bought by: • Cash • Credit • Borrowing • CREDIT • When we buy goods on credit, we get the goods immediately and pay for them at a later date. • Before a person is given credit, a business will make sure that he/she is creditworthy, i.e. they will check to see if he/she will be able to repay the money. • Ways of checking creditworthiness/credit status: • Bank can be asked for information on your financial position. • Reference from other firms that you deal with. • Credit Status Enquiry Agency. • Get sales representatives to make enquiries.
A debtor is someone who owes us money. • Types/Sources of credit • Consumer credit. This is where consumers buy goods and use services and pay the seller/supplier at a later date, e.g. milk, electricity, telephone, local shop. • Credit card. When a consumer buys goods and services using a credit card, the bill is paid by the credit card company and the consumer then pays the credit card company within the agreed credit period. Examples include; Visa and Mastercard. • Hire Purchase. (HP) • 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 of time. • The buyer obtains the immediate use of the goods but does not become the legal owner until the last instalment is paid. It is expensive, as hire purchase companies charge a flat rate of interest.
Advantages to the consumer of buying on a hire purchase. • Immediate possession and use. • Consumer has the use of item while paying for it. • HP finance is easily available. • Security is not required. • Disdvantages to the consumer of buying on a hire purchase. • Expensive – a flat rate of interest is charged. (This is where interest is charged on the original amount borrowed. It makes no allowance for the fact that the amount owing is reducing all the time as repayments are made). • Ownership acquired only after paying the final instalment. • Could encourage overspending. • (4) Leasing/renting. • When you lease/rent something, you have the use of the item, e.g. television, car, video, but you will never own it. • A regular payment is made for the use of the item.
(5) Deferred payment/budget account. • This is when an item is purchased, e.g. suite of furniture, with a deposit being paid and the balance paid in instalments. • Ownership of the goods passes to the buyer when the deposit is paid. • If the buyer defaults in payment (does not finish paying), the goods cannot be repossessed but the seller can sue the buyer for the balance outstanding.
Borrowing • Borrow the money and repay the lending agency in the future with interest. • Factors to consider before borrowing: • Do we need the goods or services? • Can we meet the repayments? – ability to repay. • What security/collateral can we offer the lender? • Rate of interest – APR. • Length of repayments. • Amount required. • Job security. • Which financial institution best meets our requirements?
Collateral/security • Lender will require collateral or security. This means that you hand over/sign over some valuable asset. The lender will hold this asset until the loan is repaid. It may be liquidated by the lender if the borrower fails to repay. • Guarantor • It is a person of good financial standing known to the bank who undertakes to repay a loan for a debtor should the debtor be unable or is unwilling to do so. • Acceptable forms of collateral; • Deeds of premises or property. • Life Assurance Policy. • Guarantor. • Share Certificates.
Advantages of borrowing • Enables people to buy goods without saving for a long time. • Increases standard of living. • Helps people in difficult financial situations. • Disdvantages of borrowing • Carries a high cost – rate of interest. • Commits borrower to repayments in the future. • High borrowings cause many social problems. • Cost of borrowing – this is the rate of interest charged by the lender. • Flat rate of interest. This is charged on the original loan amount borrowed over the full duration of the loan. No credit is given for repayments made. • True rate of interest – APR. Interest is charged on the reducing balance of the loan, i.e. it is calculated on the amount outstanding after each instalment is paid. Another name for true rate is Annual Percentage Rate (APR).
It includes other costs in taking out a loan, e.g. administration fees, stamp duty and insurance. All lending institutions must by law show the APR on any advertisement for a loan. This allows consumers to make comparisons between lending agencies. • Rights of borrower • The right to change his/her mind and cancel the agreement within ten days. • The right to pay off the loan earlier than when due. • To be made aware of the Annual Percentage Rate (APR). • To know the number of instalments. • The amount of each instalment. • To be informed of the Cash Price. • To be told the Total Credit Price. • To receive a copy of the agreement/contract.
Responsibilities of borrower • To provide true and accurate information to the lender. • To pay the monthly instalments on time. • To repay the loan in full. • Bankruptcy • If a person borrows and is unwilling or unable to repay his/her debts, he/she can be declared bankrupt by the High Court. • Term of loans • Loans can be for the short term (up to one year), medium term (one to five years), or long term (five to twenty years).
Lending agencies • Commercial banks • Term loan: a loan given for a stated reason, for a specified period of time. • Bank overdraft: where the bank manager gives permission to a current account holder to overdraw on their account up to a certain limit. • Mortgage: a home loan given by the bank for the purchase of a house. • Bridging loan: short-term loan finance given to people who have a mortgage approved but are awaiting receipt of a building society loan. • Building societies • Building societies provide hone loans and other financial services. • Credit Union • You must be a member of a credit union with a savings record to qualify for a loan. The credit union will lend a multiple of the amount saved (two or three times). Loans are given for many purposes, including cars, furniture, holidays and electrical goods.
(4) Hire purchase Already explained in notes previous. (5) Moneylenders people will borrow from moneylenders if they have difficulty in borrowing from other financial institutions. Moneylenders charge extremely high rate son interest. Licensed moneylenders have a licence from the Revenue Commissioners to operate. APR must be quoted on all loans. An unlicensed moneylender lends without a licence.
