Borrowing (Junior Cert Business Studies): Revision Notes
📚Revision Notes
Borrowing
What is borrowing?
When someone doesn't have sufficient cash to purchase something they need or want, they have the option to obtain money from a financial institution. This process is known as borrowing, which is also referred to as buying on credit.
Important
Borrowing means obtaining a sum of money from a financial institution that must be repaid with interest by an agreed date in the future.
Just as people who save money with financial institutions receive interest on their deposits, those who borrow money must pay interest on the amount they owe. This means that borrowing money comes with a cost.
Why do people borrow money?
People choose to borrow money for various reasons, understanding that each purpose requires careful consideration of the borrowing terms and repayment ability.
The main reasons include:
- Major purchases - To buy expensive items that would take too long to save for, such as a house or car
- Emergency expenses - To cover unexpected costs like medical bills when cash isn't immediately available
- Education - To pay for college fees and educational expenses
- Business ventures - To start a new business or expand an existing one
Note
It's crucial that the borrowing period matches the purpose of the loan. For example, short-term needs should be matched with short-term borrowing options, whilst long-term purchases like homes require long-term loans.
Factors to consider before borrowing
Before taking out any loan, it's essential to think carefully about your financial situation and genuine need for borrowing. Making an informed decision requires honest self-assessment and thorough planning.
Consider these important questions:
- Do I genuinely need this item right now?
- Could I save the money instead of borrowing?
- Exactly how much money do I need to borrow?
- Will the bank require security against the loan?
- How much will borrowing this amount cost, including all interest charges?
- Can I afford the monthly repayments?
- What happens if I fail to make the repayments on time?
Assessing affordability
To determine whether you can afford loan repayments, examine your household budget carefully. Look at how much money is left over each month after all essential expenses.
Example
Worked Example: Budget Assessment
Monthly income: £2,500 Essential expenses: £1,800 Money left over: £700
If loan repayment = £600: You can likely afford this loan If loan repayment = £750: You need to reconsider - either borrow less or extend the term
The key principles are:
- If the leftover amount equals or exceeds the loan repayment, you can likely afford the loan
- If the leftover amount is less than the required repayment, you'll need to either borrow less, extend the repayment period, or reduce other expenses
Sources of borrowing
There are several places where people can borrow money, each offering different advantages and terms. It's always wise to shop around and compare different options to find the best deal that suits your specific needs.
Money can be borrowed from:
- Commercial banks - Traditional high street banks offering various loan products
- Credit unions - Member-owned financial cooperatives that often offer competitive rates
- Building societies - Mutual organisations specialising in savings and mortgage lending
- Alternative lenders - Including moneylenders and online lending platforms
Note
Each source may offer different interest rates, terms, and conditions, so it's important to compare all options before making a decision. Don't just accept the first offer you receive.
Key terms to remember
Understanding financial terminology is essential when borrowing money. These key terms will help you make informed decisions and understand loan agreements better.
Important
Collateral refers to an asset (like property or a car) that secures a loan. If you can't repay the loan, the lender can take the collateral.
Important
Guarantor is someone who agrees to repay your loan if you cannot make the payments yourself.
Important
APR (Annual Percentage Rate) shows the true yearly cost of borrowing, including interest and other charges.
Important
Arrears means being behind on loan repayments - this can seriously damage your credit rating.
Summary
Summary
Key Points to Remember:
- Borrowing means getting money now but paying back more later due to interest charges
- Always consider whether you really need to borrow or if you could save instead
- Match the loan term to your needs - short-term loans for short-term needs
- Check your budget carefully to ensure you can afford the repayments
- Shop around different lenders to find the best rates and terms available