12 Questions
What type of loan is specifically designed for covering university fees and living expenses, with payment starting after graduation?
Student loan
What is the consequence of not paying back a mortgage to the bank?
The bank will sell the house to pay off the loan
What distinguishes payday loans from other types of loans?
High interest rates
What is the extra money paid on top of a loan called?
Interest
What is one of the key factors that lenders consider before lending money to an individual?
Their ability to pay back previous loans on time
Why is it important for an individual to have a plan for repaying borrowed money?
To ensure debts do not become unmanageable
What determines the amount of interest on a loan?
The amount borrowed and the repayment period
Which scenario makes borrowing money easier and more affordable?
Having a regular job and no previous debt issues
What type of loan is typically needed to buy a house, given that most people don't have hundreds of thousands of pounds saved up?
Mortgage
What is it called when the bank allows you to withdraw more money than you have in your account?
Overdraft facility
How can credit cards be used to borrow money without incurring interest charges?
By paying off the full balance each month
What makes borrowing on credit cards more expensive?
Leaving balances unpaid for an extended period
Study Notes
Borrowing Money
- When borrowing money, the lender will want something in return, known as interest, which is an extra amount of money paid on top of the loan.
- Interest rates can vary greatly, ranging from 1% to 1000% per year, depending on the lender, amount borrowed, and repayment period.
Factors Affecting Borrowing
- Having a stable job and no existing debts makes it easier to borrow money.
- Those without a regular income and with a history of money problems may find it harder and more expensive to borrow.
Types of Borrowing
- Overdraft: a type of borrowing where banks allow customers to take out more money than they have in their account, often free to start with, but with potential charges later on.
- Credit cards: allow customers to buy things and pay back the amount spent at the end of the month, free of charge if paid in full, but with interest charges if not.
- Student loans: government-funded loans for university students, repaid only when their income exceeds a certain amount.
- Mortgage: a long-term loan to buy a house, typically taking 25 years to repay, with low interest rates compared to other loans.
Important Considerations
- Interest on a mortgage can add up, e.g., £150,000 borrowed over 25 years would result in £213,000 paid back in total.
- Payday lenders offer expensive loans to those struggling to borrow elsewhere, with interest rates potentially reaching 1000% per year.
- Lenders conduct credit checks to assess the borrower's likelihood of repayment before lending.
- It is crucial to have a plan to repay borrowed money to avoid debt spiraling out of control.
This quiz explores the concept of interest on loans, covering how it is calculated as a percentage of the borrowed amount and its implications in repayment. Whether borrowing from family, friends, banks, or building societies, understanding interest rates is crucial.
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