HOT TOPIC

5. BORROWING
Student Name:
HOT TOPIC
5. BORROWING

CONTENTS

1. About Borrowing 3

2. Learn The Terms 4

3. Fixed and Floating Interest Rates 5

4. Getting a Car Loan 7

5. Interest Free Loans 10

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1. ABOUT BORROWING
Welcome to this Hot Topic on Borrowing.
Here you will learn about:
• How to borrow money
• What the benefits and drawbacks are
• And get a chance to plan borrowing some
money for some of your own purchases.

Sometimes you don’t have enough money

to make a purchase, and you need to borrow
some money. When you borrow money from
another person or party, you will do it with
agreement that it will be repaid.
Most borrowed money is repaid with interest, meaning you, the
borrower, additionally pays to the lender a certain percentage of the
original amount you have borrowed. Most borrowed funds have a date
by which time the borrower must repay the loan.

Activity

1. With a classmate, discuss the following questions about borrowing.

a) Have you ever borrowed money from a family member or the bank
in order to be able to buy something? If so, what did you buy, and how
much did you borrow? Did you repay the loan?

Yes. I had $460, and the watch that I had been saving for went on sale to
$500 (It's usual price was $750). So I borrowed some money from my
parents and worked to pay them back.

b) Have your parents borrowed money to buy a large item like a house?
I'm pretty sure they got a morgage to buy the house.

c) If you could take out a loan today, would you, and why would you? Is
having the item worth more than the risk of not being able to repay the
loan?
I would get a student loan to study, and maybe some to live somewhere.

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2. LEARN THE TERMS
Loans: A sum of money lent by one institution/person (the lender)
to another (the borrower). In return the borrower pays the lender a
percentage fee, interest, for the use of the money.

Bank Overdraft: A simple way to make sure you’ve always got access
to extra funds if you need them. You need to apply to the bank for the
amount of overdraft that you want. There are extra fees and interest
is payable on the overdraft used. Unlike a loan, there are no minimum
monthly repayments.

Mortgages: A mortgage is a specific type of loan for property or land

and is usually taken out over a longer period of time (for example, 30
years). The rate of interest on mortgages is either fixed or floating, or
can be a combination of both.

A fixed rate of interest: Is set at the time the mortgage is taken out, and
the interest rate stays the same until the fixed timeframe expires (the
maximum period you can fix the rate for in NZ is 5 years). The rate will
remain the same during this period even if the interest rate goes up or
down. The advantage of this is that repayments will stay the same for
the duration of the fixed term.

Floating interest rate: Floating interest rates will lift or lower as interest
rates in the wider market change, normally linked to the Official Cash
Rate (OCR). This means your repayments may go up or down.

Term: The term is the period of time over which the loan is taken. After
the expiration of the mortgage term, any remaining balance of the
mortgage will need to be renewed, refinanced or paid in full.

Did you know?

Paying off loans/mortgages as quickly as possible can save you a lot in

interest payments. Consider the following example:
You need to borrow $450,000 for your first home. You take out a
mortgage over 30 years with a fixed interest rate of 7.10% (for 5 years).
Monthly repayments are: $3,024
Total interest payable over term of loan: $638, 692
Total cost (amount borrowed + interest): $1,088,692

Now if you borrow the same amount with the same interest, but over a
25 year period;
Monthly repayments are: $3,209
Total interest payable over term of loan: $512,781
Total cost (amount borrowed + interest): $962,781

By doing this you have reduced the interest cost and total cost of
borrowing by $125,911.

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3. FIXED AND FLOATING
INTEREST RATES
Activity
Watch the following video on fixed and floating (variable) interest rates,
then answer the questions below.
www.youtube.com/watch?v=k0ENe93YncQ

1. What is the difference between a fixed and a floating interest rate?

2. Research two banks on the Interest website: www.interest.co.nz/

borrowing/mortgages and find out what the difference is between their
fixed interest rate for 2 years, and their floating interest rate.
Fixed for 2 years Floating
Bank One:
Bank Two:

3. Choose one bank, and write down the fixed interest rates for 1, 3, and
5 year terms. Why do you think the fixed interest rates are different
depending on the length of the term?

Bank Fixed for 1 year Fixed for 3 Fixed for 5

years years

4. Looking at the graph below, what do you think caused the steep fall in
the interest rate in 2008?

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Activity Two: Dream Home

1. Research your dream home on the internet, and imagine that you are
going to buy it.

2. If you are to pay a 20% deposit, and borrow 80% of the purchase
price, how much will the deposit be, and how much will you need to
borrow?

3. Visit Interest: www.interest.co.nz/borrowing and decide which bank

you will use for your mortgage, and whether you will go on a floating
rate, or fixed rate. If fixed rate, for what period of time (6 months – 5
years?). Fill in the table below.

Borrowing Interest rate Interest rate Term of the

amount ($) (fixed) (floating) loan (years)

4. Use the calculator at Sorted: www.sorted.org.nz/calculators/

mortgage-repayment to see what difference it makes to the total
amount you will pay over a 25 year term mortgage if:

a) You make payments weekly, fortnightly or monthly

Payment frequency Total amount to pay ($)

Weekly
Fortnightly
Monthly

b) The interest rate increases by 1% and by 3%

Interest rate Total amount to pay ($)

1% increase:
3% increase:

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 c) What difference does it make to the total amount you pay, and the
monthly payments if the term is 15 years and 20 years?

Mortgage term Total to pay ($) Monthly

repayment amount
15 years
20 years
25 years

5. With some classmates, think about what you have learnt about
mortgages. What are the benefits and the drawbacks?
For example, a major drawback is that with interest payments, you must
pay a lot more than the original amount you borrowed. Write the main
points from your discussion below.

4. GETTING A CAR LOAN

Activity

Imagine you are 18 years old and want to

buy a $5,000 car. You have a part-time
job at the local supermarket working 13
hours a week and your net pay (after tax
has been deducted) is $177.95. You have
saved up the 20% of the value of the car
and want to borrow the rest.

Investigate your options to finance your car purchase.

You may consider to borrow through a bank or a car finance company.
It is more difficult to get a loan as a teenager because you don’t have an
established credit history – a record of your responsible payment of your
debts.
Security: an asset (e.g.
car or property) that the
Principal amount: the lender can take if the
initial amount of the loan. borrower fails to make
loan repayments.
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In your investigation find out:

1. How much you will need to borrow

2. The interest rate you will need to pay

3. Length (term) of loan

4. Any security needed

5. Total cost of loan (principal and interest)

Some sites you may find useful are:

Interest: www.interest.co.nz/borrowing/car-loan
Sorted: www.sorted.org.nz/tools/debt-calculator & select car loan

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A Basic Car Buying Rule

• Before buying a car you should carefully decide how much deposit
you will save, and how long you will take to pay off the loan. The
website Teensguidetomoney: www.teensguidetomoney.com/
spending/first-time-car-buying-tips-for-teens/buying-a-car--basic-
car-buying-rule/ recommends a minimum of 20% deposit, and
paying off the loan in 48 months.
• Remember – the purchase of the car is only the beginning of
your expense items.

Conclusion

Use the information you have collected to write a paragraph explaining

whether you would or would not be able to afford to buy the car. In your
paragraph you need to include all information regarding the loan and
running costs of the car and earnings from your job.

Optional Activity:

Complete the webquest “What’s my car?” available for teachers to

download from the Young Enterprise website:
www.youngenterprise.org.nz This webquest involves you investigating
the costs of purchasing and running a car.

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5. INTEREST FREE LOANS
Activity Interest free loans: loans
where for a particular
Watch the following video about the
period of time you
introduction of interest free loans by
can pay back the loan
BNZ in New Zealand.
without having to pay
https://youtu.be/wf03JtaU5Yg interest on the amount
you have borrowed as
well.

1. Many retail companies like Harvey Norman now offer interest free
loans for a period of about 50 months where you can buy an item from
their store and pay back the cost over that period of time. Research 3
other companies who offer interest free loans, and list below their cur-
rent interest free deals.

Company 1:

Company 2:

Company 3:

2. One of the main issues with interest free loans is that if you can’t pay
back the loan within the given time period then you must pay very high
interest rates on the amount you owe (around 20% per annum). List two
benefits and two risks of interest free loans.

Benefits Risks
1. 1.

2. 2.

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This resource has been written by

Young Enterprise Trust

PO Box 25 525
Featherston Street
Wellington 6146
New Zealand

Phone: 04 570 0452

Email: support@youngenterprise.org.nz

In this series:
1. Budgeting
2. Banking
3. Impulse Buying
4. Credit Cards
5. Borrowing
6. Share Markets
7. Exchange Rates
8. Insurance
9. Kiwi Saver
10. Taxation
11. Student Loans
12. Flatting

© Young Enterprise Trust 2018

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Disclaimer: The Young Enterprise Trust cannot be responsible for

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Doc. ID: HT05-001-03

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