1. Debt, Interest & Payments © moneyskool.org. People borrow money for all kinds of different reasons – to buy a house, go to university, start a business.

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Presentation transcript:

1. Debt, Interest & Payments © moneyskool.org

People borrow money for all kinds of different reasons – to buy a house, go to university, start a business or even just to pay for the week’s shopping. Lending money is big business – personal debt in the UK currently stands at around £1.5 trillion (that’s £1,500,000,000,000!) © moneyskool.org 2015 Debt & Interest mortgages student loans credit cards payday loans overdrafts credit deals loan sharks

Borrowing money allows you to buy something with money you don’t have and then pay it off in smaller installments over a period of time. BUT this doesn’t come for free – when you borrow money you have to pay back the money that you borrowed AND you also have to pay extra money on top which is called INTEREST. Interest is the price you pay to borrow money. © moneyskool.org 2015 TOTAL PAYMENTS = MONEY BORROWED + INTEREST

The amount of interest which is added to your debt is controlled by a PERCENTAGE called the INTEREST RATE. HIGH INTEREST RATE means your debt GROWS QUICKLY © moneyskool.org 2015 LOW INTEREST RATE means your debt GROWS SLOWLY Interest Rates

The yearly interest rate is also sometimes called the APR (which stands for Annual Percentage Rate). The government makes lenders show the APR when they advertise loans so that borrowers can easily compare the cost of borrowing for different deals. The APR also takes extra charges into account – if the lender adds extra charges the APR will be higher than the yearly interest rate © moneyskool.org 2015 APR

© moneyskool.org 2015 Interest rates can make a big difference to the cost of borrowing… EXAMPLE 1: COST OF BORROWING £5,000 FOR ONE YEAR

If you make large payments, you pay off your debt quickly and less interest is added. If you make small payments, you pay off your debt slowly and more interest is added Making minimum payments on a credit card is a common (and expensive) mistake – if you only make the minimum payment every month it can take decades to clear your debt! © moneyskool.org 2015 EXAMPLE 2: PAYING OFF £5,000 CREDIT CARD DEBT AT 20% APR The size of your payments also affects the cost of borrowing…